For more than 300 years, RSA has been protecting individuals and businesses from insurable risk. Today, RSA is a leading international general insurer, with our business rooted in regional franchises, operating through our Scandinavia, Canada and UK & International1 regions.
We take pride in providing excellent customer service as well as striving to achieve high performance levels that benefit our shareholders and employees. We are a focussed, agile and resilient business.
As this may be RSA’s last annual report, it is worth reflecting on some of our major achievements over the past 300 years. From humble beginnings under the stewardship of Charles Povey in 1706, the business has grown significantly to be an ever-present member of the FTSE 100 index, providing insurance needs for generations of families and businesses across the world. The RSA story is not over, however, and under new ownership the business can continue to go from strength to strength for generations to come.
1. International includes the European, Irish and Middle East businesses. 2. Full-time equivalent. 3. Excluding UK&I exit portfolios. see pages 181 to 190 for further details. 4. Total Group. Statutory earnings per share 30.9p.
Notes to the consolidated income statement, consolidated statement of comprehensive income and dividends 124
Other commitments, contingent liabilities and events after the reporting period 166
RSA uses Alternative Performance Measures (APMs), including certain underlying measures, to help explain its business performance and financial position. Where not identified in the body of this report, further information is set out on pages 181 to 190.
Our 2020 Strategic Report, on pages 1 to 39, has been reviewed and approved by the Board of Directors on 25 February 2021 and signed on its behalf by Stephen Hester, Group Chief Executive.
Every year RSA employees contribute to our communities through fundraising and volunteering, and these programmes have necessarily been constrained by the restrictions of the pandemic. While we’ve had to think differently, we found new ways to offer a helping hand. In the UK we contributed over £10m to the insurance industry’s Covid-19 Support Fund, and we also formed our own new initiatives, notably our Community Grant Programme, which supported 168 organisations with emergency funds. In Canada, we donated funds and employee time to support food distribution to families in need, and in Scandinavia bolstered our support for those suffering poor mental health, social isolation or poverty.
£550m1 Underwriting profit £502m2 +45% 1. Excluding UK&I exit portfolios. 2. Total Group.
Dear Shareholders 2020 was a year of turbulence and change, with the pandemic bringing challenges around the world that will require new feats of human endeavour and ingenuity to overcome. On the smaller stage of RSA, I have been proud to see our business come together and adapt to support customers and our employees in these exceptional times.
Achievements to be proud of The customer driven instincts of RSA came to the fore in 2020. In every region, we bolstered support for our customers, making day-to-day interactions and doing business with us more flexible and responsive to the extraordinary circumstances of the pandemic. This included moving rapidly to digitalise those of our processes which still involved physical contact, awarding rebates where we saw persistent reductions in claims frequency, and extending special
A new chapter For RSA, the final twist of 2020 came not from Covid-19, but with a takeover bid received from a consortium of Intact Financial Corporation and Tryg A/S in the final quarter.
In that context, the vote of shareholders to approve that recommendation in January marked the end of the chapter, but not the end of the book. Subject to outstanding regulatory and anti-trust approvals, our Canadian, Danish and UK and International teams will help Intact extend their horizons beyond North America. In Tryg, colleagues in Sweden and Norway join what will become Scandinavia’s largest property and casualty insurer. I am certain that RSA’s expertise, customer care and spirit will live on in and strengthen these organisations for many years to come.
Extending thanks to the team Businesses achieve success when the energy and talents of many people come together in shared endeavour. This is very much the story at RSA. I have been repeatedly impressed by the exceptional commitment displayed by our people, and I want to put on record my sincere personal thanks to each member of our team, in every region, for their efforts during my time as Chair.
Where we are going Our vision is to win for all our stakeholders, through striving to perform at best-inclass levels in our chosen markets.
∙ Focus on continuously improving operational delivery, through better customer service, underwriting and cost-efficiency
What will help us win We aim to fulfil our purpose, ambition and strategy by consistently building our core business values: ∙ Strong customer service
Finally, I must express a most heartfelt thank you to Stephen Hester for his leadership. The turnaround of the company during Stephen’s tenure as CEO speaks for itself: he has shown tremendous commitment to the cause, matched only by the results he has helped us to achieve.
Farewell You, our shareholders, have been an integral part of RSA’s success throughout our history. While we believe the upcoming sale provides value and reward for that commitment, inevitably there is sadness in that relationship coming to an end, and in writing my own final letter to you as Chairman.
Your support for the Board and our wider leadership team, alongside your investments, have helped build the company we are today. I hope you take pride in this. We are unreservedly grateful for your support, and wish you the very best health, success and prosperity in the future.
Products that protect our customers Our customers are our business. We strive to address their changing needs and continually improve our service.
Technology We use technology to support our customers, digitise our services, and to automate our operations to make them more efficient.
We aim to be the best-in-class We continually invest in our people and their development to create a forwardlooking, high-performance culture intent on becoming market leaders in our chosen classes of business.
Our communities As a responsible business we are committed to contribute positively to the communities where we operate and proactively manage the impact of our business on the world around us.
Our investors Our aim is to deliver value to our shareholders by generating attractive and sustainable returns.
Through its programme of stakeholder engagement, the Board gains a meaningful insight into the views, priorities and issues facing its key stakeholder groups and helps RSA’s leaders to reflect these in decision-making and planning.
In 2020, the directors and senior management engaged with key stakeholder groups across our geographic regions and different lines of business. These engagements were adapted as external and internal demands on our business evolved, particularly in light of Covid-19 restrictions on operations and travel.
As well as this direct engagement, the Board monitors the Group’s relationships with customers through regular updates from relevant operational teams, including regarding customer engagement. The Board also receives reporting on enhanced ‘customer and conduct’ key performance indicators (KPIs), allowing the Board to assess challenges and to identify the successes of the Group-wide Customer Policy which is charged with increasing the consistency and quality of customer outcomes across the Group. The Board has received an update on our progress in implementing and embedding the Group Customer Policy in Canada, the UK and Scandinavia.
How the Board responds The Board seeks to ensure that the business is consistently achieving good customer outcomes and product value, including by monitoring key changes and decisions that impact on our customers, such as the plan to address the draft Financial Conduct Authority (FCA) Guidance for firms on the fair treatment of vulnerable customers.
Why the Board engages We define our workforce as our employees across all regions of the business, as well as individuals on a contract for service and agency workers, including those working remotely.
· The Group CEO communicated with the workforce about the recommended offer for RSA from Intact and Tryg. Regional CEOs ensured that appropriate and localised information and resources, including Q&As, were developed and shared with employees. These resources included information about the offer, next steps, the impact on strategy and employees as well as pensions and other employee benefits.
· The Board uses Board meetings as an opportunity to reflect on matters that are important to our workforce at a Group and regional level, to ensure that people policies are consistent with our values, including the means for the workforce to raise concerns in confidence, and to monitor that culture is aligned to those values.
· As part of the regular reporting on culture and the workforce, the Board was informed of measures to examine alignment of Group people policy to values, summary findings from quarterly regional reviews of culture health conducted by HR, Risk and Audit, and the volumes, themes and outcomes of cases managed under our whistleblowing arrangements.
We have an extensive engagement programme with our shareholders and analysts. This engagement is important to ensure that we can maintain investor support for our long-term strategic objectives and can continue to access the capital we require.
Feedback from our engagements with investors was provided to the Board. In particular, the Board received an update on inbound enquiries from investors regarding Covid-19, which were initially focussed on capital and market turbulence, as well as impacted policy wordings such as business interruption and travel policies.
The Chair of the Remuneration Committee wrote to our largest shareholders regarding our proposal on remuneration which was put to the 2020 AGM. The Board received an update from the Remuneration Committee, which had been considering matters including the voting recommendations from the corporate governance and proxy voting agencies on the Directors’ Remuneration Report and the Remuneration Policy. The Board noted positive proxy voting figures relating to the Directors’ Remuneration Report and Remuneration Policy ahead of the AGM (at which the Remuneration Policy was approved by shareholders).
There has been additional communication with our shareholders in 2020 as a result of the recommended cash offer by Intact and Tryg, including prior consultation with our most significant institutional shareholder, Cevian, which provided an irrevocable undertaking to vote in favour of the transaction. For further details, see page 11.
How the Board responds and long-term implications During the year, the Board continually assessed the key priorities of our shareholders and, when necessary, evolved their thinking in the context of Covid-19. For example, after careful consideration, the Board decided to suspend its recommendation for the 2019 final dividend. RSA have since resumed the 2020 interim dividend and RSA’s shareholders have benefitted from an improvement in tangible shareholders’ equity since last year. For further information see page 18.
The views and best interests of our shareholders have been taken into account in assessing the terms of, and subsequently recommending, the cash offer by Intact and Tryg, as well as in determining the strategic focus of the Group, reflected in the business model set out on pages 4 and 5 and which provides the framework to deliver value on a standalone basis to our shareholders.
Given the importance of our creditworthiness to our customers, investors and other stakeholders, the Group also engages on a regular basis with our two key ratings agencies.
How the Board engages The Board engages regularly with the Group’s regulators, and in 2020 a regulatory college was held between supervisors (with the exception of the Middle East and Canada). The focus of the discussion was on the impact of Covid-19. While Board attendance by the FCA was postponed to January 2021 due to Covid-19, the PRA attended a Board meeting in 2020 to discuss regulatory priorities.
Senior management interacts regularly with Standard & Poor’s and Moody’s, our two key rating agencies. Board members have been kept informed of rating agency scores and engagement with rating agencies at Board meetings. Representatives from the Board have also held a governance call with Standard & Poor’s, who responded positively to the opportunity to interact with Board members.
The outcomes of our engagement with our regulators influence the Group’s priorities and focus for the year set out in the Group’s regulatory compliance plan, which is considered and approved by the Board Risk Committee.
Long-term implications Open and constructive dialogue with our regulators has also helped to ensure that, in 2020, we received PRA approval for the latest enhancements to our internal model at a Group level. In addition, we received internal model approval from the Danish regulator in respect of our Scandinavian entities to mitigate the risk of moving to different models at Group and regional level post the Brexit transition period.
Suppliers Our suppliers are critical to our business and the long-term success of the Group. We are committed to the principles of the Prompt Payment Code, and aim to treat suppliers fairly and consistently – for example, by offering equivalent payment terms between suppliers, in order to build strong and lasting relationships. We have structured supplier management practices in place across all regions and are investing in further tools and processes to manage risk in the supply chain and ensure that our supplier relationships are managed in a cooperative and proportionate manner.
For further information on how we manage our supply chain and encourage high standards of business conduct, see page 33.
Pension schemes RSA is committed to fully supporting the pension schemes, and the Board continues to view the pension trustees as a key stakeholder group.
In 2020, the pension trustees were provided with quarterly updates on Group performance, and offered meetings with other RSA senior executives. The Board also continued to engage with and support the development of investment strategy in the UK pension schemes (noting that this is ultimately controlled by the trustees).
The Board considered the position of the pension schemes throughout its discussions with Intact, and in its decision to ultimately recommend to shareholders that the acquisition offer from Intact be accepted. For further information on engagement with pension trustees, please see page 11.
The following principal decisions and activities demonstrate how the Board has assessed and addressed different stakeholder interests and impacts in making decisions that support the implementation of the Group’s long-term strategy (as set out on page 14).
We believe that principal decisions are those that are material to the Group and that are also significant to any of our key stakeholder groups.
Decisions in response to Covid-19 The Group’s response to the Covid-19 pandemic has formed a critical part of the Board’s decision-making in 2020 and covered numerous separate areas summarised below. Since the beginning of the pandemic, RSA has been settling claims from both commercial and personal lines policyholders, as well as participating in industry initiatives to provide support and relief to customers and communities affected in all our territories.
Key decisions include the following: FCA Test Case on Business Interruption claims In response to Covid-19 and its effect on businesses holding Business Interruption (“BI”) policies, the FCA announced its intention to obtain a court declaration on contractual interpretation of certain BI policies in the UK market. The FCA identified a representative sample of 17 policy wordings and invited a subset of 8 insurers, including RSA, to assist by participating in the test case. The Board agreed that it was important to resolve ongoing uncertainty for businesses facing questions around the validity of their BI claims, and therefore determined that it was appropriate for RSA to participate in the test case.
Dividend suspension In reflecting on our dividend policy, the Board has been conscious of the need to balance the interests of shareholders against other factors such as pension contributions, maintaining a strong capital position and reputational considerations in the context
Strategic report Governance Financials of current year performance and earnings, management remuneration and other workforce actions. The Board acknowledged that any benefit to shareholders should not be at the expense of other stakeholders.
Various relief measures were also implemented in Canada, including premium decreases to reflect driving habits during Covid-19, as well as premium deferrals, premium rebates and the development of consumer rate relief implementation plans for underwriters to deploy on a case-by-case basis.
Corporate Responsibility and implementation of the Climate Change and Low Carbon Policy We know that, in challenging times, our approach to corporate responsibility and our ability to respond to societal problems is more important than ever.
Recommended offer On 18 November 2020, RSA, Intact, Regent Bidco Limited (a wholly-owned subsidiary of Intact) (BidCo) and Tryg announced that they had reached agreement on the terms and conditions of a recommended cash acquisition of RSA by BidCo.
In reaching a decision to recommend the offer, the Board took into account its duty to review and support proposals that it believes can benefit our shareholders, while also considering the interests of other stakeholders. Although the Board considers that RSA has a compelling standalone strategy that would deliver attractive value for shareholders over time, the Board believes that the offer accelerates the delivery of that value and provides an immediate premium.
Intact and Tryg placed on the contribution, skills and experience of RSA employees, and concluded that it could be confident that RSA’s employees, businesses and customers could prosper under the stewardship of Intact and Tryg. The Board ensured that, as part of the offer, and save to the extent prohibited by mandatory regulatory requirements Intact and Tryg agreed to maintain for 12 months from completion: the same base salary and incentive opportunities which, taken as a whole, were provided to each RSA employee prior to completion; benefits and allowance packages which, taken as a whole, are at least substantially comparable to those in place for each RSA employee prior to completion; and applicable redundancy and severance payments, benefits and arrangements that are no less favourable than those set out in RSA’s existing redundancy practices.
In 2020, the Board reflected on key initiatives, such as IT simplification and product simplification, noting that a key enabler of simplification is modern technology. The Board challenged management about impacts on the workforce and confirmed that management sought to minimise the number of compulsory redundancies, resulting in the majority of the redundancies in the UK being voluntary. The Board received an update on the areas of cost reduction we are pursuing as part of the first phase of the programme, as well as next steps relating to the second phase of the programme which targets sustainable cost savings going forward.
Remaining resilient and supporting our customers by monitoring and responding to changing pressures
Climate change and extreme weather Climate change presents both long-term physical risk and short- to mid-term transition risk.
· 2021 sees the UK host the 26th UN Climate Change Conference of the Parties (COP26), which will bring further momentum and agreement on coordinated action to tackle climate change.
Customer conduct The insurance industry is increasingly focussed on embedding processes to ensure that customer conduct leads to good customer outcomes.
· Our Group Customer Policy outlines steps our business must take to ensure that all customers are treated fairly, that products and service continue to meet their needs, and that we monitor customer outcomes to understand our performance.
Post-Brexit transition Leaving the EU could bring unexpected challenges and extend economic uncertainties.
· The creation of RSA Luxembourg has insulated us from the main regulatory impacts of Brexit. The transfer of risk currently underwritten through our European branch network to our Luxembourg subsidiary has ensured a smooth transition for our customers and brokers following the UK’s departure from the EU.
· We continue to monitor the new relationship between the UK and the EU closely.
· We have a suite of cyber-specific solutions for large and multinational businesses, as well as solutions for small or mediumsized business (SME). We are monitoring the market to make sure we understand demand and manage exposure.
· Reinsurance arrangements ensure that we are protected from volatility and large losses while we develop our understanding of the sector.
Phase two, the quest for “best in class performance” With success in restoring RSA to robust health, the mission was expanded to seek excellence, or “best in class” performance as we labelled it. 2016-20 have been spent in pursuit of that mission. This has involved unswerving focus on improving underwriting disciplines, cost efficiency, capability modernisation through technology and ways of working and, at its heart, a focus on winning with and for customers in those areas we could be strong. And enabling all these efforts was continued strategic discipline and performance focus and a drive to make both a permanent part of the RSA culture.
2020 results point to considerable success from these efforts. In all our overseas businesses, which constitute 80% or more of the Group’s value, we have achieved best in class results. But “best in class” is a mission more than a destination. Our competitors will keep improving, and we must also to sustain the gains so painfully won. Even in the UK, our most difficult market, performance is much improved (at least ex covid impacts), and we can see our way to the targeted results within the coming few years.
Business resilience 2020 has shown so well the vital nature of business resilience, a lesson especially relevant in financial services where you are selling a promise to customers to be there when their need arises.
RSA has shown it learnt this lesson. It’s not just about strong capital. It’s also about strong operations and effective risk management. But above all it’s about the ability to absorb blows, externally or internally generated, and to come back effectively. No business can be perfect. Mistakes will occur, weaknesses be uncovered and the unexpected transpire. Our record since 2014 has blemishes. We saw that in excessive exposure to natural catastrophes in 2018. And perhaps in our part of the industrywide wording ambiguities that left some customers uncertain of how policies responded to Covid-19, a position now addressed in the UK by the Supreme Court verdict. But we have and will continue to take the results of weaknesses and mistakes head on, to put things right and to build back stronger.
But truism as it is, companies are nothing without their ability to satisfy customer needs. In a changing world the basics of need often change slowly, though expectations on how customers are served and through what channels increase and change rather faster. This is no more so than in financial services. RSA has prioritised serving customers well throughout its history. Today the urge is no less strong and high levels of digital investment and investment in skills support more modern delivery. The pandemic has required us to do all this whilst suddenly shifting to home working. We met this challenge well. However, there is always more we aspire to do and plenty of room to improve. That is a challenge that will never subside.
· Continue investment in digital platforms for convenience, flexibility and speed
…and we have several critical assets that help us to create value…
…the combination of which results in our ambition to achieve best-in-class combined operating ratio performance…
Definition Business operating result (which represents profit before tax adjusted to add back other charges) attributable to ordinary shareholders less finance costs and underlying tax, per share.
Commentary A key measure of the underlying earnings power of the Group as it excludes shorter-term and temporary changes, such as restructuring costs.
Measuring our progress towards best-in-class The following nine key performance indicators (KPIs) are important in measuring the delivery of our strategic priorities.
Outlook We prefer to operate above the top end of our target Solvency II coverage ratio of 130–160%.
Definition A measure of operating expenses incurred by the Group, mainly comprising underwriting administrative costs and claims handling costs.
Commentary Reduction of controllable expenses is a key element of the Group’s strategy. We monitor both the absolute level of expense and the expense ratio as part of the ongoing performance focus.
Commentary Strong customer satisfaction translates to high retention levels and improved underwriting results.
a. Figures have been updated in accordance with GHG Protocol guidelines to reflect data and methodology improvements.
From a financial perspective, Covid-19 impacted our business in multiple ways, resulting in a negative impact on our financial results. There was an estimated c.£166m impact on premium income driven by direct customer relief measures and lower levels of economic activity.
The estimated direct gross claims cost of Covid-19 (including substantial IBNR reserves) was £259m4. These claims primarily related to UK and Irish business interruption claims, as well as travel and UK wedding insurance. Reinsurance recoverables arose to mitigate gross claims costs under travel insurance protection, the Group GVC and Group Cat programmes.
Excellent underwriting results for 2020 Business foundations remain strong despite significant Covid-19 turbulence
· Profit after tax of £364m, down from £383m in 2019.
· Record underwriting profits of £550m1 (2019: £405m1), total Group underwriting profits of £502m (2019: £346m).
· Underlying earnings per share of 51.2p1 (2019: 44.5p1), total Group underlying earnings per share of 47.0p (2019: 39.4p).
· Net written premiums of £6,220m1 were flat2 excluding the estimated impacts of Covid-19 of c.£166m (3%) or down 3%2 overall vs. 2019.
· Group written controllable costs were £1,339m (2019: £1,346m). Earned controllable cost ratio 21.5%.
During 2020, non Covid-19 claims frequency was down vs prior year in a range 9-34% providing partial mitigation to the negative impacts for Covid-19 claims, investment income reductions and lower premiums.
Premiums Group net written premiums of £6.2bn1 were flat2 vs. 2019 excluding the estimated impacts of Covid-19 of c.£166m (3%). These consisted of price reductions, refunds, coverage changes and specific business line volume impacts. Including these impacts, net written premiums were down 3%2 overall vs 2019.
Premiums in Canada were up 3%2 excluding the estimated impacts of Covid-19. This was led by growth in Johnson of 9%2 (of which 4%
Premiums were down 2%1,2 in the UK & International region excluding the estimated impacts of Covid-19. Premiums were down 5%1 overall at constant FX, including an estimated £86m impact from Covid-19.
UK Personal Lines premiums were down 7%1 excluding the estimated impacts of Covid-19 (down 9%1 overall). Household premiums were down slightly reflecting a lower renewal base. Pleasingly, retention was up nearly 5 points despite achieving good pricing increases and Pet premiums decreased as we continue to prioritise margin improvements. UK Commercial Lines premiums grew by 4%1 excluding the estimated impacts of Covid-19 (up 1%1 overall). We achieved price increases significantly ahead of our plans across all major lines of business and retention was better than prior year across most lines of business. Premiums in Europe were down by 3%2 driven by planned business lapses in Commercial Lines. Premiums in Ireland decreased by 2%2 excluding the estimated impacts of Covid-19 (down 7%2 overall) due to lower Personal Motor new business. In the Middle East, premiums were down 11%2 excluding the estimated impacts of Covid-19 (down 18%2 overall) largely due to lower volumes in Commercial Lines and rating pressure in Personal Lines.
Although there was negligible net written premium in the UK&I exit portfolios, there was £15m of premium earned in 2020. Although now largely run-off, the remainder of any residual unearned premium will earn through in 2021.
(2019: £405m) with a combined ratio of 91.1%1 (2019: 93.6% ). Total Group underwriting profit was £502m (2019: £346m) with a combined ratio of 91.9% (2019: 94.6%).
Group weather costs were £140m or 2.3% of net earned premiums (2019: 2.5%; five year average: 2.8%5). Weather costs were adverse in the UK & International due to February flooding in the UK, while Canada was better overall.
Large losses were £615m or 9.9% of net earned premiums (Inc. exits: 10.1%; 2019: 9.7%; five year average: 10.4%5). Excluding the estimated impacts of Covid-19 the large loss ratio was 8.7%, a c.1 point improvement versus 2019. Scandinavia improved by 0.6 points. Large losses were 1.1 points better in Canada. The UK & International was 10.6%1 excluding Covid-19 and 2.5 points worse than 2019 altogether.
Group prior year profit provided 0.2% of benefit to the combined ratio or £15m (2019: 0.8 points benefit to the combined ratio).
Our assessment of the Group reserve margin (the difference between our actuarial indication and booked reserves in the financial statements) increased during the year to c.5.5% of best estimate claims reserves, above our 5% target level. This was to reflect uncertainty related to Covid-19.
Underwriting expenses and commissions The Group underwriting expense ratio of 16.1% increased as expected due to lower premiums from Covid-19 impacts. Scandinavia increased by 0.4 points, Canada increased by 2.3 points and the UK & International increased by 1.5 points. The Canadian expense ratio also reflected increased amortisation but was impacted by lower premiums driven by Covid-19. The Group commission ratio of 13.0% was up slightly versus prior year (2019: 12.6%1).
Business operating result ◊ 337 256 200 (48) 152 (42) 751 703 597 Interest (33) (32) Other charges (187) (73) Profit before tax 483 492 Tax (119) (109) Profit after tax 364 383 Non-controlling interest (19) (24) Other equity costsc (25) (23) Net attributable profit 320 336
Tangible net asset value (£m) ◊ 3,274 2,910 Underlying earnings per share (p) ◊ 51.2 47.0 39.4 Underlying return on tangible equity (%) ◊ 18.2 16.7 14.2 a. Included within Scandinavia is a reduction of £22m to gross written and gross earned premium which reflects premium recognised over a number of years in respect of cancelled insurance policies and an increase of £10m to expenses in relation to write-off of aged debtors, following completion of a balance sheet remediation programme in Sweden. b. Exit portfolios in UK & International which have substantially run-off over the course of 2020. c. Preference dividends of £9m (2019: £9m) and coupons on Tier 1 securities of £16m (2019: £14m).
Other charges were £187m (2019: £73m). Net losses of £77m were incurred, of which £32m related to Covid-19 market volatility. There was also a £14m goodwill charge relating to our Norwegian business.
£78m of restructuring charges were incurred relating to the UK cost reduction programme. This included charges relating to the original £50m programme which was completed in 2020 as well as charges relating to the new simplification programme. This includes a voluntary redundancy programme, IT simplification and substantial property rationalisation.
Changes in economic assumptions represents £8m for the accounting 4% vs. 2019, UK & International £637m was down 6% and Canada costs of £325m was up 10% (as expected).
3. Ex-disposals (where relevant). 4. The Solvency II capital position at 31 December 2020 is estimated and for both year end 2019 and year end 2020 excludes an accrual for a final dividend.
6. Capital generation represents profit after tax attributable to ordinary shareholders, adjusted for changes in intangible assets, deferred acquisition costs and other non-capital items.
Tax The Group reported a tax charge of £119m for 2020, giving an effective tax rate (ETR) of 25% (2019: 22%). The tax charge largely comprises tax payable on overseas profits in Canada and Scandinavia. The Group’s ETR of 25% is higher than the UK statutory rate of 19% mainly due to higher tax rates in some of the Group’s core overseas jurisdictions, withholding taxes, disallowable costs, and a small reduction in the carrying value of the Norway deferred tax asset. The Group underlying tax rate for 2020 was 21% (2019: 20%). Excluding UK&I exited business, the Group underlying tax rate for 2020 was 21%. The slightly increased underlying tax rate, compared to 2019, is mainly due to a greater proportion of profits generated from Canada, which are taxed at a higher rate.
The carrying value of the Group’s deferred tax asset at 31 December 2020 was £199m (2019: £209m), of which £181m (2019: £180m) was in the UK. The decrease in the Group’s deferred tax assets in 2020 included a reduction in the Norwegian deferred tax asset of £8m. At expected tax rates, a further £312m (2019: £254m) of deferred tax assets remain available for use but not recognised on balance sheet; these are predominantly in the UK, Ireland and Norway. The increase in the year is mainly due to the change in future UK tax rate from 17% to 19% in 2020. The carrying value of the Group’s deferred tax liabilities at 31 December 2020 was £105m (2019: £84m), the majority of which are in Sweden and Denmark.
For 2021, we expect the Group’s ETR and underlying tax rate to continue to be in the region of 20%, given the scale of unrecognised UK and Irish tax assets.
Balance sheet and capital RSA’s balance sheet and capital is strong and resilient. Tangible net assets increased by 13% to £3.3bn at 31 December 2020. The increase was driven by profit in the year of £446m5, and foreign exchange gains and fair value mark-tomarket movements of £147m, mainly reflecting translational gains from weaker sterling and lower bond yields respectively. Tangible net assets were reduced by investment of £121m in intangible assets which were primarily IT related (net investment of £35m after amortisation of £86m shown as part of profit).
We maintain a measured approach to capital management, targeting a single ‘A’ credit rating (the Group’s S&P rating is ‘A’ stable and its Moody’s rating is ‘A2’ stable). This involves considering a range of indicators relating to capital, to operating results and to qualitative factors. Following the announcement of the offer from Intact and Tryg, S&P has maintained their ‘A’ rating but on ‘credit watch negative’ until it has assessed the impact of the bid, while Moody’s has reaffirmed its ‘A2’ rating.
Further details on RSA’s pension schemes and movements in the year can be found in Note 41 to the accounts.
Dividend Consistent with the 2.7 statement regarding the recommended cash offer for RSA Insurance Group plc on the 18th November 2020, a final dividend for 2020 is not being proposed as this would reduce the cash consideration payable under the terms of the acquisition. However, were the transaction not to complete, the Directors would intend to declare catchup payments thereafter (including in relation to the suspended final dividend for 2019).
Financial performance Scandinavia delivered a business operating result of £337m for 2020, up 18%. The combined ratio of 83.2% was 4.2 points better than prior year. Excluding the estimated impacts of Covid-19 the combined ratio was 85.0%. Personal Lines performance remained excellent with a combined ratio of 78.5%. Commercial Lines improved significantly by 11 points to 90.1% with the Danish Commercial Lines generating a £16m profit (2019: £48m loss).
Net written premiums were flat1 in Commercial Lines where growth in Sweden and Norway offset planned contraction in Denmark. Danish Commercial premiums were down 3%1 as planned volume contractions more than offset rate.
Large losses of 7.2% improved versus prior year (2019: 7.8%). The attritional loss ratio of 60.4% included an estimated 1.8 points of Covid-19 related frequency benefits. Excluding the estimated impacts of Covid-19 the attritional loss ratio of 62.2% was 1.2 points better than 2019.
Written controllable expenses of £371m were down 3%1 vs. 2019. driven by cost saving initiatives implemented in 2020. The earned controllable cost ratio of 21.0% decreased by 0.7 points.
For the past five years, our focus in Scandinavia has been to combine our strong brands with efficient operations to secure customer loyalty and good profitability. We continue to focus on growing these businesses, while improving underwriting to secure better performance, making the most of digitisation to improve customer experience and reduce costs.
We are the one of the leading insurers in Canada, operating across all provinces, offering a range of Personal and Commercial products. In Personal Lines, which accounts for around 70% of our overall Canadian business, we operate under the market-leading brand, Johnson.
Premiums in Canada were up 3%1 excluding the estimated impacts of Covid-19. This was led by growth in Johnson of 9%1 (of which 4% organic growth). We continued to achieve high single-digit rate and hard market conditions meant that retention remained strong at c.90% for Johnson. Overall, policies-in-force (PIFs) were up 1% in Johnson. Premiums in Commercial Lines decreased by 1%1 where volumes broadly offset strong rate. Premiums in Canada were down 1%1 overall, including an estimated £70m of Covid-19 related customer relief measures impacting written premiums, which also included the delayed renewal of a block of travel business which has been deferred to 2021.
We target a best-in-class combined ratio, underpinned by selective growth and continued cost-effectiveness. Our partnerships with brokers, our relationship with customers and the hard work of our employees will continue to be the foundation of our success.
Personal and Commercial: Personal: Commercial: Financial summary 2020 net written premiums Underwriting result ◊ COR ◊
1. Excluding UK&I exit portfolios. 2. Total UK&I. 3. At constant FX for UK&I.
Our operations in UK & International In the UK, RSA operates across both Personal and Commercial Lines. Personal insurance is offered to our customers through MORE TH>N and affinity partners. RSA has a strong presence in the motor, home and pet markets and Personal Lines accounts for 46% of our business. Some 54% of our UK business is in Commercial Lines. This insurance offered to our customers through the RSA brand via brokers or directly.
The UK reported an underwriting profit of £11m in the period and a combined ratio of 99.5%. This was heavily impacted by direct Covid-19 claims of £77m. Included within these results are the estimated impact of the Supreme Court Judgment relating to the FCA’s business interruption court proceedings, handed down on 15th January 2021. Excluding the estimated impacts of Covid-19 the business delivered an underwriting profit of £88m and a combined ratio of 95.8%.
Net written premiums of £2,030m were down 4% overall, reflecting Covid-19 impacts plus the underwriting and pricing action taken in 2018 and 2019. UK Personal Lines premiums were down 7% excluding the estimated Covid-19 impacts (down 9% overall). Overall retention improved by 3 points during 2020 and was partly helped by lower churn in new business due to the UK lockdown. Household premiums were down slightly but pleasingly we were able to grow our More Than Home book by 8%. Pet premiums decreased as we continue to prioritise margin improvements. UK Commercial Lines premiums grew by 4% excluding the estimated impacts of COVID-19 (1% growth overall). We achieved rate significantly ahead of our plans across all major lines of business and retention was better than prior year across most lines of business. Regions business continued to show strong performance with growth of 9%, supported by growth in new business and rate and retention ahead of our plans.
Exit portfolios The underwriting loss from these portfolios was £48m for the period. Net written premiums were negligible, while net earned premiums were £15m reflecting the ongoing run-off of exposures. The portfolios have materially run-off with de minimis premiums left to earn in 2021.
In Ireland, we provided significant customer forbearance measures which includes refunds of approximately €30m to retail motor customers to reflect the change in driver habits and claims costs.
In the Middle East our businesses moved swiftly to new digital solutions to help customers buy and service insurance remotely. In Oman we can now transact with people via WhatsApp, and the launch of our eClaims service allows customers to present and monitor claims digitally.
Outlook Digital investment to support Personal Lines growth and continued portfolio actions to reshape our Commercial Lines business will help us to achieve consistent and sustainable profits in competitive markets. Our ambition is for a best-in-class combined ratio of <94% in UK & International by the end of 2022.
Our risk management and controls frameworks were created to ensure that we identify, measure and manage risks across the Group before they adversely impact on our customers or the business. This information, together with the strength of the Group’s capital position, allows the Board to set a risk strategy and appetite that articulates the level of risk the Board is prepared to take in delivering strategic objectives.
Risks are managed within risk appetite, using a new risk maturity view. For material financial risks, this was achieved throughout the year and three-year plans predict that this will continue. From time to time, certain risks stray outside target and action is taken to manage them back to acceptable positions. This year saw significant progress in some key risk areas, including customer and IT/cyber.
Emerging threats arise on a frequent basis, however, there remains a risk of increasing capability of hostile states and organised crime to engineer severe attacks.
Risks exist associated with Brexit and the potential for economic shocks, capital impacts, claims inflation and supply chain implications.
Geopolitical tensions could result in new diplomatic, economic, cyber or physical conflicts.
As economies shift to low carbon emissions the transition could have material micro- and macro-economic implications affecting asset values and economic growth.
Board sets business strategy Board sets the business strategy which is incorporated in the three-year operational plan. Risk Strategy combined with Line 2 challenge of the operational plan provides robust challenge of validity and achievability of plan.
ORSA reported to Board Validated output from the model is reported to the Board, so that changes can be made to the threeyear operational plan to ensure the Group remains in appetite.
· Reserves are reviewed and challenged at the Group Reserving Committee meeting which is attended by the Group Chief Actuary, CRO, CUO, CFO and CEO. During 2020 additional focus was given to pinpoint Covid-19 impacts on behaviours and claims patterns as far as possible, to inform assumptions used in the reserving process and projections.
· The reserve assurance programme has independently verified >90% of the Group’s net reserves over a three-year period.
We face longevity and in particular market-related risks, which arise from our defined benefit pension schemes. The largest exposures arise from credit spread and equity movements, although these are partly hedged by offsetting movements in the Insurance Investment Fund.
This is the risk that underwritten business is not in line with appetite or is less profitable than planned due to insufficient pricing and setting of claims case reserves. Key exposures arise from large portfolios where claims trends are slow to emerge, such as UK Commercial and Marine.
· Controlled through well-defined risk appetite statements (including climate change factors) which are rigorously monitored at quarterly portfolio reviews, with remediation action taken where deemed necessary.
Creating a Confident Future 2020 has underlined the importance of being able to manage the uncertainties and complexities of today’s world.
The information contained in the Corporate Responsibility and People sections of this report on pages 32–39, together with the description of our business model on pages 4–5 and our principal risks on page 31, form our non-financial information statement.
Environment We recognise the important role the insurance industry has to play in addressing climate change by supporting the transition to a low-carbon economy and those facing more frequent and severe weather events. In 2020, we implemented our new Climate Change and Low Carbon Policy position across our operations as part of our commitment to responsible investment and underwriting. We have also implemented our Climate Change Action Plan, embedding climate change considerations in our risk framework and undertaking detailed scenario analysis to explore the potential impact of physical risks on our business. More on our approach to managing the risks associated with climate change can be found in our TCFD disclosure on pages 34 to 37.
In 2020, we saw a 38% reduction in our carbon emissions, a significant proportion of this reduction was due to the decline in business air travel caused by global restrictions on flights. Overall emissions from business travel decreased by 75% compared to 2019. Emissions from our property portfolio decreased by 14%, this was partly due to reduced presence in our offices due to social distancing requirements, and partly because of actions to switch to renewable energy sources and rightsize our portfolio for our organisation.
Human rights RSA has been a signatory to the UN Global Compact since 2007, which helps companies align their operations with the ten universal principles covering environment, human rights, labour and anti-corruption. Our Human Rights Policy – which is based on the Universal Declaration of Human Rights, the International Labour Organization’s Declaration on Fundamental Principles and Rights at Work, and the UN Guiding Principles on Business and Human Rights – sets out the standards we expect for our employment practices, the actions of our supply chain, and principles we apply to our investment and underwriting portfolios.
Our main charitable partnerships support our Group-wide goal of improving risk education and changing behaviours to minimise risks by enabling us to combine our expertise and expand the reach of our work. This year, we have reached more than 224,000 people through our programmes on road, water, home and workplace safety, helping to reduce the risk of accidents and the associated pressures they put on healthcare services. In the UK this has included a partnership with the Royal Society for the Prevention of Accidents (RoSPA), targeted at over 65s to reduce the risk of falls in the home. In Canada, we partnered with broker Arthur J. Gallagher to expand the reach of our TruceTO campaign that aims to reduce road accidents and fatalities among cyclists, pedestrians and motorists in Toronto. We have also continued our long-standing partnership with World Wildlife Fund Canada, bringing together community leaders to provide education on flood vulnerability and the role of natural infrastructure in preventing flooding.
Directors, people leaders and others with supervisory responsibility must ensure that employees, contractors, business partners and suppliers are aware of these policies and comply with them. In 2020, all colleagues were enrolled in a mandatory e-learning training module covering anti-bribery and corruption. We encourage employees to identify and escalate concerns to management or through our confidential third-party whistleblowing hotline in line with our Group Speaking-up & Whistleblowing Policy. Operating countries complete risk assessments that are reviewed and updated annually, supported by a central team to enable continuous improvement to controls. The Audit Committee periodically reviews Internal Audit findings in relation to our Anti-Bribery and Corruption Policy.
Task Force on Climate-related Financial Disclosures (TCFD) We report in line with the TCFD recommendations to help our stakeholders understand the ways in which climate change will impact our business.
RSA has adopted the TCFD recommendations reporting on governance, risk management, business strategy to manage climate-related risks and low-carbon opportunities, targets and metrics.
Governance The RSA Group Board has responsibility for oversight and challenge of the overall strategy of the Group, including considering climate-related issues in business plans and exposure to risks. In 2020, the Board have received regular updates on implementation of RSA’s Climate Change Action Plan, Climate Change and Low Carbon Policy position, and considered how climate change risks and opportunities are addressed through the operational plan. In 2020 we have also provided training for our subsidiary Boards on key trends related to climate change, physical and transition risks and RSA’s response.
The Group Corporate Responsibility Committee oversees the implementation of our Corporate Responsibility strategy, Confident Futures, including our strategic focus on ‘Responsible investment and underwriting’ and ‘Sustainable operations’.
For more information on Confident Futures, see pages 32 to 33
The key climate-related risks with the potential to impact our business include: · Increased operating costs from shortterm changing weather patterns and increased severity of extreme events (physical, short term) – managed through underwriting actions and reinsurance
· Increased operating costs from damage caused by increased severity and/ or duration of extreme weather events such as cyclone, floods, wildfire and/or cumulative gradual climatic changes – for example, in precipitation or sea level (physical, long term) – managed through underwriting actions and reinsurance
· Changes in the operational cost base/ claims profile due to new or unproven technologies associated with the switch to electric vehicles, larger turbine size, battery storage (transition, medium term) – managed through underwriting actions and customer engagement
· Reduction in investment returns due to early retirement of assets, reduced demand for products or increased costs of business for carbon-intensive industries (transition, long term) – managed through diversified investment portfolio and risk appetite on carbon-intensive sectors
· Reduction in demand (and associated revenues) for insurance products/services due to increasing costs of premiums, reducing affordability (physical, long term) – managed through product offering, innovation and portfolio management.
The key climate-related opportunities with the potential to impact our business include: · Increased investment in renewable energy technologies increasing demand for renewable energy insurance and increasing revenue (transition, short/ medium term) – managed through product/service offering, renewables centre of excellence and Climate Change and Low Carbon Policy position
· Development of climate adaptation and resilience solutions (physical, medium term) – managed through product/ service offering, risk management expertise and customer engagement
· We work with our customers to promote measures that improve resilience to extreme weather.
· We use weather peril models and geolocation tools to support sophisticated risk assessments and underwriting of residential and commercial properties.
Reinsurance is our primary means of reducing the financial impacts of climaterelated losses associated with the physical risks of changing weather patterns. Our catastrophe reinsurance covers flood, windstorms, hurricanes, wildfires and other severe weather events, with special provisions providing additional protection for prolonged or greater frequency events. Our reinsurance programme is designed to cover at least 1-in-200-year events and is optimised to mitigate the impact of extreme weather. We have tested the value and effectiveness of our reinsurance programme against a scenario of rapidly increasing severe weather, which has informed the Board’s decision on our forward-looking reinsurance strategy.
The impact of transition risks associated with the 2°C scenario were limited as RSA’s investment portfolio is composed of high-rated assets with minimal exposures to carbon-intensive sectors, as well as government bonds (Scandinavia, Canada, the US and the UK) issued by countries that are among the highest ranking in the Notre Dame Global Adaptation Initiative (NDGAIN ), climate change adaptation rankings.
Global catastrophe risk is a material part of RSA’s risk profile, and extensive reinsurance arrangements are in place to manage and mitigate this risk. The results of our scenario analysis highlight the importance of reinsurance protection and the Group Volatility Cover (GVC) to mitigate extreme weather events that occur over an extended period of time. Increased severity of weather events is likely to be well covered by our existing catastrophe reinsurance cover. The outcome of the scenario analysis has been considered as part of the Group’s short- and long-term reinsurance strategy. During 2021 we will take part in the Bank of England’s Climate Biennial Exploratory Scenario (CBES) which will further explore the financial risks posed by climate change and test the resilience of the financial services sector.
Linkage between weather patterns covering Canada and Northern Europe We explored the potential implications for RSA from stronger linkages between European and Canadian weather events caused by jet stream displacement and pressure anomalies, which some studies suggest are becoming more likely as temperatures increase, such as the simultaneous strong storms, heavy rainfall and freeze in winter 2013/14. For this scenario we used our internal model to test windstorm, flooding, and winter storm occurring concurrently across these geographies
We hold market-leading positions in renewable energy insurance across our portfolio. 62% of our energy underwriting portfolio is in renewables ahead of our 50% minimum threshold. Our Commercial Lines business includes a team of specialist underwriters and risk engineers with the skills, technical knowledge and industry experience to handle construction and operation of renewable energy projects around the world.
Targets and metrics We recognise the importance of understanding, measuring and managing the impact of our own operations and have set a target to reduce our carbon emissions by 50% by 2030, as well as a commitment to source 100% renewable electricity across our operations by 2025. Our target is set following the science-based target method, in line with the emissions reductions required to achieve the Paris Agreement goals. Reflecting the strategic approach we have adopted to managing climate-related issues, in 2020 we achieved ‘Leadership’ level in CDP (formerly the Carbon Disclosure Project) increasing our score from B to A-.
· 62% of energy portfolio GWP in renewable energy (2019: 65%)
2020 snapshot · We acted quickly and decisively to look after our people and their families during the Covid-19 outbreak, mobilising homeworking for the majority, including flexible hours for those providing homecare, and arranging safe office conditions where necessary for certain roles and those who could not work from home for personal reasons.
· Keeping everyone connected was critical; we increased the ways we provide information and listen to views, including weekly leadership calls, frequent all-colleague leadership messages, informal colleague ‘coffee chat’ groups with HR, online forums in our ‘Yammer’ tool, and pulse surveys.
· Despite such levels of change, we maintained our drive for best-inclass service and team spirit, as shown by a 154% year-on-year increase in nominations for our peer recognition schemes.
Building high performance Our performance management approach is a 50/50 mix of ‘what’ to deliver and ‘how’, ensuring that our culture and the way we do things has equal status with end results. Our bonus awards differentiate according to performance and, where compatible with local legislation, we encourage participation in employee share plans.
Aiming high and celebrating both the big achievements and day-to-day successes are important to us. Our people made just over 3,000 nominations for our annual UK and Ireland Shining Stars and Superhero awards recognising great service, standout behaviours in line with our values, and participation in our community and charity activities. In addition, we invited nominations for ‘Role Model for Equality’ in Sweden and colleagues used our UK, Ireland and Canada Spotlight portal to simply say thanks and share just over 87,000 good news stories throughout the year.
Inclusive opportunity to succeed is something we aim to be intrinsic in everything we do. We took time to keep this commitment front of mind, for example, communications and events in support of Black Lives Matter. We also participated in external initiatives such ‘Dive In’ because we take our role to support inclusivity both internally and in wider society seriously.
We have Employee Resource Groups, such as RSA REACH (Race, Ethnicity and Cultural Heritage) in the UK, to raise awareness of the various challenges individuals may face. This also helps inform our policies and practices, including our commitment, wherever possible, to employing and supporting people who are disabled, (or become disabled during their career with us), and welcoming job applications from all sections of the community.
Giving our people many channels to speak up about concerns is also important to our culture. We regularly provide training on the ways to do this, which includes anonymous reporting to our whistleblowing system. In 2020, we enhanced guidance for those managing concerns to ensure that our people can be confident in letting us know what is on their mind.
“ Colleagues rated RSA communications during Covid-19 as 4.4 out of 5.”
The proposed offer by Intact Financial Corporation and Tryg A/S for the RSA Group was unsolicited, however, the compelling premium reflects the attractiveness of our businesses to two of our respected peers. I am pleased with the performance of the Group during the year and the continued strong progress towards our best-in-class ambitions.
The Board and its committees focused on the following key areas in 2020: · Strategy and execution, including the response to Covid-19, and the proposed acquisition of the Group by Intact and Tryg
Further information on these areas of focus is set out later in this report.
The governance structures in place enabled the Board to react to the Covid-19 pandemic and ensured continued effective oversight of our operations.
Board composition, diversity and succession planning As we reported last year, Clare Bousfield joined the Board and Group Audit Committee with effect from 1 April 2020. Following regulatory approval, Clare took over as Chair of the Group Audit Committee with effect from 23 October 2020. She was also appointed as a member of the Board Risk and Nomination and Governance Committees with effect from the same date.
The Board values the breadth of perspective that diversity brings and is committed to maintaining a board that is diverse (in its widest sense). As at the date of this report, women make up 40% of the Board and our Board continues to meet the recommendations of the Parker Review. Our Board Diversity Policy is available on our website www.rsagroup.com. For further information on our approach to succession planning, appointments and diversity, see pages 53 and 54.
Culture, purpose and values RSA is a people-centred business which aims for a culture of high performance and where working together as a team is highly valued. We regularly discuss and receive updates on culture as well as the results of the various tools we deploy to help monitor and assess culture, including a cultural health update.
The Board reviewed the findings of an additional survey commissioned following the disruption to the workforce caused by Covid-19 and reviewed communications and decisions of management relating thereto. The Board was pleased to hear that the workforce was supportive of the actions taken by management within the year, particularly the level of communication provided. The Board also concurred with management’s decision to focus on areas of greatest concern for the workforce, including the plans to return to office environments and a greater uptake of homeworking in the future.
Stakeholder engagement Open and collaborative dialogue and interaction with all our stakeholders is in the best interests of the Company and helps us to make a positive contribution to society. Unfortunately, Covid-19 restricted the Board’s ability to meet with stakeholders in person and undertake physical site visits. However, virtual engagement was still undertaken through virtual town halls and the hybrid AGM in May 2020. Further information on the Board’s engagement with its stakeholders can be found on pages 6 to 9.
Board effectiveness This year, the performance and effectiveness evaluation of the Board and its committees was conducted internally, following the externally facilitated review last year. The evaluation was conducted using online surveys completed by the Board and regular management attendees to Board and committee meetings, complemented by individual interviews with each director conducted by the Senior Independent Director and the Company Secretary.
Skills and experience Kath has spent over 25 years in a variety of roles in global financial services, both in the UK and overseas. She was previously Chief Operating Officer, Wholesale Banking, for Standard Chartered Bank and spent 22 years at UBS. Kath has gained a deep knowledge of control, governance and risk management, working in emerging markets and across different sectors and cultures.
Skills and experience Scott has substantial financial services experience and understanding of the insurance sector, which he brings to the Board when setting the strategy and operations for the UK & International region. Scott held the position of Group Chief Financial Officer at RSA prior to his Chief Executive appointment. Before RSA, Scott was Interim Chief Executive Officer at Towergate Insurance, having previously held the post of Chief Financial Officer. Scott also held the post of Chief Financial Officer at Brit Insurance, after four years as Chief Financial Officer UK at Zurich Financial Services, and latterly as Group Financial Controller. He has also held various senior finance and non-finance roles at Aviva. Scott is a qualified accountant (ACMA) and has an MBA from Cranfield University.
Enrico Cucchiani Independent Non-Executive Director Appointment date: December 2014 Nationality: Italian Committee membership: B R
External appointments Founding Partner of TGI-Think Global Investments, non-executive director of Piraeus Bank and Member of the Board and Executive Committee of Bocconi University.
Stephen was previously Chief Executive Officer of The Royal Bank of Scotland Group plc, 2008 to 2013, where he led the largest ever corporate restructuring and recovery programme. Prior to that, he held positions as Chief Executive at British Land plc from 2004 to 2008, Chief Operating Officer of Abbey National plc and a number of senior roles at Credit Suisse First Boston in London and New York.
Martin Strobel Senior Independent Non-Executive Director Appointment date: May 2016 Nationality: Swiss Committee membership: B A I N R
Skills and experience Martin has over 25 years’ experience in insurance and financial services. He was CEO of Baloise Group for seven years to 2015. Martin joined Baloise Group as the Head of IT at Basler Switzerland, responsible for major cross-functional insurance and finance projects. From 2003 to 2008, he was a member of the Corporate Executive Committee. From 1993 to 1999, Martin performed various roles at Boston Consulting Group, Düsseldorf, advising business in the banking and insurance sectors. Martin previously held a non-executive directorship at Anivo 360 AG for three years.
Skills and experience Clare brings an in-depth understanding of life and health insurance, asset management and reinsurance to the Board. She has significant experience in the financial services sector, as well as a deep understanding of the UK regulatory environment. Clare previously held the position of UK Chief Financial Officer at Aegon and spent ten years before that in a variety of senior positions at Swiss Reinsurance Co., including regional Chief Financial Officer for UK, Ireland and Africa and Head of Group Internal Audit.
Role of the Board The primary responsibility of the Board is to provide effective leadership to ensure that it promotes the long-term sustainable success of the Company, generating value for our shareholders and other stakeholders, and contributing to wider society. The Board, supported by its committees, provides leadership within a framework of prudent and effective controls.
The Senior Independent Director supports the Chairman in the delivery of his responsibilities as required, ensuring that the views of each of the non-executive directors are given due consideration, and serves as an intermediary for the other directors and shareholders.
Group Audit Committee (GAC) The GAC plays an important role assisting the Board in its oversight and monitoring of the Company’s financial statements and the robustness of the Group’s systems of internal control, and oversees the effectiveness and objectivity of the internal and external auditors. It manages the relationship with the external auditor, including making recommendations to the Board and shareholders in relation to appointment, re-appointment and removal.
Board Risk Committee (BRC) The BRC has a pivotal role in ensuring the key risks to the Group are identified and understood, are effectively managed within risk appetite with regard to the views and interests of stakeholders, and are appropriately reflected in the Internal Model. It has oversight of customer and conduct risks.
Group Nomination and Governance Committee (NomCo) The NomCo considers the structure, size and composition of the Board and committees and identifies and proposes candidates to the Group Board. It ensures that appropriate succession plans are in place for the Board and reviews executive succession planning. The NomCo also focuses on Board effectiveness and oversees the ongoing suitability of the governance framework.
Biographical details of the individuals fulfilling these roles can be found at: www.rsagroup. com/who-we-are/ our-leadership/the -group-executive.
· Corporate responsibility and the implementation of the Climate Change and Low Carbon Policy
· Approved the Group’s 2021 operational plan, which included regional operating plans and the strategic priorities to support achieving best-in-class status.
· Specific Board sessions on various topics, including UK Personal Lines, UK Commercial Lines and the UK cost programme.
· Engagement session with the management team in the Canadian region, focusing on industry overview, financial performance, underwriting and the workforce.
· Participated in the annual Board and committee performance evaluation, this year facilitated internally. See pages 47 and 48 for more information.
· Reviewed and challenged the ad hoc Own Risk and Solvency Assessment triggered by Covid-19 prior to submission to the Prudential Regulation Authority (PRA).
· On the recommendation of the Board Risk Committee, approved the Major Model Change application prior to submission.
· Received updates on compliance with the Code and approved the system of governance for the Company.
Induction, training and development The directors have attended training sessions and seminars during the course of the year on topics such as reserving and UK customer and conduct matters together with deep dives on business areas and participated in virtual stakeholder engagement to keep their knowledge current and enhance their experience.
Process The 2020 process was a combination of online questionnaires, supplemented with individual interviews with each Board director conducted by the SID and the Group General Counsel and Company Secretary.
Interviews The interviews were used to deep dive into the themes identified in the questionnaires, and to identify tangible actions for discussion by the Board. The interviews focused on: ideas to further improve the effectiveness of the Board and its committees; the balance of skills, experience and composition of the Board; the Board’s engagement with stakeholders; Board support and the management and focus of meetings; Board training; and priorities for change and proposed actions, amongst other factors relevant to the continued effectiveness of the Board and its committees.
Results The anonymised responses to the questionnaires and feedback from the interviews were used to create reports on the performance of the Board and its committees, identifying themes, focus areas and key recommendations.
Outcomes and action plan Through the 2020 Board evaluation process, the Board confirmed it has the appropriate balance of skills, experience, independence and knowledge to enable it and its committees to discharge their duties and responsibilities effectively. Respondents unanimously concurred that the Board had performed well over the year and was operating effectively.
Actions for 2020/2021 The Board agreed the following actions for 2020/2021: Actions for 2020/2021 Responsibility
Consider whether to further build on international experience/expertise reflecting RSA’s global footprint as part of the criteria for the next Board search
Allocate further Board time for strategic deep dives Chairman and Group General Counsel and Company Secretary
Stakeholder engagement is now a standing item on each Board agenda and the effectiveness and insights from the engagement is regularly discussed.
The planned stakeholder engagement activities for 2020, although impacted by Covid-19, were, where possible, undertaken virtually.
Paper workshops for authors and presenters were held in 2020 and the start of 2021.
Provide more context on the competitive environment The Board received updates on the competitive environment during the year and context on the competitive environment and competitor performance, this included a comprehensive analysis of market changes, trends and expectations in relation to Claims in September 2020.
Details of membership and attendance at committee meetings are shown on page 55 and biographies are available on pages 42 and 43. The role and responsibilities of the Committee are set out in our terms of reference, which are available on the Company’s website.
Significant issues Management reports key accounting matters, financial controls assurance and financial results to the Committee at least quarterly.
The Committee considered and challenged the significant accounting and actuarial judgments and estimates that it believed could be material to the 2020 Annual Report and Accounts and Solvency II reporting.
In addition to the exceptional matters set out above, the Committee and the external auditors have discussed the significant issues addressed by the Committee during the year. You can read the Independent Auditor’s Report on pages 94 to 101.
The significant issues considered relating to financial reporting for the year ended 31 December 2020 are set out below.
Deferred tax asset valuation The Committee reviewed the key assumptions and valuation methodologies supporting the carrying value of the UK deferred tax asset. The profit projections presented by management were assessed and challenged, particularly in light of the history of tax losses and one-off costs as well as the increased level of uncertainty surrounding future profit projections as a result of Covid-19 and the firm offer received from the consortium.
In conclusion, the Committee was satisfied that the carrying value was reasonably stated. The Committee continues to monitor the UK deferred tax asset on a biannual basis.
Pension and postretirement obligations The Committee reviewed reports on the valuation of the pension schemes. Management completed an assessment as to the appropriateness of the assumptions currently used, including a comparison with market practice and external expert reviews, and reported the findings to the Committee.
The Committee concluded that the changes proposed by management in relation to
The Committee agreed with management’s consistent use of APMs, which aim to provide clear information on the Group’s performance to enable users to understand and assess the performance of the continuing business and evaluate future performance potential.
· Considered whether the 2020 Annual Report and Accounts were fair, balanced and understandable, and whether the disclosures were appropriate. Taken as a whole, the Committee is satisfied that the 2020 Annual Report and Accounts are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company’s position and performance, business model and strategy.
© 2020 Friend Studio Ltd File name: Gov_XCommitteeXReports_v36 Modification Date: 4 March 2021 1:48 pm benchmarking to support continual process improvement and control optimisation. An independent review of the UK FCF operations was conducted in 2020 and reported satisfactory results.
· At the half year and year end, considered and discussed KPMG’s findings and opinions in relation to the key risk areas, judgments, changes to the audit plan and materiality, and discussed the underlying reasons.
· Considered KPMG’s wider comments on governance, financial reporting processes and efficiencies as well as comments on information systems and controls and separately their reporting on Solvency II returns and observations on key areas of judgment in relation to Solvency II.
· Received updates from the Group General Counsel and Company Secretary on relevant legal developments.
· Considered the semi-annual assessment of the effectiveness of the governance, risk and control framework in each region from the Group Chief Auditor.
· Reviewed and approved the Group Internal Audit Charter which sets out the function’s role, mandate and authority, and includes independence and objectivity criteria.
· Reviewed the procedures for detecting fraud and the systems and controls for the prevention of bribery and received reports on any non-compliance.
· Considered presentations from regional management regarding the Group’s internal controls, including challenges with Scandinavian reserving data reconciliation, updates regarding Swedish debtors, progress on the underwriting accumulation system and Canadian claims handling challenges.
· Held private meetings with the Group Chief Auditor, the Group Chief Financial Officer, the external auditor and the Group Chief Actuary without other members of management being present.
Internal Control To continually assess the effectiveness of the Internal Control System, the Committee received regular reports from the Group Chief Auditor, external auditor and the Group Chief Risk Officer on the integrity of the control environment and discussed and challenged the findings, recommendations and proposed control improvements set out in the reports. The Committee reviewed the effectiveness of the Internal Control System during 2020 and concluded that it was appropriate and operated effectively during the year.
GIA is an independent and objective function reporting to the Board and Group Audit Committee. The Group Chief Auditor is a member of the Group Executive Committee and has a primary reporting line to the Chairman of the Committee, with a secondary reporting line to the Group Chief Executive. Regional Chief Auditors report directly to the Group Chief Auditor, while recognising local legislation and regulation.
GIA’s scope of activities is unrestricted, and its audit universe extends to all legal entities, joint ventures and other business partnerships, outsourcing and reinsurance arrangements. It includes first line of defence control validation and second line of defence assurance activities, and the system of governance as set out under Solvency II.
GIA operates a six-monthly rolling riskbased audit plan, allowing for a frequent and dynamic risk assessment that includes emerging and systemic risks. The Committee may request additional audits as required. Rolling audit plans were approved by the Committee in May and December 2020 and their input was included in the plans.
Auditor independence and objectivity The Committee attaches considerable importance to the work, opinions and findings of KPMG, whose representatives participate in all Committee meetings. The Committee has provided clear guidance to KPMG on the expectations of it as auditor: that the Committee on behalf of shareholders, not management, is KPMG’s client; that as a team they are expected to challenge appropriately; to raise issues and concerns with the Committee as soon as is appropriate; and, on material matters, indicate its agreement to the position taken by management, or to explain why it does not, and the implications.
· The rotation of the lead engagement partner at least every five years. Salim Tharani was appointed as the lead audit partner in July 2020
KPMG presented to the Committee on the FRC’s inspection findings report on the KPMG 2019/2020 audit cycle. The Committee discussed the actions taken by KPMG in response and how they impact the RSA audit.
In assessing the mindset, professional scepticism and degree of challenge to management, the Committee took into account the observations, recommendations and conclusions drawn by KPMG at the half year and year end, and considered their findings and opinions in relation to the key risk areas, judgments made, any changes to the plan and to materiality and discussion of the underlying reason. In addition, the Committee considered the performance of the external auditor in meetings during which the Committee questioned the auditor’s planning, strategy, risk identification process and conclusions.
If an engagement requires Committee approval but work needs to commence before the next meeting at which approval could be sought, the Chairman of the Committee and the Group Financial Controller may approve the engagements (up to £50,000 and £20,000 respectively). These are then reported to the following Committee meeting for ratification.
In line with FRC guidance, the Non-Audit Services Policy caps such fees at 70% of the average total audit fee paid in the previous three years calculated. The Committee is satisfied that the auditor’s independence and objectivity was not compromised by providing non-audit services.
The non-audit fees for 2020 were £1.6m which related to audit-related assurance services including £0.9m in respect of Solvency II reporting. The Committee considered that KPMG is best placed to complete the Solvency II assurance work given its knowledge and understanding of the business and IFRS reported position. Full details of the remuneration paid to KPMG during 2020, including for non-audit services and the ratio to audit fees, is provided in the notes to the financial statements on page 128.
Board and committee composition The Committee led the processes in relation to the changes made to the Board and its committees during the year. As previously reported in the Company’s 2019 Annual Report, Clare Bousfield was appointed as a non-executive director to the Board and as a member of the Group Audit Committee on 1 April 2020. Following a recommendation by the Committee, the Board approved Clare’s appointment as Chair of the Group Audit Committee in place of Alastair Barbour, and as a member of the Board Risk Committee and Nomination and Governance Committee with effect from 23 October 2020. Clare brings extensive experience in audit and finance to her role as Chair of the Group Audit Committee, along with a considerable, technical knowledge of the insurance industry.
Succession planning Succession planning has remained a key area of focus for the Committee during the year. The Committee is dedicated to ensuring that an effective succession plan is maintained for both Board and senior management positions.
Following Clare’s appointment, the Committee considered the results of a refreshed skills review and the areas for strengthening, together with the tenure of directors, diversity of members and the size and combination of the Board and its committees as part of succession planning discussions.
Diversity and inclusion The Board recognises the importance and beneficial impact of diversity of gender, social and ethnic backgrounds and cognitive and personal strengths on Board effectiveness, and values the breadth of perspective that such diversity can bring.
· Ethnicity data monitoring has been introduced in the UK to analyse employee ethnicity demographics and recruitment activity, helping to bring a diversity lens to senior management appointments.
In response to the Code and reporting requirements under section 172 of the Companies Act 2006, the Committee has reviewed the Board’s direct and indirect engagement with the Company’s key stakeholders and discussed the Board’s stakeholder engagement plan for 2021. The stakeholder engagement plan for 2021 will be updated and shared with the Board on a quarterly basis as events take place and as guidelines develop.
Senior Independent non-executive director2 Martin Strobel 9/9 6/6 5/5 4/4 4/4 2/2
NOTES: 1. Alastair Barbour stepped down from his position as GAC Chair on 23 October 2020. At the same time, he ceased to be a member of GAC, BRC and NomCo.
Executive Directors 79 5. Approach to recruitment remuneration 81 6. Service contracts and policy for payments on loss of office 82 7. Malus and clawback 83 8. Legacy incentive plans 83 9. Required shareholding 84 10. Policy for Non-Executive Directors 84
2020 performance and context RSA is reporting an excellent set of results, delivered in a year of great external challenges. Additionally the success over the last seven years of building the company’s underwriting performance to record levels has been reflected in the recommended bid for RSA at a 52% premium, delivering the prospect of highly attractive shareholder value.
Equity at 18.2% (2019: 16.0%), · Combined operating ratio at 91.1%
· Identifying ways to support affected customers across our different geographies.
· Supporting the FCA’s legal test case on business interruption insurance to provide clarity of cover, and committing to paying claims promptly in line with our policy promises while protecting all stakeholders against unaffordable widening of cover.
· Engaging in industry initiatives on future pandemic coverage options and voluntary relief funds.
· Launching a community grant programme to provide funding to local charities and social organisations in the UK.
· Enabling our people to provide service to customers safely and effectively from their homes, including reviewing our HR policies on sick pay and caring for dependants, and providing additional well-being resources.
· Preserving the great majority of jobs and not taking support from the Government via furlough schemes or other routes.
Linking pay with performance Taking account of the excellent performance and the efforts to support stakeholders, the Group CEO, CFO and CEO UK & International will receive total remuneration of £4.9m, £1.8m and £2.2m respectively (2019: £4.0m, £1.5m and £2.0m, where the CFO figure is for service from 31 July – 31 December 2019 only). This includes: · 2020 Annual Bonus Plan awards of 100%, 100% and 70% respectively, half of which are deferred into shares for three years, and
· 2018–20 long-term incentive award vesting at 81% of the maximum.
The long-term incentive vesting is an estimate assuming the bid from Intact and Tryg to acquire RSA completes. The Committee is mindful that the company’s Total Shareholder Return has been affected by the bid announced in November 2020, and therefore, it has used its discretion to delay the final calculation for the long-term incentive TSR
Planning for 2021 In 2021 we will maintain the same simple and clear remuneration offering, except no RSA 2021 long-term incentive grants will be made, unless the bid should not complete.
Stephen Hester and Scott Egan will continue to voluntarily reduce the pension contribution rates they receive. Stephen’s rate will reduce from 24% to 21% of salary from 1 April 2021, and is due to reduce to 18% from 1 April 2022 and 10% from 31 December 2022 (aligning with the 10% rate for new UK-based colleagues). Scott’s rate will reduce from 14% to 13% from 1 April 2021, 12% from 1 April 2022 and 10% from 31 December 2022.
Workforce remuneration and engagement The Committee continued to monitor workforce remuneration throughout its activity in the year.
Shareholder engagement As part of its efforts to promote clarity, in early 2020, the Committee engaged with RSA’s leading investors and corporate governance bodies and the feedback received was taken into account in finalising the review of the Directors’ Remuneration Policy.
Finally, I would like to extend my thanks to my fellow Committee members for their contribution and insights.
Purpose The Committee determines the remuneration and contractual terms for the Executive Directors, Executive Committee and the Chairman (who are detailed on pages 42 to 45).
Members The Committee comprises a number of independent Non-Executive Directors. The Committee’s members in 2020 were: Kath Cates (Chair), Enrico Cucchiani and Martin Strobel.
The number of meetings attended by each Director is shown on page 55.
Attendees At the invitation of the Committee, the Chairman, Group Chief Executive and designated representatives from functions within the business attend meetings where relevant to advise on Group strategy, risk, performance, and HR policies and practices, and support the Committee’s work. These Committee attendees during 2020 included the Group HR Director, Group General Counsel and Company Secretary and Group Reward Director. Additional written input was provided by the Group Chief Risk Officer.
Meetings held in 2020 In 2020, the Committee met on six occasions (four scheduled and two additional) and the table below summarises the matters it discussed.
· Testing of Annual Bonus Plan 2019 and LTIP cycle 2017–19 performance conditions; and determination of outcomes
· Review of executives’ personal goals for 2020, base salaries and Chairman’s fee • •
· Review/update on wider workforce engagement and remuneration, including gender pay gap, pay ratios and impact of Covid-19
· Review of LTIP participation, share grants made, all-employee share plan participation, and dilution levels • •
· Review of Directors’ Remuneration Report and Solvency II disclosures • • •
3. Executive Director total remuneration 2020 (audited) The table below sets out the Executive Directors’ total remuneration single figures. Non-Executive Director fees are detailed on pages 74 to 75.
3. LTIP 2020: Estimated value of Performance Shares and accrued dividend equivalents under the 2018–20 LTIP cycle due to vest on 2 March 2021 using an average share price over the last quarter of 2020 of £5.8346. Reflects the performance conditions having been met to the extent noted on pages 65 to 67. In the case of the relative TSR condition, the estimate assumes the bid for RSA completes, however a final calculation of this element of the vesting will be made once the bid outcome is known.
5. Pension 2020: Scott Egan received a taxable cash allowance of 15% of base salary until 1 April 2020, when it was voluntarily reduced to 14%, and it will be further reduced to 13% from 1 April 2021, 12% from 1 April 2022 and 10% from 31 December 2022. Stephen Hester’s taxable pension cash allowance has been voluntarily reduced from 30% of salary to 27% of salary from 1 April 2019 and to 24% from 1 April 2020. It will voluntarily reduce to 21% from 1 April 2021, 18% from 1 April 2022 and 10% from 31 December 2022. Charlotte Jones received a pension benefit of 10% of salary, which is aligned to that for other new UK-based employees. This was split between contribution to the RSA Pension Scheme and taxable cash allowance until 31 July 2020. Charlotte opted out of the RSA Pension Scheme on 31 July 2020, after which she received the 10% of salary wholly in the form of a taxable cash allowance. The aggregate value paid by the Company into the RSA Pension Scheme (a defined contribution plan) for the Executive Directors in 2020 was £4,813 (2019: £3,479). No Executive Director has a prospective entitlement to a defined benefit pension in respect of their service with RSA.
Annual Bonus Plan 2020 The Executive Directors’ 2020 Annual Bonus Plan consisted of financial and business targets aligned to the Group’s operational plans. In the case of the Group CEO and CFO these included: Group underlying Return on Tangible Equity (ROTE), Group underlying profit before tax (PBT), Group combined operating ratio (COR), a Business Scorecard and role-specific personal objectives. The measures for the CEO UK & International emphasised the performance of his region as well as the Group. The maximum bonus opportunity was 160% of salary, of which half of any award is deferred into RSA shares for three years. Bonus awards are subject to malus and clawback provisions. In determining 2020 bonus awards under this Plan, the Committee considered how goals had been met and took account of key risk factors.
The overall bonus calculations are shown in the table below, and details are set out on the following pages.
Targets were not reduced for Covid-19 despite its negative impact on Group results.
Financial Performance (40% weighting) The measures applicable to the Group CEO and CFO for this component of the bonus plan are shown in the following table: Bonus Financials: Group CEO and CFO 2019 Actual1 2020 Target1 2020 Actual1 Weighting (% of maximum) Achievement (% of maximum)
Note: 1. Financial measures in these tables relate to the Group’s underlying performance which is the basis on which the Group’s plans and targets were set by the Board, in common with practice in prior years. It is also the primary basis on which the Group was managed and its activities reported to shareholders. The Committee also considers all other financial measures to determine whether they should give rise to any adjustments to pay outcomes and has applied a downward adjustment to the UK&I Business Scorecard component of the bonus plan, as set out in the following section.
Business Scorecard (30% weighting) The Business Scorecard focuses on key areas of management activity essential to the success of the Company spanning Underlying Financial Performance, Risk and Resilience (including capital) and Business Sustainability (including customer franchise). Achievement is measured against a range of objective measures, with the overall outcome being determined using judgment in the round. Absent unusual results, the highest Scorecard weightings are accorded to the Underlying Performance financial measures and as a result the majority of annual bonus awards overall are driven by financial measures. The Scorecard outcome will vary from the headline financial metrics’ outcome if these are over or underrepresentative of the underlying actions of management and their results.
The Scorecard applicable to the Group CEO and CFO is shown in the following table.
Business Sustainability: Group policy/premium retention 80% Broadly in line with 2019 80%
· Within the Underlying Performance heading, the financial indicators of controllable expenses, controllable expense ratio, and attritional loss ratio were collectively significantly better than target. The committee considered the impact of UK exits and restructuring charges but at RSA Group level this was more than offset by the outperformance of the underlying financial measures leaving the Group Scorecard assessment still as above. The raw financials were complemented by good achievements across the strategic plan initiatives – in particular, the operational resilience in response to Covid-19 and continued underlying improvement in underwriting across all businesses, most notably in Denmark.
· On Risk and Resilience, Solvency II coverage was maintained at the top of the targeted range. This was the case including and excluding the 2019 final dividend, which was suspended as the Board took account of regulatory and reputational sensitivities to the short-term use of capital early in the Covid-19 pandemic. Dividends resumed with the 2020 interim and the company stated its intention to catch up the payment should the bid to purchase RSA not complete. Internal capital actions included the obtaining of regulator approval to apply Volatility Adjustment in the Group’s capital model, which reduces exposure to credit spread movement. The internal risk and control environment was rated positively.
· On Business Sustainability, good customer service levels were maintained through the pandemic. This included actions to settle claims promptly and fairly, as well as sustaining claims supply chains, and providing a range of customer support measures across the Group’s geographies, ranging from coverage adjustments to capping of rates and tailored payment plans. The company has been a key contributor to industry initiatives exploring future pandemic coverage options and voluntary relief funds.
The Scorecard for the CEO UK & International is shown in the following table.
Underlying Performance: UK & Intl controllable expense ratio 22.5% 22.7% 23.1%
Capital actions and broader risk management – See narrative See narrative
Business Sustainability: UK policy/premium retention 76% Broadly in line with 2019 80%
UK & Intl customer franchise and conduct – See narrative See narrative
Notes: 1. As note 1 of bottom tables on page 60. 2. Defined excluding Claims Handling Expenses (which are part of the expense measure).
· Underlying Performance was ahead of target in terms of controllable expenses and attritional loss ratio, while the controllable expense ratio was below target thus driving strong achievement though less than the Group overall. As a result, the impact of UK restructuring costs and exits considerations had a more visible result on the UK&I scorecard. Strategic initiatives have tracked in line with targets overall, including good progress on the Underwriting and Pricing workbench and Personal Lines roadmap, while digital transformation work in Claims continued albeit on a longer ramp-up due to Covid-19.
The Committee assessed the Scorecard, driven by its financial measures. In using its judgment however, the Committee also took account of the impact of restructuring and portfolio exits on some metrics in the year, and on customers during the UK business interruption uncertainties, and applied a downwards adjustment, resulting in a Business Scorecard outcome of 20/30.
Personal Scorecard (30% weighting) This component focuses on personal performance vs the priorities set by the Board for the Executive Directors in 2020. The Remuneration Committee considers their performance holistically in relation to the development and driving of strategy, financial performance, appropriate risk management, customer and people initiatives (both what was delivered and how). The Committee’s assessment for each Executive Director was as shown in the following tables: Bonus Personal Scorecard: Scott Egan, CEO UK & International Progress
· Ensured major capability improvement programmes continued to be delivered, with emphasis on Commercial Lines pricing & underwriting and claims. Upgrade in cyber and IS resilience.
· Actions to optimise UK motor businesses in Personal and Commercial Lines.
· Financial resilience in challenging circumstances, UK&I Underwriting Result of £90m and UK&I COR of 96.7% (COR 94% excluding impact of Covid-19).
· Grip on pricing and underwriting. Meaningful improvements in Commercial Lines capabilities delivered through emphasis on getting the ‘Brilliant Basics’ right. Industrialisation of underwriting processes via ‘workflow’ implementation and pricing tool streamlining. Responsive and timely actions taken to address issues that arose during the year.
· Rate increases ahead of plan across major UK portfolios. · Risk profile: Operate to good standards of risk/regulatory control, with focus on IT, risk and audit outcomes.
· Strong governance and customer focus throughout Covid-19. · Good progress on underwriting, and risk and control culture.
· Continued development of business leadership team. Key appointments including regional CFO and Chief Underwriting Officer.
· Chaired the Group Corporate Responsibility Committee responsible for outlining RSA’s Climate Change and Low Carbon Policy.
· 2020–22 strategic plan agreed with the Board, consistent with progress and ambition.
· Sustained the performance of portfolios that generated superior returns and implemented performance improvement plans, e.g. 14 points improvement in the Danish combined ratio.
· Delivery of financial improvements as set out above, e.g. Group underlying PBT of £718m and record Group underwriting result of £550m.
· Prudent capital management approach, sustaining “A stable” S&P credit rating and strong Core Tier 1 capital.
· Furthered rebalancing of portfolio to divest where exceeding risk appetite. · Stakeholders/Customer: Lead good relationships with external stakeholders, and initiatives to sustain the importance of customer in RSA.
· Continued to lead the importance of customer focus across RSA with 80% retention.
· Leadership: Effective leadership of the Group executive, including succession and development plans. Advocacy for ESG initiatives across the Group, including diversity and inclusion.
· Championed progress on diversity & inclusion. 35.3% representation of women in the Management Group (above the 33% minimum targeted by 2020; 2019: 34.6%). Firm-wide messaging for Black Lives Matter.
· Strong management of the bid negotiations and due diligence, which facilitated the firm offer from Intact and Tryg with a 52% premium.
· Developed the 2021–23 plan at macro and granular level, with optimum balance of performance and pragmatism to facilitate best-in-class ambitions.
· Increased proactive engagement and challenge with the businesses to influence strategic decisions, building on the steps taken in 2019. Key driver regarding improved cost plans in UK Personal Lines, Denmark and Ireland.
· Oversight of Group IT agenda in terms of cost, capability and risk.
· Financial delivery: Optimise Group performance vs plan, investment returns within risk policy and group corporate structure.
· Delivery of Group performance vs plan, e.g. Group underlying PBT of £718m and Group underwriting result of £550m.
· Finance function operated >6% below budget. · Steered the IFRS 17 project for timely and uncomplicated delivery.
· Risk profile: Ensure a high standard of financial control and risk management, in terms of judgment, reporting and compliance, across the Group.
· Sustained high-quality investor relations, including >130 investor meetings. · Led rating agency relationships effectively, holding quarterly meetings with
Moody’s and S&P. · Positive feedback from Audit Committee and Board. · Continued to develop external network within insurance industry.
· Increased Finance function proactivity on identifying opportunities and solving business issues.
Long-term incentive awards vesting from 2018–20 cycle The long-term incentive awards in the 2018–20 cycle will partially vest in 2021, based on the achievement of the three performance conditions described below. These are aligned with, but different from, the annual bonus measures. Awards take the form of Conditional Performance Shares and the targets are set for a three-year period at the start of the cycle, as opposed to being set annually for bonus targets.
Outperformed index by 18.8% (RSA TSR 22.9% vs. Index of 8.4%)
Notes: 1. Relative TSR index of comparators includes: Admiral, Allianz, Aviva, Chubb, Direct Line, Gjensidige Forsikring, Hiscox, Intact, MAPFRE, QBE, Topdanmark, Tryg and
2. Group underlying ROTE is calculated on a three-year average basis. A straight-line calculation was applied to determine the portion of awards that vest for performance between threshold and on-target, and between on-target and maximum. The average required for on-target vesting (62.5% vesting) in this cycle was 16.7%.
Relative Total Shareholder Return (33.33% weighting) RSA’s TSR performance (which combines share price and dividend returns) is measured against an index of comparators. As the bid for RSA announced on 18 November 2020 fell within the performance period, it has impacted RSA’s TSR. Therefore the Committee has used its discretion under the PSP rules and approved Policy to delay the final calculation for the TSR condition until there is clarity as to whether the bid will complete. This is to avoid any risk of an unjustified gain, i.e. the TSR outcome will only benefit from the bid if shareholders receive the benefit of the bid completing. The estimate provided above is on the basis that the bid completes.
Attritional loss ratio2 Reduction to ≤49.6% in 2020 50.0% 49.4% 44.7%
Notes: 1. As note 1 of bottom tables on page 60. 2. Defined excluding Claims Handling Expenses (which are part of the expense measure) and adjusted for reinsurance changes.
· In Underlying Performance, controllable expenses and attritional loss ratio were significantly better than target, indicating strong collective underlying financial control over the period. Controllable expense ratio was within 0.1% of target (primarily due to the impact of Covid-19). This performance was facilitated by the progression and execution of strategic plan initiatives over the three-years, more fully recorded in the Annual Report for each relevant period. This included key transformation programmes such as underlying improvement in underwriting across all businesses, key technology deliveries, the repositioning of UK & International and the execution of the planned portfolio exits. The operational resilience and determined reaction to the challenging circumstances of 2018 and the Covid-19 pandemic were seen as strong positives.
Notes: 1. Estimate includes the vesting 141,233 Performance Shares valued at £824,041 (of which none is attributable to share price appreciation), and accrued dividend equivalents valued at £68,691 that will be added to the awards that vest. Valued using an average share price over the last quarter of 2020 of £5.8346 and compared to a grant share price of £6.3232.
4. The Committee considered whether any discretionary adjustments in respect of the vesting were appropriate and concluded that none were required.
The Relative TSR target requires RSA’s performance to be equal to or better than the index of comparator companies. The Group underlying ROTE target is set in line with the Group’s operating plan for the three-year period.
(one-third weighting each). 2. If threshold performance is achieved, 25% of the number of shares shown will vest. 3. The face value of the award is calculated as the maximum number of shares that would vest if all performance measures and targets are met at maximum, multiplied by the mid-market closing price of an RSA Ordinary Share averaged over the five business days preceding the date of grant, 6 March 2020, of £5.2064. The Committee considered the RSA share price movement prior to grant. As the price was similar to that at which the 2019 awards were granted, it determined that no adjustment to award levels was necessary to avoid windfall gains.
Required Shareholding The left-hand side of table below shows the Executive Directors’ Shareholding level as at 31 December 2020, calculated based on the shares they own outright, and an after tax value of share awards that are not subject to performance conditions.
Number of shares owned outright as at 31 Dec 2020 Valuation1
Notes: 1. The valuation is against an average mid-market closing price of an RSA Ordinary Share during 2020 of £4.8358. 2. Includes Deferred Bonus Shares and Restricted Shares (awarded as part of a buyout). 3. Estimates the potential additional Shareholding that could result from these awards at vesting, after statutory deductions. 4. Calculated using the gross annual base salary as at 31 December 2020. 5. Includes Performance Shares as detailed in the following table.
Performance Shares. For simplicity, the dividend equivalents that are added to vesting share awards are not included here. Valued as in notes 1 and 4 above.
Notes: 1. The Company granted conditional awards over Ordinary Shares under the PSP during the year at nil cost. The number of shares was calculated based on the mid-market closing price averaged over the five business days preceding the grant date (6 March 2020, average share price of £5.2064).
6. Restricted Shares and Performance Shares in the 2017–19 and 2018–20 cycles were granted to Charlotte Jones to replace awards forfeited on leaving her previous employer, as detailed on page 94 of last year’s report. Restricted Shares are subject to continued service with RSA and malus adjustment. A portion of the shares vesting in 2020 were sold to cover statutory deductions, the rest were retained.
7. Loss of office and former director payments (audited) There were no payments to Directors for loss of office in 2020.
Historical TSR and executive remuneration The following graph shows the TSR of the Group over the ten years from 31 December 2010 to 31 December 2020, with reference to the FTSE 100 Index and a peer group comprised of those companies included in the LTIP’s Relative TSR component (which are noted on pages 65 and 67). The FTSE 100 Index is included as it comprises the 100 most highly capitalised companies in the UK market, of which RSA was a member in 2020.
Single figure of total remuneration (£’000) 2,488 311 2,164 1,011 21 39 2,118 2,469 4,478 5,077 3,996 4,025 4,942
Annual bonus award rates (% of maximum) 58% 59% 50% 0% n/a n/a 68% 77% 100% 63% 32% 93% 100%
LTIP vesting rates (% of maximum) 31% 34% 34% 0% n/a n/a n/a n/a 43% 58% 74% 50% 81%
Notes: 1. Includes wages and salaries, social security costs, pension costs and share-based payments as shown in the notes to the Financial Statements on page 127. 2. Includes the figures as shown in the notes to the Financial Statements on page 131. As announced on 8 April 2020, the proposed final dividend to equity holders in respect of the year ended 31 December 2019 of 15.6p per Ordinary Share (amounting to a total dividend of £161m), as disclosed in the 2019 Annual Report and Accounts, was suspended.
The following table compares the 2020 total remuneration single figure for the Group Chief Executive with the Group’s UK-based employees at the 25th percentile, median and 75th percentile.
Notes: 1. The Company determined the remuneration figures for the employee at each quartile with reference to a date of 31 December of the year shown. 2. Calculation method Option B was used as it provides a fair representation of the pay ratios given RSA’s remuneration structures. In the business context where multiple
HR information systems are operated, it is relatively time-efficient to calculate while remaining appropriately specific, and therefore is used in preference to Options A or C. Under this option, gender pay gap data as at April 2020 is used to identify the best equivalents for the three RSA UK employees paid at the 25th percentile, median and 75th percentile. A 2020 total remuneration figure is then calculated for each of these employees, and for a sample of employees with hourly remuneration rates either side to ensure that a representative employee is selected. Each of the three identified individuals was a full-time employee during the year.
4. The 2019 ratio figures are restated to reflect the actual value of the Group CEO’s 2017–19 Performance Shares vesting.
A range of factors are taken into account in setting pay across the organisation, such as market positioning, inflation, job scale and content, and individual experience. The Group Chief Executive’s remuneration is weighted relatively more towards variable pay due to the responsibility of the role, and therefore the ratio for any given year will shift according to incentive plan outcomes for that year, including multi-year long-term incentive awards. Further, since the majority of profits, revenues and employees of RSA lie outside the UK, the Group Chief Executive total remuneration will move in line with the total Group performance which may differ from UK employee averages that will primarily reflect UK performance. Nevertheless, the Committee is mindful of the importance of monitoring and assessing pay relativities, and ratios will be kept under review. The pay ratio between 2019 and 2020 shows an increase, which was due to a higher Group CEO total remuneration single figure based on a higher variable remuneration outcome and estimated share price used to value the 2018–20 LTIP vesting. The current overall trend in ratio since 2018 is similarly reflective of the combined impact of the incentive plan outcomes year-on-year (and share price movement) on the Group CEO’s variable and total remuneration, as his fixed remuneration was 1.0% lower in 2020 than in 2018. As such, the Committee is satisfied that the pay ratios for 2020 are consistent with the relevant UK HR policies.
Dilution RSA monitors its dilution levels on a regular basis to ensure that they remain within the headroom limits set by the Investment Association. As at 31 December 2020, the dilution levels were as follows: Limit RSA dilution %
9. Implementation of Policy in 2021 This section outlines how the Committee intends to implement the Directors’ Remuneration Policy during 2021.
Stephen Hester’s voluntary reduction of his taxable pension cash allowance will continue, with payments from 1 April 2021 to reduce by 3% of salary, to 21% of salary (future scheduled reductions are to 18% of salary from 1 April 2022 and 10% from 31 December 2022). Scott Egan’s voluntary reduction of his taxable pension cash allowance will also continue, with payments from 1 April 2021 to reduce by 1% of salary to 13% of salary (future scheduled reductions are to 12% from 1 April 2022 and 10% from 31 December 2022). This will align the directors to the rate offered to new UK-based employees, reflecting recent developments in UK corporate governance.
Aligning strategy and incentive measures in 2021 The table below shows how the business strategy, and the key performance indicators that underpin it, are reflected in the Annual Bonus Plan for Executive Directors in 2021: Strategic priorities Annual Bonus Plan 2021
The Business Scorecard component focuses on key areas of management activity essential to the success of the Company including Underlying Performance, Risk and Resilience and Business Sustainability including Customer franchise and ESG. For the CEO UK & International, divisional performance indicators are included. The Personal Scorecard consists of objectives bespoke to each Director, with a focus on both what is achieved and how goals are delivered. Half of the total bonus will be awarded in cash where clawback can apply; the balance is deferred into shares for a three-year period where malus adjustment can apply.
The Committee will assess performance for 2021 once the financial year has ended, taking into account material risk factors. All of the bonus targets are considered to be commercially sensitive because they signal the Group’s forward plan for the year, and therefore they are not provided in this document. Disclosure will be provided in the 2021 Directors’ Remuneration Report, to the extent that such a report is required. Should the bid for RSA complete, bonus awards for the period of 2021 to completion will be influenced by timing and the Committee will use its discretion to react to this shorter period, to determine an appropriate outcome in line with the approved Policy.
Long-term incentive 2021–23 No 2021 grant is currently planned in light of the bid for RSA.
Notes: 1. Taxable benefits: This includes reimbursement in respect of travel and accommodation related to the director’s role. Sonia Baxendale received benefits of £13,363 for taxable travel and subsistence where relief under HMRC rules is not available. The corresponding 2019 figure for Sonia Baxendale in the table has been restated for travel expenses incurred in the year.
All employees (excluding directors)1 2019 to 2020 2.0% 4% 2018 to 2019 2.3% 2%
Fee structure There will be no increase to the Chairman’s fee and it will remain at its current level (effective from 1 April 2020) of £445,707.
Under the Company’s Articles of Association, the Non-Executive Directors’ remuneration is determined by the Board (minus the Non-Executive Directors), within limits set by shareholders. The Non-Executive Directors’ fees effective from 1 April 2020 will continue to apply.
Shareholding The table below shows the interests of Non-Executive Directors in Ordinary Shares of £1.00 each of the Company, including those of closely associated persons.
Notes: 1. As at 25 February 2021, the interests in Ordinary Shares of the current Directors have not changed since 31 December 2020. 2. Sonia Baxendale’s holding is in RSA ADRs, purchased 5 March 2020. 3. Clare Bousfield was appointed as Non-Executive Director effective 1 April 2020. The table above shows her shareholding as at that date and not 1 January 2020. 4. Full details of all Directors’ shareholdings and options to subscribe for shares are recorded in the Group’s Register of Directors’ Interests which is open to inspection by shareholders at the AGM and at the Company’s registered office during standard business hours. The Directors had no share options that vested and remained unexercised, or were exercised in the year.
Note: 1. In October 2020 it was announced that Alastair Barbour would remain on the Board as a Non-Executive Director. He had intended to step down from the Board at this time, being the ninth anniversary of his appointment as a non-executive director. Alastair has continued to serve on the Board during the proposed acquisition of the Group to provide continuity and to contribute his considerable knowledge and experience to the process. For further details please see pages 41 and 54.
Directors’ Remuneration Report continued 11. Statement of voting at Annual General Meeting The following voting was recorded at the AGM on 7 May 2020: Resolution Votes for Votes against Total votes cast Votes withheld1
The most recent resolution to approve the Directors’ Remuneration Policy was at the AGM on 7 May 2020, where the following voting was recorded: Resolution Votes for Votes against Total votes cast Votes withheld1
Strategic report Governance Financials 1. Introduction The Directors’ Remuneration Policy was approved by shareholders on 7 May 2020, and was effective from that date. No changes to the Policy are proposed this year.
This Policy describes the framework that will be used to set and manage the Directors’ remuneration, including: · How decisions on Directors’ remuneration will be made at RSA, and the philosophy and strategy which underpin these decisions; · How remuneration packages will be structured for current, newly appointed and departing directors; · What impact business and individual performance will have on the potential value of Executive Directors’ remuneration; · What key contractual terms will apply to current and newly appointed directors; and
· RSA’s engagement with its shareholders and employees on the subject of executive remuneration.
Risk Risk management is built into the Policy, in line with good practice. Formulaic award outcomes can be overridden (e.g. if the outcome would be excessive beyond management’s influence) and/or adjusted down for risk. Malus and clawback provisions are in place. Half of the bonus is deferred. The LTIP is three years plus a two-year retention period. There is a significant shareholding requirement, which is now extended to apply post-employment.
Alignment to culture The Committee reviewed the balance of financial and non-financial incentive measures, and the approach to assessing individual performance (which places emphasis on both ‘what’ is delivered, and ‘how’ goals are met in the context of RSA’s values). It concluded the Policy is aligned to RSA’s business values and desired culture.
Similar factors are used in setting both employee and executive pay, including market positioning, job size and content, and individual experience. All permanent UK-based employees are eligible to receive a bonus award, and have the opportunity to participate in RSA’s all-employee share plans. At senior levels, remuneration is increasingly long-term and at risk, with an increased emphasis on share-based remuneration. For example, bonus deferral is only operated for senior leaders (and where required by Solvency II), as is participation in the long-term incentive plan.
Salaries are benchmarked referencing peer group companies of comparable size and complexity.
Other than exceptional circumstances such as a role change, salary increases will not exceed the level of increases applied to other RSA employees.
Benefits (fixed remuneration) This element forms part of a market competitive package and supports the executive.
Executive Directors in participating countries can acquire shares in RSA’s all-employee share plans (Sharesave and Sharebuild), and those in the UK can participate in RSA’s flexible benefits programme.
Benefits are determined with reference to market practice within the same peer group companies referred to in respect of salaries. The Committee can also source information from bespoke benefit surveys to aid decisionmaking.
Note: 1. Stephen Hester’s rate reduced from 27% of salary to 24% from 1 April 2020, and will reduce to 21% from 1 April 2021, 18% from 1 April 2022 and 10% from 31 December 2022. Scott Egan’s rate reduced from 15% of salary to 14% from 1 April 2020, and will reduce to 13% from 1 April 2021, 12% from 1 April 2022 and 10% from 31 December 2022. Charlotte Jones currently receives 10% of salary.
A majority weighting is given to financial metrics. Measures can be assessed on a Scorecard basis.
The performance measures and targets used to inform the 2020 bonus awards are on pages 60 to 65.
For recruitment purposes, or in highly exceptional circumstances, such as for retention, the Committee may agree to a conditional performance-related award being made up to an additional 170% of salary. This would be considered a ‘one-off’ award. Where an exceptional award is made, full disclosure will be given of the rationale.
Performance conditions are reviewed for each new cycle and set in line with the Company’s operational plan, long-term strategy and considering shareholder interests.
The LTIP will include at least two measures. A majority weighting is given to financial metrics. Metrics can be assessed through a Scorecard.
· Benefits and contractual terms will be the same as those offered to current Executive Directors, however the Committee will have close regard for the benefits and contractual terms offered to other new RSA employees, and may exercise judgment to flex the package to accommodate any specific terms bespoke to the individual, e.g. related to health, annual leave, relocation or insurance benefits.
Directors’ Remuneration Report continued 6. Service contracts and policy for payments on loss of office Each of the Executive Directors is employed under a service agreement, which contains a variety of contractual terms and conditions. Contracts are available for inspection by shareholders at the Company’s registered office. Terms are designed to ensure fair treatment for departing executives while avoiding reward for failure.
· Material financial loss of a business unit as a result of circumstances that should reasonably have been risk-managed by the individual
8. Legacy incentive plans The Policy provides for any outstanding awards granted under legacy incentive plans to continue in place, although the current Executive Directors do not hold any such awards.
· Details of the Chairman’s fee and the Non-Executive Directors’ fees earned for 2020 are noted on pages 74 to 75.
· As the Non-Executive Directors are not employed by the Company, they are not eligible to receive a bonus award or participate in any of RSA’s share plans.
UK Corporate Governance Code The Board, through the Group Nomination and Governance Committee, monitors compliance with the Code. The Company has complied with all principles and provisions of the 2018 Code which was in force throughout the year (which is available at www.frc.org.uk). Details of how the principles and provisions of the Code have been applied are set out in the Directors’ and Corporate Governance Report, the reports from the Board committees and in the Strategic Report.
Provision 4: When 20 per cent or more of votes have been cast against the board recommendation for a resolution, the company should explain what actions it intends to take to consult shareholders in order to understand the reasons behind the result. The board should provide a final summary on the views received by shareholders and actions taken in the annual report.
Relevant disclosures contained in the Strategic Report pages 6 to 11
Provision 10: The board should identify in the annual report each non-executive director it considers to be independent.
Provision 23: The annual report should describe the work of the nomination committee. Pages 53 to 54
Provision 27: The directors should explain in the annual report their responsibility for preparing the annual report and accounts, and state that they consider the annual report and accounts, taken as a whole, is fair, balanced and understandable, and provides the information necessary for shareholders to assess the company’s position, performance, business model and strategy.
Relevant disclosures contained in the Corporate Governance Report on page 51
Provision 31: Taking account of the company’s current position and principal risks, the board should explain in the annual report how it has assessed the prospects of the company, over what period it has done so and why it considers that period to be appropriate.
Provision 35: Where a remuneration consultant is appointed, this should be the responsibility of the remuneration committee. The consultant should be identified in the annual report alongside a statement about any other connection it has with the company or individual directors.
Provision 41: There should be a description of the work of the remuneration committee in the annual report. Relevant disclosures contained in the Remuneration Report on pages 56 to 84, particularly on pages 56 to 57
The Board confirms that it has reviewed the schedule of directors’ conflicts of interest during the year and that the procedures in place operated effectively in 2020. None of the directors had an interest in any contract of significance with the Company or any of its subsidiaries during 2020.
Dividends In accordance with regulatory requirements, in order for the Company’s Ordinary Shares to be counted towards the new Group capital requirements, any dividends declared by the Company must be capable of being cancelled and withheld or deferred at any time prior to payment, if the relevant capital requirements have been breached or payment of the dividend would lead to non-compliance with those requirements. The directors have no current intention of exercising this cancellation right, other than where required to do so by the PRA or necessary or desirable for regulatory capital purposes. This year, the Board suspended payment of the 2019 final dividend due to regulatory advice and the need to maintain a strong capital base to support our customers during the Covid-19 pandemic and deferred the 2020 interim dividend payment to December 2020. Consistent with the 2.7 statement regarding the recommended cash offer for RSA Insurance Group plc on the 18 November 2020, a final dividend for 2020 is not being proposed though were the transaction not to complete, the directors would intend to declare catch-up payments thereafter.
The Group is committed, wherever possible, to employing and supporting people who are disabled, or become disabled during their career with the Group and we welcome applications from all sections of the community. Our Equal Opportunities and Dignity at Work policies support these commitments.
More information on employees can be found on pages 38 to 39.
The assessment also considered the impact of the offer to buy RSA should the deal complete or fall away. If the deal completes the Board expects restructuring of the Group to occur, but considers that the ability of the Parent Company and operating businesses to continue as a going concern will not be adversely affected.
Viability statement In accordance with the UK Corporate Governance Code, the directors have assessed the viability of the Group over an initial three year period and beyond after considering the longer term risks to the prospects of the business and mitigating actions that are in place. This assessment has been performed on a standalone basis.
As part of assessing the Group’s prospects reliance is placed on the operational planning process, which are based on the Group continuing to operate on a standalone basis. The Group prepares a three year operational plan and capital forecast along with sensitivity analysis in line with the Group’s strategy. These forecasts are subject to review and challenge by the directors on at least an annual basis.
These tests allow the Board to review and challenge the Risk Management strategy and consider potential mitigating actions.
The directors have also considered the prospects of the Group through review of the longer term strategy as set in the Strategic Report on pages 1 to 39 and the principal risks and uncertainties that are of a longer term nature (set out on pages 28 to 31), including the impact and uncertainty as a result of the Covid-19 pandemic and Brexit. In their judgement the potential impacts such as claims inflation and supplier disruption would be covered by the circumstances envisaged under the stress test scenarios detailed above.
The Board has also assessed the impact of the offer to buy RSA from a consortium of Intact Financial Corporation and Tryg A/S. In making its recommendation to the shareholders to accept the bid, the Board considered many factors including the strategic fit of the bidders for the RSA businesses as well the proven track record of successfully integrating and creating long term value from acquisitions. Although the Board cannot be certain of the actions of the new owners, through familiarising itself with the bidders, it expects them to be responsible owners. In the event that the deal does not complete, the directors consider that the Group would remain resilient.
Where data is not provided by an operating entity, values have been estimated using either extrapolation of intensities from similar sites within the Company or using the previous data as a proxy. All conversion factors have been sourced from recognised public sources, including the UK’s Department for Business, Energy & Industrial Strategy, the International Energy Agency and the GHG Protocol’s stationary combustion tool.
The adjacent figures cover the period 1 January 2020 to 31 December 2020.
A significant proportion of the overall reduction in emissions and energy use during 2020 has been due to restrictions on business travel caused by the Covid-19 pandemic; we aim to take these learnings on board to avoid a rebound in emissions although we expect these to be higher in future years.
Modern slavery As per section 54(1) of the Modern Slavery Act 2015, our Slavery and Human Trafficking Statement is published annually on our Group website. The statement covers the activities of RSA Insurance Group plc and its subsidiaries and details policies, processes and actions we have put in place to ensure that appropriate steps are taken to protect against slavery and human trafficking in our supply chains and all parts of our own business.
Political donations During the year the Group did not make any donations to political parties or independent election candidates. Each year the Company proposes a resolution authorising political expenditure up to £100,000 for each of donations to political parties and independent election candidates, donations to political organisations and incurring political expenditure.
Intensity ratio: Gross tonnes CO2e per FTE LB 0.94 1.44 1.70 1.93 2.04
A. Indicates values independently assured by PwC in accordance with ISAE 3000 (Revised) and ISAE 3410. For further information, please refer to our reporting criteria and PwC’s assurance opinion which can be found on our Corporate Responsibility pages at www.rsagroup.com/responsibility.
As at 31 December 2020, the Ordinary Shares and Preference Shares represented 89% and 11% respectively of the Company’s total issued share capital. Directors are limited as to the number of shares they can allot (save in respect of employee share schemes). Renewal of the directors’ authorities to allot shares will be sought at the 2021 AGM, as appropriate. In addition, directors are restricted by the limits set out by the Investment Association. During 2020, the directors exercised their authorities to allot shares only in respect of employee share schemes.
Registered shareholdings by size as at 31 December 2020 No. of holdings No. of shares % of holdings % of shares
The table below shows the holdings of major shareholders as disclosed to the Company in accordance with the Disclosure Guidance and Transparency Rules (DTR) as at 31 December 2020 and as at 19 February 2021.
Cevian Capital II G.P. Limited 146,179,931 14.13% Indirect 146,179,931 14.13% Indirect
JPMorgan Chase & Co. Below 3% Below 3% Indirect 62,434,318 6.03% Indirect, Financial instruments (ADRs and
Statement by directors Section 414A of the Companies Act 2006 requires the directors to present a Strategic Report of the Company for the financial year ended 31 December 2020. The information that fulfils the requirements of the Strategic Report set out in section 414C of the Companies Act 2006 can be found on pages 1 to 39.
So far as each director of the Board is aware, there is no relevant audit information (as defined in section 418(3) of the Companies Act 2006) of which the Company’s external auditor is unaware, and each director has taken all reasonable steps to make himself/ herself aware of, and to establish that the external auditor is aware of, any relevant audit information.
· The Company’s exposure to price risk, underwriting risk, reserving risk, credit risk, liquidity risk and cash flow risk
Management report The Strategic Report is considered to form the management report for the purpose of DTR 4.1.8.R.
Directors’ Report The Directors’ Report for the year ended 31 December 2020, was approved by order of the Board and signed on its behalf.
Significant transactions and events 7 Loss on disposal of businesses 123 8 Reorganisation costs 123
Notes to the consolidated statement of cash flows 45 Reconciliation of cash flows from operating activities 164 46 Reconciliation of movements of liabilities arising from financing activities 165
Notes to the Parent Company financial statements 1 Basis of preparation 177 2 Significant accounting estimates and judgements 177 3 Adoption of new and revised accounting standards 177 4 Significant accounting policies 177 5 Risk and capital management 178 6 Related party transactions 178 7 Share-based payments 178 8 Dividends paid and proposed 178 10 Current and deferred tax 180 11 Other debtors and other assets 180 12 Share capital 180 14 Issued debt 180
Company law requires the directors to prepare Group and Parent Company financial statements for each financial year. Under that law they are required to prepare the Group financial statements in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and applicable law and have elected to prepare the Parent Company financial statements on the same basis. In addition the Group financial statements are required under the UK Disclosure and Transparency Rules to be prepared in accordance with International Financial Reporting Standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union (IFRSs as adopted by the EU).
· Make judgments and estimates that are reasonable, relevant and reliable
· Assess the Group and Parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern
© 2020 Friend Studio Ltd File name: AuditorsXreport_v16 Modification Date: 4 March 2021 5:03 pm 1. Our opinion is unmodified We have audited the financial statements of RSA Insurance Group plc (“the Company”) for the year ended 31 December 2020 which comprise the consolidated income statement, consolidated and parent company statement of comprehensive income, consolidated and parent company statement of changes in equity, consolidated and parent company statement of financial position, consolidated and parent company statement of cash flows, and the related notes, including the accounting policies in note 5 and note 4 for the parent company.
Valuation of insurance liabilities Insurance contract liabilities 2020: £9,379 million gross, £7,755 million net; 2019: £9,141 million gross, £7,561 million net, relating to provision for losses and loss adjustment expenses.
Subjective valuation: Valuation of insurance contract liabilities is highly judgmental because it requires a number of assumptions to be made with high estimation uncertainty such as loss ratios, estimates of the frequency and severity of claims and, where appropriate, the discount rates for longer tail classes of business, by territory and line of business. The determination and application of the methodology and performance of the calculations are also complex.
Certain lines of business have greater inherent uncertainty, for example those where claims emerge more slowly over time, or where there is greater variability in claim settlement amounts and potential exposure to large losses due to the effect of uncertain or unknown future events. This includes UK Professional and Financial Risk classes; the Danish Workers Compensation class; the Swedish Personal Accident classes; and the Canadian General Liability class. Additional uncertainty in the valuation of insurance liabilities has arisen as a result of the Covid-19 pandemic and the estimation of resulting claims, particularly for Business Interruption classes and the impact of the FCA Test Case ruling, and reductions in claims frequency experienced for some classes of business.
We performed the tests above over the valuation rather than seeking to rely on the Group's controls because the nature of the balance is such that we would expect to obtain audit evidence primarily through the detailed procedures described.
· We found the valuation of the insurance liabilities to be acceptable (2019 result: acceptable).
Existence of insurance debtors (2020: £318m of the total insurance debtors of £2,814 million; 2019: £2,737 million)
Management’s remediation programme identified the need for a write-down due to system limitations and process breakdowns which had the potential to be material.
Since the issues date back a number of years, there is judgement to be applied in considering which period the adjustment should be recorded within and a risk that the related disclosures are not sufficient.
Our procedures included: · Tests of details: Our component team in Sweden compared samples of debtor balances to appropriate documentation, such as signed policy agreements and confirmed cash receipts, to test the valuation of individual debtor balances; · Historical comparisons: With support from our Scandinavian component team, we assessed the appropriateness of estimation techniques employed by the Group to determine the allocation of the adjustment between financial statement line items and compared the assumptions applied to our historical experience and knowledge of the business; · Fraud risk assessment: We consulted with professionals with forensic knowledge in designing appropriate procedures to address the fraud risk factors associated with the identified issues. These procedures included challenging how the error arose and considering whether any individuals could have benefitted from the accounting treatment; · Assessing principles: Judgement was applied in determining the appropriate periods in which the correcting adjustment should be recorded taking into account the relevant accounting principles, the materiality of the adjustment and its impacts on headline financial metrics; · Assessing transparency: We considered the adequacy of the Group’s disclosure in respect of the adjustment made and its potential distortive effect on the financial statements.
· As a result of our work we found the existence of the Swedish insurance debtors to be acceptable. We also found the treatment and disclosure of the correcting adjustment in relation to the Swedish insurance debtors to be acceptable.
Valuation of post-employment benefits and obligations (2020: £9,401 million; 2019: £8,681 million)
Refer to pages 49 to 50 (Audit Committee Report), pages 112 to 113 (accounting policy) and pages 155 to 160 (financial disclosures).
Subjective valuation: Small changes in the assumptions and estimates used, in particular the discount rate, inflation rate and mortality improvements, which are highly sensitive to market and geographic circumstances, can have a significant effect on the valuation of the Group’s post-employment obligations and therefore the amount of the post-employment benefits and obligations and the Group’s financial position.
The effect of these matters is that, as part of our risk assessment, we determined that the valuation of post-employment benefits and obligations has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole and possibly many times that amount. The financial statements (note 41) disclose the sensitivity estimated by the Group.
· We found the valuation of the post-employment benefits and obligations to be acceptable (2019 result: acceptable).
Refer to page 49 (Audit Committee Report), page 112 (accounting policy) and pages 145 to 147 (financial disclosures).
Having found the estimate to be at the high end of a reasonable range, we exercised judgement to determine the acceptability of the amount recognised, and the clarity of the associated disclosure of the sensitivity of key assumptions.
· We found the valuation of deferred tax assets recognised to be acceptable (2019 result: acceptable).
Refer to page 177 (accounting policy) and page 179 (financial disclosures).
· We found the assessment of the valuation of the parent company's investment in subsidiaries to be acceptable (2019 result: acceptable).
© 2020 Friend Studio Ltd File name: AuditorsXreport_v16 Modification Date: 4 March 2021 5:03 pm 3. Our application of materiality and an overview of the scope of our audit Materiality for the group financial statements as a whole was set at £35m (2019: £35m), determined with reference to a benchmark of net earned premiums (of which it represents 0.6% (2019: 0.5%)).
We continue to consider net earned premiums to be the most appropriate benchmark and a fair reflection of revenue from the Group’s operations as it is not subject to the volatility arising from multi-year insurance contracts that net written premiums would be, and provides a more stable measure year on year than group profit before tax.
In line with our audit methodology, our procedures on individual account balances and disclosures were performed to a lower threshold, performance materiality, so as to reduce to an acceptable level the risk that individually immaterial misstatements in individual account balances add up to a material amount across the financial statements as a whole.
Performance materiality for the parent company was set at 75% (2019: 75%) of materiality, which equates to £24.0m (2019: £23.6m). We applied this percentage in our determination of performance materiality because we did not identify any factors indicating an elevated level of risk for the parent company.
In addition, we applied materiality of 0.1p (2019: 0.1p) to the disclosure of Earnings per share, for which we believe misstatements of lesser amounts than materiality for the financial statements as a whole could be reasonably expected to influence the company's members' assessment of the financial performance of the group.
The components within the scope of our work accounted for the percentages of the group’s results illustrated opposite. For the residual components, we performed analysis at an aggregated group level to re-examine our assessment that there were no significant risks of material misstatement within these.
Total Profits and Losses that made up Group Profit Before Tax
The Group team instructed component auditors as to the significant areas to be covered, including the relevant risks detailed above and the information to be reported back. The Group team approved the component materialities, which ranged from £10m to £28m (2019: £8m to £28m), having regard to the mix of size and risk profile of the Group across the components. The audit procedures over the Canada, Scandinavia and Ireland components (2019: all components) was performed by component auditors and the audit procedures over the UK component and the specified risk-focused audit procedures over the parent company was performed by the Group team.
4. Going concern The Directors have prepared the financial statements on the going concern basis as they do not intend to liquidate the Group or the Company or to cease their operations, and as they have concluded that the Group’s and the Company’s financial position means that this is realistic. They have also concluded that there are no material uncertainties that could have cast significant doubt over their ability to continue as a going concern for at least a year from the date of approval of the financial statements (“the going concern period”).
We also considered less predictable but realistic second order impacts, such as the impact of non-completion of the proposed takeover bid received by the Group.
Our procedures also included: · Consideration of specific scenarios that could reasonably arise in relation to the Covid-19 pandemic or implications of the proposed takeover transaction, and assessing the assumptions applied by management in relation to these scenarios.
However, as we cannot predict all future events or conditions and as subsequent events may result in outcomes that are inconsistent with judgements that were reasonable at the time they were made, the above conclusions are not a guarantee that the Group or the Company will continue in operation.
5. Fraud and breaches of laws and regulations – ability to detect Identifying and responding to risks of material misstatement due to fraud To identify risks of material misstatement due to fraud (“fraud risks”) we assessed events or conditions that could indicate an incentive or pressure to commit fraud or provide an opportunity to commit fraud. Our risk assessment procedures included: · Enquiring of directors, the audit committee, internal audit and management and inspection of policy documentation as to the Group’s high-level policies and procedures to prevent and detect fraud, including the internal audit function, and the Group’s channel for “whistleblowing”, as well as whether they have knowledge of any actual, suspected or alleged fraud.
As required by auditing standards, we perform procedures to address the risk of management override of controls and the risk of fraudulent revenue recognition, in particular the risk that estimated premium is valued incorrectly or recorded in the wrong period and the risk that Group and component management may be in a position to make inappropriate accounting entries, and the risk of bias in accounting estimates and judgements such as premium adjustments, including premium estimates.
We communicated identified laws and regulations throughout our team and remained alert to any indications of non-compliance throughout the audit. This included communication from the Group to full scope component audit teams of relevant laws and regulations identified at Group level, and a request for full scope component auditors to report to the group team any instances of non-compliance with laws and regulations that could give rise to a material misstatement at group.
Secondly, the Group is subject to many other laws and regulations where the consequences of non-compliance could have a material effect on amounts or disclosures in the financial statements, for instance through the imposition of fines or litigation or the loss of the Group's licence to operate. We identified the following areas as those most likely to have such an effect: regulatory capital and liquidity, conduct regulation and certain aspects of company legislation recognising the financial and regulated nature of the Group’s activities. Auditing standards limit the required audit procedures to identify non-compliance with these laws and regulations to enquiry of the directors and other management and inspection of regulatory and legal correspondence, if any. Therefore if a breach of operational regulations is not disclosed to us or evident from relevant correspondence, an audit will not detect that breach.
Context of the ability of the audit to detect fraud or breaches of law or regulation Owing to the inherent limitations of an audit, there is an unavoidable risk that we may not have detected some material misstatements in the financial statements, even though we have properly planned and performed our audit in accordance with auditing standards. For example, the further removed non-compliance with laws and regulations is from the events and transactions reflected in the financial statements, the less likely the inherently limited procedures required by auditing standards would identify it.
6. We have nothing to report on the other information in the Annual Report The directors are responsible for the other information presented in the Annual Report together with the financial statements. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except as explicitly stated below, any form of assurance conclusion thereon.
Based on those procedures, we have nothing material to add or draw attention to in relation to: · the directors’ confirmation within the Viability Statement (page 88) that they have carried out a robust assessment of the emerging and principal risks facing the Group, including those that would threaten its business model, future performance, solvency and liquidity; · the Principal Risks disclosures describing these risks and how emerging risks are identified, and explaining how they are being managed and mitigated; and
Independent auditor’s report to the members of RSA Insurance Group plc continued
We are also required to review the Viability Statement, set out on page 88 under the Listing Rules. Based on the above procedures, we have concluded that the above disclosures are materially consistent with the financial statements and our audit knowledge.
· the section of the annual report that describes the review of the effectiveness of the Group’s risk management and internal control systems.
· the parent Company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns; or
Salim Tharani (Senior Statutory Auditor) for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants 15 Canada Square London E14 5GL
Unwind of discount and change in economic assumptions 39 (39) (46)
Items that may be reclassified to the income statement: Exchange gains/(losses) net of tax on translation of foreign operations 22 55 (85)
Profit for the year – – – – – – – – 359 359 24 383
Shares issued for cash (note 34) 1 3 – – – – – – – 4 – 4
Share-based payments (note 19/34) 4 – – – – – – – 6 10 – 10
Profit for the year – – – – – – – – 345 345 19 364
Other comprehensive income/(expense) (note 22) – – – – – 112 – 46 (25) 133 (5) 128
Shares issued for cash (note 34) 1 5 – – – – – – – 6 – 6
1. Equity attributable to owners of the Parent Company is a new sub total and includes Tier 1 notes. This has replaced the shareholders equity sub total disclosed in the 2019 Annual Report and Accounts, which did not include Tier 1 notes.
The attached notes on pages 107 to 173 form an integral part of these consolidated financial statements.
Cash and cash equivalents at the beginning of the year 886 781
Cash and cash equivalents at the end of the year 33 1,083 886
RSA Insurance Group plc (the Company) is a public limited company incorporated and domiciled in England and Wales. The Company through its subsidiaries and associates (together the Group or RSA) provides personal and commercial insurance products to its global customer base, principally in the UK, Europe, Ireland, Middle East (together UK & International), Scandinavia and Canada.
The Board has made an assessment of going concern covering a period of at least 12 months from the date of approval of these financial statements. The Board’s assessment included the review of Group’s strategic plans and updated forecasts, capital position, liquidity including credit facilities and investment portfolio, which are based on the Group continuing to operate on a standalone basis and reflects the Group’s assessment of the impact of the current challenging economic environment. The review included significant stress testing, including extreme downside scenarios and a reverse stress test. Scenarios considered include significant deteriorations in market and credit conditions, and severe claims events from catastrophe losses. In making their assessment, the Board have considered the impact of the recent UK Supreme Court decision on business interruption losses, including the availability of reinsurance to recover incurred claims.
Accounting policies that are significant to understanding the performance, financial position and cash flows of the Group are set out in note 5 with other policies presented in Appendix A. The notes are grouped together by their nature.
Estimates and their underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are recognised prospectively. In 2020, the Covid-19 global pandemic has had a significant impact on market conditions and our business. Where an estimate has been impacted by Covid-19, additional disclosure has been provided in the relevant note.
· Valuation of insurance contract liabilities: the assumptions used in the estimation of the eventual outcome of the claim events that have occurred but remain unsettled at the end of the reporting period. Covid-19 has increased the level of estimation uncertainty with key assumptions impacted, such as frequency, severity and claims development patterns. There is also increased uncertainty relating to the valuation of Covid-19 business interruption (BI) claims. The initial assessed impact of the UK Supreme Court judgement on 15 January 2021 on BI policy wording, and the initial assessed impact of the FBD court judgement in Ireland announced on 5 February 2021, has been included in the actuarial indication of ultimate losses. The ultimate liability could be materially different from the current estimate as legal interpretations and regulatory expectations develop and clarify the criteria for eligible claims, further information becomes available with regard to the number of eligible claimants who meet the required claim criteria, and the extent to which losses are recoverable under reinsurance contracts which depends upon the extent to which reinsurance responds in the manner the Company expects. Outside UK&I, litigation is underway in Scandinavia and Canada that could give rise to a change in assessed cost should the outcome be different to our expectation. Refer to note 39 for additional information.
· Impairment of financial assets: determining if there is objective evidence of impairment requires judgment and in the year to 31 December 2020, £32m of impairments have been recognised (note 10). The value of unrealised losses in the revaluation reserve at 31 December 2020 is £84m (31 December 2019: £73m).
© 2020 Friend Studio Ltd File name: Notes_01_to_29_v26 Modification Date: 9 March 2021 11:26 am 4) New accounting standards, interpretations and amendments yet to be adopted Transition from EU-adopted IAS to UK-adopted IAS At the end of the Brexit Transition Period, SI 2019/685 brings the International Accounting Standards (IAS) already endorsed in the EU into UK law as ‘UK-adopted international accounting standards’. UK entities are required to apply UK-adopted IAS for financial years beginning after 31 December 2020 with the option to early adopt. The Group has chosen not to early adopt and will apply UK-adopted IAS from 1 January 2021. As there are no changes when applying UK-adopted IAS, there will be no impact on the Group.
IFRS 17 ‘Insurance Contracts’ The International Accounting Standards Board (IASB) issued IFRS 17 ‘Insurance Contracts’ (IFRS 17) in May 2017, which was revised in June 2020 (aimed at helping companies implement the Standard and making it easier for them to explain their financial performance), to replace IFRS 4 ‘Insurance Contracts’ (IFRS 4) for annual reporting periods beginning, at the latest, on or after 1 January 2023.
Detailed build and testing of systems and processes to implement IFRS 17 is in progress and is on track to complete in 2021. Parallel run testing of reporting is scheduled to take place in 2022 to assure reporting compliance by 1 January 2023. The implementation plans have taken into account the changes in the revised standard issued in June and contingency planning has been considered in the event that the endorsement process adds any further delay to implementation after 2023.
Information required by IFRS 4 when applying the temporary exemption can be found in note 26 and note 6.
There have been no significant changes to the Group’s accounting policies during 2020.
Premium income Written premium is recognised in the period in which the Group is legally bound through a contract to provide insurance cover. It represents the full amount of premiums receivable under the contract, including estimates where the amounts are not known at the date they are written. These are deferred as a provision for unearned premiums until recognised as revenue principally computed on a monthly or daily pro-rata basis. Net earned premiums are stated net of amounts passed (‘ceded’) to reinsurers. Premiums are shown before deduction of commission and exclude any sales based taxes or duties.
Insurance receivables Premium receivables due from policyholders or intermediaries at the end of the reporting period are presented within insurance and reinsurance debtors in the consolidated statement of financial position. The amount recoverable is reduced when there is an event arising after the initial recognition that provides objective evidence that the Group may not receive all amounts due under the insurance contract. Impairment losses for non-recoverable amounts are charged to underwriting and policy acquisition costs in the consolidated income statement and directly reduce the carrying amount of insurance debtors in the consolidated statement of financial position.
Reinsurers’ share of insurance contract liabilities within the consolidated statement of financial position includes the reinsurers’ share of provisions for losses and loss adjustment expenses and unearned premiums. The Group reports third party reinsurance balances on the consolidated balance sheet on a gross basis to present the exposure to credit risk related to third party reinsurance. The amount recoverable is reduced when there is an event arising after the initial recognition that provides objective evidence that the Group may not receive all amounts due under the reinsurance contract.
At initial measurement, the Group classifies its financial assets and financial liabilities in one of the following categories: · Designated at fair value through profit and loss (FVTPL)
© 2020 Friend Studio Ltd File name: Notes_01_to_29_v26 Modification Date: 9 March 2021 11:26 am 5) Significant accounting policies continued The table below summarises the classification and treatment of the Group’s financial assets and financial liabilities.
Hedge of a net investment in a foreign operation – effective portion is recognised in OCI, ineffective portion is immediately recognised in the income statement
Basis of preparation and significant accounting policies continued 5) Significant accounting policies continued Impairment of financial instruments The Group determines, at each reporting date, whether there is evidence that the value of a financial asset or a group of financial assets, other than those measured as FVTPL are impaired. A financial asset is impaired if there is objective evidence that indicates that an event has occurred after the initial recognition of the asset that may have resulted in a loss of value as a result of having a negative effect on the estimated future cash flows generated by that asset which can be estimated reliably.
Financial assets are impaired according to either a debt, equity, or loans and receivables impairment model. The appropriate impairment model is determined based on the characteristics of each instrument.
An equity security is considered impaired if there is objective evidence that the cost may not be recovered. In addition to qualitative impairment criteria, a significant or prolonged decline in fair value below cost is considered as indication of potential impairment. Impairment is considered to have occurred when the decline in fair value relative to cost has been more than 30% for a continuous twelve-month period. Unless there is evidence to the contrary, an equity security is also considered impaired when the decline in fair value relative to cost is more than 40% at the end of the reporting period, or when it has been in an unrealised loss position for a continuous fifteen-month period. Where there is objective evidence that impairment exists, the cumulative unrealised loss previously recognised in other comprehensive income is reclassified to the consolidated income statement.
Current and deferred tax Current and deferred tax are recognised in the consolidated income statement, except to the extent that the tax arises from a transaction or event recognised either in other comprehensive income (OCI) or directly in equity. Any exceptions permitted under IAS 12 ‘Income Taxes’ are disclosed in the notes. To the extent that deferred tax assets are recognised or derecognised in the period and it is not possible to attribute this directly to either the consolidated income statement or OCI, as is the case typically for brought forward tax losses, then these amounts are attributed between the income statement and OCI transactions using a reasonable pro rata split based on historical movements.
A defined benefit scheme refers to any other pension scheme; specifically, the Group’s defined benefit schemes define 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.
· Net interest on the net defined benefit liability/asset: this is determined by applying the discount rate applied to the defined benefit obligation for the period to the net defined benefit liability/asset, and results in a net interest expense/income.
Goodwill, other intangible assets, and internally developed and externally acquired software are allocated to cash generating units (CGUs) for the purpose of impairment testing. When testing for impairment, the recoverable amount of a CGU is determined based on value in use calculations. Further information on how the value in use is calculated can be found in note 23.
A) Underwriting risk Underwriting risk refers to the risk that claims arising are higher (or lower) than assumed in pricing due to bad experience including catastrophes, weakness in controls over underwriting or portfolio management, claims management issues or policy wording interpretation issues.
Pricing for the Group’s products is generally based upon historical claims frequencies and claims severity averages, adjusted for inflation and modelled catastrophes, trended forward to recognise anticipated changes in claims patterns after making allowance for other costs incurred by the Group, conditions in the insurance market and a profit loading that adequately covers the cost of capital.
Passing elements of our insurance risk to reinsurers is another key strategy employed in managing the Group’s exposure to insurance risk. The Group Board determines a maximum level of risk to be retained by the Group as a whole. The net retained risk is distributed across the Group in accordance with Group and local risk appetite. The strategy is dependent on being able to secure reinsurance cover on appropriate commercial and contractual terms and the nature of the programme presents risks in that recoveries are contingent on the particular pattern of losses and aggregation across the Group.
There is a risk to the Group from the inherent uncertainty in estimating provisions at the end of the reporting period for the eventual outcome of outstanding notified claims as well as estimating the number and value of claims that are still to be notified. There is also uncertainty in the level of future costs of handling and settling the outstanding claims. This is especially true when there is a material change in circumstances near the end of the reporting period such as the UK Supreme Court judgement on 15 January 2021 and the Ireland court judgement on 5 February 2021.
· Material changes in the external claims environment in areas such as legal and medical activities which impact the speed of claims development have also been considered. The distortions in data caused by the various issues means identification of trends is more difficult than normal and results in increased uncertainty relating to actuarial indications of ultimate losses.
· The views of internal peer reviewers of the reserves and of other parties including actuaries, legal counsel, risk directors, underwriters and claims managers.
· The outcome from independent assurance reviews performed by both external actuarial consultants and the Group actuarial function to assess the reasonableness of regional actuarial indication estimates.
· Market risk, including price, interest rate and currency rate risks
The Group’s credit risk appetite and credit risk policy are developed by the BRC and are reviewed and approved by the Board on an annual basis, to ensure limits remain within its quantitative appetite. This is done through the setting of Group policies, procedures and limits. Covid-19 has generated increased levels of market volatility increasing the risk of credit default and downgrade. The Group’s strategy continues to be reviewed in light of Covid-19 developments and the frequency of engagement with the Group’s fund managers has been increased.
The Group’s use of reinsurance is sufficiently diversified that it is not concentrated on a single reinsurer, or any single reinsurance contract. The Group regularly monitors its aggregate exposures by reinsurer group against predetermined reinsurer group limits, in accordance with the methodology agreed by the BRC. The Group’s largest reinsurance exposures to active reinsurance groups are Berkshire Hathaway, Lloyd’s of London and Talanx. At 31 December 2020 the reinsurance asset recoverable from these groups does not exceed 3.9% (2019: 4.1%) of the Group’s total financial assets. Stress tests are performed by reinsurer counterparty and the limits are set such that in a catastrophic event, the exposure to a single reinsurer is estimated not to exceed 6.3% (2019: 6.6%) of the Group’s total financial assets.
Risk and capital management continued 6) Risk and capital management continued The credit profile of the Group’s assets exposed to credit risk is shown below. The credit rating bands are provided by independent rating agencies. The table below sets out the Group’s aggregated credit risk exposure for its financial and insurance assets.
As at 31 December 2020 Credit rating relating to financial assets that are neither past due nor impaired
Reinsurers’ share of insurance contract liabilities – 670 1,554 58 34 21 2,337 1. The debt securities meeting SPPI criteria under IFRS 9 which are below investment grade are stated under IAS 39 at fair value. 2. Loans and receivables are measured using amortised cost and their carrying amounts are considered to be as approximate fair values. 3. The insurance and reinsurance debtors classified as not rated comprise personal policyholders and small corporate customers that do not have individual credit ratings.
© 2020 Friend Studio Ltd File name: Notes_01_to_29_v26 Modification Date: 9 March 2021 11:26 am 6) Risk and capital management continued Ageing of financial assets that are past due but not impaired 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, excluding those assets that have been classified as held for sale.
Reinsurers’ share of insurance contract liabilities 29 2,337 – – – – 3 2,340 –
Cash and cash equivalents 33 1,094 – – – – – 1,094 –
Loans and receivables 26 338 – – – – – 338 –
Increase in interest rate markets: Impact on fixed income securities and cash of an increase in interest rates of 100bps 22 19 (440) (390)
The sensitivity of the fixed interest securities of the Group has been modelled by reference to a reasonable approximation of the average interest rate sensitivity of the investments held within each of the portfolios. The effect of movement in interest rates is reflected as a one time rise of 100bps on 1 January 2021 and 1 January 2020 on the following year’s income statement and other comprehensive income. The impact of an increase in interest rates on the fair value of fixed income securities that would be initially recognised in OCI will reduce over time as the maturity date approaches.
iii. Currency risk The Group incurs exposure to currency risk in two ways: · Operational currency risk – by holding investments and other assets and by underwriting and incurring liabilities in currencies other than the currency of the primary environment in which the business units operate, the Group is exposed to fluctuations in foreign exchange rates that can impact both its profitability and the reported value of such assets and liabilities.
At 31 December 2020, the Group’s equity attributable to owners of the Parent Company deployed by currency was: Pounds Sterling £m
Equity attributable to owners of the Parent Company is stated after taking account of the effect of currency forward contracts, swaps and foreign exchange options. The analysis aggregates the Danish Krone exposure and the Euro exposure as the Danish Krone continues to be pegged closely to the Euro. The Group considers this aggregate exposure when reviewing its hedging strategy.
© 2020 Friend Studio Ltd File name: Notes_01_to_29_v26 Modification Date: 9 March 2021 11:26 am 6) Risk and capital management continued The table below illustrates the impact of a hypothetical 10% change in Danish Krone/Euro, Canadian Dollar or Swedish Krona exchange rates on equity attributable to owners of the Parent Company when retranslating into sterling: in Pounds Sterling against Danish
Movement in equity attributable to owners of the Parent Company at 31 December 2020 (71) 87 (75) 91 (13) 16
Changes arising from the retranslation of foreign subsidiaries’ net asset positions from their primary currencies into Sterling are taken through the foreign currency translation reserve and so consequently these movements in exchange rates have no impact on profit or loss.
Liquidity risk Liquidity risk refers to the risk of loss to the Group as a result of assets not being available in a form that can immediately be converted into cash, and therefore the consequence of not being able to pay its obligations when due. To help mitigate this risk, the BRC sets limits on assets held by the Group designed to match the maturities of its assets to that of its liabilities.
Deposits received from reinsurers 43 11 – – – – – – 11 11
The capital and interest payable on the bonds and notes have been included until the earliest dates on which the Group has the option to call the instruments and the interest rates are reset. For further information on terms of the bonds and notes, see note 37.
The Group’s overall capital position is primarily comprised of equity attributable to owners of the Parent Company of £4,564m (2019: £4,169m) and subordinated loan capital of £403m (2019: £402m) and aims to maximise shareholder value, while maintaining financial strength and adequate regulatory capital. In addition the Group also aims to hold sufficient capital so as to maintain its single ‘A’ credit rating.
At 31 December 2020, the estimated SCR and corresponding eligible own funds were as follows: Unaudited 2020 £bn £bn
In Q1 2020, RSA were granted approval by the PRA to apply the Volatility Adjustment to the majority of the Group’s Technical Provisions, which reduces the exposure of the Solvency II position to spread movements, and is reflected in the sensitivities above.
The Group defines its ORSA as a series of interrelated activities by which it establishes: · The quantity and quality of the risks which it seeks to assume or to which it is exposed
Papers are presented to the Board throughout the year dealing with individual elements that make up the ORSA. The information contained in those papers and the associated decisions taken are summarised in an annual ORSA report, which is submitted to the Group’s regulators as part of the normal supervisory process. The ORSA is approved by the BRC.
There were two ORSA’s during 2020. An ad hoc ORSA was triggered in response to Covid-19 events. This considered the UK business interruption court case together with Covid-19 impacts across all key risk categories – Market risk, Underwriting risk, Reserving risk and Credit risk. This also considered a refresh of the Group Recovery plan together with a Reverse Stress Test event. As a follow on from the July process an updated ORSA report was presented to the BRC in January 2021. This considered the year end 2020 position, refreshed stress scenario testing and aligned to the latest 3 year capital projections. The ORSA process during this cycle continues to demonstrate ongoing balance sheet strength and balance sheet resilience.
© 2020 Friend Studio Ltd File name: Notes_01_to_29_v26 Modification Date: 9 March 2021 11:26 am 7) Loss on disposal of businesses In 2020, the loss of £6m includes £5m from the sale of the Group’s 57.1% holding in British Aviation Insurance Company Limited.
Notes to the consolidated income statement, consolidated statement of comprehensive income and dividends 9) Segmental information The Group’s primary operating segments comprise Scandinavia, Canada, UK & International and Central Functions, which is consistent with how the Group is managed. The primary operating segments are based on geography and are all engaged in providing personal and commercial general insurance services. Central Functions include the Group’s internal reinsurance function and Group Corporate Centre.
Assessing segment performance The Group uses the following key measures to assess the performance of its operating segments: · Net written premiums
Transfers or transactions between segments are entered into under normal commercial terms and conditions that would also be available to unrelated third parties.
10) Net investment return A summary of the net investment return in the income statement is given below: Investment income Net realised gains/(losses) Net unrealised losses Impairments Total investment return 2020 £m 2019 £m 2020 £m 2019 £m 2020 £m 2019 £m 2020 £m 2019 £m 2020 £m 2019 £m
Net realised gains transferred to income statement Impairments transferred to income statement
Gross changes in provision for losses and loss adjustment expenses (35) (137)
The average number of employees during the year is as follows: UK & International 6,718 6,846
Further information on pension obligations of the Group can be found in note 41. Further information on employee share schemes can be found in note 19.
Key management personnel transactions One member of key management personnel has control over an entity external to the RSA Group. This company did not transact with the Group during the year.
Fees payable to the auditor for audit of the Company’s annual accounts 1.4 0.8
Fees payable to the auditor and its associates for other services: The audit of the Company’s subsidiaries, pursuant to legislation 5.5 4.7
18) Income tax The tax amounts charged in the income statement are as follows: 2020 £m 2019 £m
Increase/(decrease) of current tax in respect of prior periods 1 5
Derecognition of deferred tax asset for prior year losses 20 6
Non-recognition of deferred tax asset for current year losses 3 5
Different tax rates of subsidiaries operating in other jurisdictions 18 8
© 2020 Friend Studio Ltd File name: Notes_01_to_29_v26 Modification Date: 9 March 2021 11:26 am 18) Income tax continued The effect of change in tax rates mainly relates to the impact of the change in the UK tax rate (17% to 19% from April 2020) on the UK deferred tax asset. A valuation allowance has also been booked to the UK deferred tax asset and so the net UK deferred tax asset remains largely unchanged at £181m (2019: £180m). The impact of the rate change and valuation allowance is split between income statement and other comprehensive income based on the source of the originating temporary differences. The result of this is that the UK rate change impact is almost entirely booked to the income statement, but the valuation allowance is split between the income statement and other comprehensive income. The income statement element of the valuation allowance is included within the de-recognition of deferred tax asset for prior year losses amount of £20m together with a deferred tax asset write down in Norway of £8m. The net income statement impact of the UK rate change and subsequent UK deferred tax asset valuation allowance is a £9m deferred tax credit.
Income/gains not taxable (or taxed at lower rate) largely comprises tax-exempt investment income and life insurance profits taxed at a lower rate in Sweden. Non-deductible expenses largely comprise expenses related to the proposed takeover of the RSA Group and share scheme costs.
The current tax and deferred income tax credited/(charged) to each component of other comprehensive income is as follows: Current Tax Deferred Tax Total 2020 £m 2019 £m 2020 £m 2019 £m 2020 £m 2019 £m
Fair value gains and losses (12) 2 14 (10) 2 (8)
Remeasurement of net defined benefit pension liability 2 – (19) (3) (17) (3)
Total credited/(charged) to other comprehensive income (6) – (5) (16) (11) (16)
The Swedish corporation tax rate of 20.6% applies from 1 January 2021.
Notes to the consolidated income statement, consolidated statement of comprehensive income and dividends continued 19) Share-based payments The total amount included within staff costs in the consolidated income statement in respect of all share scheme plans in 2020 is set out below.
However, the Remuneration Committee has the discretion to modify the treatment of leavers’ share awards that have yet to be released, based on the leaving circumstances, where this is appropriate and in shareholders’ interests.
Less: Tier 1 notes coupon payment (£m) (note 21) (16) (14)
Ordinary dividend: Final paid in respect of prior year – 13.7 – 141
The Tier 1 notes coupon payment relates to the two floating rate notes issued on 27 March 2017 (note 35).
As announced on 8 April 2020, the proposed final dividend to equity holders in respect of the year ended 31 December 2019 of 15.6p per ordinary share (amounting to a total dividend of £161m), as disclosed in the 2019 Annual Report and Accounts, was suspended.
Fair value gains/(losses) net of tax 102 – (5) 97 – – 97 1 98
Exchange losses net of tax (14) – (1) (15) (64) – (79) (6) (85)
Fair value gains/(losses) net of tax 128 – (7) 121 – – 121 – 121
Notes to the consolidated statement of financial position 23) Goodwill and intangible assets
© 2020 Friend Studio Ltd File name: Notes_01_to_29_v26 Modification Date: 9 March 2021 11:26 am 23) Goodwill and intangible assets continued Amortisation Amortisation expense of £74m (2019: £72m) has been charged to underwriting and policy acquisition costs with the remainder recognised in other operating expenses.
When testing for impairment, the carrying value of the Cash Generating Unit (CGU) to which goodwill and intangibles have been allocated is compared to the recoverable amount as determined by a value in use calculation. Where the value in use is less than the current carrying value of the CGU in the statement of financial position, the goodwill or intangible asset is impaired in order to ensure that the CGU carrying value is not greater than its future value to the Group.
Cash flows beyond the operational plan period are extrapolated using the estimated growth rates which management deem appropriate for the CGU. The cash flow forecasts are adjusted by appropriate discount rates. When testing for intangible asset impairment (including those not available for use), a consistent methodology is applied although future cash flow projection years are not extrapolated beyond the asset’s useful economic life.
The range of pre-tax discount rates used for goodwill and intangible impairment testing, which reflect specific risks relating to the CGU at the date of evaluation, and weighted average growth rates used in 2020 for the CGUs within each operating segment are shown below. In determining a cost of capital, data over a period of time is utilised to avoid short term market volatility. The growth rates include improvements in trade performance, where these are forecast in the three year operational plan for the CGU.
The impairment testing identified that the carrying value of Norway goodwill was greater than the CGU value in use. As a result, an impairment of £14m has been recognised in other operating expenses taking the carrying value to £nil. No other impairments have been identified, with recoverable value sufficiently exceeding carrying value elsewhere in the Group.
Sensitivities relating to key assumptions in the value in use model are shown in the table below. A 1% increase in the cost of capital and a 1% decrease in future growth rates have been considered, neither of which would result in an impairment of goodwill.
© 2020 Friend Studio Ltd File name: Notes_01_to_29_v26 Modification Date: 9 March 2021 11:26 am 23) Goodwill and intangible assets continued
24) Property and equipment Property and equipment is split between property and equipment owned and right-of-use assets as follows: 2020 £m 2019 £m
Right-of-use assets relate to leased properties and other equipment. Further information can be found in note 44.
Depreciation expenses of £13m (2019: £14m) have been charged to underwriting and policy acquisition costs.
Impairments of £4m (2019: £nil) have been recognised in UK&I underwriting and policy acquisition costs relating to fixtures and fittings not expected to be utilised further to the exiting of leased office space.
The carrying amount of Group occupied property that would have been recognised had the assets been carried under the cost model at 31 December 2020 is £4m (2019: £5m).
Financial assets measured at fair value 12 11,385 – 11,397 1,804 9,593
At 31 December 2020, the Group has accepted £531m (2019: £429m) in collateral, consisting of government debt securities of £508m (2019: £405m), which the Group is permitted to sell or repledge in the event of default by the owner, and cash and cash equivalents of £23m (2019: £24m). The obligation to repay the cash is included in the balance sheet in other liabilities and the corresponding cash received is recognised as an asset. The fair value of the collateral accepted is £531m (2019: £429m). The terms and conditions of the collateral held are market standard. The assets held as collateral are readily convertible into cash.
Currency risk (net investment in foreign operation) 1,541 – – 1,541 12 17
The Group also applies hedge accounting to specified fixed interest assets in its investment portfolio. In order to remove exchange risk from these assets the Group may also acquire cross currency interest rate swaps to swap the cash flows from the portfolio into cash flows denominated in pounds sterling or the functional currency of the entity acquiring the asset. The Group applies fair value hedge accounting when using ‘fixed to floating’ interest rate swaps and cash flow hedge accounting when using ‘fixed to fixed’ interest rate swaps. The interest rate swaps exactly offset the timing and amounts expected to be received on the underlying investments. The investments have a remaining term of between 5 months and 35 years, with the substantial majority having a term of less than 8 years. There have been no defaults and no defaults are expected on the hedged investments. The Group also applies cash flow hedge accounting to certain foreign currency operating expense contracts in order to reduce foreign exchange risk on these contracts.
In addition, as at 31 December 2020, the Group has borrowings from credit institutions under repurchase agreements of £121m (2019: £146m) (note 38). The Group continues to recognise debt securities in the statement of financial position as the Group remains exposed to the risks and rewards of ownership.
Repurchase arrangements are settled “delivery versus principal” and so are disclosed in the above table net of associated debt securities.
© 2020 Friend Studio Ltd File name: Notes_01_to_29_v26 Modification Date: 9 March 2021 11:26 am 26) Financial assets continued IFRS 9 ‘Financial Instruments’ The Group qualifies for temporary exemption from applying IFRS 9 ‘Financial Instruments’ on the grounds that it has not previously applied any version of IFRS 9 and its activities are predominantly connected with insurance, with the carrying amount of its liabilities within the scope of IFRS 4 and debt instruments included within regulatory capital being greater than 90% of the total carrying amount of all its liabilities at 31 December 2015 and with no subsequent change in its activities.
The fair value at 31 December 2020 and change during the year of financial assets that are held to collect cash flows on specified dates that are solely for payment of principal and interest (SPPI) and are not held for trading as defined under IFRS 9, nor are managed or evaluated on a fair value basis, is set out below, together with the same information for other financial assets: As at 31 December 2020 SPPI
The fair value gains/losses on SPPI financial assets and other financial assets during the year are £144m gains (2019: £114m gains) and £80m losses (2019: £31m gains) respectively.
Companies within the Group that are applying IFRS 9 and disclose relevant information in their own published financial statements in addition to that already included in these consolidated financial statements are indicated in Appendix B.
The fair value of property has been determined by external, independent valuers, having appropriate recognised professional qualifications and recent experience in the location and category of the property being valued.
The valuations of Group occupied properties and investment properties are based on the comparative method of valuation with reference to sales of other comparable buildings. Fair value is then determined based on the locational qualities and physical building characteristics (principally condition, size, specification and layout) together with factoring in the occupational lease terms and tenant covenant strength as appropriate.
© 2020 Friend Studio Ltd File name: Notes_01_to_29_v26 Modification Date: 9 March 2021 11:26 am 27) Fair value measurement continued Derivative financial instruments Derivative financial instruments are financial contracts whose fair value is determined on a market basis by reference to underlying interest rate, foreign exchange rate, equity or commodity instrument or indices.
In certain circumstances, the Group does not receive pricing information from an external provider for its financial investments. In such circumstances the Group calculates fair value, which may use input parameters that are not based on observable market data. Unobservable inputs are based on assumptions that are neither supported by prices from observable current market transactions for the same instrument nor based on available market data. In these cases, judgment is required to establish fair values. Changes in assumptions about these factors could affect the reported fair value of financial instruments.
Investment property Investment property valuations are carried out in accordance with the latest edition of the Valuation Standards published by the Royal Institution of Chartered Surveyors (RICS), and are undertaken by independent RICS registered valuers. Valuations are based on the comparative method with reference to sales of other comparable buildings and take into account the nature, location and condition of the specific property together with factoring in the occupational lease terms and tenant covenant strength as appropriate. The valuations also include an income approach using discounted future cash flows, which uses unobservable inputs, such as discount rates, rental values, rental growth rates, vacancy rates and void or rent free periods expected after the end of each lease. The valuations at 31 December 2020 reflects equivalent yield ranges between 4.15% and 15.41% (2019: 4.25% and 12.30%).
Private fund structures Loan funds are principally valued at the proportion of the Group’s holding of the Net Asset Value (NAV) reported by the investment vehicle. Several procedures are employed to assess the reasonableness of the NAV reported by the fund, including obtaining and reviewing periodic and audited financial statements and estimating fair value based on a discounted cash flow model that adds spreads for credit and illiquidity to a risk-free discount rate. Discount rates employed in the model at 31 December 2020 range from 0.2% to 8.7% (2019: 0.5% to 6.0%). If necessary the Group will adjust the fund’s reported NAV to the discounted cash flow valuation where this more appropriately represents the fair value of its interest in the investment.
Given the current ongoing economic uncertainty, the asset valuation techniques described above that rely on unobservable inputs are less certain, and additional sensitivity has been applied to the valuation of level 3 assets in this note on page 142.
Covid-19 has impacted financial markets with price volatility and changes in trading volumes. A review of the assets’ fair value and their classification on the fair value hierarchy has been performed. As a result of this review, Canadian preference shares of £178m (31 December 2019: £176m) have been transferred from level 1 to level 2 of the fair value hierarchy in recognition of the relatively low volume of trading in 2020.
The following table provides an analysis of financial instruments and other items that are measured subsequent to initial recognition at fair value as well as financial liabilities not measured at fair value, grouped into levels 1 to 3. The table does not include financial assets and liabilities not measured at fair value if the carrying value is a reasonable approximation of fair value.
© 2020 Friend Studio Ltd File name: Notes_01_to_29_v26 Modification Date: 9 March 2021 11:26 am 27) Fair value measurement continued Fair value hierarchy
Available for sale financial assets: Financial assets at FVTPL: Debt securities – – 12 12
Total value of liabilities not measured at fair value – 837 – 837
Total value of liabilities not measured at fair value – 814 – 814 1. During the year the price spread criteria applied to evidence sufficient activity in bond markets to meet level 1 classification requirements have been reviewed and aligned across asset categories and across the Group. As a consequence of this review, the 2019 fair value hierarchy has been re-presented to reclassify certain mortgage backed securities from level 1 to level 2, and to reclassify certain government securities from level 2 to level 1, with a net impact of a decrease to level 1 of £1,089m and an increase to level 2 of the same amount.
Total gains/(losses) recognised in: Total gains/(losses) recognised in: Other comprehensive income (5) 1 – – – (4)
Level 3 financial assets at 31 December 2020 309 422 12 285 19 1,047
The following table shows the level 3 available for sale financial assets, investment properties and Group occupied property carried at fair value as at the balance sheet date, the main assumptions used in the valuation of these instruments and reasonably possible decreases in fair value based on reasonably possible alternative assumptions.
Group occupied property – land and buildings1 Property valuation 19 (2) 19 (1)
Level 3 available for sale financial assets: Equity securities2 Cash flows; discount rate 309 (4) 279 (2)
1. The Group’s property portfolio (including the Group occupied properties) is almost exclusively located in the UK. Reasonably possible alternative valuations have been determined using an increase of 50bps in the discount rate used in the valuation. This increase has been considered in light of the current level of uncertainty and a change of 50bps is considered a reasonably possible scenario. The 31 December 2019 sensitivity has been restated using a change of 25bps, which is considered a reasonably possible scenario at the time. The 2019 sensitivity reported in the 2019 Group Annual Report and Accounts used a change of 100bps, which, with hindsight, was more severe than market conditions at that time warranted.
2. The Group’s investment in financial assets classified at level 3 in the hierarchy are primarily investments in various private fund structures investing in debt instruments where the valuation includes estimates of the credit spreads on the underlying holdings. The estimates of the credit spread are based upon market observable credit spreads for what are considered to be assets with similar credit risk. Reasonably possible alternative valuations have been determined using an increase of 50bps in the credit spread used in the valuation. This increase has been considered in light of the current level of uncertainty and a change of 50bps is considered a reasonably possible scenario. The 31 December 2019 sensitivity has been restated using a change of 25bps, which is considered a reasonably possible scenario at the time. The 2019 sensitivity reported in the 2019 Group Annual Report and Accounts used a change of 100bps, which, with hindsight, was more severe than market conditions at that time warranted.
The Group does not securitise any of its investments in financial instruments and does not create, promote or administer structured entities on behalf of third party investors. The Group therefore considers that it does not act as a sponsor for any structured entity.
In addition, the Group has commitments for future undrawn subscriptions limited to the amounts set out in the subscription agreements. The Group has no obligations to provide any other additional funding or other financial support to these entities. The Group has determined that its maximum exposure to structured entities is the sum of the carrying value and the undrawn commitments. These exposures at 31 December 2020 are summarised in the table below: Class of investments Nature of the underlying investments of the vehicle
Cash money market funds Short term cash deposits 447 – 447 365 – 365
Structured entities are not consolidated and are disclosed as follows in the consolidated statement of financial position: 2020 £m 2019 £m
The following changes have occurred in the reinsurers’ share of provision for unearned premiums during the year: 2020 £m 2019 £m
Reinsurers’ share of provision for unearned premiums at 1 January 746 739
Total reinsurers’ share of provision for unearned premiums at 31 December 716 746
Of the £199m (2019: £209m) deferred tax asset recognised by the Group, £188m (2019: £193m) relates to tax jurisdictions in which the Group has suffered a tax loss in either the current or preceding period; £181m (2019: £180m) of which relates to the UK.
Notes to the consolidated statement of financial position continued 31) Current and deferred tax continued
The impact of these scenarios on forecast UK profits and the deferred tax asset is summarised below: Profits £m
The following table summarises the main categories of deferred tax assets/(liabilities) recognised by the Group: 2020 £m £m
Net amount arising on acquisition/disposal of subsidiaries and other transfers 1 –
© 2020 Friend Studio Ltd File name: Notes_30_to_end_NEW_v21 Modification Date: 9 March 2021 12:19 pm 31) Current and deferred tax continued
Unrecognised tax assets/(liabilities) as at 31 December 2,385 528 2,313 454
Unremitted retained earnings relate to the Group’s subsidiaries in Canada. The Group can control, subject to regulatory and governance requirements, the remittance of earnings to the UK and there is no intention to remit the retained earnings in the foreseeable future if the remittance would trigger a material incremental tax liability. As such the Group has not recognised any deferred tax in respect of the potential taxes on the temporary differences arising on unremitted earnings of continuing overseas subsidiaries.
To be settled after 12 months 506 363 33) Cash and cash equivalents £m £m
Cash and cash equivalents, and bank overdrafts (consolidated statement of cash flows) 1,083 886
Total cash and cash equivalents (consolidated statement of financial position) 1,094 909
Cash and cash equivalents of £27m (2019: £29m) held in Canada are restricted for operational RSA Group use.
Notes to the consolidated statement of financial position continued 34) Share capital continued During 2020, the Company issued a total of 3,622,316 new Ordinary Shares of £1 each ranking pari passu with Ordinary Shares in issue (2019: 4,707,366 new Ordinary Shares of £1 each), on the exercise of employee share options and in respect of employee share awards. The number of Ordinary Shares in issue, their nominal value and the associated share premiums are as follows: Number of shares
Preference Shares of £1 each 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 Company.
At 31 December 2020, the total number of options over Ordinary Shares outstanding under the Group employee share option plan is 5,045,575 (2019: 4,463,331) and the total number of potential shares outstanding under the long term incentive plan and under the Sharebuild plan is 11,035,537 Ordinary Shares (2019: 9,941,034 Ordinary Shares). Further information on the employee share schemes is provided in note 19.
© 2020 Friend Studio Ltd File name: Notes_30_to_end_NEW_v21 Modification Date: 9 March 2021 12:19 pm 36) Non-controlling interests The non-controlling interests (NCI) of the Group includes the interests in the following Group entities: NCI shares at 31 December 2020
During 2020 the dividends paid to the non-controlling interests in the Middle East were £13m (2019: £13m).
38) Other borrowings The Group’s other borrowings as at 31 December 2020 are £132m (2019: £169m), relating to borrowings from credit institutions under repurchase agreements of £121m (2019: £146m) and bank accounts in overdraft £11m (2019: £23m).
There is considerable uncertainty with regard to the eventual outcome of the claims that have occurred but remain unsettled by the end of the reporting period. This includes claims that may have occurred but have not yet been notified to the Group and those that are not yet apparent to the insured.
The Group uses a number of commonly accepted actuarial projection methodologies to determine the appropriate provision to recognise. These include methods based upon the following: · Historic claims development trends are assessed and used to inform extrapolation of the latest payments and reported claims cost for each prior period to their ultimate value
· Estimates based upon a projection of claims numbers and average cost
· Bespoke methods for specialist classes of business, for example, for a legacy Children’s PA product in Scandinavia we use a frequency/severity model based upon transition assumptions between the various stages of a claim
· Severity, based on different average claims costs observed during the year