Net written premiums were up 3% during the year at constant exchange rates with growth of 16% in Emerging Markets and 11% in Canada, with Scandinavia flat. Premiums were down 4% in the UK and Western Europe.
COMMERCIAL In the fast-paced world of commercial enterprise our customers rely on us to help them mitigate the impact of potential risks. Our commercial products ensure that if the need arises, their business will be up and running again as quickly as possible.
A Motor D Property B Marine and Other E Group Reinsurance C Liability
SPECIALTY Our Global Specialty Lines business supports the insurance needs of large and specialised businesses worldwide. Our philosophy is simple; it’s about understanding our customers’ businesses, inside-out and back-to-front.
SO WHO ARE OUR CUSTOMERS? WE PROTECT INDIVIDUALS AND BUSINESSES, PROTECTING CARS, PROPERTY, PETS, LIABILITY, MARINE AND PERSONAL ACCIDENT RISKS
1 Estimated number of unique customers 2 Estimated number of policies in force
1. The total no claims bonuses of our More Th>n customers adds up to two million years – about the same time that man has walked upright on the Earth.
4. In Denmark, in 2013, we helped 13 families to rebuild their homes after fires, we replaced 2,086 windows, helped 3,850 people get new bicycles and replaced 4,279 mobile phones.
5. In Canada our Johnson business has over 400 affinity group partnerships; more than four million Canadians are members of affinity groups serviced by Johnson.
THE EFFECT OF CHANGING CUSTOMER BEHAVIOURS CHANGING CUSTOMER BEHAVIOURS ARE CREATING NEW PRODUCT OPPORTUNITIES
Strategic report 8 Business model 10 Market dynamics 14 Chairman’s statement 18 Group Chief Executive’s statement 20 Our strategic priorities 24 Key performance indicators 26 Our people 28 Corporate responsibility 32 Risk management 36 Financial review
Other information 173 Shareholder information 175 Financial calendar 176 Jargon buster
FACTS ON FACEBOOK Customers can get advice on how to prevent and handle childhood accidents and illness with the click of a mouse.
THERE FOR THEM BEFORE THEY’RE EVEN BORN Partnering with Sweden’s most popular pregnancy app has led to a 42% increase in the uptake of pregnancy insurance.
CHILD SICKNESS AND ACCIDENT INSURANCE IN SWEDEN Sweden is probably the only country in the world where over 80% of parents buy sickness and accident (S&A) insurance for their children. This is despite their excellent social security coverage.
• Most parents make their choice of provider before their child is born.
We’re opening up RSA to them in a way we have never been able to before.
Our most senior technical and market experts are now exclusively available to work with our top brokers in the market to address their needs directly, which is something they have told us they value the most.
Our exclusive trading sites are staffed by the right experts, who have the authority to make decisions quickly and make things happen. All products and markets – from SME deals to global programmes, are available to trade through a local team of technical and industry experts backed by the breadth and depth of RSA.
Our product offers are constantly evolving because our customers’ needs are too. And these are different all over the world, so we need to be agile and help our brokers keep up with the changes.
The stopover in Vancouver coincided with the tail end of the Northwest Passage shipping season, and the vessel’s owners decided to consider this unprecedented route instead. However, no commercial bulk carrier had sailed through the Northwest Passage before and this represented a considerable challenge in obtaining insurance for the voyage.
Before agreeing to provide hull coverage, RSA sent experts to Denmark, including our own marine surveyor, to review the route with the ship’s owners. Issues that had to be considered and resolved included expected levels of ice coverage, whale breeding and migration grounds, and whether there was sufficient water depth at all points along the proposed route.
“Your immediate response would be, ‘Well, that’s incredible – that’s never been done before – do I just reject it, or do I make some inquiries and see what I can do?’ ”
Responding to a challenge like this allows us to make some industry firsts.
CHARTING A NEW COURSE We insured the first fully loaded commercial bulk carrier, Nordic Orion, to sail the Northwest Passage
We distribute our products through many different channels. Efficient access to customers is key if we are to continue to develop our business.
LOWER CLAIMS COSTS AND HIGHER RETENTION Generally, claims which are settled quicker, settle for less, meaning claims ratios fall. Satisfied customers will stay with us for longer reducing acquisition costs.
ENABLES CUSTOMERS TO MANAGE THEIR RISK APPETITE We work with our customers to make sure that they can reduce their risks, reducing premiums for them and claims costs for us.
Our business generates significant assets which are prudently invested to deliver returns to shareholders.
SPREADING BEST PRACTICE As markets evolve we can quickly export best practice from one country to another meaning that the best of RSA is available to all the societies we operate in.
AS A GLOBAL INSURER WE ARE ABLE TO WRITE BUSINESS IN 140 COUNTRIES. THIS GIVES US A UNIQUE PERSPECTIVE ON THE MACRO TRENDS IN THE GLOBAL PROPERTY AND CASUALTY SECTOR.
THE TRENDS THAT SHAPE OUR WORLD Customers’ needs are constantly changing – both in terms of what they buy and how they buy it. Our product range continues to evolve as we respond to these changing needs. Furthermore we continue to respond to changing distribution trends. The pace of internet adoption varies across the world, but in all countries we are seeing growing demand for online sales and service – we are responding by recycling the capabilities we have in more mature markets (for example the UK) into those areas which are only just beginning to adopt online purchase of insurance (for example Scandinavia and Emerging markets).
Weather frequency and severity appears to be increasing across the world. In 2013, we suffered some of the worst natural catastrophes in recent years including heavy flooding in Canada and windstorms in Europe. We are working hard to understand these changing weather patterns and to
Serving the global community The global trends in this map are affecting insurance markets across the world. As a global insurer we work with our partners to anticipate and understand these trends, and improve our business model...
The Atlantic region consists of four provinces with a small and rural population. Quebec is the second largest P&C market, but is the most profitable. Ontario constitutes the largest population and GDP, and therefore it is the largest P&C market. Of note is the size of the Ontario Auto market which accounts for 25% of the total industry premiums. Lastly, the West, which consists of four provinces, and is the fastest growing economic and insurance region in Canada, given expansion in its rich resource sector.
The largest line of business across Canada is personal auto, which is the only provincially rate-regulated insurance product in the country. This means that insurers can’t compete with a single national product, and auto rates can take up to six months to be approved. Additionally, primary auto insurance is provided by government insurers in the provinces of British Columbia, Saskatchewan, Manitoba and partially in the province of Quebec.
UNITED KINGDOM AND WESTERN EUROPE The UK economy has shown clear signs of recovery in 2013 and is now leading the major economies in the West. Growth of close to 2.5% is forecast for 2014. Whilst the services sector is leading the recovery, the UK manufacturing and construction sectors are also picking up.
Despite this, consumers are still price conscious, and consumer spending is expected to recover only gradually over the next few years. The prospects for further energy and food price rises, as well as eventual upward pressure on interest rates, may serve to dampen this.
SCANDINAVIA Together, the three Scandinavian countries where we are present represent approximately £800bn of GDP and comprise 20 million people.
There is a very consolidated insurance market structure across the region with the top four firms controlling between 60% and 80% of the market. Most players are big in two of the three countries, and smaller in the third. Also, in our two largest markets, Sweden and Denmark, the market structures have been very stable for many years.
Whilst the product mix across P&C is similar to the rest of the world, there are some special product areas, like Sickness and Accident insurance, Workers Compensation and Renewable Energy, that are more unique to Scandinavia.
In terms of distribution, there is virtually no broker activity in Personal lines. A lot of business is still sold by agents selling face to face but the dominant channel is direct to customers through call centres.
Perhaps surprisingly, the number of customers completing a sale on the internet is pretty low. This currently stands at around 1–2% in Denmark and 15% in Sweden. Whilst a large proportion of customers actually do go online to get an initial quote, they tend to want to complete the sale over the phone. Nevertheless, we expect the level of completion online to steadily increase in the future.
In Latin America, medium-term economic growth of between 2 and 5% is expected across the region. Unemployment rates are at historic lows and are expected to remain stable. Whilst interest rates have declined they remain stable and are significantly higher than in US and Western Europe. Exchange rate volatility has been a feature across the region. Our assets and liabilities are well matched by country which means that the primary foreign exchange exposure we face is on translation of results into Sterling.
In Central and Eastern Europe, the economic environment has been steadily improving with good growth prospects across the region. Interest rates and unemployment are stable. The introduction of the Euro in Latvia in 2014, and Lithuania in 2015, is expected to drive increases in foreign investments.
Buoyant new car sales are expected in the UAE (10% compound growth over the next three to five years).
In Asia, Hong Kong is expected to deliver economic growth of 2–3% in the medium-term. The non-life market in Singapore is fiercely competitive, whilst we are seeing increasing specialty lines activity from London and European insurers across the region.
Regrettably, the impact of our 2013 results and the rights issue that we intend to launch, do not justify the payment of a final dividend.
In addition to the appointment of Stephen as Group Chief Executive, we welcomed another new Board member, Kath Cates, during 2013. Kath brings a wealth of financial services experience to the Board.
Edward Lea and Malcolm Le May have indicated that they do not intend to stand for re-election at the forthcoming Annual General Meeting and will retire as Directors with effect from 8 May 2014. I would like to thank them both for their contribution to RSA. With effect from that date, Johanna Waterous will succeed Edward Lea as the Senior Independent Director and Kath Cates will succeed him as Chair of the Board Risk our view that the issues in Ireland were isolated to Ireland, but we are further tightening our processes across the Group to ensure that these types of events do not happen again.
In early December, the Board accepted the resignation of Simon Lee, the Group Chief Executive, and asked me to assume the responsibilities of Executive Chairman. I would like to thank Simon for his contribution to RSA over the last decade and also over the last two years as Group Chief Executive, a period that has featured a number of significant challenges. The Board wishes him well for the future.
Part way through this business review, on 4 February 2014, I was very pleased to be able to announce the appointment of Stephen Hester as RSA’s new Group Chief Executive. He is an exceptional business leader with
The sign of the true strength of an organisation is how it deals with adversity. Despite a very challenging year, I have been impressed by the quality of our people and the way they have remained focused and committed to the organisations goals. I look forward to a much better year in 2014.
2. During the course of 2013 we identified issues with bodily injury claims in our Irish business. This prompted a full internal review of the Irish reserves, resulting in the announcement of £128m of reserve strengthening of which around half related to business written in 2013 and around half related to business written in previous years. Around three-quarters of the overall strengthening was due to the adverse bodily injury trends.
5 November 2013 – we announced that we had commenced a review of our Irish reserves with the probable need for strengthening.
10 November 2013 – announced the appointment of PwC to undertake a comprehensive review of the issues identified in the Irish claims and finance functions.
28 November 2013 – announced the resignation of RSA Ireland’s CEO, Philip Smith.
13 December 2013 – announced the completion of the Irish reserve review and a further injection of £135m of capital into RSA Insurance Ireland.
8 January 2014 – following an internal disciplinary process, RSA Ireland’s CFO and Claims Director were dismissed for their roles in the irregularities.
OUR RESPONSE: The work of PwC, KPMG and RSA’s Group Internal Audit confirms the Board’s view that there is nothing fundamentally wrong with RSA’s Control Framework and the issues identified were restricted to Ireland.
Nevertheless, we acknowledge that there are lessons to be learnt and we are tightening elements of our Control and Financial Framework in response to these events. Specifically, there are four key things we are in the process of addressing: 1. As a result of the issues in Ireland we are ensuring that the appropriate checks and balances in our operating model are working properly and that we can demonstrate their rigour and independence.
3. We are tightening up our processes to reduce the risk of management override and inappropriate collaboration.
4. Finally, we are ensuring that our whistleblowing policy is recommunicated to all employees and is effective and properly understood.
DECEMBER UK STORMS Severe adverse weather impacted the UK in late December with strong winds, heavy rainfall and significant flooding. Claims notifications to RSA peaked at nearly 40 times the expected daily level for these dates. The net cost to RSA was £14m.
IMAGES 1 Fallen tree obstructs a road Kalvehave, Denmark, October 2013.
ATLANTIC ICE STORM A severe ice storm (a storm which results in the accumulation of at least 0.25 inches of ice on exposed surfaces) hit Toronto and Eastern Canada in December with significant damage to trees, resulting in extensive power cuts, property and auto damage. The net cost to RSA was £12m.
May I say firstly that I am greatly encouraged by, and appreciative of, the welcome extended by the Board and the wider RSA team. We are in the difficult position of both asking shareholders for significant funds and announcing poor results for 2013. I therefore want to offer you my initial views on RSA, its strengths and weaknesses, as well as give you a sense of how I see the way forward.
• We work for our Shareholders. Our job is to set a disciplined strategic framework within which our potential can best be realised. We need to operate crisply and effectively within that framework to build the best performing businesses that we are capable of. We need to communicate clearly what we are doing and why, and to ensure it represents the best long-term path to shareholder value.
The operating results in 2013 are poor overall. RSA’s problems in Ireland and weather issues across the Group hit hard but are recognised and action has been taken. Our businesses in Canada, Scandinavia and Latin America are leaders in their respective markets and offer the potential for good returns and premium growth. In the UK, we have the opportunity and need to improve our performance and have already started this journey, although there is more to do in this tough competitive market. Low interest rates are set to restrain Group investment income for some time. And our spread of smaller market activities is an investment distraction too wide for success.
We have also taken some significant non-cash charges at the year end to recognise the facts of the situation we now deal with. There is some goodwill from past acquisitions we need to write down. Our UK business spent heavily on (capitalised) technology between 2006 and 2011 which has not produced the scale of improvement targeted and needs to be partly written down. Prudent management dictates that we lower the discount rate on long-tail liabilities. The Towers Watson review of our overall reserves has confirmed that they fall within a range of reasonable best estimates.
Our capital position There is no single capital measure that captures what we need to achieve. But across the various ratings, internal and regulatory measures, we simply do not have enough tangible equity to properly support our business. This is partly due to 2013 setbacks and partly to rising regulatory standards. But it also reflects a business that over some years has become gradually undercapitalised and overleveraged, and has suffered from weakened tangible equity with acquired goodwill, software expenditure and high dividends relative to profits earned. In the future, we intend to maintain stronger capital metrics targeting at least median comparable industry levels.
We reluctantly concluded we must ask shareholders, via a rights issue, for a substantial sum to augment the ‘self help’ and complete our capital plan. This issue, which has been fully underwritten on a standby basis by our banks, at £775m represents c.20% of our market value as at 26 February. This money is needed to get our capital position to a strong place, anticipatory of industry capital trends and allow our action plan for the business to be constrained by value and not by capital distress. It is needed to protect shareholders’ existing investment in RSA and to allow the actions we plan to make the most of our future value.
We will consider further options as the Group stabilises. If there are sensible alternatives to further reduce legacy risks or otherwise create value we will examine them.
The impact of the 2013 results is that a final dividend cannot be justified. We regret this. However, we are clear that dividends are an important component of shareholder returns for companies in the general insurance industry, and RSA will be managed with that goal in mind. Looked at in this early stage of RSA’s recovery actions, a mediumterm goal of paying out 40–50% of earnings in dividends seems sensible. Should unused surplus capital still develop this can be returned to shareholders through other means. The pace with which dividends return to this target range will be determined by the pace and success of execution of our recovery plans, by markets and by the evolution of capital requirements from rating agencies and regulators. Any 2014 interim dividend, so soon after the proposed rights issue proceeds are received, is likely to be modest.
Our action plan The key ingredients of our plan are therefore: 1. Tighten the strategic focus of the Group so we can concentrate on performing sustainably well in core businesses.
2. Reset the quantity and quality of capital strength the Group works with, and the disciplines that will sustain it. This requires focus and transparency on risk profile as well as on the capital that supports it.
Through achieving our strategic priorities, we aim to build a business which stands out within the insurance sector due to its prudent management, balance sheet strength and clarity of communication. We are present in many of the most attractive insurance markets in the world and we either have, or are building, profitable market-leading positions in these markets. We continue to work hard to improve the efficiency of the business without compromising our high standards for customer service.
• Accounting policies and treatments are set to ensure that an appropriately prudent view is maintained. For instance during 2013 we adjusted our assumptions for discounting liabilities to more closely reflect the low yield environment.
• Asset allocation and investment management policies are cautious. We are largely invested in investment grade sovereign and corporate bonds with minimal exposure to higher volatility classes such as equities.
• Appropriate use of reinsurance is made to reduce exposure to catastrophe and other insurance risk. During the year we increased our reinsurance buying to protect shareholders from the extreme weather events we encountered.
• Using external independent bodies to check our work and ensure standards are maintained. During 2013, in addition to the use of KPMG, our external auditor, we employed experts in reviewing our handling of the Irish issues, and in reviewing the adequacy of our reserves across the world.
• Improved the quality of disclosure on prior year reserve releases to demonstrate the sustainability of this income stream.
We remain committed to this programme of improved disclosure and to making ourselves available to investors to help them with their investment decisions.
We have demonstrated a consistent track record of strong profitability with combined ratios in the high 80s. RSA is the only Global insurer with significant retail and commercial operations in Scandinavia. As such, we believe that this gives us strategic advantage – in terms of sharing expertise from the rest of the Group with the Scandinavian business, as well as helping financial performance through access to the Group’s reinsurance programme and capital diversification.
Emerging Markets The emerging markets continue to offer an attractive mix of growth and improving profitability. Many of these markets are characterised by a rising middle class with increasing disposable income and insurable assets which, together with the prospect for fast growing insurance penetration, provides exciting opportunities. We are particularly attracted to Latin America where we have a strong presence across the region. We are the number one insurer in Chile, number three in Uruguay, and a leading insurer in Argentina. We also have a leading Marine business in Brazil, and businesses in Mexico and Colombia.
EFFICIENT COST BASE In order to maximise profits for our shareholders we need to ensure that we are effective at managing our cost base. This is something that we do on an ongoing basis, for example: • In Scandinavia we are implementing a new product system which, in addition to reducing our costs, will improve the quality of our products and service.
Looking ahead to 2014, we will continue to seek opportunities to reduce our cost base.
THINK CUSTOMER At RSA we aim to put customers at the heart of everything we do, and it’s something we’ve been committed to for over 300 years.
Delivering for our customers is an important part of our strategy. We believe in building strong and profitable long-term relationships with our customers, encouraging them to buy more, stay longer and recommend us. With increasing competition and challenging market conditions, we believe that delivering for our customers is more important now than ever.
To ensure we remain on track with our commitment to delivering for our customers, we use key goals such as Net Promoter Score (NPS) and Customer Engagement to measure our performance over time.
Definition Premiums in respect of policies written during the year, less any costs associated with purchasing reinsurance protection
Commentary NWP is an important metric for RSA, in particular, ensuring an appropriate growth rate that matches the footprint of the Group and its capacity for growth. Growth rates in our core markets would typically be in the low to mid single-digit range, whilst we would expect to see higher growth in our emerging markets businesses.
Commentary Insurance companies manage a number of different capital metrics. These metrics have a common theme, which is that they all benefit from growing levels of TNAV. It is also important because TNAV represents the underlying value of our business.
WE CONSIDER THAT THE FOLLOWING NINE KEY PERFORMANCE INDICATORS ARE IMPORTANT IN MEASURING THE DELIVERY OF OUR STRATEGIC PRIORITIES.
Note: Where relevant, KPI data shown here has been restated for changes to IAS19 ‘Employee Benefits’.
Commentary Whilst there are several ways of measuring capital strength, the headline focus falls on Solvency I (IGD), one of two key measures stipulated by our lead regulator, the PRA, as well as our own internal economic capital assessment model (ECA) which assesses the likely capital requirements of the Group in an extreme stressed scenario.
Definition Profits generated from underwriting insurance business, plus the return from investments, less items such as central overheads, interest expense, amortisation and tax
Commentary Healthy and growing levels of profit are important as they pay dividends and, when retained in the business, drive growth in TNAV and improve capital metrics.
Definition We use key measures such as net promoter score (NPS) – a measure of the number of customers who would recommend our products less the number of customers who would not recommend them
Definition Net tonnes of carbon emissions (CO2) per £m of net written premiums (NWP)
Commentary We understand the importance of reducing our own environmental impact. Our operations in the UK, Ireland and Group Corporate Centre are carbon neutral, offsetting their equivalent emissions in renewable-energy projects in China, India and South America which are certified to the Voluntary Carbon Standard.
FOSTERING DIVERSITY AND INCLUSION The Group’s commitment and desire is to always appoint the best person for the job.
In order to reflect the needs of our customers, facilitate innovation and collaboration, and ensure we have the capabilities we need for the future, we believe that fostering a diverse workforce and inclusive culture are central to our long-term success. In 2013, we initiated a global Diversity and Inclusion Programme, with a number of workstreams to further develop the diversity of our workforce.
Our key area of focus is to strengthen our pipeline of female employees in senior leadership positions. We have a number of initiatives under way, including a global female sponsorship programme, female networking events and mentoring programmes. Enhanced flexible working opportunities have been introduced, along with a new global recruitment policy and increased intake of females on our global talent programmes. In 2013, we entered into a partnership with Mumsnet, a UK social networking site for parents and carers, and RSA is a member of its Family Friendly Employer scheme.
A Executive Development Programme B Senior Talent Acceleration Programme C Fast Track Programme
DEVELOPING A HIGH PERFORMANCE CULTURE We believe we can create competitive advantage by building and maintaining a culture where high performance is recognised and rewarded, and appropriate actions are taken to address underperformance.
To support this, in 2013, we refreshed our leadership development programmes, a number of which were already externally recognised and award winning. The Group now has programmes in place at all levels to develop its future leaders and realise the potential of its talented people.
• The Fast Track Programme – for emerging talent, and is styled on a ‘Mini-MBA’.
• As well as our talent programmes we have built Academies and Centres of Excellence to support the development of specialist and technical expertise. There are Centres of Excellence for Marketing and eBusiness as well as the long established Technical Academy.
CREATING AN ENGAGED AND MOTIVATED WORKFORCE In 2013, the Group continued to partner with leading engagement specialist Gallup, using their Q12 survey methodology. The Q12 survey is completed by around three million people globally every year and measures the key drivers of employee engagement. The Group runs its engagement survey annually and it is open to all employees, with 92% of employees participating in the survey in 2013.
RSA has a long-standing philosophy of encouraging employee share ownership, operating two HMRC-recognised share schemes: Sharebuild and Sharesave. Details of the Executive Directors’ interests in Sharesave and Sharebuild are noted on page 87. The current participation in the two schemes is as follows: Total Employees
The Group is also committed to fostering a constructive relationship with recognised independent trade unions, ensuring a regular and open dialogue on business issues and early consultation on changes affecting the workforce. In the UK, Unite is formally recognised through a partnership agreement which covers collective consultation and bargaining on behalf of non-management employees. The Management Association (TMA) represents managerial employees under a separate consultative agreement. In Scandinavia, the Group has formal meeting forums with the national unions in Denmark, Sweden and Norway, respectively, where the Group informs and negotiates changes affecting the workforce. Within the Group’s CNS operation in British Columbia, Canada, there is a collective bargaining agreement with the Canadian Office and Professional Employees Union. The European Works Council (EWC) is a cross European body that meets annually and was created to enable information sharing and consultation on transnational issues affecting our European workforce.
ISSUE Our products and services provide everyday protection for our customers’ families, pets, homes, cars, businesses and possessions. They help make our communities safer places to live, work and travel.
Motor insurance is a significant part of our business and that means we have a clear interest in making driving safer. It is a tragedy that more than a million people every year are killed on roads and a further 50 million are injured. Road accidents are the world’s leading cause of death for young people and the World Health Organization believes they will be the third-largest burden on global health by 2020. The emotional, economic and social cost is substantial, with most countries losing 1–3% of their Gross National Product as a direct result.
ISSUE Our customers and our business thrive when they are part of healthy, prosperous communities and we believe there are twin challenges in bringing down youth unemployment around the world – which stands at nearly 73 million – and in fostering entrepreneurship that supports economic growth. That is why we empower our people to champion these issues and the causes which are close to their hearts and can have the most impact in the places they live and work.
Road safety is something the whole Group unites behind but we continue to work on other prevention and safety issues too, including our ongoing water safety programmes in Sweden through our Trygg Hansa brand.
RESPONSE Our new approach will support communities by targeting two specific areas: Education and Employability; and Enterprise and Entrepreneurship. We will be asking our people to use their knowledge and skills to help raise the achievements and aspirations of young people and to champion the next generation of entrepreneurs.
In addition to the two areas of focus, we want to encourage our people to support issues close to their hearts. RSA has a workforce that is passionate about making a difference to local charities and we encourage them to support the causes they care about by providing matched funding and time off for volunteering. In 2013, RSA made £1.86 million (2012: £1.6 million) of charitable corporate donations.
THRIVING COMMUNITIES ACTION Flash floods in Alberta, Canada in the summer of 2013 caused widespread devastation, cutting off vital supplies and submerging thousands of homes and businesses. Our priority was to ensure our customers were receiving the support and service they needed, with our claims teams out in full force to help people get their lives and businesses back on track as quickly as possible. To support the relief efforts further, a corporate donation of $100,000 was made to the Canadian Red Cross. We also matched donations made by employees across the country, while a group of employees spent two days volunteering in High River, one of the hardest-hit regions in the province. In November, the Canadian Red Cross recognised RSA Canada for its contribution to the largest emergency response deployment in the country’s history.
In the UK, we launched a new partnership with the Dame Kelly Holmes Legacy Trust* (DKHLT), a charity which helps disadvantaged young people build their confidence and employability skills. Our three-year funding, and access to our online training resources, supports their ‘Give Back by at least 274,000 drivers. The ‘Manifesto of the Movement’ was signed by partner organisations, volunteers and members of the press and all 200 INTOUCH staff played their part in the internal launch. Meanwhile road safety messages were taken to a number of Moscow schools as part of an ongoing programme of visits. The Movement has its own website and Facebook page with more than 30,000 unique users per month.
* Adrian Brown, RSA UK and Europe CEO, is a trustee of DKHLT
SUSTAINABLE FUTURE ACTION RSA has partnered with WWF-Canada since 2009, funding critical marine conservation activities and working to understand better the impact of a changing climate on our oceans. Expert ecological and environmental insight gained through this partnership helped RSA to underwrite a historic journey made by the Nordic Orion, a 225-metre, ice-strengthened vessel, when it sailed from Vancouver, Canada to Pori, Finland in September 2013. Rather than travelling through the Panama Canal, as would usually be the case, the voyage went through the Northwest Passage, becoming the first commercial bulk carrier to do so. The benefits were significant, with 1,000 nautical miles taken off the route-cutting USD$80,000 in fuel consumption and reducing the journey time by five days. The ship was also able to take 25% more cargo than if it had gone through the shallower Panama Canal. Providing expert advice on ecologically sensitive ares is one way in which RSA, as a leading marine insurer, is committed to promoting the adoption of best environmental practices within the worldwide shipping industry. RSA is a member of the Sustainable Shipping Initiative (SSI), an alliance of global companies and non-governmental organisations (NGOs) founded by the Forum for the Future.
RESPONSIBLE BUSINESS Our CR programme is underpinned by a robust internal governance structure and policy framework. Ultimate responsibility rests with our Group Chief Executive and our CR Committee ensures accountability and delivery across business lines. Our key non-financial data is assured annually by external auditors.
OUR SUPPLY CHAIN We work closely with our business partners and intermediaries to reduce our collective environmental impacts and manage social issues in our supply chain.
In 2012, we began working with our investments teams and WWF to understand how environmental, social and corporate governance issues are, or can be, integrated into fixed income investment pricing and assessment. This work continued in 2013.
GREENHOUSE GAS EMISSIONS FOR RSA INSURANCE GROUP (TONNES OF CO2e *)
Net tonnes CO2 per £m NWP 4.1 4.0 * Group carbon dioxide equivalent emissions (tonnes) Scope 1: All direct GHG emissions. Scope 2: Indirect GHG emissions from consumption of purchased electricity, heat or steam. Scope 3: Other indirect emissions
GEOGRAPHICAL BREAKDOWN OF GREENHOUSE GAS EMISSIONS FOR 2013 (TONNES OF CO2e *)
This assessment has been carried out in accordance with the World Business Council for Sustainable Development and World Resources Institute’s (WBCSD/WRI) Greenhouse Gas Protocol; a Corporate Accounting and Reporting Standard, together with the latest emission factors from recognised public sources including, but not limited to, Defra, the International Energy Agency, the US Energy Information Association, the US Environmental Protection Agency and the Intergovernmental panel on Climate Change.
RISK MANAGEMENT THE FUTURE SUCCESS OF THE GROUP IS UNDERPINNED BY OUR CONSERVATIVE RISK PROFILE AND CLEAR RISK APPETITE.
The Board is closely involved in risk management via the Board Risk Committee which meets quarterly. The quarterly risk reports monitor the status of all risks and will form an integral part of our ORSA process.
Strong culture • Board set ‘tone from the top’ of open communication and engagement • Putting the customer at the centre of what we do • High quality and engaged staff.
Rigorous review of RSA’s planning process: The Group and regional Risk functions subjected the Operational Planning process to significant independent challenge, especially given the Group’s reduced capital strength and the importance of aligning strategic decisions with appropriate earnings expectations. This involved early and continual engagement, objective analysis (both top-down and portfolio level bottom-up), trend and peer comparisons, and cross-checking with other risk inputs. The result is increased confidence given to the Board in the robustness of the revised Plans.
Monitoring capital: The Risk function and Board Risk Committee devoted significant time to capital during 2013, developing and approving an enhanced risk appetite to set out more consistently and explicitly the target range and buffers for each principal capital measure. This was calibrated against standard stress tests, reputational risk assessment and model risks. The Committee oversaw a reduction in risk appetite during the year to reflect the reducing capital buffers: equity exposures were reduced, additional reinsurance protection was purchased, M&A activity was halted and capital action plans were launched.
Our strategic risk profile is our forward-looking assessment of the principal risks to delivering our strategy. Towards the end of 2013 we launched our business review, and we are adjusting our strategy; as a result, as in any time of change, a key risk for us to manage is the alignment of our strategy, execution and impact on financial performance with the expectations of our shareholders. As part of the management of this risk, the Risk function conducted an independent, end-to-end challenge of our business planning process which supports its robustness and our confidence in the future.
There is evidence that regulators may, in the light of the introduction of Solvency II, seek to enforce greater restrictions on the fungibility of capital, in other words, whether the capital we hold across our businesses is accessible to support the risk profile over appropriate time-frames. As an internationally diversified group, we continue to monitor this risk carefully in dialogue with our regulators, and to manage the internal capital flows between our entities effectively.
Risk Description and impact How we manage Change in likelihood in year
Insufficient capital generation over medium-term to support dividend and corporate activity
• Accelerated delivery of UK strategy • Delivery of other regions’ operational plans • M&A moratorium and additional reinsurance protection • ALM and cashflow risk management • Capital strategy project to rank options
Impact of negative long-term macroeconomic trends, financial market volatility and/or persistently adverse yield environment
Failure to develop and distribute appropriate and/or innovative products to existing/new customers and new channels
• Group Architecture and IS Strategy • E-enablement initiatives • Customer Engagement programme
Failure of reinsurance programme to deliver planned benefits through e.g. counterparty failure, operational error or failed recovery processes
• Develop articulation of desired culture • Design indicators to assess cultural risks and enable audit • Global Diversity and Inclusion (D&I) programme underway • People and Leader Expectations in development for Brand refresh
• Remuneration committee governance • Review of remuneration system • Investor and media relations 34 RISK MANAGEMENT
• Financial volatility caused by increasingly interconnected worlds, too-big-to-fail industries and increasing competition for resources
• Social volatility caused by high youth unemployment, gender imbalance in the developing world, etc. • Increase in environmental disasters (e.g. droughts, hurricanes, etc.)
• Ageing population in need for more health and pension related insurance products • Increased ethnic diversity → further segmentation; Polar lifestyles, obesity vs fitness → better targeting • Shifts in ‘mindset’ of workers ‘Contentment vs striving’ • Outsourcing/off-shoring developments in light of productivity/performance focus • R&D/innovation imperative driving war for talent requiring new organisational structures
DISTRIBUTION OF QUANTIFIABLE RISKS Our internal model provides a quantification of the total amount of risk borne by the Group, expressed as the amount of capital required to enable it to meet all liabilities to a confidence level consistent with the Group’s target ‘A’ rating.
Consistent with our strategy and appetite, the majority of the Group’s risks relate to insurance, comprising higher than anticipated underwriting losses, net catastrophe losses and reserve deterioration.
Within our defined-benefit pension schemes we have progressively reduced risk over a number of years through a succession of significant de-risking actions; however, due to the large size of the schemes relative to the business, they still present a material exposure, currently exacerbated by the economic environment producing a prolonged period of low real-yields.
targeted reductions in Scandinavia and the UK and Western Europe. Our 2012 acquisitions in Argentina and Canada added two points of growth. Foreign exchange accounted for one point of growth on a reported basis.
The loss ratio (a measure of the value of claims as a proportion of premiums) was 69.5% (2012: 66.0%). The underlying loss ratio (excluding large losses, weather losses and prior year development) was 59.9% (2012: 59.5%) and large losses were in line with expectations at 7.1% (2012: 7.0%). However, weather losses of 3.5% (2012: 2.2%) were heavily impacted by events across
Scandinavian underwriting profit was £225m (2012: £237m) with good levels of current and prior year profits despite the impact of two severe windstorms during the fourth quarter. Canada made an underwriting profit of £10m (2012: £101m) despite record adverse weather losses, including severe flooding in Alberta in June, and in Toronto in July, together with a severe ice storm in Eastern Canada and Toronto in December. In the UK and Western Europe region, the UK underwriting profit of £36m is driven by a good performance across our Property and Household books, an improved result in Commercial Motor which was offset by underwriting losses in Liability and Personal Motor as a result of challenging market conditions. In Ireland, the underwriting loss was £220m reflecting reserve strengthening and the impact of the irregularities within the Irish claims and finance functions. Italy made an underwriting loss of £1m (2012: loss of £50m) with the improvement driven by the remedial actions we have taken. Emerging Markets underwriting profit of £46m is up 39% (2012: £33m) with good performances across all three regions.
Investment income of £493m was slightly ahead of expectations but down 4% on prior year (2012: £515m), reflecting the continued low bond yield environment. The average yield on the total portfolio was 3.5% (2012: 3.6%), with average yield on the bond portfolios of 3.4% (2012: 3.5%).
In 2013 the Group restated its financial statements for changes to IAS 19 Employee Benefits. All years shown above have been restated on this basis.
Reinvestment rates in the Group’s bond portfolios at 31 December 2013 were approximately 120bps lower than the existing portfolio yield.
The unwind of discount of £160m was £76m adverse to prior year (2012: £84m) and reflects the reduction in the discount rate in certain UK long-tail liability lines from 5% to 4%.
Other operating activities Other operating activities of £104m included central costs, investment expenses, and the ongoing investments in our associates in India and Thailand and our direct operations in Central and Eastern Europe.
Solvency II costs of £20m were £12m lower than 2012 as our processes continue to be embedded into our day-to-day operations and our rephasing of the project due to the delayed implementation date.
The fixed interest portfolio remains concentrated on high quality short dated assets, with 98% of the bond portfolio investment grade, and 69% rated AA or above. Peripheral European sovereign debt amounts to less than 1% of the portfolio and is primarily backing the liabilities of our insurance operations in Ireland and Italy. Our investment exposure in Argentina is £133m and these securities are held to back the liabilities arising out of our insurance operations there.
The average duration of the bond portfolio remains at 3.8 years (2012: 3.8 years). Following the purchase of increased levels of non-government bonds in 2012, levels have remained consistent in 2013 and non-government bonds make up 63% of the bond portfolio.
At the 2013 year end our equity holdings were £583m. Since the year end we have sold c.£460m of equities which has enabled us to realise significant benefit in our capital models.
CAPITAL POSITION The Group monitors a range of capital measures. The disappointing events of 2013 have had a detrimental effect on all of these measures.
At 31 December 2013, shareholders’ funds were £2,893m, down 23% from the start of the year. This was primarily driven by the loss for the year, dividends paid, foreign exchange losses, and adverse mark-to-market movements on our bond portfolio. Net asset value per share was 75p (2012: 101p).
As at 31 March 2012, the main UK schemes, Royal Insurance Group Pension Scheme (RIGPS), the SAL Pension Scheme (SALPS) and the Bradford scheme were c.93% funded on the prudent measure that the Trustees are required to use, with a combined deficit of £477m1. This compares to a combined deficit of £725m1 at 31 March 2009.
Guaranteed deficit funding contributions for these schemes of c.£64m p.a. will be paid in 2014, 2015 and 2016. This compares with deficit funding contributions of c.£72m in 2012 and c.£65m in 2013.
Upgraded to A ‘stable outlook’ after the approval of the 2013 Annual Report
SCANDINAVIA Our Scandinavian business continued to perform strongly, delivering an underwriting profit of £225m (2012: £237m) and a combined ratio of 88.1%, in line with our expectations of a combined ratio in the mid-high 80s.
A Household B Personal Motor C Personal Accident and other D Commercial Property E Liability F Commercial Motor G Marine and other
In Scandinavian Personal Lines, profitability was strong with an underwriting result of £236m and a combined ratio of 76.9% which was 3.2 points better than prior year. This mainly reflects an improving performance in Danish Personal which benefited from continued rating action and a lower underlying claims ratio. Sweden and Norway Personal also saw increased underwriting profits. Scandinavia Commercial made an underwriting loss of £11m with a combined ratio of 101.6% (2012: 94.6%) driven by the weather losses and elevated large loss frequency in the first half discussed above.
OUTLOOK We continue to expect the Scandinavian P&C markets to grow in line with local GDP growth, and we expect to grow in line with the market. We’re continuing to make good progress in improving the balance of profitability across the region. Our focus is on continued strong profitability in Sweden, improving profitability in Denmark whilst focusing on profitable growth in Norway. We expect the business to continue to deliver combined ratios in the mid-high 80s.
Growth of 11% in Personal benefited by seven points from the UC acquisition. Underlying growth in Personal of 4% was driven by Household, with rate increases across most provinces and strong growth in the Western region. Excluding UC, Personal Motor premiums were flat due to our focus on managing the portfolio for profitability, particularly in the Ontario market where we have seen some rating pressure. As the market begins to adjust pricing following the significant weather events in 2013, we’ve seen high single-digit rate increases in the Household book in Ontario and Alberta.
In Commercial lines, premiums were up 9% to £562m (2012: £524m as reported) with strong growth of 11% in Property and 15% in Motor. Excluding the acquisition of UC, growth was 3% across the Commercial portfolio reflecting continued rate increases and growth in our Large Commercial and Specialty business lines which were up 4% excluding the impact of UC.
Underwriting profit was £10m (2012: £101m) with profitability severely affected by the June floods in Alberta, the July floods in Toronto and a severe ice storm in Toronto and Eastern Canada in December. The floods in Alberta and Toronto have proved to be the costliest and third costliest natural catastrophes in Canadian history, with net costs to RSA of £44m and £38m respectively. In addition to this, a severe ice storm hit Toronto and Eastern Canada in December with significant damage to trees resulting in extensive power cuts, property and auto damage. The net cost to RSA was £12m. Following each of these events, our priority has been to provide exceptional service, care and support to our customers, brokers and impacted local employees.
OUTLOOK 2013 has been a very challenging year for us in Canada but our franchise value across the country remains strong. Subject to weather trends, we expect the COR to return to the low-mid 90s in 2014 and we expect to grow premiums in line with market growth of 2–5% per annum.
In UK Personal, premiums were down 1% to £1,311m (2012: £1,319). Good growth of 6% in Household was driven by our affinity and broker businesses. Motor was down 9% due to our exit from under-performing segments and continuing competitive market conditions. Underlying growth in Pet was good but overall was down 3% due to an adjustment to pipeline premium. The underwriting result was a profit of £51m (2012: £62m) and the combined ratio was 97.4% (2012: 96.3%). Household underwriting profits were £88m (2012: £50m) whilst Motor made a loss of £40m reflecting the impact of lower volumes impacting our expense ratio and some abnormal severity increases in large losses.
In the UK, the fourth quarter saw a series of weather events, with a net cost to our UK and Western Europe business of £46m. Despite these events, and the disappointing results in Liability and Personal Motor, the UK business delivered an underwriting profit of £36m (2012: £21m) and a combined ratio of 99.2% (2012: 98.8%).
Total UK and Western Europe 3,589 (4) (226) (8) 106.6 1 At constant exchange 42 FINANCIAL REVIEW
OVERVIEW You will have read about the challenges that face the Company earlier in the Report. We are operating in many challenging markets and the Board is committed to delivering on our key objectives; namely to improve the capital strength of the Company, optimise the Group’s business portfolio and deliver a sustainable dividend into the future; to deliver long-term value to shareholders and provide an exceptional customer experience. Throughout the year, the Board has reviewed and developed Company strategy to drive the business forward, adapting strategy as necessary. We have a strong leadership team with wide ranging experience, expertise and capability and we understand the challenges that we face. Our leadership has been tested during a challenging year in 2013. The Board is confident in the quality of the management team as we enter 2014.
The Board promotes high standards of corporate governance throughout the Company and has a solid corporate governance framework in place. The independent review undertaken by PricewaterhouseCoopers LLP (‘PwC’) to investigate the financial and regulatory reporting processes and controls within the Irish business, and Group oversight and controls of the Irish business, described the Group’s System of Governance and Control Framework as appropriate in terms of structure and design for an international insurance group of our size and complexity, with elements of the framework’s design comparing favourably across the market. This framework enables efficient and effective decision-making with clear responsibilities.
During the year, two of our Non-Executive Directors, John Maxwell and Noel Harwerth, both of whom had served nine years on the Board, retired as directors of the Company. I would like to take this opportunity to thank them for their continued support and service to the Company during their time in office.
In September, we welcomed a new Non-Executive Director, Kath Cates to the Board. Kath has joined the Board with an extensive range of international experience, building on the diverse experience and skills we already have.
COMPLIANCE WITH THE UK CORPORATE GOVERNANCE CODE Throughout the year, the Company has complied with the Principles and Provisions of the 2012 UK Corporate Governance Code (the ‘Code’), with the exception of the period from 13 December 2013 to 4 February 2014, when I performed the role of Executive Chairman on an interim basis following the departure of Simon Lee on 12 December 2013. Following the appointment of Stephen Hester, I have now reverted to my role as Non-Executive Chairman.
An external performance evaluation has been undertaken during the year to review the performance and effectiveness of the Board, its Committees and individual directors. The evaluation focused on the Board environment, the work of the Board and time effectiveness. Further details of the review can be found on page 54 of this Report.
A 0 to 3 years B 3 to 6 years C 6 to 9 years D Over 9 years
Skills and experience: Edward Lea was appointed as a Non-Executive Director in July 2003 and was appointed Senior Independent Director in January 2011. Previous roles include Finance Director of BUPA, ASDA and MFI, Chairman of Redbourn Group Limited, Director of McIntyre Care. He has extensive experience of financial management and business development in quoted and international business groups. External appointments: Director of Powertraveller Limited.
Skills and experience: Alastair Barbour was appointed as a Non-Executive Director in October 2011. Alastair retired from KPMG in March 2011. In the last 20 years of his 36 year career with the firm, in the UK and overseas, he led their financial services team in Scotland with a primary focus on insurance and investment management. Alastair has extensive experience in advising on accounting and financial reporting, corporate governance and management issues in the financial sector. External appointments: Non-Executive Director of Phoenix Group Holdings, Standard Life European Private Equity Trust plc, Liontrust Asset Management plc, CATCo Reinsurance Opportunities Fund Limited, The Bank of N.T. Butterfield & Son Limited (a company listed in Bermuda) and a Fellow of the Institute of Chartered Accountants in England and Wales.
Skills and experience: Hugh Mitchell was appointed as a Non-Executive Director in September 2012. Hugh is the Chief Human Resources and Corporate Officer of Royal Dutch Shell plc and a member of the Shell Executive Committee. Hugh has considerable experience in advising on HR and remuneration matters. External appointments: Director of Shell International Limited, Shell Foundation and Shell Aircraft Limited. Advisory roles held at The Centre for Advanced Human Resources at Cornell University Advisory Board, IMD Business School Advisory Board, Fellow of the National Academy of Human Resources (USA) and Honorary Vice-President of the Chartered Institute of Personnel and Development.
Skills and experience: Johanna Waterous was appointed as a Non-Executive Director in May 2008. Previous roles include Chairman of Tate Enterprises and over 20 years with McKinsey & Company, with roles including Co-leader of the Global Marketing and Sales Practice and Leader of their UK Consumer Practice and the European Retail Practice. Johanna brings deep expertise on consumer behaviour, sales and marketing across multiple sectors. External appointments: Non-Executive Director of WM Morrison Supermarkets plc, Non-Executive Director and Senior Independent Director of Rexam PLC, Director of RBG Kew Enterprises Limited, Chairman of Sandpiper CI and Director of Shoppers Drug Mart Corporation (a company listed on the Toronto Stock Exchange).
THE EXECUTIVE COMMITTEE COMPRISES THE EXECUTIVE DIRECTORS WHOSE BIOGRAPHIES ARE ON PAGE 47 AND THE FOLLOWING SENIOR EXECUTIVES: 1. MIKE HOLLIDAY-WILLIAMS Chief Executive, Scandinavia
Derek joined RSA as Group General Counsel and Group Company Secretary in July 2010 and has over 19 years’ experience in the insurance industry. From 2002, he served as Group General Counsel at Benfield Group Limited, where he was responsible for the global legal, company secretarial and compliance teams. Prior to that, Derek held positions in law firms Pinsent Curtis (now Pinsent Masons), McKenna & Co (now CMS Cameron McKenna) and Norton Rose.
Caroline has been with the Group since 2007. She was appointed Group Chief Auditor in September 2012 having been Group Financial Planning and Analysis Director, and UK Finance Director. Prior to joining RSA, Caroline held a number of finance roles at Aviva and spent 12 years at KPMG.
Currently Group Chief Risk Officer, David joined the Group in June 2007 and was Group Operations and Risk Director until November 2012. Immediately prior to that David spent two years consulting to blue chip and government organisations. Previously David was CIO at Barclays and a member of the Group Executive Committee. He has extensive non-executive experience and is currently a Non-Executive Director at the Royal London Group and at the Financial Services Compensation Scheme.
Vanessa took up the role of Group Human Resources Director in September 2011. She joined RSA in 2005 as Human Resources Business Partner Director in the UK, and has worked in a variety of roles across the Group. In 2006 she was promoted to Human Resources Director for the Emerging Markets Region. In 2008, she was promoted again to the role of UK Human Resources Director. Prior to working at RSA, Vanessa was HR Director – Global Retail at Lego and before that Head of HR for Gap, the international clothing retailer.
David was appointed Group Underwriting Director in July 2013. He joined RSA in March 2008 as Group Motor Portfolio Director and in February 2010 became Underwriting and Claims Director, Emerging Markets. Prior to RSA, David was at Zurich Financial Services where he was Head of Personal Lines underwriting and Chief Pricing Actuary for the Zurich Group. David has 25 years of insurance experience in underwriting, pricing and actuarial related matters, and is a Fellow of the Institute of Actuaries.
Paul was appointed Group Broker Relationship and Sales Director in July 2011. Paul has over 35 years’ experience in the insurance industry, having joined RSA in 1976. He has held a number of leadership roles in RSA including Managing Director Commercial in RSA’s UK business from 2007 and previously CEO, Republic of Ireland.
Details of the directors’ service contracts and terms of appointment, together with their interests in the Company’s shares, are shown in the Directors’ Remuneration Report on pages 69 to 93 and are incorporated into this report by reference.
With effect from 13 December 2013, on an interim basis the roles of the Chairman and the Group Chief Executive were combined, with Martin Scicluna performing the role of Executive Chairman following the resignation of the Group Chief Executive, Simon Lee. This was a temporary measure until a new Group Chief Executive was identified and appointed. Until 12 December 2013 and from 5 February 2014, the roles of Chairman and Group Chief Executive were separate and complementary, with responsibilities clearly divided. A summary of the role statements for the Chairman, Group Chief Executive and Senior Independent Director are provided later in this report on page 51. No one individual has unfettered powers of decision.
Non-Executive Directors are initially appointed for a three-year term with an expectation that they will continue for at least a further three years. They are nominated by the Group Nomination Committee and subsequently approved by the Board, for election or re-election annually at the Company’s Annual General Meeting (AGM) for approval by shareholders. The Company’s Articles of Association give the directors power to appoint and replace directors as required.
ROLE OF THE BOARD The primary responsibility of the Board is to oversee and provide effective leadership to ensure that it promotes the success of the Company for the benefit of the members as a whole. The Board provides entrepreneurial leadership within a framework of prudent and effective controls.
At least annually, the Board reviews the effectiveness of the Group’s systems of risk management and internal controls and he overall corporate governance arrangements. In support of this, reviews have been undertaken during the year by Group Internal Audit, PwC and KPMG. The Board ensures that the Company maintains adequate accounting and other records and ensures compliance with statutory and other regulatory obligations. In addition, any changes to the legal, financial and share capital structures of the Company and approval of any significant expenditure, material transactions and contracts, are reserved for the Board.
There is a standing agenda of items that is continually refreshed. The Board sets annual objectives for the business in line with the current Group strategy and monitors achievement of the Company’s objectives through regular reports which include updates from the Group Chief Executive and the Group Chief Financial Officer (Group CFO) on all material business matters. The Board considers that the information provided to the Board and its Committees is supplied in a timely manner and is of an appropriate quality to enable it to discharge its duties.
• Undertaking the role of ambassador for the Company, participating in the engagement and effective communication with the Company’s stakeholders.
• Developing, recommending and presenting to the Board taking into account any threats or opportunities: – strategic plans – risk appetite for the business – risk exposure
• Preparing detailed business plans for the Company and its major subsidiaries, monitoring the performance of the Group, ensuring that objectives are achieved and business plans are implemented within budget
• To oversee, direct and control financial management and control standards
• Identifying and executing acquisitions and disposals up to prescribed limits
• Developing the Company’s communications strategy to meet the needs of, and engage with all internal and external stakeholders
Responsible for: • Providing support to the Chairman in the delivery of his responsibilities when required
Responsible for: • Challenging and agreeing the Group’s strategy with executive management
Further information on the individuals fulfilling these roles can be found on page 47.
• Strategic Corporate Review: focusing on strategic objectives, planning and implementation
• Brand and marketing strategy • Global Specialty Lines • Telematics • UK Personal Lines • UK Commercial Lines • Commencement of the business and strategic review • Corporate Responsibility strategy
Financial • Monthly review of performance for each business region • Review of profitability against plan • Financial reporting and controls • Review of the capital position against internal and external capital measures • Monitoring share price performance
• Approval of the 2014–16 operational plan • Audit tender process • Significant transactions and contracts • Preparation for Solvency II • Reinsurance protection appetite • Investments appetite and performance
Governance • Internal audit updates • Annual Directors and Officers Policy renewal update • Investor reaction, analyst consensus and market sentiment • Results and AGM material
The Board held 10 scheduled meetings during the year and five additional meetings. During the year, one Board meeting was held overseas, affording the Non-Executive Directors an opportunity to gain further insight into the business, the local management team and the culture. Where a director was not available to attend a meeting, where possible their views were canvassed by the Chairman prior to the relevant meeting and the Board informed of their opinions and observations. Formal minutes recording the decisions of all Board and Committee meetings are prepared and circulated to each director. If a director objects to a particular decision this is recorded in the minutes of the relevant meeting. When considering matters such as the approval of financial statements and large operational contracts, the Board may delegate authority to a Committee to finalise and approve as required.
Johanna Waterous 10/10 5/5 Notes: 1. Kath Cates was appointed as a director with effect from 1 September 2013. 2. Noel Harwerth and John Maxwell ceased to be directors with effect from 3. Simon Lee ceased to be a director with effect from 12 December 2013. 4. Stephen Hester was appointed as a director with effect from 5 February 2014.
When appointing new directors, regard is given to the size of the Board, the balance of Executive and Non-Executive Directors, and the benefits of diversity, including gender. The Board considers the skills, experience, independence and knowledge already represented when making decisions on new appointments, and ensures that succession planning processes are in place. Each director is nominated by the Group Nomination Committee and subsequently approved by the Board for election or re-election annually at the Company’s AGM for approval by shareholders.
The Board reviews the membership of its Committees on an annual basis to ensure they remain appropriate. Further details on changes to Board Committee membership are contained in the relevant Committee report. Only members of the Board Committees are entitled to attend Committee meetings; however, the Committee or its chairman may invite any directors, other executives of the Group or any external professional advisers to attend all or part of any meetings as and when required.
Additionally, the Board receive briefings on matters which are material to the Group on the financial and operational performance of the business and briefings on legislative and regulatory changes, and on corporate governance matters affecting the Group.
Committee members • Overview from each of the Board Committees • Corporate governance structure • Group Operations, Risk and Underwriting • Reinsurance and Professional Specialty Insurance.
Following the completion of the review, the Board received a discussion document outlining an independent view of the Board’s strengths and future challenges. Boardroom Review also discussed the findings of the evaluation individually with each director, the Group General Counsel and Group Company Secretary and the Deputy Group Company Secretary, and the performance of each Committee and director with the Chairman. The document offered observations and recommendations for consideration, which were the subject of an initial discussion by the Board at their January 2014 meeting for incorporation into the way the Board will operate during 2014 and beyond. The specific comments were as follows: • While the relatively small size of the Board encourages an intimate debate and fast decision making, the review noted that the desire for a small Board should not limit the pool of expertise around the Board table, or inhibit the extent of diverse constructive dissent and criticism. It would be helpful if future Non-Executive Directors added to the Board had an in-depth and specific experience of the general insurance sector and an understanding of the fundamental changes taking place across platforms, geographies, clients and customers. The Board was encouraged to consider what lessons could be learnt from their, and management’s, handling of recent events. Executive and Non-Executive Directors should allocate time to discuss the risks emerging from culture and strategy, and the activities and behaviour of individual leaders. Site visits, during which directors can make connections and form relationships, will be important in building awareness of the Group as a whole
• Close attention to incentives will be important as new strategic imperatives require alignment between performance and reward, and directors will need a comprehensive understanding and further scrutiny of formal and informal incentive systems throughout the Group. They will also need to increase attention on the role of executive succession planning throughout the Group during this period of uncertainty, particularly for key individuals who may be unsettled by recent events, with regular discussions about people becoming a greater part of the Board’s agendas.
Martin Scicluna is also Chairman of Great Portland Estates plc, was appointed as a director of Ship Midco Limited, trading as Worldpay, on 31 October 2013, and as a member of the Financial Services Trade and Investment Board on 23 September 2013. The Board is satisfied that these commitments are not a constraint on the Chairman’s time or his ability to carry out his duties. Between 13 December 2013 and 4 February 2014, the Chairman undertook the role of Executive Chairman, which combined the role of Chairman and Group Chief Executive until a replacement Group Chief Executive was appointed. Upon his appointment as Executive Chairman, the Board confirmed that due to the interim nature of the appointment, they were satisfied that Martin Scicluna’s external commitments would not restrict him from effectively performing this role.
Stephen Hester, Richard Houghton and Adrian Brown, Executive Directors of the Company, do not hold outside directorships of FTSE100 (or any other listed) companies but would be allowed to have one such appointment, subject to the approval of the Group Nomination Committee.
Service agreements and letters of appointment, for both the Executive and Non-Executive Directors, are available for inspection at the Company’s registered office, and at the AGM.
The Directors’ Responsibility Statement appears on page 94 and is incorporated by reference into this Report.
A report from the external auditor can be found on pages 95 to 98.
GOING CONCERN In considering the appropriateness of the going concern basis, the Board has reviewed the Group’s ongoing financial commitments for the next 12 months and beyond. The Board’s review included the Group’s strategic plans and updated forecasts, capital position, liquidity and credit facilities, and investment portfolio. As a result of this review, the directors have satisfied themselves that it is appropriate to prepare these financial statements on a going concern basis.
The Delegated Authority Framework specifies how executive authority is delegated from the Board to the Group Chief Executive and onward delegation to other executives in the Group. Senior executives across the Group receive an executive licence setting out their specific limits of authority in terms of entering into financial, underwriting, claims and other business commitments. Each executive is responsible for ensuring a similar process of delegation is in place within his or her area of responsibility. Further detail on the overall risk framework is set out on pages 32 to 35.
ACCOUNTABILITY STATEMENT BY DIRECTORS Section 414A of the Companies Act 2006 requires the directors to present a Strategic Report for each financial year of the Company. The information that fulfils the requirements set out in section 414C can be found on pages 8 to 43, and is incorporated by reference into this Report.
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 steps necessary as a director in order to make himself/herself aware of, and to establish that the external auditor is aware of, any relevant audit information.
• An indication of likely future developments in the Company’s business.
CONFLICTS OF INTEREST AND RELATED PARTY TRANSACTIONS In accordance with section 175 of the Companies Act 2006, each director has a duty to avoid conflicts of interest. Under Articles 91 and 92 of the Company’s Articles of Association, conflicts of interest may be authorised by the Board or a Board Committee. Directors are required to notify the Group General Counsel and Group Company Secretary when a conflict of interest arises. Each directors’ conflicts of interest are reviewed on an annual basis. Any director who has declared a conflict of interest shall not count towards the quorum or vote on any resolution to authorise the conflict of interest and, at the Board’s discretion, may be excluded from any meeting at which the conflict of interest is under consideration. Where a conflict of interest is authorised, restrictions may be imposed on the conflicted director, such as excluding the director from the discussion or receiving any information in connection with the conflict of interest.
Under the Company’s £500m five-year senior committed debt facility, if a change of control occurs, if the majority of lenders require, the facility can be cancelled with immediate effect and all outstanding loans, together with accrued interest, become due and payable.
The Board undertook a review of the indemnity provisions during 2013 to bring them in line with market practice. The Company believes that it promotes the success of the Company to provide this indemnity to its directors in order to ensure that the Group attracts and retains high calibre directors through competitive terms of employment in line with market standards.
ENGAGEMENT EMPLOYEES Engagement, high performance and expertise of the Group’s employees are key to the successful delivery of our business strategy. The Company places major emphasis on informing and involving employees with clear and regular communication. Employees had the opportunity to share their views on the Company through a global employee engagement survey during 2013. The results were shared openly and employees are actively encouraged to take improvement actions based on the survey results.
CUSTOMER Delivering for the Group’s customers has been vitally important for the Group since we started back in 1710, and this remains a key priority. Across the Company, the aim is to meet customer needs through the delivery of consistently high quality products and services. This is underpinned by an emphasis on innovation and continuous improvement of the customer experience based on the extensive use of customer feedback and insight. To support this focus, in 2013 the Company initiated work to seek to ensure that customer needs are central to all processes. This work is focused on four areas – Communications, Products and Services, People and Culture and Environment and Channels.
REGULATORS The Board is responsible to the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) for complying with the Group’s UK insurance regulatory obligations. The Board attaches great importance to its regulatory responsibilities and is committed to dealing with the regulators in an open, cooperative and transparent manner. The Board paid close attention to the expectations of the PRA and FCA following their establishment on 1 April 2013, and also monitored developing EU regulation, in particular Solvency II. During the year the PRA and FCA conducted private meetings with several members of the Board and executive management and the Board collectively met with the PRA. In addition, the Group includes a number of regulated entities which foster positive regulatory relationships in support of the businesses. Accordingly, maintaining effective relationships with the Group’s regulators across the world is integral to the success of the Group’s strategy and its long-term value.
A Europe B Asia and Others C UK D USA and Canada
A Unit trusts/Mutual funds B Private/Retail C Pension funds D Other E Insurance
Receipts (ADR) programme which is managed by JPMorgan Chase NA. The programme allows shareholders to invest in the Company through US dollar denominated funds.
Franklin Mutual Advisers, LLC 184,256,341 5.01% Direct & Indirect 184,256,341 5.01% Direct & Indirect
Share Capital Further information on the Company’s share capital, together with details of the movements in the Company’s issued share capital during the year, and rights attaching to the shares, can be found in note 19 of the notes to the Financial Statements which is incorporated into this report by reference.
The Company has two classes of shares: ordinary shares of 27.5p each and preference shares of £1 each. Each ordinary share carries the right to one vote at general meetings of the Company and no right to fixed income. As at 31 December 2013, the ordinary shares and the preference shares represented 96.7% and 3.3% respectively of the total issued share capital. Directors are limited as to the number of shares they can allot (save in respect of share schemes). Renewal of the directors’ authorities to allot shares will be sought at the 2014 AGM. In addition, directors are restricted by the limits set out by the Association of British Insurers. During 2013, the directors exercised their authorities to allot only in respect of employee share schemes and the Scrip Dividend Scheme.
There are no specific restrictions on the size of a shareholding nor on the transfer of shares, which are both governed by the general provisions of the Articles of Association and legislation. The directors are not aware of any agreements between the Company’s shareholders that may result in restrictions on the transfer of securities or on voting rights. The Company may purchase any of its own shares (including any redeemable shares). An authority from ordinary shareholders for the Company to purchase up to 359,842,892 of its own ordinary shares (representing 10% of its issued share capital as at 6 March 2013) was passed at the 2013 AGM. This authority will expire at the conclusion of the 2014 AGM.
The Company operates three employee benefit trusts to hold ordinary shares in the Company which are used to satisfy grants under the Group’s share incentive schemes and Capita Trustees Limited is the current Trustee of each trust. In addition, a Share Incentive Plan (Sharebuild) Trust is operated of which Capita IRG Trustees is the Trustee. The Trustees may vote in respect of any shares held in the
Annual Greenhouse Gas Emissions In accordance with Part 7 of the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013, certain disclosures are required in respect of greenhouse gas emissions. The information to fulfil this requirement can be found in the Corporate Responsibility section on page 31 and is incorporated into this report by reference.
Separate resolutions are proposed on each item of business. In accordance with the provisions of the Articles of Association, any proxy form sent by the Company to shareholders in relation to any general meeting must be returned to the Company, whether in written form or in electronic form, not less than 48 hours before the time for holding the meeting, excluding non-business days (or, in the case of a poll taken otherwise than at or on the same day as the meeting, not less than 24 hours before the time appointed for the taking of the poll). At any general meeting, every ordinary shareholder present shall have one vote on a show of hands and on a poll, every ordinary shareholder present in person or by proxy shall have one vote for each share of which he/she is the holder. Each resolution will be put to a poll at the AGM in 2014. The results of the vote on each resolution will be announced to the London Stock Exchange and will be available on the Company’s website, www.rsagroup.com/AGM2014.
At the 2013 AGM, an average of 63.5% of the total issued share capital was voted across all resolutions, with an average of 97.8% voting for all resolutions.
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. This resolution is proposed in the event that the funding of seminars, functions and charitable donations by the Company may be regarded as political in nature. During the year the Company has not made any donations to political parties or independent election candidates.
BOARD COMMITTEES The following pages 61 to 64 report on the activities of the Board Committees throughout 2013. Separate reports on the activities and duties of the Group Audit Committee and Group Remuneration Committee can be found in the Group Audit Committee Report on pages 64 to 68 and Directors’ Remuneration Report on pages 69 to 93 respectively and are incorporated into this Report by reference.
Board Committee Membership The Board delegates duties to five committees so that matters receive detailed consideration. The composition of each Committee is recommended by the Group Nomination Committee and reviewed on an annual basis. When reviewing Committee membership, consideration is given to each individual’s expertise and experience. The Committee’s role is enhanced where representation on multiple Committees ensures a good exchange of information between the Committees at all times.
As Chairman of the Group Nomination Committee, the purpose of this report is to update shareholders on the activities of this Committee throughout 2013.
• Consideration of applicants and recommendation of Kath Cates’ appointment as director, and search for Group Chief Executive resulting in the appointment of Stephen Hester
The Group Nomination Committee manages the process of identifying potential Board appointees and recommending candidates for assessment by the Board as a whole. During the year the Committee continued to focus on ensuring that the right balance of skills, experience, knowledge, independence and the benefits of diversity, including gender were represented on the Board, both currently and in the future. In doing so, in 2013 the Committee identified Kath Cates as a new appointee and made a recommendation to the Board regarding her appointment as a new Non-Executive Director and to the Group Audit and Board Risk Committees. Kath brings overseas experience to the Board. The Committee also commenced a process in late December in respect of the appointment of Stephen Hester, the new Group Chief Executive who was appointed in February 2014.
An assessment of the time commitment required to adequately fulfil each role is considered by the Committee and consideration is given to approval of additional commitments of Non-Executive Directors during their tenure, especially where such commitment might affect the time the director is able to devote to their role.
As Chairman of the Group Investment Committee, I am pleased to present an update for the year to shareholders.
Global economic and market conditions through 2013 continued to remain challenging. With economic growth remaining subdued, cash rates and bond yields remained close to record low levels, placing downward pressure on investment income. Against this background the Committee continued to review alternatives for enhancing the returns generated by the investment portfolios. This included a strong allocation towards high quality non-government bonds and also a modest further allocation towards loan products.
Since the end of 2013, the Group has sold c.£460m of equities to improve its capital position. The proceeds of these disposals were reinvested into bonds or cash in line with the Group’s high quality, low risk portfolio strategy.
Simon Lee3 4/4 Notes: * Chair of Committee 1. Kath Cates became a member of the Committee with effect from 1 September 2013. 2. Noel Harwerth ceased to be a member of the Committee with effect from 31 March 2013. 3. Simon Lee ceased to be a member of the Committee with effect from 12 December 2013. 4. Martin Scicluna became a member of the Committee with effect from 8 February 2013 and Alastair Barbour and Edward Lea from 1 March 2013.
• Business Risk review: – Insurance Risk – Financial Risk – Reinsurance
The Committee devoted significant time to capital during the year, discussing and approving an enhanced capital risk appetite to set out more consistently and explicitly the target range and buffers for each principal capital measure. This was calibrated with reference to a set of standard stress tests, reputational risk assessment and model risks. The Committee oversaw a change in risk appetite during the year to reflect the capital situation: equity exposures were reduced, additional reinsurance protection was purchased, M&A activity was halted and capital action plans were launched.
During the year, the Committee was externally evaluated by Boardroom Review, a provider of independent advice on boardroom effectiveness. This review was in compliance with the Code, the results of which are detailed on page 54. The Committee has discussed the outcomes of that review.
GROUP AUDIT COMMITTEE REPORT I am pleased to present to shareholders the Group Audit Committee Report for 2013, which sets out the responsibilities and the key activities of the Committee, recognising its key role in the governance of the Company. I would like to welcome Kath Cates, who joined the Board and the Committee on 1 September 2013.
• Reviewing the effectiveness of internal control and risk management processes
During the year the Committee was externally evaluated by Boardroom Review as part of the wider review of the Board and its Committees, the outcome of which can be found on page 54.
COMMITTEE COMPOSITION, SKILLS AND EXPERIENCE The Committee is comprised of four independent Non-Executive Directors. With effect from 1 September 2013, Kath Cates was appointed to the Committee, bringing substantial overseas business operating experience. The Board is satisfied that the Committee has recent and relevant financial experience as required by the Code, with all members bringing diverse financial, overseas and industry experience which, together with their varied tenure at the Company, enables the members collectively to act as an effective Committee. In addition, three of the four Committee members are also members of the Board Risk Committee, facilitating the close working and ready exchange of information between the two committees.
The Committee acknowledges the importance of keeping skills current and relevant. To that end, it receives training from audit firms and from management. The Committee members review and identify training needs on both a collective and individual basis, and training is arranged as appropriate.
The Committee members met privately before each scheduled meeting to discuss issues on which to concentrate with management and advisers in the meeting. The Committee held regular private meetings with the Group Chief Auditor and the external auditor without other members of management being present.
The Group Chief Executive, the Group CFO, the Group General Counsel and Group Company Secretary, the Group Chief Auditor, the Group Head of Regulatory Risk and Compliance and representatives of the external auditor, KPMG, are regular attendees at Committee meetings by invitation. The Chairman attended Committee meetings in February and August, when full-year and half-year results were considered. Other members of management and external advisers may attend at the invitation of the Committee. Details of membership and attendance at Committee meetings are shown in the table below.
Johanna Waterous 6/6 Notes: * Chair of Committee 1. Kath Cates became a member of the Group Audit Committee with effect from 2. Noel Harwerth ceased to be a member of the Group Audit Committee with effect from 31 March 2013.
The Committee has been assisted in carrying out its duties by a disclosure committee which meets quarterly, and is responsible for considering and identifying any disclosure matters in connection with the preparation of quarterly market releases containing material financial information. The Group Disclosure Committee is chaired by the Group General Counsel and Group Company Secretary and comprises members of senior management from finance, legal, investor relations, company secretarial and risk.
WHISTLEBLOWING The Group has a whistleblowing policy, the effectiveness of which is reviewed annually by the Committee. The aim of the policy is to provide employees with a confidential forum to raise concerns in good faith where they either do not feel comfortable raising the matter with local management or are not satisfied with the local management response. A summary of all whistleblowing incidents, underlying investigations and actions undertaken is provided to the Committee on an annual basis.
FINANCIAL REPORTING AND SIGNIFICANT FINANCIAL ISSUES The main matters and primary areas of judgement addressed and concluded on by the Committee were as follows: Irish financial and claims irregularities: • Following the discovery of accounting irregularities, the Committee maintained oversight of the internal and external investigations and ensured that the scope of the work and remediation was appropriate. The Committee agreed with management’s proposal to extend the work of the external and internal auditors to provide assurance that the issues identified in Ireland did not extend to other parts of the Group. The Committee assessed their findings and determined that there was sufficient evidence to conclude that the issues were limited to the Irish entity and that the Irish results had been appropriately adjusted. For further information on the Irish issues see below.
Valuation of investment assets: • In order to satisfy the Committee that investment assets are fairly stated, the Committee receives and reviews quarterly updates detailing the valuation together with the movement in the value of the investment portfolio. The Committee also reviews the quarterly Financial Controls Framework report, which specifically details the effectiveness of controls over investment accounting, and noted that no significant issues have arisen.
Valuation of insurance liabilities: • The Committee has paid particular attention to ensuring that management has exercised appropriate judgement in estimating insurance contract liabilities including assessing the impact of claims trends and other influencing factors. The Committee also examined the appropriateness of discount rates on certain long-tail liabilities: – The Committee received and reviewed actuarial reserving reports which detail the basis for judgement in valuing insurance liabilities from management and an external review of the adequacy of reserves by Towers Watson. The Committee satisfied itself that management reflected available and reliable information when setting the reserves and that an appropriate margin was maintained. In respect of Irish reserves, the Committee concluded that once management became aware of the extent of the issues, the financial statements were adjusted appropriately
Employee benefits and retirement pension obligations: • During the year the Committee received reports on the valuation of the pension schemes. As the pension schemes are sensitive to changes in key assumptions, a sub-group of the Committee reviewed the methodology and assumptions in detail and examined pension scheme valuation movements against other companies with similar schemes. In addition, any non standard changes in judgements are reviewed by the Committee and during the year the Committee assessed management’s proposal to change the index used to derive the discount rate and concluded that the change was appropriate. The Committee was briefed by management on the impact of the revised standard IAS 19 Employee Benefits which came into effect on 1 January 2013, with particular reference to the treatment within the Consolidated Income Statement and the required restatement of the 2012 comparatives therein. Management also took the Committee through the impact of the introduction of IFRS 13 on the treatment of assets within the de-risked element of the pension scheme and concluded the disclosure was appropriate.
Valuation of deferred tax assets: • The Committee reviewed the key assumptions and financial projections supporting the UK deferred tax asset. The Committee assessed the forecasts presented by management and in particular, the longer-term projections of profitability in light of the business review and the extrapolations used in the projections, and concluded that management’s view was fair and reasonable.
On 9 January 2014, the findings of these reviews were released to the market. The independent PwC review described the Group Control Framework as appropriate in terms of structure and design, for an international insurance group of this size and complexity, and elements of its design compare favourably across the market. The effectiveness of the framework, as it related to Ireland, was weakened due to independent controls not operating effectively.
FINANCIAL CONTROL FRAMEWORK The Financial Control Framework aims to deliver a consistent approach to finance-related controls across the Group that is fit for purpose for all regions, embedding a control culture that strengthens the Group’s finance environment by ensuring that financial processes are managed effectively in order to mitigate the risk of financial misstatement. The process involves documenting and testing the operation of key financial controls, thereby providing an acceptable degree of assurance around the financial control environment.
The Committee received quarterly reports focusing on the assessment and testing of controls, including notification of any system or control weaknesses, or breaches in the period and the action taken as a result, allowing the Committee to address deficiencies and take action as appropriate.
INTERNAL CONTROL The Board has overall responsibility for the effectiveness of internal control systems, with the implementation and maintenance being delegated to the Executive Directors and senior management.
The Committee reviews the performance of internal control systems quarterly, with an annual review undertaken by the Board. This system includes governance, financial controls, the risk management framework and processes to deliver regulatory and compliance requirements. In addition the Board, through the Board Risk Committee, considers reports from risk specialists across the Group and reviews Group-level risk management information. The systems are designed to identify and mitigate, rather than eliminate, the potential risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material financial misstatement or loss.
The Committee has an embedded Non-Audit Services Policy to assist with maintaining the independence of the external auditor and its personnel. The policy was reviewed early in 2013 and revised to permit only specifically defined services considered to be audit related to be performed by the auditor, and that all non-audit services must be approved by the Committee. A limit in value of non-audit fees incurred by the auditor, to 25% of total audit fees for a financial year, has been introduced. In exceptional circumstances the auditor could be considered for additional services where there is an overwhelming business rationale, but only with Board approval. A summary of the policy is available on the Company’s website at www.rsagroup.com/ termsofreference.
A comprehensive, risk-based audit plan is prepared by GIA on an annual basis, taking into consideration the key strategic and emerging risks facing the Group. Regular updates were provided to the Committee on the progress of the 2013 plan, and in December the 2014 plan was reviewed, challenged and approved by the Committee. The Committee received quarterly reports from GIA on their assessment of the internal control environment of the Group and management were required to present to the Committee their views on the key risks and issues identified by GIA, along with the related remediation plans.
The Committee has reviewed a detailed assessment against the requirements of the new guidelines issued by the Institute of Internal Auditors titled ‘Effective Internal Audit in the Financial Services Sector’ and actions have been initiated to ensure compliance by 2015.
During the year the Committee received presentations from the regional chief auditors, enabling a more detailed view of the activities performed in each region, and providing additional context to business risks.
It is the intention of the Committee that the Company will adhere to the Code requirement of tendering for the external auditor at least every 10 years.
• No bonuses will be awarded to the Executive Directors for 2013, which affects the Group Chief Financial Officer and the Chief Executive, UK and Western Europe
The ‘single figure’ tables on page 82 show the extent to which actual remuneration levels have reduced in 2013 from 2012.
In recognition of how challenging 2013 has been, many employees at all levels will not receive a salary increase this year, especially those based in the UK and Ireland. In addition, the total budget for 2013 employee bonus awards across the Group has reduced significantly.
In the intervening period following Mr Lee’s departure, Martin Scicluna took on the role of Executive Chairman. At his request, his remuneration remained unchanged.
2. Information about the Group Remuneration Committee 80 3. Total remuneration 2013: ‘single figure’ tables (audited) 82 4. Components of Executive Directors’ remuneration 83 5. Directors’ shareholding (audited) 86 6. Payments to Directors for loss of office (audited) 88 7. Payments to former Directors (audited) 88 8. Historical TSR performance and executive remuneration 89 9. Percentage change in remuneration 89 10. Relative importance of spend on pay 89 11. Implementation of Remuneration Policy in 2014 90 12. Statement of voting at General Meeting 92 14. External Directorships 93 15. Directors’ contracts 93
Mr Hester will be expected to hold all shares issued via the new LTIP for a further two-year period once they have vested. He is subject to a required shareholding of 300% of salary, to be acquired over a five-year period, as set out in the policy summary on pages 74 to 75.
Turning to the remuneration review, in the 2012 Directors’ Remuneration Report, I advised that the Committee would be continuing to refine the Group’s remuneration policy and framework. This review has concluded and some important changes have been agreed for implementation in 2014. These changes support the execution of both operational plans and the business strategy to strengthen the Group’s performance over the short and long term. In summary, the changes that the Committee has agreed are: • The Executive Directors’ Annual Bonus Plan and the LTIP are focused on improving results for the sole purpose of building sustainable shareholder value. The incentive framework will apply to other senior leaders across the Group.
• A new LTIP has been designed to be straight-forward for employees, shareholders and regulators to understand, therefore matching share awards will no longer be granted.
• The normal maximum LTIP award opportunity reduces from 309% of salary to 230% of salary. To allow the Committee additional headroom to grant performance-related awards for appointment purposes to gain high calibre candidates, or in other highly exceptional circumstances, a ceiling of 400% of salary will be in place. This headroom will not be used routinely, and will be by exception only.
• Through the new LTIP, Executive Directors will retain their vested shares for two years; they can only sell sufficient to cover statutory deductions during this retention period.
During the year, the Committee engaged the Group’s 20 largest shareholders and the ABI, NAPF and ISS on remuneration changes, and it took on board their feedback on matters such as performance conditions and remuneration simplification to achieve a remuneration structure which is balanced and appropriate, has regard to current best practice and, above all, is intended to promote growth in shareholder value for the long-term benefit of RSA. Equally, risk management is woven even closer into the setting and managing of remuneration policy, with key proposals and changes being briefed to the Board Risk Committee.
Hugh S Mitchell Non-Executive Director and Chairman of Group Remuneration Committee 26 February 2014
1. INTRODUCTION In this section of the Directors’ Remuneration Report, the principles and policies are described that will be used to set and manage the Directors’ remuneration over the next three years, subject to shareholder approval. The Group Remuneration Committee considers that this report will be effective from the date it is approved by shareholders. However, it has been adhering to many of the revised best practice components within this Report since 1 January 2014.
Specifically, this Remuneration Policy Report covers: • How decisions on directors’ remuneration will be made at RSA, and the remuneration philosophy and strategy which underpin these decisions
• What impact business and individual performance will have on the potential value of the Executive Directors’ remuneration
• What key contractual terms will apply to current and newlyappointed directors
The next pages of this Report describe how these remuneration principles are applied in practice.
• Benefits are determined with reference to market practice within the same benchmark peer groups referenced above. The Committee can also source information from bespoke benefits surveys to aid decision-making.
Note to table: All permanent UK-based employees are eligible to receive a bonus award, but share deferral is only operated for senior leaders at RSA.
• Pension cash allowances are paid monthly and are subject to statutory deductions. • Pension cash allowances are set referencing practice within the benchmark peer groups and specialist survey data may also be obtained. The Committee has regard to the market median allowance data.
• Committee can act within the parameters of the Plan’s rules as approved by shareholders and its performance conditions, covering matters such as the measures, calculation methods, performance period, eligibility rules, and general Plan mechanics. The purpose of discretion is to enable the LTIP to be appropriately administered under both normal and exceptional circumstances, e.g. corporate or capital events affecting the Group or a significant number of employees. In addition, the Committee can make such amendments as may be necessary to respond to legal, accounting or regulatory changes. Awards can be reduced or otherwise amended, provided the action is fair and justifiable, for example, to guard against a windfall award or the converse generated by an accounting treatment, to put employees in a neutral position following a capital event. Specifically, under a change of control, performance conditions are tested and awards can vest earlier than scheduled, pro-rated for time and performance, however, the Committee can determine whether a pro-ration for time is applied to other forms of award not subject to performance conditions.
• Performance conditions for any outstanding awards are Group underlying Return on Equity and relative Total Shareholder Return as noted in the Directors’ Remuneration Report for 2012 and in this Report on page 85. There is no re-testing of the performance conditions.
• Conditional awards are determined based on the Director’s salary as at the grant date, using the mid-market closing price of an RSA ordinary share, as determined by the Committee in accordance with the Plan’s rules.
• The performance conditions and targets that will apply to the 2014 grant, subject to the new LTIP gaining shareholder approval, are detailed on page 91.
• New LTIP designed to replace 2006 Plan, for shareholder approval at 2014 AGM.
• Performance conditions revised and include a scorecard aligned to the business review.
Note to table: The policy applicable to the Executive Directors’ long-term incentives is the same for all other participants who receive performance-based awards, with exception to the two-year post-vesting retention period which only covers Executive Directors. LTIP award opportunities vary for individuals below the Board.
• The Executive Directors will continue to retain any awards granted under RSA’s 2006 Long-term Incentive Plan including deferred share awards. Subject to the 2014 Performance Share Plan being approved by shareholders, no further grants will be made under the 2006 Plan. The Committee can exercise the same discretion as noted in the LTIP section above, as appropriate.
• Executive Directors must acquire shares in RSA and hold them according to specified levels, expressed as a salary multiple. • Executives have five years in which to build up their holding, commencing from the first date an unconditional share award is made to them as a Director. No shares are to be sold until the holding level is reached, except where required to cover statutory deductions.
• Performance conditions do not apply. • With effect from 1 January 2014, the shareholding levels to be reached are: Group Chief Executive: 300% of salary Other Executive Directors: 150% of salary The Executive Directors’ shareholding levels as at 31 December 2013 are noted on page 86.
• Shareholding level increased for Group Chief Executive from 200% to 300% of salary, as noted on page 92.
• No Director will be appointed on a notice period exceeding 12 months. • Where the Director is an internal promotion within the Group, he/she may be permitted to retain any legacy benefits or terms at the Committee’s discretion. Continuity of service with the Group will be maintained.
• As a point of principle, restricted shares will only be used where a performance condition has been achieved or is nearing testing and there is a reasonable expectation of the vesting level. Cash bonuses may be bought out with restricted shares in order to give the Director an early ‘stake’ in RSA.
Leaver treatment Ensures fair treatment for departing executives while avoiding reward for failure.
• Fees are reviewed annually but an annual increase may not always be applied. • When assessing fee levels, account is taken of the required time commitment and the degree of expertise necessary to fulfil the particular role (such as chairing a committee).
• Performance conditions do not apply. • With exception to the Chairman, all Non-Executive Directors receive a base fee, further fees are then paid to reflect membership of more than one committee and for chairing a committee. A separate fee is paid to the Senior Independent Director. The Chairman receives a fee for his role and this is set by the Committee.
• Fees increased on 1 July 2013, and details are noted on page 92.
• The unexpired period of the Director’s notice may either be paid or served, including on garden leave; this is regardless of which party has served notice. Generally, in the event of termination and in all cases of termination on performance grounds, the Committee’s policy would be to seek and apply mitigation, and payments may be made on a phased basis.
• Compulsory deferred bonus shares granted from 2014 onwards will only be forfeited for executives where the Clawback Policy is implemented or for other reasons determined by the Committee. In 2013, compulsory deferred shares were only permitted to be retained for executives whose employment ended for reasons of ill-health, redundancy, death or retirement.
5. PAYING FOR PERFORMANCE RSA has a pay-for-performance culture across the Group, which means that remuneration is linked closely to the performance of both the business and the individual. A significant proportion of the Executive Directors’ remuneration is variable, i.e. it is subject to performance conditions and is therefore ‘at risk’. The Committee’s aim is that superior levels of remuneration will only be paid in return for delivering superior levels of performance.
The table below shows when each component of the Executive Directors’ remuneration package (as noted in the charts above) would be delivered to them once any performance conditions or other restrictions have ended (as noted by the shading). These each relate to the 2014 financial year and, in the case of the LTIP, for awards vesting in 2017.
Year of share award granting Year of share award vesting Year when any restrictions have ended
Notes: 1. The ‘below threshold’ scenario shows the minimum remuneration receivable. For the Group Chief Executive, it includes annual base salary, benefits and pension valued in accordance with the terms of Stephen Hester’s appointment. For the Group Chief Financial Officer and Chief Executive, UK and Western Europe, it includes the value of annual base salary and pension as at 1 January 2014 and the value of benefits in the single total figure of remuneration for 2013. No bonus is awarded and no LTIP vesting occurs for below threshold performance.
2. The ‘on-target’ scenario shows the remuneration receivable with a bonus award at half of the maximum opportunity (i.e. 80% of salary) and LTIP vesting at 62.5% (i.e. half-way between threshold (25% vesting) and maximum (100% vesting)). The LTIP maximum award level is taken to be 300% of salary for the Group Chief Executive which reflects Stephen Hester’s appointment commitment for the 2014 grant only, and 230% of salary for the Group Chief Financial Officer and Chief Executive, UK and Western Europe.
As the Executive Directors are UK-based employees, the Group Reward Director met with the EWC during 2013 to engage it specifically on boardroom remuneration. She explained how the Executive Directors’ packages are structured, the factors that influence them and the role of the Remuneration Committee. Finally, the EWC heard how the directors’ remuneration principles are used to inform how remuneration is approached across the Group, even though the actual detail may differ from country to country. Members of the EWC welcomed the insight shared with them, and the session enabled a free flowing exchange of views. Further briefings will be held to maintain the EWC’s knowledge, gain mutual insight and enable further input on reward matters.
Executive Directors Each of the Executive Directors is employed under a service agreement, which contains a variety of contractual terms and conditions. Their employment can be terminated by the Company or the individual, by the serving of 12 months’ notice. In the case of summary dismissal, no notice will be served by the Company and no compensation will be paid in lieu of it. Notice periods are approved by the Committee and, at its discretion, can be reduced in the event an Executive Director resigns and wishes to leave prior to the end of his contractual notice period.
The Company has the contractual right to place the Executive Directors on garden leave for part, or all, of their notice period. Salary, benefits and pension contributions continue during garden leave, but this time will not count towards the calculation of any annual bonus award that may subsequently be due. Executive Directors do not have terms which provide additional rights or payments to them in the event of a change of control, reconstruction or amalgamation of the Company. Restrictive covenants are in place to help protect RSA’s interests should the individual leave the Company for any reason.
Executive Directors may hold one external non-executive position of a FTSE100 company provided this does not give rise to any conflict of interest, with the approval of the Nomination Committee. If there is any remuneration arising from this role, the individual can retain it.
The date when each Executive Director was appointed to the Board is shown in the table on page 93. Contracts are available for inspection by shareholders at the Company’s registered office.
Purpose of the Committee The Group Remuneration Committee (Committee) is a formal committee of the Board, accountable to shareholders through its policies and actions. It updates shareholders via the publication of the Directors’ Remuneration Report. At the AGM on 9 May 2014, the Policy section of this Report on pages 71 to 79 will be submitted for a binding shareholder vote, while the Annual Report section on these pages, 80 to 93, will be put to an advisory vote.
To enable the Committee to fulfil its accountabilities to shareholders, it meets as often as is required and it must meet at least twice a year. It operates within an agreed set of terms, which the Committee reviews annually. A copy of these terms of reference can be viewed on the Group’s website at: www.rsagroup.com or alternatively a paper copy can be requested in writing from the Group Company Secretary.
Committee members The Committee comprises a number of independent Non-Executive Directors who are called upon to exercise judgement on the setting and management of executive remuneration. The Committee’s members in 2013 are detailed in the table below. The number of meetings each Director attended is shown as a proportion of the total number of meetings held during the period of the year in which they were a Committee member.
Committee attendees The Chairman, Group Chief Executive and other senior executives attend Committee meetings by invitation to advise on Group strategy, performance, HR and remuneration policies and practices. However, none of these executives have a right to attend and are not present if their own remuneration is being discussed. The table below notes the Committee attendees during 2013.
Leigh Harrison Group Reward Director Note: 1. Simon Lee resigned from the Board and his employment ended effective 12 December 2013. He attended Committee meetings prior to this date.
Committee meetings held in 2013 In 2013, the Committee met on five occasions and the table below summarises the matters it discussed.
July • Review of the 2013 LTIP grant and an update on dilution levels
• Approval of the rules relating to the Scandinavia deferred bonus plan
December1 • Update on the Annual Bonus Plan 2013 and LTIP cycles 2011, 2012 and 2013
XXXX82 3. TOTAL REMUNERATION 2013: ‘SINGLE FIGURE’ TABLES (audited) The tables below set out the Directors’ total remuneration single figure for the financial year ended 31 December 2013. For comparative purposes, 2012 figures are also provided. The components of the Executive Directors’ remuneration are detailed on pages 83 to 85. The fee structure applicable to Non-Executive Directors is detailed on page 92. Non-Executive Directors do not participate in any of the Group’s incentive plans.
3. LTIP 2013: performance based awards granted under the 2011–13 LTIP cycle will lapse in full on 7 April 2014. 4. LTIP 2012: the value of Performance Shares, Compulsory Deferred Matching Shares and Voluntarily Invested Deferred Matching Share awards that vested on 7 April 2013, arising from the LTIP cycle 2010–12, against a market price of £1.096 on the vesting date.
The Executive Directors’ salaries remain unchanged for the 1 April 2014 review, as also noted on page 90.
• Richard Houghton received a combination of a taxable cash allowance of 5.27% of base salary (£26,000), and an employer pension contribution of 9% of base salary into the defined contribution scheme (£44,000). In 2012, Richard Houghton received a taxable cash allowance of 13.18% of base salary and no pension contribution.
All-employee share plans Executive Directors were eligible to participate in RSA’s all-employee share plans (Sharesave and Sharebuild) during the year. Details of their share interests in these plans to 31 December 2013 are noted in the tables on page 87.
The achievement of the financial performance measures was below threshold for the year ending 31 December 2013. There was achievement in respect of the individual performance measures, however in light of the financial results the Committee determined that no award would be made to Executive Directors for this component of the bonus plan.
Long-term incentives – awards vesting from 2010–12 and 2011–13 cycles (audited) Conditional long-term incentive awards were made to Executive Directors in the 2010–12 and 2011–13 cycles. This included Performance Shares of up to 150% of salary. Additionally, they could receive Matching Shares for each share deferred through the respective 2009 and 2010 annual bonus plans, via both compulsory and voluntary deferral. The maximum opportunity was 2.5 matching shares per deferred bonus share for the 2010–12 cycle; this was reduced to two matching shares for the 2011–13 cycle.
Notes: 1. Relative TSR target is between median and upper quintile within a peer group of: Aegon, Allianz, Aviva, AXA, Baloise, Generali, Legal & General, Munich Re, QBE, Swiss Re and Zurich. 2. Group underlying ROE target is a three-year average measured over the performance period. 3. A straight line calculation is applied to determine the portion of awards that vest for performance between the threshold and maximum targets.
As a result, the 2010–12 cycle had partial vesting on the ROE performance measure (32.5% vesting) and partial vesting on the relative TSR performance measure (41.2% vesting). Awards granted under the 2011–13 cycle will not vest as neither of the performance conditions were achieved.
Notes: 1. 2011–13 cycle: The table shows that no performance-based awards arising from this cycle will vest. 2. 2010–12 cycle: The market price of an ordinary share on the date of vesting, 7 April 2013, was £1.096. 3. Simon Lee resigned from the Board and his employment ended on 12 December 2013. His awards in the 2011–13 LTIP cycle shown above lapsed on this date. 4. Richard Houghton was appointed as a Director on 12 June 2012, and had no awards in the above LTIP cycles.
Long-term incentives – awards granted in 2013 (audited) Conditional long-term incentive awards were made to the Executive Directors during 2013. The awards included both Performance Shares and Matching Shares because they were granted under the 2006 LTIP. They will vest in 2016, subject to the satisfaction of the plan’s performance conditions based on Group underlying ROE and relative TSR, which are measured over a three-year period. The targets for these performance measures are shown in the table below.
LTIP performance measures 2013–15 Threshold target: 25% vesting3 Maximum target: 100% vesting3
Group ROE2 9% 14% Notes: 1. Relative TSR index of comparators includes: ACE, Admiral, Allianz, Amlin, Aviva, Catlin, Direct Line, Gjensidige Forsikring, Hiscox, Intact, Mapfre, QBE, Topdanmark, Tryg and Zurich. 2. Group underlying ROE target is a three-year average over 2013 to 2015. 3. A straight line calculation is applied to determine the portion of awards that vest for performance between the threshold and maximum targets.
The awards granted to each Executive Director are set out in the table below: Director
Basis of Award: Two matching shares granted for each share deferred from the 2012 bonus award4
No. of Shares5 Face Value6 No. of Shares5 Face Value6 No. of Shares5 Face Value6 Face Value6
2. For Performance Shares and Compulsory Deferred Matching Share awards, the performance measures are Group underlying ROE (70% weighting) and relative TSR (30% weighting). 3. For Voluntarily Invested Deferred Matching Shares, the performance measure is Group underlying ROE (100% weighting).
5. If threshold performance is achieved, 25% of the number of shares shown will vest. 6. Face value of awards are calculated as the maximum number of shares that would vest if all performance measures and targets are met, multiplied by the mid-market closing price of an RSA ordinary share averaged over the five business days preceding the date of grant (3 April 2013), of £1.166. 7. Simon Lee resigned from the Board and his employment ended on 12 December 2013. His LTIP awards shown in this table lapsed on that date.
Clawback Policy A Clawback Policy was introduced in 2013 which has been further strengthened to apply to awards issued in 2014 onwards. In summary, the Committee has the ability to reduce or forfeit awards that have yet to be paid or vest in the case of shares (i.e. malus adjustment), to delay the payment or vesting date or to amend another form of award or benefit which has yet to be received. These sanctions may apply in circumstances including: • Material financial misstatement of results for any financial year or the material financial loss/under-performance of a business unit that could have been reasonably risk-managed
• Deterioration in the financial health of the Company leading to severe financial constraint
The number of shares held by the Executive Directors as at 31 December 2013 is shown in the table below. Simon Lee’s and Adrian Brown’s shareholdings exceeded the required level. Richard Houghton joined RSA in June 2012 and continues to build up his holding within the allotted five-year period.
Johanna Waterous 36,761 45,161 Notes: 1. Adrian Brown and Richard Houghton each had a beneficial interest as at 31 December 2013 in Voluntarily Invested Deferred Shares held under the LTIP. Adrian Brown also has an interest in the Partnership, Dividend and Matching Shares under Sharebuild. These are not included in the above table. They are disclosed on pages 87 to 88. 2. As at 26 February 2014, the interests in ordinary shares of the current Non-Executive Directors and Richard Houghton had not changed since 31 December 2013.
Changes in the interests of Adrian Brown are disclosed in the notes to the Sharebuild table on page 87. 3. Simon Lee resigned from the Board and his employment ended on 12 December 2013. His share interests are shown at that date and not 31 December 2013. 4. Kath Cates was appointed to the Board with effect from 1 September 2013. The table above shows her shareholding on the date of her appointment and not 1 January 2013. 5. Noel Harweth and John Maxwell resigned from the Board on 31 March 2013. Their interests are shown as at 31 March 2013.
Outstanding options Unexpired options held during 2013 in respect of the ordinary shares of the Company as a result of executive and Sharesave share option schemes are shown below. All options were granted for nil consideration. None of the terms or conditions of any of the existing options over shares of the Group were varied during the year.
Notes: 1. The aggregate gross gain made by Directors during the year on the exercise of share options amounted to £39,778.38. 2. Simon Lee resigned from the Board and his employment ended on 12 December 2013. His interests are therefore shown as at close of business on that date. With the exception of the
Sharebuild The Directors’ interests in Sharebuild shares during 2013 were as follows: Sharebuild Shares held at 1 January 2013
Notes: 1. The interests of Adrian Brown increased by 254 ordinary shares on 7 January 2014 and a further 242 ordinary shares on 7 February 2014 following the purchase of Partnership Shares and the awards of Matching Shares on those dates.
2. Under the terms of the Company’s all-employee Sharebuild Plan (an HMRC-approved Share Incentive Plan), the Matching Shares awarded between December 2009 and February 2011 have vested. Any Matching Shares which have vested under the rules have remained in the Trust and are included in the above table. 3. Simon Lee resigned from the Board and his employment ended on 12 December 2013, and he received his Partnership Shares, vested Matching Shares and Dividend Shares as at that date in accordance with the rules of the Sharebuild Plan. A total of 3,839 unvested Matching Shares in the Scheme were forfeited upon his resignation.
8. In respect of the awards made to Adrian Brown and Simon Lee, the market price on the date of grant of awards (7 April 2010) was 129.1p, the market price on date of vesting of awards (7 April 2013) was 109.6p. The performance conditions for these awards are shown on page 84.
9. The aggregate value of share awards vested for Directors during the year under the Long-term Incentive Plan amounted to £1,198,162. Voluntarily Invested Deferred Shares, which are shown in the table above, are not included in this value.
10. No other Directors of the Company held long-term incentive scheme interests during 2013.
6. PAYMENTS TO DIRECTORS FOR LOSS OF OFFICE (audited) Simon Lee resigned from the Board and his employment ended on 12 December 2013. He received no ex-gratia remuneration for loss of office, however, in line with Mr Lee’s contractual agreement, he was entitled to receive a payment in lieu of twelve months’ notice, paid in monthly instalments. The payment is equivalent to his annual salary (£824,000). A portion of this payment, £40,144, was paid for the period from 13 December to 31 December 2013.
7. PAYMENTS TO FORMER DIRECTORS (audited) There were no payments made to former directors during 2013, other than the payments disclosed in the Loss of Office section above. As disclosed in the 2011 Director’s Remuneration Report, former Group Chief Executive, Andy Haste, was treated as a ‘Good Leaver’ and so the awards conditionally granted to him in the 2010–12 LTIP cycle partially vested on 7 April 2013, pro-rated for time and achievement against the Plan’s performance conditions. The 749,914 Performance, Matching and Compulsory Deferred Shares vesting were valued at £821,906 using a market price at date of vesting of £1.096. His 155,637 Voluntarily Invested Deferred Shares from the cycle were valued at £170,578 based on the same vesting date and share price.
9. PERCENTAGE CHANGE IN REMUNERATION The table below sets out the percentage change in salary, benefits and bonus for the individual undertaking the most senior Executive Director role in the Company compared with UK employees on average between 2012 and 2013. The UK population was selected for this comparison because pay changes within RSA vary significantly, according to local market factors. The Group Chief Executive’s role has a Group-wide remit, but is located in the UK.
Most senior Executive Director2 -0.2% 6.0% -100% Notes: 1. Family medical cover was introduced for Executive Directors from 1 January 2013 to reflect market practice. The value of the benefits used in the calculation increased from £34,479 in 2012 to £36,548 in 2013.
2. The calculation for the 2013 year includes Martin Scicluna for the period he was Executive Chairman (13 to 31 December 2013), and Simon Lee for the period he was Group Chief Executive (1 January to 12 December 2013). Simon Lee did not receive a bonus in respect of the 2013 financial year.
10. RELATIVE IMPORTANCE OF SPEND ON PAY The table below shows the all-employee pay spend and returns to shareholders by way of dividends for 2013. Figures from 2012 are provided for comparison. The employee pay data covers the Group’s employees globally, and therefore includes the impact of exchange rate changes. Levels of inflation vary across the different countries in which the Group operates and, therefore, salary changes will be reflective of local market conditions.
Total Distributions to Shareholders2 336 232 -31.0% Notes: 1. Includes salaries, social security costs, pension costs and share-based payments as shown in the notes to the Financial Statements on page 132. 2. Includes the figures as shown in the notes to the Financial Statements on page 134.
The graph shows the TSR of the Group with reference to the FTSE100 Index and the relative TSR peer group used as an LTIP performance measure for the 2013–15 cycle, the constituents of which are noted on page 85.
The FTSE100 Index is included as it comprises the 100 most highly capitalised companies in the UK market, of which RSA was a member in 2013.
RSA’s TSR performance relative to the indices is shown over the five years from 31 December 2008 to 31 December 2013. The graph reflects the change in value of ordinary shares in a company over time, as represented by a hypothetical £100 holding in the shares. Any distribution of dividends is included. Data was provided by Datastream.
Notes: 1. Martin Scicluna was appointed Executive Chairman effective 13 December 2013.
The single figure of total remuneration above is pro-rated for his time in the position. 2. Simon Lee resigned as Group Chief Executive and his employment ended on 12 December 2013. He did not receive a bonus in respect of the 2013 financial year, and his awards in the 2011–13 LTIP cycle lapsed on that date.
3. Simon Lee became the Group Chief Executive effective 1 November 2011. The single figure of total remuneration above is pro-rated for his time in the position.
LTIP Opportunity of 58% of salary at threshold, rising to 144% of salary for on-target performance and 230% of salary at maximum (opportunity of 300% of salary at maximum for Group Chief Executive).
Performance measures and weightings for 2014 are: – Group underlying Return on Tangible Equity ( ) – Relative Total Shareholder Return ( ) – Business Review Scorecard (comprising growth in TNAV per share, cumulative earnings and a range of capital strength metrics) ( )
Required shareholding Group Chief Executive shareholding requirement increases to 300% of base salary
Recruitment of new Group Chief Executive Stephen Hester joined the Board on 5 February 2014. His remuneration package is set out below: • Base salary: £950,000 per annum. No sign-on payments or other similar exceptional, compensatory remuneration will be paid.
• Pension: A taxable cash allowance of 30% of base salary.
The level of compulsory deferral has doubled, such that 50% of the total bonus will be awarded in the form of shares and released following a three-year deferral period. As the bonus plan is now decoupled from the long-term incentive plan, there will be no requirement for any voluntary bonus deferral, nor will any matching shares be granted.
The bonus opportunity remains unchanged at 80% of salary for on-target achievement, rising to a maximum of 160% of salary. Threshold performance has been aligned to the market following a benchmarking exercise and it represents 16% of salary (i.e. 10% of the maximum opportunity).
The Committee will assess performance for 2014 once the financial year has ended. It will review the Executive Directors’ achievement against the performance measures and apply a performance management framework to ascertain award levels. 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 – a performance narrative will be disclosed in the 2014 Directors’ Remuneration Report.
The table below sets out the structure of the bonus plan for 2014.
Notes: 1. The measure applicable to Adrian Brown will be UK and Western Europe Underwriting Result. 2. The measure applicable to Stephen Hester and Richard Houghton will be Group COR, the measure applicable to Adrian Brown will be UK and Western Europe COR. 3. Resulting levels of awards related to Group ROTE, Group PBT, Underwriting Result and COR are calculated on a straight line basis between threshold and target, and between target and maximum.
For the 2014 grant, by exception, the relative TSR metric will be targeted against a performance period which will commence four weeks before the grant date and end on 31 March 2017; this is to ensure that the measurement period does not begin during a time when shareholders were not in possession of the full information on RSA’s performance and strategy. All other metrics will be assessed against a performance period of 1 January 2014 to 31 December 2016. Achievement against the Business Review Scorecard will be evaluated using a performance framework whereby each metric will be reviewed against its target, and judgement in the round used to determine the level of vesting. The specific targets cannot be disclosed prospectively for reason of price sensitivity, particularly regarding the capital metrics. A performance narrative will be given to summarise the level of vesting on the Business Review Scorecard once the performance conditions have been tested. Executive Directors must retain all vested shares arising from this incentive plan for a further two years (except those sold to cover statutory deductions).
LTIP performance measures 2014–16 Weighting Threshold target: 25% vesting3 Maximum target: 100% vesting3
Notes: 1. The index of comparators for this cycle includes: ACE, Admiral, Allianz, Amlin, Aviva, Catlin, Direct Line, Gjensidige Forsikring, Hiscox, Intact, Mapfre, QBE, Topdanmark, Tryg and Zurich. 2. Group underlying ROTE will be calculated on a three-year average basis. 3. A straight line calculation is applied to determine the portion of awards that vest for performance between the threshold and maximum targets in respect of relative TSR and Group ROTE.
Executive shareholding requirement From 1 January 2014, the Group Chief Executive’s shareholding requirement increased from 200% to 300% of salary. The requirement for other Executive Directors remains at 150%.
Non-Executive Directors’ fees Under RSA’s Articles, the Non-Executive Directors’ remuneration is determined by the Board, within limits set by shareholders. (The biographies of the Non-Executive Directors are contained on pages 46 to 47). The only exception is in respect of the Chairman, whose terms fall within the remit of the Group Remuneration Committee. The Board (minus the Non-Executive Directors) discharges its accountability for setting and managing Non-Executives Directors’ remuneration; it will do this when their contractual terms or fee structure are under consideration, which is typically once a year, as noted on pages 76 to 77.
The table below shows the Non-Executive Director fee structure. The Chairman receives a fee of £400,000 per annum which, under the terms of his appointment is not scheduled to be reviewed until January 2016. The Company reviewed the Non-Executive Directors’ fees during 2013 in accordance with the Remuneration Policy, and did so referencing a range of information including market data on fees taken from the same peer groups used to benchmark the Executive Directors’ salaries, UK inflation figures and the average reviews applied elsewhere in the Group. The fees effective from 1 July 2013 will continue to apply in 2014.
5% over 10 years for discretionary schemes, including long-term incentives 4.13%
The table below shows when the Non-Executive Directors’ appointments became effective and when their terms will expire.
Non-Executive Director Date of initial appointment Expiry date of current term
• Make an assessment of the Group and Parent Company’s ability to continue as a going concern.
RESPONSIBILITY STATEMENT We confirm to the best of our knowledge: • The financial statements on pages 99 to 172, prepared in accordance with International Financial Reporting Standards as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and loss/profit of the Group and Parent Company; • The business review on pages 36 to 43, which is incorporated into the Directors’ report, includes a fair review of the development and performance of the business and the position of the Group; and
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF RSA INSURANCE GROUP PLC ONLY
• The risk: The Group has significant insurance liabilities representing 59% of total liabilities. The valuation of insurance liabilities is one of the key judgemental areas that our audit is concentrated on due to the level of subjectivity inherent in estimating the impact of claims events that have occurred but for which the eventual outcome remains uncertain. Particular judgement arises over the estimation of the value of amounts that should be provided for claims that have been incurred at the reporting date but have not yet been reported to the Group.
Management override of controls Refer to page 67 (Group Audit Committee Report).
• The response: In addition to extending the scope and extent of our own detailed audit procedures in Ireland, in all the other locations in which the Group operates, we extended procedures around the judgemental areas of the balance sheet which were inappropriately accounted for in Ireland. These included claims reserves, inappropriate deferral of costs, acceleration of income recognition and under-provision of insurance liabilities across a number of financial statement captions. We increased the nature and extent of our procedures over claims reserves, for example through selecting larger samples of claims to test. The Group’s Internal Audit function has performed additional procedures over claims reserves across the business, including testing the effectiveness of controls over large loss case reserving. We evaluated the quality of Internal Audit’s work and where appropriate we have reperformed some of the testing in order to be able to rely on Internal Audit’s findings. In response to this risk, and in agreement with the Board, we have extended our audit procedures and performed additional detailed testing of certain transactions and balances, with particular emphasis given to income recognition and cost deferral. This testing was carried out to significantly lower levels of materiality akin to that applied in the local statutory audits of the entities. Our procedures included vouching system data to supporting documentation from other sources, recalculating the recognition of earned premiums and amortisation of deferred acquisition costs, testing whether deferred costs met relevant criteria (for example, because they relate to the acquisition of insurance policies) and more detailed testing of manual journals through examining a larger number of journals and obtaining evidence to support amounts and rationale for posting.
• The risk: The valuation of intangible assets and goodwill on acquisitions is complex and typically requires a high level of judgement, particularly in countries where there is increased uncertainty over the economic prospects, growth rates or future business prospects for example in Argentina and Poland. The accounting irregularities identified in the Irish business have further increased the uncertainty related to the performance of this business going forward. Goodwill is tested for impairment annually and the most significant judgements arise over the forecast cashflows and the discount rates applied in calculating the value in use, which is then compared to the carrying value of the business to assess if the goodwill is impaired. In addition, the Group holds a significant amount of capitalised software intangible assets, the majority of which are in the UK and Scandinavian businesses. Judgement arises over whether the software is generating sufficient economic benefits to support its value, the period benefits will be realised over, and the amount of any impairments that are recognised.
• Our response: In this area our audit procedures included, among others, challenging the cashflow forecasts and corresponding assumptions, and the useful economic lives of intangible assets based on our understanding of the relevant business and the industry and economic environment in which it operates. We compared forecasts to business plans and also previous forecasts to actual results to assess the performance of the business and the accuracy of forecasting. We compared the Group’s assumptions to externally derived data as well as our own assessments in relation to key inputs such as projected economic growth, forecast profit margins, cost inflation and discount rates and applied sensitivities in evaluating the Group’s assessment. Our own valuation specialists have assisted us in evaluating the assumptions and methodologies used by the Group, in particular those relating to the discount rate and growth rates and in evaluating these assumptions with reference to valuations of similar companies. Our focus has been on goodwill in businesses that are most sensitive to the assumptions underlying the valuations, in particular Ireland, where the recent accounting irregularities mean that there is increased uncertainty over future profitability. We have also focused our procedures on the basis for impairments that have been recognised in respect of the Group’s businesses in Argentina and Poland. We assessed whether the impairments of goodwill were sufficient and supported by the valuations of the business.
• Based on our understanding of the business and its operations, we have assessed whether there were any indications that capitalised software intangible assets may be impaired. Where impairment indicators were identified, we examined the assumptions behind the expected future benefits to be derived from using the related software, considering both the value of the benefits and the extent to which they are derived from the use of the software. In assessing this, we compared the assumptions to our understanding of the business and relevant economic and industry factors. We evaluated whether sufficient future benefits are expected from the software and systems to support the current carrying value and to assess whether impairments recognised were appropriate.
Deferred tax assets £302 million Refer to page 67 (Group Audit Committee Report), page 109 (accounting policy) and pages 151 to 153 (financial disclosures).
• Our response: In this area our audit procedures included, among others, testing of the controls over the maintenance of each scheme’s membership data as well as sample testing from those data to the source documentation establishing the obligation to members, and vice versa. With the support of our own pension actuarial specialists, we then challenged the key assumptions applied to this data to determine the Group’s net deficit, being the discount rate, inflation rate and mortality/life expectancy. This included a comparison of these key assumptions against externally derived data. We also considered the adequacy of the Group’s disclosures in respect of the sensitivity of the deficits to these assumptions.
IT systems and controls Refer to page 67 (Group Audit Committee Report).
We agreed with the audit committee to report to it all corrected and uncorrected misstatements we identified through our audit with a value in excess of £2.5m, in addition to other audit misstatements below that threshold that we believe warranted reporting on qualitative grounds.
Audits for group reporting purposes were performed by component auditors at five key reporting components being: Scandinavia; Canada; UK and Western Europe; Emerging Markets and the Group Corporate Centre. Each of these key reporting components includes a number of individual locations. In total, we performed audits for group reporting purposes in 11 different locations. In addition, specified audit procedures were performed by component auditors in nine further locations.
These group procedures covered 93% of gross written premiums, 95% of profits and losses before taxes, 98% of insurance liabilities and 93% of total assets. The segment disclosures in note 1 set out the individual significance of a specific segment.
The audits undertaken for group reporting purposes at the key reporting components of the Group were all performed to materiality levels set by, or agreed with, the Group audit team. These component materiality levels were set for each component. Within each component the materiality levels applied ranged from between £10m to £40m. Detailed audit instructions were sent to all the auditors in these locations. These instructions covered the significant audit areas that should be covered by these audits (which included the relevant risks of material misstatement detailed above) and set out the information required to be reported back to the Group audit team. The Group audit team visited the following locations: UK, Canada, Sweden, Denmark, Ireland, Chile, Argentina, Brazil and the UAE. Telephone meetings were also held with the auditors at these locations and for other locations that were not physically visited during the audit.
4. OUR OPINION ON OTHER MATTERS PRESCRIBED BY THE COMPANIES ACT 2006 IS UNMODIFIED In our opinion: • the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and
5. WE HAVE NOTHING TO REPORT IN RESPECT OF THE MATTERS ON WHICH WE ARE REQUIRED TO REPORT BY EXCEPTION Under ISAs (UK and Ireland) we are required to report to you if, based on the knowledge we acquired during our audit, we have identified other information in the annual report that contains a material inconsistency with either that knowledge or the financial statements, a material misstatement of fact, or that is otherwise misleading.
Under the companies Act 2006 we are required to report to you if, in our opinion: • adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or
Scope of report and responsibilities As explained more fully in the Directors’ Responsibilities Statement set out on page 94, the directors are responsible for the preparation of the Group financial statements and for being satisfied that they give a true and fair view. A description of the scope of an audit of financial statements is provided on the Financial Reporting Council’s website at www.frc.org.uk/auditscopeukprivate. This report is made solely to the Company’s members as a body and is subject to important explanations and disclaimers regarding our responsibilities, published on our website at www.kpmg.com/uk/auditscopeukco2013a, which are incorporated into this report as if set out in full and should be read to provide an understanding of the purpose of this report, the work we have undertaken and the basis of our opinions.
Less: change in provision for unearned premiums, reinsurers’ share 81 2
Earnings per share on (loss)/profit attributable to the ordinary shareholders of the Parent Company
Items that will not be reclassified to the income statement: Remeasurement of net defined benefit pension liability net of tax 18 17 (137)
Movement in property revaluation surplus net of tax 18 2 4
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2013
Shares issued for cash (note 19) 3 5 – – – – – – 8 4 12
Changes in shareholders’ interests in subsidiaries – – – – (1) – – (10) (11) 10 (1)
CONSOLIDATED STATEMENT OF CASHFLOWS FOR THE YEAR ENDED 31 DECEMBER 2013
Cash and cash equivalents at beginning of the year 1,329 1,258
There are no significant changes to Group accounting policies during 2013 other than those disclosed below.
Expected returns on plan assets are no longer recognised in profit or loss. Expected returns are replaced by recording interest income in profit or loss, which is calculated using the discount rate used to measure the pension obligation.
The information for the year ended 31 December 2012 has been restated and the impact of the revised standard on the results previously reported for the year ended 31 December 2012 is provided in note 27.
The change in presentation has no impact on either the total financial results or the financial position of the Group.
IFRS 13 Fair Value Measurement The Group has adopted IFRS 13 ‘Fair Value Measurement’ and as a consequence there are additional disclosures included in the financial statements as presented in note 13.
The basis of selection of the accounting policies for the accounting for financial assets is to designate financial assets that are held as investments on the basis on which the investment return is managed and the performance is evaluated internally. Where the investment return is managed on the basis of the periodic cashflows arising from the investment, a financial asset is designated as an available for sale financial asset with unrealised gains recognised in the statement of comprehensive income. Where the investment return is managed on the basis of the total return on the investment (including unrealised investment gains), the financial asset is designated as at fair value through the income statement.
Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of subsidiaries are changed where necessary to ensure consistency with the policies adopted by the Group.
TRANSLATION OF FOREIGN CURRENCIES Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which each entity operates (the functional currency).
On consolidation, exchange differences arising from the translation of the net investment in foreign entities, and of borrowings and other currency instruments designated as hedges of such investments, are recognised in other comprehensive income within the foreign currency translation reserve. When a foreign entity is sold, the cumulative exchange differences relating to that foreign entity are recognised in the income statement as part of the gain or loss on sale.
Goodwill arising on the acquisition of a foreign entity is treated as an asset of the foreign entity and the carrying value is translated at the closing exchange rate.
Other intangible assets Other intangible assets comprise renewal rights, customer lists, brands and other acquired identifiable non monetary assets without physical form.
An impairment review is carried out whenever there is an indication that an intangible asset is impaired. Where the carrying amount is more than the recoverable amount, an impairment charge is recognised in the income statement.
Land is not depreciated. Depreciation on all other items is calculated on the straight line method to write down the cost of such assets to their residual value over their estimated useful lives as follows: Group occupied buildings normally 30 years Fixtures and fittings 10 years Motor vehicles 4 years Equipment 3–5 years
INVESTMENT PROPERTY Investment property, comprising freehold and leasehold land and buildings, is held for long-term rental yields and is not occupied by the Group.
FINANCIAL ASSETS A financial asset is initially recognised on the date the Group commits to purchase the asset at fair value plus, in the case of all financial assets not classified as at fair value through the income statement, transaction costs that are directly attributable to its acquisition. A financial asset is derecognised when the rights to receive cashflows from the investment have expired or have been transferred and when the Group has substantially transferred the risks and rewards of ownership of the asset.
On initial recognition, financial assets may be categorised into the following categories: financial assets at fair value through the income statement, loans and receivables, held to maturity financial assets and available for sale financial assets. The classification depends on the purpose for which the investments were acquired. Management determines the classification of its investments at initial recognition.
Investment income is recognised in the income statement. Dividends on equity investments are recognised on the date at which the investment is priced ‘ex dividend’. Interest income is recognised using the effective interest method. Unrealised gains and losses on available for sale investments are recognised in other comprehensive income, except for impairment losses and foreign exchange gains and losses on monetary items (which are recognised in the income statement). On derecognition of an investment classified as available for sale, the cumulative gain or loss previously recognised in other comprehensive income is recognised in the income statement.
• Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices)
Insurance contract liabilities The provision for unearned premium represents the portion of the premiums written relating to periods of insurance coverage subsequent to the end of the reporting period after the deduction of related acquisition costs.
At the end of each reporting period liability adequacy tests are performed to ensure the adequacy of the provision for unearned premium net of related DAC assets. In performing these tests best estimates of future contractual cashflows, claims handling and administrative expenses as well as investment income on assets backing such liabilities are used. Any deficiency is charged to the income statement immediately by establishing a provision for liability adequacy (the unexpired risk provision). The unexpired risk provision is assessed in aggregate for business classes which, in the opinion of the Directors, are managed together.
A reinsurance asset (reinsurers’ share of insurance contract liabilities) is recognised to reflect the amount estimated to be recoverable under the reinsurance contracts in respect of the provisions for losses and loss adjustment expenses reported under insurance contract liabilities. The amount recoverable from reinsurers is initially valued on the same basis as the underlying provisions for losses and loss adjustment expenses. 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 and the event has a reliably measurable impact on the expected amount that will be recovered from the reinsurer.
CASH AND CASH EQUIVALENTS Cash and cash equivalents are short-term, highly liquid investments that are subject to insignificant changes in value and are readily convertible into known amounts of cash. Cash equivalents comprise financial assets with less than three months’ maturity from the date of acquisition.
OWN SHARES Own shares are deducted from equity. No gain or loss is recognised on the purchase, sale, issue or cancellation of the own shares. Any consideration paid or received is recognised directly in equity.
LOAN CAPITAL Loan capital comprises subordinated bonds which are initially measured at the consideration received less transaction costs. Subsequently, loan capital is measured at amortised cost using the effective interest rate method.
TAXATION Taxation in the income statement is based on profits and income for the year as determined in accordance with the relevant tax legislation, together with adjustments to provisions for prior years. Deferred tax in respect of the unremitted earnings of overseas subsidiaries and principal associated undertakings is recognised as an expense in the year in which the profits arise, except where the remittance of earnings can be controlled and it is probable that remittance will not take place in the foreseeable future, in which case the tax charge is recognised on the dividends received.
Deferred tax is provided in full using the liability method on temporary differences arising between the tax bases of assets and liabilities and the carrying amounts in the financial statements. However, if the deferred tax arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting, nor taxable profit or loss, it is not accounted for. Deferred tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the end of the reporting period and are expected to apply when the related deferred tax asset is realised or the related deferred tax liability is settled.
EMPLOYEE BENEFITS Group companies operate various pension schemes. The schemes are generally funded through payments to trustee administered funds. The Group has both defined contribution and defined benefit schemes. A defined contribution scheme is a pension scheme under which the Group pays fixed contributions into a separate entity. A defined benefit scheme is a pension scheme that defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and salary.
The value of the net defined benefit liability (asset) recognised in the statement of financial position for each individual post retirement scheme is calculated as follows: • The present value of defined benefit obligation of the scheme at the end of the reporting period
• Minus the fair value at the end of the reporting period of the scheme assets out of which the obligations are to be settled directly.
The net interest on the net defined benefit liability (asset) is determined by multiplying the net defined benefit liability (asset) by the discount rate, both as determined at the start of the annual reporting period and taking account of any changes in the net defined benefit liability (asset) during the period as a result of contribution and benefit payments.
Termination benefits Termination benefits are payable when employment is terminated before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises termination benefits at the earlier of when it can no longer withdraw the offer and when any related restructuring costs are recognised. Benefits falling due more than 12 months after the end of the reporting period are discounted to present value.
LEASES Rental income from operating leases is recognised on a straight line basis over the term of the lease. Payments made under operating leases are charged on a straight line basis over the term of the lease.
CURRENT AND NON CURRENT DISTINCTION Assets are classified as current when expected to be realised within the Group’s normal operating cycle of one year. Liabilities are classified as current when expected to be settled within the Group’s normal operating cycle of one year. All other assets and liabilities are classified as non current.
INTRODUCTION One of the purposes of insurance is to enable policyholders to protect themselves against uncertain future events. Insurance companies accept the transfer of uncertainty from policyholders and seek to add value through the aggregation and management of these risks.
In addition, the Group uses other methods such as the Bornhuetter-Ferguson method, which combines features of the above methods. The Group also uses bespoke methods for specialist classes of business. In selecting its best estimate, the Group considers the appropriateness of the methods and bases to the individual circumstances of the provision class and underwriting year. The process is designed to select the most appropriate best estimate.
The pension assets and pension and post retirement liabilities are calculated in accordance with International Accounting Standard 19 (IAS 19). The assets, liabilities and income statement charge, calculated in accordance with IAS 19, are sensitive to the assumptions made from time to time, including inflation, interest rate, investment return and mortality. IAS 19 compares, at a given date, the current market value of a pension fund’s assets with its long-term liabilities, which are calculated using a discount rate in line with yields on ‘AA’ rated bonds of suitable duration and currency. As such, the financial position of a pension fund on this basis is highly sensitive to changes in bond rates and will also be impacted by changes in equity markets.
UNCERTAINTIES AND CONTINGENCIES The uncertainty arising under insurance contracts may be characterised under a number of specific headings, such as: • Uncertainty as to whether an event has occurred which would give rise to a policyholder suffering an insured loss
There may be significant reporting lags between the occurrence of the insured event and the time it is actually reported to the Group. Following the identification and notification of an insured loss, there may still be uncertainty as to the magnitude and timing of the settlement of the claim. There are many factors that will determine the level of uncertainty such as inflation, inconsistent judicial interpretations and court judgements that broaden policy coverage beyond the intent of the original insurance, legislative changes and claims handling procedures.
The establishment of insurance contract liabilities is an inherently uncertain process and, as a consequence of this uncertainty, the eventual cost of settlement of outstanding claims and unexpired risks can vary substantially from the initial estimates, particularly for the Group’s long tail lines of business. The Group seeks to provide appropriate levels of provisions for losses and loss adjustment expenses and provision for unexpired risks taking the known facts and experience into account.
The Group has exposures to risks in each class of business within each operating segment that may develop and that could have a material impact upon the Group’s financial position. The geographic and insurance risk diversity within the Group’s portfolio of issued insurance policies mean it is not possible to predict whether material development will occur and, if it does occur, the location and the timing of such an occurrence. The estimation of insurance contract liabilities involves the use of judgements and assumptions that are specific to the insurance risks within each territory and the particular type of insurance risk covered. The diversity of the insurance risks results in it not being possible to identify individual judgements and assumptions that are more likely than others to have a material impact on the future development of the insurance contract liabilities.
ASBESTOS AND ENVIRONMENTAL CLAIMS The estimation of the provisions for the ultimate cost of claims for asbestos and environmental pollution is subject to a range of uncertainties that is generally greater than those encountered for other classes of insurance business. As a result it is not possible to determine the future development of asbestos and environmental claims with the same degree of reliability as with other types of claims, particularly in periods when theories of law are in flux. Consequently, traditional techniques for estimating provisions for losses and loss adjustment expenses cannot wholly be relied upon and the Group employs specialised techniques to determine provisions using the extensive knowledge of both internal asbestos and environmental pollution experts and external legal and professional advisors.
POTENTIAL CHANGE IN DISCOUNT RATE FOR LUMP SUM DAMAGES AWARDS Legislative changes may affect the Group’s liability in respect of unsettled claims in the use of predetermined factors used by courts to calculate compensation claims. For example, in the UK, standard formulae are used as an actuarial measure by the courts to assess lump sum damages awards for future losses (typically loss of earnings arising from personal injuries and fatal accidents). The calibration of these standard formulae can be updated by the UK Government and the Lord Chancellor may review the methodology to be applied in determining the discount rate to calculate the appropriate settlements, or the discount rate itself, in due course. A reduction in the prescribed discount rate would increase the value of future claims settlements.
POTENTIAL CREDIT RISK FOR STRUCTURED SETTLEMENTS In Canada the Group has purchased annuities from regulated Canadian life insurers in order to pay fixed and recurring payments to certain claimants. This arrangement exposes the group to a credit risk in the event that the life insurers are unable to make these payments which is mitigated by an industry compensation scheme which in that event would assume a significant majority of the remaining outstanding obligations. The likelihood of both a Canadian regulated life insurer and the industry compensation scheme being unable to pay their obligations is considered very remote and so no provision has been recognised in respect of this risk.
ACQUISITIONS AND DISPOSALS The Group makes acquisitions and disposals of businesses as part of its normal operations. All acquisitions are made after due diligence, which will include, amongst other matters, assessment of the adequacy of claims reserves, assessment of the recoverability of reinsurance balances, inquiries with regard to outstanding litigation and inquiries of local regulators and taxation authorities. Consideration is also given to potential costs, risks and issues in relation to the integration of any proposed acquisitions with existing Group operations. The Group will seek to receive the benefit of appropriate contractual representations and warranties in connection with any acquisition and, where necessary, additional indemnifications in relation to specific risks although there can be no guarantee that these processes and any such protection will be adequate in all circumstances. The Group may also provide relevant representations, warranties and indemnities to counterparties on any disposal.
CONTRACTS WITH THIRD PARTIES The Group enters into joint ventures, outsourcing contracts and distribution arrangements with third parties in the normal course of its business and is reliant upon those third parties being willing and able to perform their obligations in accordance with the terms and conditions of the contracts.
RATING ENVIRONMENT The ability of the Group to write certain types of insurance business is dependent on the maintenance of the appropriate credit ratings from the rating agencies. The Group has the objective of maintaining, at a minimum, single ‘A’ ratings. At the present time the ratings are ‘A’ (CreditWatch Developing) from S&P and ‘A2’ (stable outlook) from Moody’s. A worsening in the ratings, below objective, could have an adverse impact on the ability of the Group to write certain types of general insurance business.
The Group employs a comprehensive Risk Management System that includes a full range of risk policies, procedures, measurement, reporting and monitoring techniques and a series of stress tests and scenario analyses to ensure that the risk exposures that arise from operating the Group’s business are managed appropriately.
For the purposes of managing risks, the Group classifies risks into the following categories: • Insurance
Underwriting and claims risks The Group manages these risks through its underwriting strategy, adequate reinsurance arrangements and proactive claims handling. The underwriting strategy aims to ensure that the underwritten risks are well diversified in terms of type and amount of risk, industry and geography.
Underwriting limits are in place to enforce appropriate risk selection criteria. The Group generally has the right not to renew individual policies, it can impose deductibles and it has the right to reject the payment of a fraudulent claim. In certain territories, legislation imposes a minimum amount for which employers can be liable for claims for compensation from employees injured at work. These liabilities are usually insured under an employer’s liability (or similar) insurance policy. All policies issued by the Group comply with minimum statutory requirements.
The Group has developed enhanced methods of recording exposures and concentrations of risk. This means there is greater control of exposures in high risk areas and enables a prompt response to claims from policyholders should there be a catastrophic event such as an earthquake.
Reserve risk The Group establishes loss reserves to account for the anticipated ultimate costs of all losses and related loss adjustment expenses (LAE) on losses that have already occurred. The Group establishes reserves for reported losses and LAE, as well as for incurred but not yet reported (IBNR) losses and unallocated loss adjustment expenses (ULAE). Loss reserve estimates are based on known facts and on interpretation of circumstances including the Group’s experience with similar cases and historical claims payment trends. The Group also considers the development of loss payment trends, levels of unpaid claims, judicial decisions and economic conditions.
• An actuarial indication of ultimate losses together with an assessment of risks and possible favourable or adverse developments that may not have been fully reflected in calculating these indications. At the end of 2013 these risks and developments include: the possibility of future legislative change having retrospective effect on open claims; changes in claims settlement procedures potentially leading to future claims payment patterns differing from historical experience; the possibility of new types of claim, such as disease claims, emerging from business written several years ago; general uncertainty in the claims environment; the emergence of latent exposures such as asbestos; the outcome of litigation on claims received; failure to recover reinsurance and unanticipated changes in claims inflation
• The views of internal peer reviewers of the reserves and of other parties including actuaries, legal counsel, risk directors, underwriters and claims managers
USE OF REINSURANCE The Group is exposed to both multiple insured losses and losses arising out of a single occurrence, for example a natural peril event such as a hurricane, flood or earthquake.
All of the Group’s operations are required to purchase reinsurance within agreed local reinsurance appetite parameters. The Group Corporate Centre authorises the operations’ proposed treaty purchases to check that they at least meet the Group’s appetite, for example the ‘1 in 200 year’ standard for catastrophe risk. Group Corporate Centre also checks to see that total Group exposures are within the limits set out above and also are consistent with the required risk based capital. In addition, local facultative arrangements may be purchased where deemed appropriate.
Reinsurers’ share of insurance contract liabilities – 538 1,235 202 44 1 2,020
With the exception of AAA rated government debt securities, the largest aggregate credit exposure does not exceed 3% of the Group’s total financial assets. Holdings of government bonds in Greece, Italy, Ireland, Spain and Portugal are £119m at 31 December 2013 and comprise around 1% (2012: around 1%) of the total bond portfolio. In addition to this the Group holds £189m of senior and subordinated bank debt and £103m of other corporate holdings in these countries.
The Group is exposed to credit and concentrations of risk with individual reinsurers, due to the nature of the reinsurance market and the restricted range of reinsurers that have acceptable credit ratings. The reinsurance strategy is to purchase reinsurance in the most effective manner from reinsurers who meet the Group’s security standards. Reinsurance counterparties are subject to a rigorous internal assessment process on an ongoing basis to ensure that their creditworthiness continues to be satisfactory and the potential impact from reinsurer default is measured regularly and managed accordingly. The Group Reinsurance Credit Committee oversees the management of these risks. Group standards are set such that reinsurers that have a financial strength rating of less than ‘A-’ with Standard & Poor’s, or a comparable rating, are removed from the Group’s authorised list of approved reinsurers unless the Group’s internal review discovers exceptional circumstances in favour of the reinsurer. Collateral is taken to mitigate exposures, where appropriate, to acceptable levels. At 31 December 2013 the Group held collateral against £165m (2012: £143m) of reinsurers’ share of insurance contract liabilities.
Cash and cash equivalents 1,162 – – – – – 1,162 –
The Group is permitted to sell or repledge collateral held in the event of default by the owner, the fair value of which has been noted above at £463m. The terms and conditions of the collateral held are market standard. The assets held as collateral are readily convertible into cash.
The ISDA agreements do not meet the criteria for offsetting in the statement of financial position. This is because the Group does not have any currently legally enforceable right to offset recognised amounts, because the right to offset is enforceable only on the occurrence of future events.
Repurchase arrangements and other similar secured borrowing 295 – 295 (295) – – 295
Notes: 1. The Group’s equity derivatives are exchange traded instruments and as such the Group treats the intermediary as a single counterparty in the above table.
MARKET RISK The Group is exposed to the risk of potential losses from adverse movements in market prices including those of interest rates, equities, property, exchange rates and derivatives.
The Group sets appropriate risk limits to ensure that no significant concentrations in individual companies arise. The Group takes a long-term view in selecting shares and looks to build value over a sustained period of time rather than utilising high level of purchase and sales in order to generate short-term gains from its equity holdings.
Property price risk The Group’s portfolio of properties is subject to property price risk arising from changes in the market value of properties. Further information on the valuation approach is included in note 13. Thus if the value of property falls so will the fair value of the portfolio as set out in the sensitivity analysis on page 122.
• Structural currency risk – by investing in overseas subsidiaries and operating an international insurance group.
Shareholders’ equity is stated after taking account of the effect of currency forward contracts and foreign exchange options. On this basis, a 10% change in Sterling against Danish Krone/Euro, Canadian Dollar or Swedish Krona would have the following impact on shareholders’ equity: 10% strengthening in Pounds Sterling against Danish
Krone/Euro £m 10% strengthening in Pounds Sterling against Canadian Dollar £m 10% weakening in
Derivatives The Group may use derivative financial instruments for the purpose of reducing its exposure to adverse fluctuations in interest rates, foreign exchange rates, equity prices and long-term inflation. The Group does not use derivatives to leverage its exposure to markets and does not hold or issue derivative financial instruments for speculative purposes. Forward contracts and foreign exchange options are used to reduce the risk of adverse currency movements on certain forecast future cash transactions and for structural hedging. The policy on use of derivatives is approved by the BRC.
The Group is party to a series of swap contracts which collectively provide limited cover against a sharp increase in long-term claims inflation. In total the swap contracts provide inflation cover over a nominal value of £180m (2012: £180m) and are split over different contract terms.
At 31 December 2013 the Group holds currency forward contracts and foreign exchange options that are designated as hedging instruments to reduce structural foreign exchange risk. The derivatives are included in the table above. Further information on designated hedges can be found in note 29.
Sensitivity analysis The Group uses a number of sensitivity or stress-test based risk management tools to understand the impact of the above risks on earnings and capital in both normal and stressed conditions. These stress tests combine deterministic shocks, analysis of historical scenarios and stochastic modelling using the internal capital model to inform the Group’s decision making and planning process and also for identification and management of risks within the business units.
Changes in the income statement and other comprehensive income: Increase/(decrease) in income statement
Notes: 1. This analysis assumes that there is no correlation between equity price, interest rate and property market rate risks. It also assumes that all other assets and liabilities remain unchanged and that no management action is taken. This analysis does not represent management’s view of future market change, but reflects management’s view of key sensitivities 2. 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 2014 and 1 January 2013 3. The impact on the fair value of the loan capital for a 100bps rise in interest rates is a decrease of £42m (2012: £55m) 4. The effect of movements in equity and property markets is reflected as a one time decrease of worldwide equity and property markets on 1 January 2014 and 1 January 2013 which results in a 15% decline in the value of the Group’s assets in these investment categories 5. This analysis has not considered the impact of the above market changes on the valuation of the Group’s insurance contract liabilities or retirement benefit obligations 6. This analysis is presented gross of the corresponding tax credits/(charges) 7. The equity price risk sensitivity analysis is indicative and is based on the Group’s equity portfolio as at 31 December 2013. Since 31 December 2013 the Group has significantly reduced its equity portfolio and as a result the equity price risk has substantially reduced such that a 15% fall in equity markets would result in a £6m decrease to total comprehensive income
Maturity periods or contractual repricing The following table summarises the contractual repricing or maturity dates (whichever is earlier) for financial liabilities that are subject to fixed and variable interest rates. Insurance contract liabilities are also presented and are analysed by remaining estimated duration until settlement.
Subordinated guaranteed perpetual bonds – – – 375 – – – 375 342
Subordinated guaranteed perpetual notes 450 – – – – – – 450 460
Subordinated guaranteed dated notes – – – – – 500 – 500 494
Provisions for losses and loss adjustment expenses 4,096 1,916 1,243 840 584 1,397 2,218 12,294 11,148
Deposits received from reinsurers 41 – – – – – – 41 41
Interest on perpetual bonds and notes 109 73 73 62 48 24 7 396
Subordinated guaranteed US$ bonds – – – – – – 15 15 14
Subordinated guaranteed perpetual bonds – – – – 375 – – 375 334
Subordinated guaranteed perpetual notes – 450 – – – – – 450 470
Provisions for losses and loss adjustment expenses 4,065 1,849 1,199 826 600 1,464 2,334 12,337 11,002
OPERATIONAL RISK Operational risk is the risk of direct or indirect losses resulting from human factors, external events and inadequate or failed internal processes and systems. Operational risks are inherent in the Group’s operations and are typical of any large enterprise. Major sources of operational risk can include operational process reliability, information security, outsourcing of operations, dependence on key suppliers, implementation of strategic and operational change, integration of acquisitions, fraud, human error, customer service quality, inadequacy of business continuity arrangements, recruitment, training and retention of staff, and social and environmental impacts.
The Group manages operational risk using a range of techniques and tools to identify, monitor and mitigate its operational risk in accordance with the Group’s risk appetite. These tools include Risk and Control Self Assessments, Key Risk Indicators (e.g. fraud and service indicators), Scenario Analyses and Loss Reporting. In addition, the Group has developed a number of contingency plans including Incident Management and Business Continuity Plans. Quantitative analysis of operational risk exposures material to the Group is used to inform decisions on the overall amount of capital held and the adequacy of contingency arrangements.
The Group defines its ORSA as a series of inter-related activities by which it establishes: • The quantity and quality of the risks which it seeks to assume
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.
The Group’s regulated entities aim to hold appropriate levels of capital to satisfy applicable local regulations. In certain instances this could restrict the subsidiaries’ ability to transfer funds to the UK parent where retained earnings form part of the local required regulatory capital. Additionally, regulation in certain countries in which the Group’s subsidiaries operate may also impose other limitations such as foreign exchange control restrictions.
The economic capital analysis compares available capital with the economic capital assessment (ECA). Available capital is the capital (over and above the IFRS insurance liabilities) that is available to absorb losses. It includes subordinated debt, but excludes items such as goodwill and other intangible assets, deferred tax items and pension scheme surpluses and deficits. ECA is the capital required to meet liabilities at a confidence level equivalent to Standard & Poor’s long-term A rated bond default curve.
The economic capital model is used to support, inform and improve the Group’s decision making across the Group. It is used to determine the Group’s optimum capital structure, its investment strategy, its reinsurance programme and to determine the pricing and target returns for each portfolio. The economic capital model is also used for the Group’s Individual Capital Assessment (ICA). The only adjustment made is to use the PRA’s required calibration.
As at 31 December 2013 the Group has an IGD surplus of £0.2bn (unaudited) (2012: £1.2bn). The IGD surplus has been impacted by adverse movements in investment markets with significant reductions in bond values, retained losses and an increase in requirements resulting from higher business volumes. The coverage ratio stood at 1.1 times (unaudited) at 31 December 2013 (2012: 1.9 times).
Other activities comprise administration expenses, ongoing investment in the Group’s operations in Central and Eastern Europe and other expenses of £73m (2012: £89m), which includes the Group share in the loss after tax of its associates of £2m (2012: £6m). In addition there are investment expenses and charges of £31m (2012: £33m).
Net written premiums and non current assets from major geographical regions Net written premiums Non current assets 2013 £m 2012 £m 2013 £m 2012 £m
Net unrealised gains/(losses) Impairments Total investment return 2013 £m 2012 £m 2013 £m 2012 £m 2013 £m 2012 £m 2013 £m 2012 £m 2013 £m 2012 £m
Debt securities: At fair value through the income statement – – – – (15) (15) – – (15) (15)
Net realised (gains)/losses transferred to income statement Impairments transferred to income statement Net movement recognised in equity 2013 £m 2012 £m 2013 £m 2012 £m 2013 £m 2012 £m 2013 £m 2012 £m 3. NET CLAIMS
Gross changes in provisions for losses and loss adjustment expenses 226 (181)
Reinsurers’ share of change in insurance contract liabilities for claims (44) 107
4. LOSS BEFORE TAX The following items have been included in arriving at the loss before tax on operations: Other operating income £m £m
Audit related assurance services of £1.7m in 2013 includes extended audit work following the identification of financial and claims irregularities in Ireland (for further information refer to the Corporate Governance section), review of the regulatory returns and the half year press release.
UK and Western Europe includes staff employed in Group Corporate Centre.
The prior year tax charge has been restated. For full details of the restatement refer to note 27 ‘Retirement Benefit Obligations’.
Tax at the UK rate of 23.2% (2012: 24.5%) (57) 110
Release of tax provided in respect of prior periods (24) (22)
Tax rates The table below provides a summary of the current tax and deferred tax rates for the year in respect of the main tax jurisdictions in which the Group operates: Current Tax Deferred Tax Current Tax Deferred Tax
6. EARNINGS PER SHARE ATTRIBUTABLE TO THE ORDINARY SHAREHOLDERS OF THE PARENT COMPANY The earnings per ordinary share are calculated by reference to the profit attributable to the ordinary shareholders and the weighted average number of shares in issue during the year.
Weighted average number of ordinary shares for diluted earnings per share (thousands) 3,632,180 3,576,531
Net carrying amount at 31 December 2013 589 6 332 176 1,103
Net carrying amount at 31 December 2012 720 8 542 219 1,489
Additions of software development comprise £14m (2012: £12m) of external software and £112m (2012: £128m) of internally developed software.
As part of the Group business review, a decision has been made to refine and rationalise IT infrastructure. As a result of this decision, a software impairment charge of £221m (2012: £nil) has been recognised within other operating expenses.
A number of other assumptions and estimates are involved in the application of a cashflow model to forecast operating cashflows, premium volumes, expenses and working capital requirements. Forecasts of future cashflows are based on the best estimates of future premiums, operating expenses and taxes using historical trends, general geographical market conditions, industry trends and forecasts and other available information. These assumptions are subject to review by management. The cashflow forecasts are adjusted by appropriate discount rates. Discount rates used in 2013 are within a range of 8% to 24% (2012: 6% to 24%), are post tax and reflect specific risks relating to the relevant segments at the date of evaluation. The weighted average growth rates used in 2013 are within a range of 0% to 15% (2012: 2% to 13%).
Goodwill impairment charges of £106m (2012: £nil) have been recognised within other operating expenses, split between Emerging Markets £90m and UK and Western Europe £16m.
In Emerging Markets the impairment charge reflects slower than anticipated economic growth in Poland and increased economic uncertainty in Argentina. In UK and Western Europe the impairment charge reflects plans to contract some lines of business in the UK and reduced economic growth projections in Italy.
Sensitivity analysis The Group’s impairment tests have identified the goodwill of the Irish CGU as having headroom of £33m. Headroom is defined as the recoverable amount less the carrying value of the CGU, negative headroom indicates impairment. A reasonable change in key assumptions could potentially cause the Irish CGU to be impaired.
Depreciation expenses of £34m (2012: £35m) have been charged to underwriting and policy acquisition costs.
The carrying amount of Group occupied property that would have been recognised had the assets been carried under the cost model at 31 December 2013 is £58m is (2012: £140m).
The movement in the Group occupied property reserve is shown below: 2013 £m 2012 £m
Group occupied property reserve at 31 December 23 22 10. INVESTMENT PROPERTY Investment property consists of £331m (2012: £340m) freehold and long leasehold buildings.
Summarised below are the assets, liabilities, revenue and profit and loss of the companies above: 2013 £m 2012 £m
Some associates have been omitted from this note to avoid providing particulars of excessive length but none materially affects the results or assets of the Group. A full list of the Group’s associates will be filed at Companies House.
13. FAIR VALUE MEASUREMENTS RECOGNISED IN THE STATEMENT OF FINANCIAL POSITION
Derivative liabilities: At fair value through the income statement – 28 – 28
Derivative assets: At fair value through the income statement – 32 – 32
Derivative liabilities: At fair value through the income statement – 36 – 36
There were no transfers between Level 1, Level 2 and Level 3 during 2013 or 2012.
A reconciliation of Level 3 fair value measurements of financial assets is shown in the table below. There are no Level 3 financial liabilities measured at fair value.
Available for sale investments Investments at fair value through the income statement
Level 3 financial assets at 1 January 2012 28 10 21 55 114
Level 3 financial assets at 1 January 2013 35 10 33 38 116
Level 3 financial assets at 31 December 2013 63 10 34 27 134
Of the total gains/(losses) for the period recognised in other comprehensive income (shown in the reconciliation above), £4m (2012: £1m) relate to assets held at the end of the reporting period and is reported in movements in the revaluation reserves in the statement of changes in equity.
Group occupied properties and investment properties are classified as Level 3 assets in the fair value hierarchy.
The valuations of buildings with vacant possession are based on the comparative method of valuation with reference to sales of other vacant buildings. Fair value would change based on the locational qualities and physical building characteristics (principally condition, size, specification and layout) as appropriate.
Investment properties are valued using discounted cashflow models which takes into account the net present value of cashflows to be generated from the properties. The cashflow streams reflect the current rent (the gross rent) payable to lease expiry, at which point it is assumed that each unit will be re–let at its estimated rental value. Allowances have been made for voids and rent free periods where applicable. The appropriate rent to be capitalised is selected on the basis of the location of the building, its quality, tenant credit quality and lease terms amongst other factors.
Loan capital The Group’s loan capital instruments are classified as Level 2 financial liabilities with the exception of the Subordinated guaranteed US$ bonds which are classified as Level 3 financial liabilities.
The following changes have occurred in the reinsurer’s share of provision for unearned premiums during the year: 2013 £m 2012 £m
Reinsurers’ share of portfolio transfers and (disposals)/acquisitions of subsidiaries (2) 6
Reinsurers’ share of provision for unearned premiums at 31 December 366 299
Reinsurers’ share of portfolio transfers and (disposals)/acquisitions of subsidiaries (6) 22
Reinsurers’ share of provisions for losses and loss adjustment expenses at 31 December 1,660 1,650
Total insurance and reinsurance debtors 3,593 3,592 16. OTHER DEBTORS AND OTHER ASSETS
To be settled after 12 months 144 134 17. CASH AND CASH EQUIVALENTS The interest bearing financial assets included in cash and cash equivalents had an effective interest rate of 2.08% (2012: 1.17%) and had an average maturity of 26 days (2012: 34 days).
Exchange losses net of tax – (116) (10) (126) (4) (130)
Movement in property revaluation net of tax 2 – – 2 – 2
Total comprehensive (expense)/income for the year (256) (116) (341) (713) 5 (708)
Fair value gains/(losses) net of tax 113 – (3) 110 1 111
Movement in property revaluation net of tax 4 – – 4 – 4
Total comprehensive income/(expense) for the year 113 (61) 180 232 4 236
During 2013, the Company issued a total of 85,847,680 new ordinary shares ranking pari passu with ordinary shares in issue (2012: 64,930,085 new ordinary shares), on the exercise of employee share options and in respect of employee share awards and under the scrip dividend scheme. The number of ordinary shares in issue, their nominal value and the associated share premiums are as follows: Number of shares
Issues in lieu of dividends as previously reported 45,594,331 12 (12)
Issued in respect of employee share options and employee share awards 19,961,699 5 5
Rights attaching to the shares The preference shares are not redeemable but the holders of the preference shares have preferential rights over the holders of ordinary shares in respect of dividends and of the return of capital in the event of the winding up of the Parent Company.
Full information on the rights attaching to shares is in the Parent Company’s Articles of Association which are available on the Group’s website.
There have been no defaults on any of the bonds or notes during the year. The Group has the option to defer interest payments on the bonds and notes but to date has not exercised this right. The right to defer interest on the perpetual bonds and notes would no longer be available if they fail to meet certain requirements set by the Group’s regulators in the future.
The aggregate fair value of total loan capital at 31 December 2013 is £1,457m (2012: £1,510m).
The provision for unearned premiums is shown net of deferred acquisition costs of £934m (2012: £938m). The movement in deferred acquisition costs during 2013 is attributed to £1,266m (2012: £1,187m) acquisition costs deferred during the year, £1,224m (2012: £1,114m) amortisation charged during the year, £39m exchange losses (2012: £13m exchange losses), and a £7m (2012: £nil) reduction due to other movements.
Provisions for losses and loss adjustment expenses at 1 January 11,002 11,097
Total claims payments made in the year net of salvage and other recoveries (6,427) (6,018)
Provisions for losses and loss adjustment expenses at 31 December 11,148 11,002
Assumptions The total value of provisions for losses and loss adjustment expenses less related reinsurance recoveries before discounting is £9,998m (2012: £9,943m).
Discount rate Average number of years to settlement from reporting date 2013 Years 2012 Years
As at 31 December 2013, the value of the discount on net reserves is £510m (2012: £591m) excluding annuities and periodic payment orders. All other factors remaining constant, a decrease of 1% in the discount rates would reduce the value of the discount by approximately £105m. The sensitivity calculation has taken into consideration the undiscounted reserves for each class of business and the respective average settlement period.
Claims development tables The tables below present changes in the historical provisions for losses and loss adjustment expenses that were established in 2003 and the provisions for losses and loss adjustment expenses arising in each subsequent accident year. The tables are presented at current year average exchange rates on an undiscounted basis and have been adjusted for operations that have been disposed of.
Present value recognised in the consolidated statement of financial position 9,488
The Articles of Association of the Group defines a cap on borrowing limits. This cap is not being amended at the 2014 AGM. At 31 December 2013 the cap on borrowing limits is £3,457m (2012: £4,484m) of which £1,641m (2012: £1,636m) had been utilised.
The following are the major deferred tax assets and liabilities recognised by the Group and their movements during the year: 2013 £m 2012 £m
The movement in the net deferred tax assets recognised by the Group was as follows: 2013 £m
Net arising on acquisition/disposal of subsidiaries and other transfers 2 (9)
Remeasurement of net defined benefit pension liability – – (13) 41 (13) 41
Net deferred tax assets of £233m (2012: £241m), that relate to tax jurisdictions in which the Group has suffered a loss in either the current or preceding period, have been recognised on the basis that future taxable profits will be available against which these can be utilised. The evidence for the future taxable profits is a forecast consistent with the three year operational plans prepared by the relevant businesses, which are subject to internal review and challenge. Where relevant, the forecast includes extrapolations of the operation plans using assumptions consistent with those used in the plans.
Of the above, £304m (2012: £396m) is due to be settled outside of 12 months.
See note 27 for further information regarding the pensions and post retirement benefit obligations.
27. RETIREMENT BENEFIT OBLIGATIONS The Group operates defined contribution pension schemes, funded and unfunded defined benefit pension schemes, and has other post retirement obligations.
The profile of the members of the three main UK schemes at 30 September 2013 (the latest date at which full information is available) is as follows: Number
Active members – members in employment with the Group and accruing benefits 2,844
Deferred members – members no longer accruing and not yet receiving benefits 26,844
Accrued benefits are revalued up to retirement in accordance with government indices for inflation. A cap of 2.5% per annum applies to the revaluation of accrued benefits. A cap of 5% per annum applies for benefits which accrued prior to March 2010.
After retirement, pensions in payment are increased each year based on the increases in the government indices for inflation. A cap of 5% applies to benefits (in excess of Guaranteed Minimum Pensions) which accrued prior to 31 December 2005, and a cap of 2.5% applies to benefits accruing after that date.
The UK schemes are managed through trusts with independent trustees responsible for the safeguard of the interests of all members. The trustees meet regularly with Group management to discuss the funding position and any proposed changes to the schemes. The schemes are regulated by The Pension Regulator. Each scheme is subject to triennial valuations, which are used to determine the future funding of the schemes by the Group including funding to repair any funding deficit. The effective date of the most recent valuations of the three main UK funds is 31 March 2012.