Our business is built around our customers. By focusing on their needs we challenge ourselves to achieve more.
By doing this we can continue to retain and satisfy customers, provide a challenging and engaging environment for our people, and build strong foundations for attractive shareholder returns.
Notes: 1. Return on opening tangible equity. 2. Overall staff sentiment, per YouRSAy staff survey.
Strategic report Chairman’s statement 2 RSA insights 4 Business model 6 Group Chief Executive’s statement 8 Strategic priorities 12 Key performance indicators 22 Financial review 24 Risk management 36
Directors’ and Corporate Governance Report Chairman’s governance letter 40 Board of Directors 42 Executive Committee 44 Corporate governance 46 Board Committee reports 55 Directors’ Remuneration Report 66 Appendix: remuneration policy 83 Other statutory information 91
Financial statements Directors’ responsibilities 98 Independent auditor’s report 99 Financial statements 103 Risk and capital management 116 Notes to the financial statements 128 Financial statements of the Parent company 173
Explore online Visit us online to see summary information and listen to our Group Chief Executive’s statement at: rsagroup.com/annualreport
We are making things better together We’ve been protecting customers from risk and uncertainty for more than 300 years. However, as the world evolves, so do the needs of our customers. As new risks and opportunities emerge, we must constantly innovate and improve to serve our customers well and win in our chosen markets.
Notes: 1. Combined ratios prior to 2014 do not reflect expense reallocations made during 2015. 2. Includes continuing and discontinued operations.
We are one of the world’s longest standing general insurers, providing peace of mind to individuals and protecting small businesses and large corporations from uncertainty.
- A leading international general insurer focused on the UK & Ireland, Canada and Scandinavia.
We have tightened our strategic focus onto three core regions; the UK & Ireland, Scandinavia and Canada.
These core markets are where we have established leadership positions, giving us the scale, relationships and track-record needed to compete and win for customers, for shareholders and our broader communities.
Welcome to our 2015 Annual Report. During the year we have continued to make excellent progress on our transformation journey.
RSA Annual Report and Accounts 20152 Strategic report – Chairman’s statement
In terms of performance improvement, I am pleased to report that our 2015 results are significantly ahead of last year. Premiums have stabilised with Core Group premiums of £5.7bn, flat year-on-year at constant exchange. Underwriting profits have improved significantly to £220m (2014: £41m) with a combined ratio of 96.9% (2014: 99.5%). Operating profit of £523m was up 43%, with profit-after-tax up 221% to £244m. Alongside this we have continued to focus on serving our customers well and enhancing the experience they have with RSA. We are proposing a final dividend for 2015 of 7.0p which would bring total dividends for the year to 10.5p (2014: 2.0p).
In Stephen Hester, our Company has a leader with a wealth of experience in engineering performance improvement across many sectors, and he is progressing well in building a high performance culture at RSA. During 2015 he has further strengthened his team with the arrival of Stephen Lewis, who started in January as CEO of our UK & Ireland business, and Scott Egan, who joined as our new Group CFO and member of the Board in October. I would like to thank Stephen and his management team, together with the Board, for their contributions in 2015.
RSA Annual Report and Accounts 2015 3Strategic report – Chairman’s statement
Impact: According to research by the OECD, inequality harms economic growth. Education is a key factor and a lack of investment in education a major contributor to inequality and financial exclusion.
Response: At RSA we believe in equal opportunities and value diversity. During 2015 22% (2) of our Board members were female (7 male) and 27% (231) of the Group’s Senior Managers were female (615 male). We seek greater female representation at a senior level but base all hiring and promotion decisions on merit. Females represented 53% (9,147) of employees overall (male 8,143).
We also support our communities. Employability workshops with local schools deliver education, inclusion and accessibility and our partnership with the School for Social Entrepreneurs promotes financial participation.
What: Public trust in businesses remains low since the financial crisis. Elderman’s trust barometer shows financial services are among the least trusted.
Impact: Trust is crucial to success. Our customers trust us to be there when things go wrong and shareholders trust us to deliver against our stated targets.
Response: We don’t take trust for granted. We earn it, by placing customers at the heart of our business, constantly improving our products and services to meet their needs, and by providing open and honest communication with shareholders.
What: We operate in markets that are characterised by modest economic growth following the global financial crisis.
Impact: This translates into a slow-down in emergence of new insurable risks and a competitive pricing environment, making profitable growth more challenging.
Our strategy is highly influenced by economic context, which directly impacts both the insurance and financial markets, in which we operate.
RSA Annual Report and Accounts 20154 Strategic report – RSA insights
What: Digital technology is re-configuring the way that customers interact with insurers and the way that insurers understand their customers.
Impact: Digitisation has empowered customers to make more informed insurance purchase decisions. In the UK, according to Swiss Re Sigma, over 35% of motor insurance policies are purchased online. In other markets, search and pre-sales activity is increasingly performed online by the customer who will complete via broker, telephony or other sales channels.
What: Climate change poses risks to both people and the natural environment. According to PwC’s megatrends report, by 2030, the world will need 50% more energy and 35% more food than it does today. This will increase pressure on finite natural resources.
Response: Responding to major events and protecting our customers when they need us most is what we do. As extreme weather events have become more frequent we have expanded our resources and capabilities to manage them. We constantly monitor weather patterns and predictions to ensure we are prepared when the worst happens, and our claims teams have developed Event Plans to ensure the business is ready to respond when our customers need us. To read more about our response in action during the winter flooding in the UK and Scandinavia see page 29.
As well as responding to specific events, RSA is also committed to doing its bit to reduce carbon emissions, targeting a 12% reduction by 2018. Also, RSA is a leading insurer of renewable energy, having been involved in coverage of 90% of operational off-shore wind farms.
Insights We understand that our business operates in a broader market context. By adapting to our environment we ensure we maintain a robust business model, relevant to our customers and market place.
Financial £5bn of capital is employed within RSA to support operating activities and generate shareholder returns.
Relationships and partnerships Relationships across our value chain are a key resource for RSA. We rely on relationships with brokers and partner organisations to distribute c.75% of our business and relationships with our supply chain enable us to provide an efficient claims service.
People RSA is a peoplecentred business, with c.14,000 employees across our core business ensuring that operations run smoothly.
RESPONSIBLE BUSINESS First and foremost we act responsibly in everything that we do
FOCUSED A leading general insurer, focused on the UK & Ireland, Canada and Scandinavia
RSA Annual Report and Accounts 20158 Strategic report – Group Chief Executive’s statement
The immediate market outlook for RSA seems broadly similar to that we described 12 months ago. Low interest rates force our industry to put more emphasis on underwriting results and leading players are showing the discipline to achieve that. However, slow growth and strong price competition remain dominant themes with sharp value/volume trade-offs.
• Plan design • Management strengthening • Implementation starts: – Cost base – Underwriting actions
Improving our cost position is the other critical element of performance. We are ahead of original targets (>£180m gross savings by 2016) and able to increase for the second time our future savings targets to in excess of £350m by 2018. Headcount has come down 36% since 2013 (pro-forma for LatAm) and 13% in core businesses, with more to come. And all of these continuing efforts are enabled by extensive people, technology and infrastructure renewal.
2015 Actions 2015 was a year of delivery, with more achieved than we had thought probable. Our actions spanned three areas: Strategic focus: Divestments were closed in Asia, India, Italy and UK Engineering. Russia has closed since year end. The Latin America sale is scheduled to close in stages over the next six months, adding a further 12% to our Solvency II capital ratio. The latter was a key uncertainty for us, but successfully contracted in September some weeks after the Zurich approach. Only the Middle East business remains outstanding from our non-core list (£43m net attributable assets).
In addition to releasing the power of focus on our core businesses, the disposals (gains totalling c.£500m since 2014) have both bolstered capital and pay for the restructuring actions needed to reduce costs and improve core business performance.
Financial Results Operating profits – our key ongoing measure – rose 43% to £523m. This forms a more respectable base from which we aim for further substantial improvements over the next three years. While December’s UK floods took results from well above, to slightly below our 2015 underwriting plan, sharp improvement on prior year is still visible.
2. Net of Group aggregate reinsurance cover 2015 earned premium of £46m (2014: nil). 3. Pro forma for aggregate reinsurance 2015 net recovery of £28m (£74m recovery net of £46m earned premium cost) shown separately in Group Re.
Within these figures are notable achievements on a regional basis. Canada delivered a 91.7% COR, albeit helped by positive reserve run-off. The Scandinavian COR of 94.0% was held back by one-off additional Swedish reserve strengthening but lower costs and an improving attritional loss ratio provide a platform for attractive further growth. UK pro forma underwriting profit was £40m3 despite significant impact from the December storms, while the attritional loss and cost ratios improved year-on-year. This is our best UK result for many years.
RSA is a valuable company. We can make it much more valuable. We are on a course to do just that.
Our 2015 Strategic Report, on pages 2-39, has been reviewed and approved by the Board of Directors on 24 February 2016.
Following careful consideration by the Board the decision was taken in 2015 to sell RSA’s Latin American operations.
The sale was agreed in September for total proceeds of £403m, and is expected to complete in stages during 2016.
Stronger Customers and shareholders rely on RSA to operate with financial strength. Following the financial overhaul in 2014, our capital position has remained strong throughout 2015. Additional strategic disposals and improving operational profits have helped to stabilise capital and return the business to paying a regular dividend to shareholders.
Better value for customers Better for our customers means providing consistent support and excellent service. We are focusing on being proactive and digitally enabled and providing tailored products that meet evolving customer requirements.
Better value for society and the environment We have four key priorities as part of our Corporate Responsibility programme: to be a responsible business; to help to create a safe world; to contribute to thriving communities; and to help secure a sustainable future.
RSA Annual Report and Accounts 2015 13Strategic report – Our strategic priorities
Better for our customers means providing consistent support and excellent service. We are focusing on being proactive and digitally enabled and providing tailored products that meet evolving customer requirements.
The call centre, which we operate on behalf of John Lewis, was also recognised for outstanding customer service in 2015 when it was ranked number one in the Which? call centre customer satisfaction survey. Particularly valued were the staff’s knowledge, politeness and helpfulness. This same centre was also featured on the BBC’s Watchdog programme as a rare positive example of excellent customer service after a claim was settled in phenomenal time: “ Wow! I could not believe that anyone could be that efficient… One hour and forty three minutes from initial call to final settlement. I will be staying with John Lewis for some time.”
Rapid digitisation – boosting customer experience In Canada we are improving customer and broker experience by investing in digital technology. During 2015 we developed an app within our Johnson business, making it easier for customers to manage elements of their policies online, via their laptop, desktop or smartphone. The app, which launched in January 2016, went from design to implementation within 16 weeks and received fantastic customer feedback.
We’re also active in telematics across our other regions, targeting a broader customer base. During 2015, we were the first to market with a mobile app- based proposition in our Johnson business in Canada called AvenU and in Norway, our Codan business completed an exciting mobile app pilot during the year, rewarding drivers that demonstrated good driving. In both Canada and Norway, we’re taking advantage of the increasing capability that mobile technology provides and transferring the insights we have developed from the UK market.
“ As well as making commercial sense for RSA, what’s really great is that we’re helping young drivers to be safer on the roads, and hopefully instilling great driving habits for life.” Kenny Leitch Global Telematics Director
RSA Annual Report and Accounts 2015 15Strategic report – Our strategic priorities
For employees we are simplifying processes and upgrading tools to make it easier to get things done. We are maintaining our focus on developing people across our businesses and we are committed to rewarding and recognising people appropriately for the work they do.
RSA Annual Report and Accounts 201516 Strategic report – Our strategic priorities
Talent at RSA RSA is committed to developing talent across the organisation. Every member of staff is encouraged to identify and explore learning and development opportunities with their leaders. In addition, RSA runs a number of development programmes for high-performing colleagues at all levels of the organisation: Fastrack Fastrack is the starting point for focused career development and planning. The programme includes elements of the mini-MBA and covers business fundamentals as well as deepening self-awareness.
We’ve introduced social media solutions such as Yammer and SharePoint to drive collaboration between colleagues on a global scale and enable the business to operate more efficiently. Yammer in particular has seen adoption rates of well over 50%, and has contributed to a reduction in emails. It has also been used to improve interaction with Senior Leadership through ‘Town Hall’ events where colleagues can participate online and ask questions directly to Management teams via Yammer.
The Big Upgrade has seen us bring c.17,000 employees globally under one virtual roof via the BT One Cloud network. It has also seen three UK teams move into one place in the Walkie-Talkie building at 20 Fenchurch Street.
We have four key priorities as part of our Corporate Responsibility programme... ...To be a responsible business; to help to create a safe world; to contribute to thriving communities; and to help secure a sustainable future.
As in previous years volunteers from Codan in Denmark handed out thousands of high visibility vests to commuters. Also in 2015, following research in Denmark that showed young people would wear reflective clothes if they were ‘cool’, Codan and the Child Accident Prevention Foundation teamed up with designer, Soulland, to create a reflective collection for young people.
Nick Brown, Fastrack candidate and Michelle Benson, Development Director of the School for Social Entrepreneurs.
SSE supports individuals to establish businesses with a social purpose that address inequalities and social exclusion in our local communities. In Canada and the UK we are supporting students’ development by sharing our business skills and knowledge. We provide senior mentors from the business, ‘introduction to risk’ workshops and half-day workshops helping social entrepreneurs tackle their business issues.
In 2015 we supported SSE and their fellows though our Fastrack leadership development programme. Small groups of our future leaders were tasked with helping entrepreneurs on projects that addressed strategic challenges they were facing.
“ We continue to be at the forefront of renewable energy innovation.” Brendan Reed Global Portfolio Manager, Wind Energy (UK)
We have delivered a reduction in our emissions per FTE over time, as a result of improved operational efficiency, buying sustainable alternatives where possible and empowering employees to work more sustainably.
“ Being a responsible business is about providing insurance for our customers, and financial return to our shareholders without negatively damaging the environments we operate in. Operating in this way is good for our reputation, good for the planet and good for the bottom line – it’s just good business sense.” Darren McKenzie UK and Western Europe COO
RSA Annual Report and Accounts 2015 19Strategic report – Our strategic priorities
Our strategy is designed to maximise value for shareholders. We have simplified the business. We are also investing in the future and streamlining the cost base to build the foundations for attractive shareholder returns.
We are deploying transformation programmes in each region and at the Group head office, aimed at improving customer service, increasing process efficiency and optimising costs.
We’ve been doing business in Canada for over 300 years and during that time we have grown into a trusted market leader. However, as we grew, both organically and through acquisition, we developed an inefficient office footprint across 75 separate locations. During 2015 we made significant progress consolidating this down to just 35, including two regional hubs, focused on operations and customer care. With this structure we can bring employees together to share best-practice and increase efficiency whilst also making significant savings on property costs.
“ Our transformation journey has proved that we can improve efficiency and effectiveness at the same time as enhancing our customer experience.” Sid Chopra Canada Chief Operating Officer
Case Study: Scandinavian country based organisation The Scandinavian transformation has two stages. The first is designed to provide the region with the right foundations for success, whilst the second focuses on optimising and future-proofing the business model.
Previously Scandinavia was managed with separate Personal and Commercial product divisions which each spanned the region. The change to countrybased organisation better recognises the different market and customer dynamics in Denmark, Sweden and Norway, enabling each country to tailor its approach to local demands.
Towards the end of 2015 the Scandinavian businesses moved in to the second stage of the transformation, which will continue in earnest during 2016. This stage has several key areas of focus: digitisation and customer journey; operational efficiency and automation; underwriting and claims excellence and infrastructure and IT improvement. These areas are designed to future-proof the business model and enable us to pursue our ambition of best-in-class.
We consider the following nine key performance indicators important in measuring the delivery of our strategic priorities.
Outlook Targeting 12-15% in the medium-term. Currently expecting to be in the upper-half of this range in 2017.
Commentary The COR is used as a measure of underwriting efficiency across the industry. The aim is to achieve a COR as sustainably low as possible – that is without uncompetitive pricing or compromising reserves.
Outlook Initially targeting a sustainable COR in the mid-90s, improving thereafter.
Definition Eligible capital above the Solvency Capital Requirement (SCR) under Solvency II. The coverage ratio represents total eligible capital as a proportion of the SCR.
Outlook We target a Solvency II coverage ratio in the range of 130% – 160% .
Notes: 1. Combined ratios prior to 2014 do not reflect expense reallocations made during 2015. 2. Capital surplus under Solvency II introduced in 2015. 3. Core group in 2013 includes Latin America.
Definition Operating expenses incurred by the Group in undertaking business activities
Commentary Reduction of controllable expenses is a key element of the Group’s turnaround strategy. The absolute level of expense and the expense ratio (expenses as a proportion of earned premium) are both monitored as part of the turnaround and ongoing performance focus
Definition Total shareholders’ funds, excluding goodwill, intangibles, and preference share capital. TNAV represents the underlying net asset value of the business.
Commentary Growing TNAV generally indicates improving capital metrics, it also represents the underlying asset value of the business, though is sensitive to external market movements.
Commentary Attritional loss ratios are a key lever in the Group’s turnaround of financial performance. Improvements in the business mix together with investments in digitally-enabled underwriting and claims excellence are targeted at reducing the attritional loss ratio.
Definition We use direct measures of satisfaction, such as NPS and indirect measures, including retention.
Outlook Target a growing level of customer satisfaction and maintain retention around 80%.
Definition Gross tonnes of carbon dioxide equivalent per full time equivalent (FTE).
Commentary We endeavour to reduce our emissions as far as possible by operating efficiently, procuring sustainable alternatives and promoting sustainable business practices. In the UK we have offset unavoidable operational emissions by purchasing certified carbon credits in projects in Honduras, Africa and Vietnam.
Outlook We expect TNAV:Premium to be greater than or equal to 35%.
RSA Annual Report and Accounts 201524 Strategic report – Financial review
Regional headlines (at constant exchange) include growth of 4% in Scandinavia, due to improving rate and retention across the book; Canadian premiums down 3%, reflecting the underwriting actions we have been taking to improve profitability as well as competitive market conditions; growth of 2% in the UK, driven by growth in our target Commercial portfolios offset by reduced Personal premiums, reflecting continued discipline in a competitive market and the ongoing impact of business exits; and premiums in Ireland were down 4% reflecting the continued impact of our remediation work.
Retention trends remained broadly stable with overall retention across the Group of around 80%.
The current year profit was £129m (2014: £73m). This reflected a core business current year attritional loss ratio of 56.6% which showed a 1.9 point improvement from 2014 on an underlying basis2 with good improvements across all core regions.
Weather, large and prior year Total weather costs for 2015 were £218m representing a weather loss ratio of 3.1% (2014: £253m or 3.2%; five year average: 3.2%). Included within this is a £76m net cost to the Group relating to the adverse weather in the UK, Ireland and Scandinavia in November and December. The gross cost of these storms was £174m, and after recoveries from the Group catastrophe treaty was
Premiums Group net written premiums were down 3% on 2014, however Core Group premiums rose 1% on an underlying and constant exchange basis to £5.7bn.
Total large losses were £556m or 7.9% of premiums (2014: £587m or 7.4%), marginally lower than the five year average of 8.1%, with lower than trend levels in the UK, partly offset by more elevated losses in Scandinavia, Canada and Ireland.
Investment result The investment result was £322m (2014: £343m) with investment income of £403m (2014: £439m).
Investment income was down 8% on prior year, primarily reflecting the continued impact of the low bond yield environment.
Based on current forward bond yields and foreign exchange rates, together with the expected timing of disposal completions in 2016, it is estimated that investment income will be in the order of £330m for 2016 and around £315m in 2017 and 2018. Discount unwind of c.£55m is expected for 2016, falling to around £50m thereafter, as a result of the disposal of Latin American operations.
Financial results – management basis £m unless otherwise stated Scandinavia Canada UK Ireland Group Re Core Group Non-core Group FY15 Group FY141
Notes: 1. 2014 comparatives have been restated for expense allocation changes made between the underwriting result and investment/central expenses.
The 2013 underwriting result has also been adjusted to reflect this change. 2. Attributes the impact of moving the Group aggregate reinsurance cover (taken out in 2015) earned premiums to weather/large and to adjust for 2014 year end discount rate change impact on 2015 claims in Scandinavia. 3. Total controllable costs include underwriting operating expenses, claims expenses, investment expenses, central expenses and Solvency II costs.
Intangible net losses of £51m in respect of goodwill and intangible asset write downs (2014: £99m) mainly relate to the write-down of certain non-core assets to their recoverable amount.
Tax The Group has reported a tax charge of £79m for the year, giving an effective tax rate (ETR) of 24.5%. This largely comprises tax on overseas profits, particularly in Canada, Latin America and Scandinavia; a reduction in the UK deferred tax asset valuation due to the lower UK corporation tax rate of 18%; and the upward revaluation of UK deferred tax assets based on current assessments of probable future taxable profits in the UK.
The carrying value of the Group’s net deferred tax asset at 31 December 2015 was £126m (of which £101m is in the UK). Additionally, the Group has income tax losses of £631m for which no deferred tax asset has currently been recognised, predominantly in the UK (c.£400m) and Ireland (c.£130m).
Credit spreads: -0.25% parallel shift -10% Note: 1. Sensitivities shown pro-forma for pension de-risking
Solvency II SCR1 by risk driver a. Underwriting 19% b. Catastrophe 12% c. Reserving 13% d. Legacy2 11% e. Market and credit 12% f. Currency 3% g. Pension 23% h. Operational 7%
Note: 1. Total controllable costs include underwriting expenses, claims expenses, investment expenses, central expenses and Solvency II costs.
RSA Annual Report and Accounts 2015 27Strategic report – Financial review
The Group has not utilised any transitional measures, except for the grandfathering of existing debt arrangements.
Rating agencies S&P and Moody’s provide insurance financial strength ratings for the Group and its principal subsidiaries. During 2015 the Group’s S&P rating was re-affirmed at A ‘stable outlook’. The Group is rated A2 by Moody’s with outlook upgraded to ‘stable’ from ‘negative’ during 2015.
In terms of accident year, there has been significant positive development across the 2010-13 accident years. This has come from most major lines in Scandinavia, UK Commercial Property, UK Personal lines and Canada. 2005 and prior includes the impact of strengthening for Abuse and Deafness claims in the UK and legacy Swedish Personal Accident strengthening.
Funding basis We have now reached agreement with the Trustees of RSA’s main UK pension schemes on the results of the latest triennial actuarial valuations including future pension deficit funding contributions and a significant allowance for immediate further de-risking.
Guaranteed deficit funding contributions of c.£65m p.a. will be paid in 2017, 2018 and 2019. This represents a continuation of the current level of deficit contributions.
The agreed deficit figure includes an allowance for a significant immediate de-risking of the schemes’ assets from around 25% to 15% return seeking assets (for example equities) with a corresponding increase in the schemes’ bond type assets from 75% to 85%.
Accounting (IAS 19) basis Under Solvency II the accounting basis becomes the principal driver of capital requirement for pensions along with the market risk arising from the asset mix versus liability profile.
At an aggregate level the pension fund position under IAS 19 improved during the year from a deficit of £72m to a surplus of £64m. Both the UK and non-UK positions improved, and the IAS 19 surplus for the UK schemes now stands at £117m.
Together with the interim dividend of 3.5p, this brings the total dividend for the year to 10.5p, representing 47% pay out of headline and 38% of underlying EPS. Our medium-term policy of between 40-50% ordinary dividend payouts remains, with additional payouts where justified. Potential for additional payouts should follow the completion of restructuring and the unwind of unrealised bond gains.
Outlook The Group expects to make further good progress in 2016 against its Action Plan and the year has started well in that regard. Core business NWP is targeted to show modest growth vs 2015. Attritional loss ratios are expected to show further improvement as are controllable expenses. Volatile items in weather/ large losses remain unpredictable though bounded by reinsurance protection similar to 2015. If volatile items stay per plan, attractive further improvement in underwriting profit is expected.
An advance in 2016 operating profit is our goal with underwriting improvements more than offsetting reduction in investment income and disposal impacts from Latin America.
Our operations in Scandinavia In Scandinavia we operate in Sweden as Trygg-Hansa and in Denmark and Norway as Codan. We are the fourth largest insurer in Sweden, the third largest in Denmark and the seventh largest in Norway, whilst we are the fifth largest overall across the region.
Our business is split evenly between Personal and Commercial lines and is principally distributed direct to consumer, via strong agency relationships, with a growing bancassurance channel.
We have key strengths in our Swedish Motor and Personal Accident products and in our Danish Commercial business.
Scandinavian market context The Scandinavian economy remains stable overall but with mixed experience across the region: While GDP growth in Sweden remains strong and Denmark experiences a fragile recovery, Norway’s GDP growth is suffering from declining oil prices.
However, insurance markets remain broadly stable and profitable across the region with incumbents generally maintaining competitive position against market challengers.
Underlying performance remains encouraging with record current year profits in Sweden and strong progress on cost reduction.
Types of business a. Personal Motor 19% b. Household 19% c. Personal Other 17% d. Com. Property 19% e. Com. Motor 11% f. Liability 8% g. Marine & Other 7%
Personal lines grew 4%, driven by strong balanced growth in Sweden through a combination of rate increases and good retention. Denmark Personal premiums were broadly flat although showed positive momentum in our affinity offering.
Our Commercial business grew 3% overall with 4% growth in Denmark and 5% growth in Norway. Swedish commercial was marginally up 1%.
Operating result The underwriting result was £94m profit (2014: £169m) with a strong current year underlying performance, offset by some one-off legacy reserve strengthening. Current year profits were £127m overall, including a record result in Sweden of £165m, while Denmark profitability was impacted by a series of Marine large losses.
Total operating profit, after including the investment result of £69m (2014: £72m), was £163m (2014: £241m).
Performance improvement The current year attritional loss ratio was 64.5%, and better than 2014 at 64.8%. Weather losses of 1.0% compared to 1.6% in 2014, while large losses of 6.3% compared to 4.7% in 2014.
Outlook We continue to expect the Scandinavian P&C markets to grow in line with local GDP growth. Our focus remains on improving the underlying performance of the business, in particular attritional loss ratios and cost improvements in Denmark and Sweden. We target combined ratios converging with those of key competitors over the medium-term.
RSA Annual Report and Accounts 2015 29Strategic report – Regional review
Types of business a. Personal Motor 39% b. Household 31% c. Com. Property 13% d. Com. Motor 6% e. Liability 7% f. Marine & Other 4%
Our operations in Canada In Canada we are the fifth-largest insurer, having established our market position through a combination of organic and acquisitive growth. We operate across all provinces and provide a broad multi-product and multi-channel offering to both personal and commercial customers.
Premiums Net written premiums in Canada were down 3% on a constant exchange rate basis to £1,360m (2014: £1,510m as reported) with 2% rate increase offset by 5% volume reduction. Personal
Commercial, premiums were down 5% as a result of the rating and portfolio action we have been taking, particularly on poorer performing blocks of business.
Taken together, volatile items in weather and large losses represented 7.0% (2014: 8.6%), slightly better than long term averages and prior year.
After including an investment result of £66m (2014: £78m), the operating result was £182m (2014: £99m).
Controllable expenses are flat year-onyear, although the actions we have been taking in 2015 set the path to achieving attractive cost savings in 2016.
We welcomed new leaders across the business and made progress in the way we operate, such as reducing the number of locations across the country, paving the way for more flexible and digital service options for our customers in the future.
Next year we will continue to focus on improving our pricing sophistication, rolling out lean management practices. and working to implement critical IT platforms, such as our new claims system and rating engine, to increase our efficiencies and service to customers.
As part of the Group-wide transformation we are focused on improving performance in each key channel. Major activities include, rebalancing portfolios to leverage competitive advantage and explore market opportunities, improving customer journeys and proposition through process-optimisation and digital-enablement, and investing in technology to increase claims efficiency and pricing sophistication.
RSA Annual Report and Accounts 201532 Strategic report – Regional review
Our operations in UK & Ireland In the UK, we are the second largest Commercial insurer with key positions in Property, Motor, Liability, and Marine, and exposures across the SME, MidMarket and Global Specialty customer segments. We operate across the key UK market centres, as well as in six European locations. We are a leading international Marine player through the London markets.
We also have strong positions in the UK Personal Household, Motor, and Pet markets. We have a direct insurance offering through our MORE TH>N brand, and a broker portfolio focused on profitable segments. We also have affinity relationships with some of the major UK retailers.
We are a leading player in Ireland with particular strengths in Household insurance and in direct sales through our 123.ie business.
RSA Annual Report and Accounts 2015 33Strategic report – Regional review
Premiums Net written premium grew 2% in 2015 against a challenging and competitive landscape. Growth was driven in particular by the Commercial portfolio, where Property and Motor lines were significant contributors. In Personal lines premiums were down 4%, driven by a reduction in Household, as increased market competition has led to lower retention levels. However, the partnership agreement announced with Nationwide Building Society towards the end of 2015 represents a marquee endorsement of our customer franchise and will make us market leaders in UK home insurance.
Operating result The headline underwriting profit of £12m (2014: £4m) and combined ratio of 99.5% (2014: 99.9%) includes the impact of £134m of claims related to storms Desmond, Eva and Frank in December (£100m Commercial, £34m Personal).
On a pro forma1 basis, the UK underwriting profit was £40m and the combined ratio 98.5%.
Adding the investment result of £135m (2014: £132m) leads to a total operating result of £147m or £175m pro-forma for reinsurance recoveries (2014: £136m).
During the pitch process RSA’s broker relationships, deep sector-knowledge, market-leading risk management tools and claims proposition proved to be the differentiating factors.
The RSA claims team remained involved and committed throughout, working in partnership with Severn Trent to meet and exceed expectations.
Our strategy Our strategy in the UK market is to invest in the business, developing our technical insurance capability, enhance our customer proposition and improve cost efficiency to enable RSA to compete in the top quartile of our competitor set. We have embarked on an ambitious transformation programme which includes the replacement of some of our legacy technology, introduction of new pricing and underwriting tools, streamlining and automating processes, increased use of off-shore resources and development of a new operating model.
Once fully implemented, our transformation programme will result in greater underwriting and pricing capability, a lower cost base, and improved customer outcomes.
Operating result Significant improvement was made in the current year attritional loss ratio, falling from 80.3% in 2014 to 74.2% in 2015, with strong momentum heading into 2016 as action taken in the second half of 2015 earns through to the underwriting result.
Outlook Our goal remains to return the business to operating profitability in 2016 through continued underwriting improvement and cost reduction.
Across the entire disposal programme, we have completed the sales of businesses in the Baltics, Poland, Canadian broker (Noraxis), Thailand, Hong Kong, Singapore, China, India, Italy, UK Engineering Inspection and Russia.
Aside from discontinued operations in Latin America, the Group has further non-core businesses in the Middle East and UK Legacy.
UK Legacy Our UK Legacy portfolio comprises exposure to asbestos and other long-term liabilities arising from Employers’ and Public Liability policies written over the past 50 years.
The portfolio is part of our non-core operations, all of which will not necessarily be disposed.
2. Non-Core. 3. Includes Baltics, Poland, Noraxis, Hong Kong, Singapore, Thailand, China, India, Italy, UK Engineering and Russia.
Our risk strategy supports our ambition as a focused general insurer. By leveraging expertise in risk selection we aim to protect customers and maximise risk-adjusted returns for shareholders.
During 2015, a data storage device went missing from an accesscontrolled data server room, but our proactive response ensured affected parties were quickly notified with no customers suffering a financial loss.
In reacting to this event we rapidly engaged a multi-disciplined team of experts, including the Regional Executive Team, business partners and compliance and communications professionals, as well as all relevant regulatory bodies, to ensure that the situation was dealt with efficiently and effectively.
Whilst we continue to enhance our control framework to avoid incidents such as this it is reassuring to know that we have effective response processes in place if events do occur and that customers suffered no financial loss as a result of this incident.
At RSA we ensure risk management is fully integrated throughout the Group using a ‘three lines of defence’ model.
The second line includes the risk management and compliance functions and has responsibility for monitoring and assuring first line activities.
The third line includes the independent Audit function, including the Group Audit Committee and Internal Audit. This line conducts periodic reviews of the first and second lines, providing a further review of the Group’s risk and control environment.
RSA Annual Report and Accounts 201536 Strategic report – Risk management
Understanding the risk management framework The risk management framework is integral to our system of governance and incorporates both the risk management system and the internal control system, discussed further on page 46.
5. Solvency capital modelling The overall assessment of the Group’s risk profile is used to inform the Internal Solvency Capital Model, which calculates our Solvency Capital Requirement (SCR), as part of the Groups Own Risk Solvency Assessment (ORSA). The Internal Solvency Capital Model is run on a regular basis throughout the year with outputs sense-checked to ensure that they provide a robust and reliable basis on which to make key business decisions. Outputs from the model are reported to the Board and where relevant amendments are made to fine-tune the Group’s operational plans.
Key risk and exposures SII SCR % Key mitigants and controls Commentary
• Reinsurance counterparty credit risk exposures are reviewed regularly to ensure they remain within appetite
Reserving Risk Represents the risk that the Group’s estimates of future claims will be insufficient. The risk is largest for longer-tailed lines of business such as the UK Legacy portfolio, including asbestos and elements of our Personal Accident products in Sweden
• The Group expects overall positive run-off of reserves at around one percent of Net Earned Premium, subject to volatility in any given year
Underwriting and Claims Risk This is the risk that underwritten business is less profitable than planned due to insufficient pricing or claims case reserving. Key exposures arise from larger portfolios operating in competitive markets, where claim trends are slow to emerge, such as UK commercial or Marine 19% • Underwriting and claims activities are governed by well-defined risk appetite statements, which are monitored quarterly via regional portfolio reviews
• Assets in the Insurance Investment Fund are well-matched with insurance liabilities to hedge volatility
• Part of the settlement involved a de-risking of the pension fund assets, reducing the volatility in our capital requirement
• RSA continues to explore options to further de-risk the pension fund
• The Group transformation programme has made positive progress during the year
RSA Annual Report and Accounts 201538 Strategic report – Risk management
Another key element of our SCR is risk relating to our defined benefit corporate pension scheme, which is closed to new members. While the scheme is well funded (95% following latest triennial review) and in an accounting surplus, under the rules of Solvency II capital is held for a 1 in 200 year adverse event, which increases the level of capital required against the scheme. For more information on the pension scheme, see note 38 of the financial statements.
In the coming years Solvency II will continue to develop and inform the way the Group manages risk and capital. In 2017 the Group will, for the first time, report its Solvency and Financial Condition Reports (SFCR), which will provide a standardised disclosure of performance, risk management and capital position of insurers.
As well as broadening our appreciation of the risk landscape and potential threat of emerging risks, this and other deep-dive assessments are presented to the Board to help inform and refine the Group’s risk strategy and risk appetite.
Solvency II and Solvency Capital Requirement (SCR) Solvency II is a new EU-wide insurance regulatory regime relating principally to how insurers manage capital to mitigate the risk of insolvency. Originally adopted by the European Parliament and Council in 2009, the Solvency II Directive became effective on 1 January 2016.
One of the key aims of Solvency II is to introduce a harmonised prudential framework for insurers promoting transparency, comparability and competitiveness amongst European insurers.
Pillar III relates to enhanced and standardised disclosure requirements, including increased transparency of the risk strategy and risk appetite of the business.
RSA has been preparing for the introduction of the Solvency II regime since it was announced in 2009 to ensure we were ready for the change and able to respond to its requirements.
RSA Annual Report and Accounts 2015 39Strategic report – Risk management
RSA Annual Report and Accounts 201540 Directors’ and Corporate Governance Report – Chairman’s governance letter on merit. These new appointments are part of our Board succession planning and address a need identified by the Board in its 2014 evaluation, and subsequent discussions, to add directors whose skills complement and strengthen the Board.
The Board has had an extremely busy year with seven additional meetings in response to the unsolicited approach from Zurich Insurance Group Ltd (Zurich). All directors made themselves available at short notice and robust discussions were held with good interaction between the Board, management and advisers to ensure the Board made the best decisions possible for the benefit of shareholders, customers and employees.
The Group Investment Committee has continued to oversee the Group’s investment policy and strategy and performance against these. It has also commenced overseeing the disposition and performance of the investment portfolios of the Group’s defined benefit pension schemes.
RSA Annual Report and Accounts 201542 Directors’ and Corporate Governance Report – Board of Directors
Prior to that he held positions as Chief Executive, British Land plc from 2004 to 2008, Chief Operating Officer, Abbey National plc and a number of senior roles at Credit Suisse First Boston in London and New York. Stephen has over 30 years’ experience in financial services and FTSE100 companies with expertise in transforming the performance of businesses.
External appointments: Chairman of Great Portland Estates plc and Senior Independent Director and Chairman of the Audit Committee of Worldpay Group plc.
Kath has over 20 years’ experience in global financial services. She was previously Chief Operating Officer, Wholesale Banking for Standard Chartered Bank and spent 22 years at UBS. Kath has gained a deep knowledge of control, governance and risk management, working in emerging markets and across different sectors and cultures.
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).
External appointments: Partner of Think Global Investments LLP and Director and Executive Committee Member of Bocconi University.
A Group Audit Committee B Board Risk Committee I Group Investment Committee N Group Nomination and Governance Committee R Group Remuneration Committee
RSA Annual Report and Accounts 2015 43Directors’ and Corporate Governance Report – Board of Directors
Johanna’s previous roles include Chairman of Tate Enterprises and over 20 years with McKinsey & Company, positions including Co-leader of the Global Marketing and Sales Practice and Leader of their UK Consumer Practice and the European Retail Practice, Director of Shoppers Drug Mart Corporation (a company listed on the Toronto Stock Exchange), and a non-executive director of WM Morrison Supermarkets plc. Johanna brings deep expertise on consumer behaviour, sales and marketing across multiple sectors.
Patrick Bergander joined the RSA Group’s Executive Committee in June 2014 following his appointment as CEO of RSA Scandinavia. Previously CFO for Scandinavia, Patrick has been with the Group since 2011. Patrick has held senior finance roles at Electrolux and If Skadeförsäkring.
Steve became CEO for UK and Western Europe in January 2015, joining from Zurich where he was CEO, UK General Insurance and Shared Services for five years. During his 25 year career at Zurich, Steve held a number of operational and financial roles in the UK and overseas including Head of Group Operations, Planning and Performance Management (2007-09), Chief Financial Officer and Head of Operations, Global Corporate European businesses (200607 ). Steve is a Fellow of the Chartered Association of Certified Accountants, having qualified in 1990.
William was appointed Group Chief Risk Officer in December 2014. Since joining RSA in 2006, William has also held the roles of Group Risk Director, Group Financial Controller and Head of Corporate Finance. He is a chartered accountant with extensive risk management and finance experience with a number of blue-chip financial institutions including HSBC Investment Bank, Aviva, the Financial Services Authority and seven years at Deloitte.
RSA Annual Report and Accounts 2015 45Directors’ and Corporate Governance Report – Executive Committee
Derek joined the Group in July 2010 and has over 20 years’ experience in the insurance industry.
Role: Group General Counsel and Company Secretary and Global Broker Relationship Director
Paul joined the Group in 2003 as HR Director and was Chief Executive of Emerging Markets from 2006-14. He was appointed Group Chief Operating Officer in May 2014 and in this capacity is responsible for the business disposal programme, business transformation and the Underwriting, Claims and Reinsurance functions and IT. He has also recently taken on responsibility for Human Resources. Paul has over 25 years’ senior management experience in the financial services sector, including three years at AXA and 10 years at GE Capital.
The Financial Reporting Council are responsible for the publication and periodic review of the Code. The latest version of the Code, published in 2014 can be found at www.frc.org.uk
The Group operates within a System of Governance designed to ensure the safety and soundness of the Group through having a well-managed business with effective decision-making, robust procedures and strong internal reporting. It also ensures that the Group complies with all relevant legislation and regulation in each jurisdiction in which it operates. This includes ensuring compliance with the Code and this Annual Report and Accounts is available on the Group’s website at www.rsagroup.com/ financial-reporting. The Group Nomination and Governance Committee monitors compliance with the Code and further information on how Code compliance is overseen can be found in that Committee’s report on pages 55 to 56. This report describes the Group’s System of Governance.
Risk Management System Governs how we identify, measure, manage, monitor and report risk. This system follows a three lines of defence model.
Risk Management in the Strategic Report on pages 36 to 39.
Risk Management System and the Risk Function in the Board Risk Committee Report on pages 57 to 58.
Internal Control System Sets out controls that sit behind the Corporate Governance Framework and the Risk Management System, the Group’s day-to-day procedures.
Following a Group-wide review of governance and internal control systems in 2014, an enhanced Internal Control System was adopted globally to ensure consistency of oversight and reporting; and robust objectivity and independence.
RSA Annual Report and Accounts 201546 Directors’ and Corporate Governance Report – Corporate governance
The Company’s Articles of Association authorise the Board to manage the business of the Company and give the directors power to appoint and replace directors as required until the next AGM. 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. Directors are nominated by the Group Nomination and Governance Committee and are subsequently approved by the Board for election or re-election annually at the Company’s AGM for approval by shareholders.
The role of Chairman and Group Chief Executive are separate and clearly differentiated through role statements approved by the Board. No one individual has unfettered powers of decision making.
Further information on the individuals fulfilling these roles can be found in their biographies on pages 42 to 43.
This Framework enables the business to: • Ensure that all employees execute their responsibilities within a clearly defined set of limits and subject to specified terms and conditions appropriate to their role, competence, experience and technical capability so as to mitigate the risk of the Group being exposed/committed to material financial, operational, legal, reputational and/or regulatory risk and/or loss
• Ensure that the risks associated with managing and delegating authorities are mitigated through the use of appropriate preventative and detective controls and remain within the Risk Appetite
• Provide clarity to the business on who can make what type and level of decisions, enabling swift escalation to the appropriate executive.
Role of the Board The primary responsibility of the Board is to provide effective leadership to ensure that it promotes the success of the Company for the benefit of its members as a whole. The Board, supported by its Committees, provides entrepreneurial leadership within a framework of prudent and effective controls. The Board is accountable to stakeholders for the creation and delivery of strong sustainable performance and the creation of long-term shareholder value.
The Board sets annual objectives for the business in line with the current Group strategy and monitors achievement against these objectives through regular reports. These include updates from the Group Chief Executive and the Group Chief Financial Officer on all material business matters. There is a rolling agenda of items for consideration by the Board that is continually refreshed in line with the needs of the business.
There is a schedule of matters reserved for the Board that can only be amended by the Board itself. This is reviewed annually. For a summary of the schedule of matters reserved for the Board and roles of the Chairman, Group Chief Executive, Senior Independent Director and Non-Executive Directors, visit the Company’s website at www.rsagroup.com/ corporate-governance.
Key Activities of the Board in 2015 During the year, the Board has considered a wide range of items in the discharge of its duties. The key items of business considered include reviewing the Group’s strategy; approving the Group’s Solvency II Internal Model application to the Prudential Regulatory Authority (PRA); monitoring the Group’s System of Governance; considering the possible offer from Zurich, and approving the agreement to sell the Group’s businesses in Latin America. More information about each of these areas is below.
The Board received regional strategy presentations throughout the year and held a discussion focused on macro digital trends, changing customer demands and how the Group could meet these demands by further digitising processes, optimising the customer experience and increasing the sophistication of pricing.
During the year the Board considered and approved the sale of the Group’s Latin American businesses to Suramericana S.A. and the sale is due to complete during 2016. The Board received regular updates on the sale process and negotiations with interested parties and agreed that the sale to Suramericana, at the price achieved, was in the best interests of shareholders and delivered against the Board’s objective to focus on core markets.
4. These meetings were scheduled at short notice in response to the possible offer from Zurich and other items of business and directors made every effort to attend.
When a director was not available to attend a meeting their views were canvassed by the Chairman prior to the relevant meeting where possible, 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.
RSA Annual Report and Accounts 2015 49Directors’ and Corporate Governance Report – Corporate governance
Commitment The letters of appointment for the Chairman and each of the Non-Executive Directors set out their anticipated time commitment, being an average of two days per week for the Chairman and 28-32 days per year for Non-Executive Directors. Non-Executive Directors are required to allocate sufficient time to meet the expectations of the role, in attending Board and Committee meetings and the AGM. In addition, Non-Executive Directors may be required from time to time to attend meetings, training and briefings, and to spend time in the business.
Throughout 2015, directors have demonstrated flexibility and commitment in attending numerous Board and Committee meetings at short notice, and have made themselves available to meet with the Group’s lead Regulators as required. This is especially evident in the number of additional meetings held due to the unsolicited approach from Zurich in July 2015.
Martin Scicluna is also Chairman of Great Portland Estates plc and Senior Independent Director and Audit Committee Chairman of Worldpay Group plc. The Board is satisfied that these commitments are not a constraint on the Chairman’s time or his ability to carry out his duties.
Stephen Hester and Scott Egan are not currently directors of any listed companies but would be allowed to have one such appointment, subject to approval from the Group Nomination and Governance Committee.
Additionally, the Board receives briefings on matters that 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.
• Meetings with various function heads and regional business areas to enhance their technical knowledge and understanding of the business
Governance in Action Non-Executive Director roles are not limited to Board attendance. Each of the Committee chairmen meet regularly with key members of management. For example, Alastair Barbour, Chairman of the Group Audit Committee, held regular discussions throughout the year with members of Group management, particularly from Finance, Risk, Regulatory Compliance, IT and Internal Audit along with members of the UK management teams. Alastair has also attended a number of subsidiary meetings including a UK risk and controls committee meeting; and board and audit committee meetings in the Canadian business. These meetings have deepened Alastair’s understanding of the business, critical issues and challenges and what is being done to progress them.
RSA Annual Report and Accounts 201550 Directors’ and Corporate Governance Report – Corporate governance
To ensure the Board remains effective, an internal performance evaluation is carried out annually. At least once every three years, the evaluation process is carried out by an external party followed by two years of an internal evaluation process. During the year, the Chairman led an internal evaluation with support from the Company Secretary. The evaluation was carried out using an online questionnaire, involved all directors and regular attendees, and reflected on the key areas identified in the previous evaluation for focus during 2015. It considered the Board and Board Committee composition, performance, oversight, knowledge and understanding. An external performance evaluation will be carried out in 2016.
The results of the evaluation were presented to the Group Nomination and Governance Committee, which concluded that the Board and its Committees had operated effectively throughout 2015, with good relationships between directors and a high level of transparency and trust in the Boardroom, enabling quality debate and challenge. In particular, the Committee highlighted that the process during the possible takeover period from July to September 2015 was handled very well with swift, decisive actions taken whilst sufficient time was given to evaluating the options in a structured manner.
• Directors to spend greater time engaging with the business, both formally and informally through individual site visits and meetings with management
The Chairman has also reviewed the performance of each of the directors during the year and concluded that each director contributes effectively to the Board and that each Non-Executive Director devotes sufficient time to their role. The Group Nomination and Governance Committee considered the evaluation and concluded that each director be recommended to shareholders for election or re-election at the 2016 AGM.
The Senior Independent Director met independently with each of the Non-Executive Directors to evaluate the performance of the Chairman. The review concluded that the Chairman had led the Board in a highly effective way throughout the year.
Refine the longer-term strategic vision of the Group. Annual strategy meeting held in June 2015 with particular emphasis on digital trends and how each region plans to transform its business in the long-term.
Board and Committee agendas to be reviewed to have greater focus on major issues in addition to ‘Business as Usual’.
Technical updates for the Non-Executive Directors were conducted during the year, including on Solvency II, underwriting and claims. In 2016 this will be extended to include technical updates by major broker and distribution partners.
During the year three Non-Executive only meetings were held and a number of meetings have been scheduled for 2016. The Committee chairmen regularly meet with management outside of formal meetings and the Executive Directors are available to meet with the Non-Executive Directors whenever required.
During 2015 there has been a cultural shift across the Group via the introduction of technology platforms Sharepoint, Lync and Yammer. This has led to improved global collaboration and knowledge sharing as well as giving all employees access to the senior leadership of the organisation. Global ‘Town Hall’ meetings are held using live streaming and Yammer to communicate the Group’s full and half year results. To encourage employee involvement in the Company’s performance a number of employee share plans are offered.
Performance and talent management processes are in place across the Group to ensure an ongoing focus on high performance and the development and acquisition of talent. The Group runs a number of talent programmes for senior and emerging talent and has continued to focus on retaining talent. The Group continues to place a key focus on the development of technical capability lead by the Technical Academy, an internal training academy which runs technical programmes, forums, conferences and a global graduate programme for employees in Underwriting, Claims and Actuarial.
Further information is set out in the Strategic Report on pages 16 to 17 and is incorporated into this Report by reference.
Customer For over 300 years the Group has been helping to protect customers all over the world from risk and uncertainty. To ensure the business remains relevant, we regularly seek customer feedback to help us improve our service and products. The primary measure used to do this is the universally recognised Net Promoter Score (NPS), which produces a customer satisfaction score based on a scale of 1 to 10. The NPS can be collected for various elements of a customer’s interaction with the Group, such as when getting a quote or making a claim or a general impression of the business. In addition to NPS, we track a range of other metrics that differ by product and region including: retention, complaint levels, trust and product advocacy.
Regulators The Board is responsible to the 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, co-operative and transparent manner. The Board paid close attention to the expectations of the PRA and FCA with particular focus on Solvency II and the Internal Model application process. During the year the PRA and FCA conducted private meetings with several members of the Board and executive management and regular management information is provided to assist them with the supervision of the Group. In addition, the Group includes a number of regulated entities which foster positive regulatory relationships in support of the business. Accordingly, maintaining effective relationships with the Group’s regulators across the world is integral to the success of the Group’s strategy and its long-term value.
Shareholders The Group is committed to proactive and transparent interaction with shareholders and other market participants. During 2015, the Company held over 360 meetings with institutional investors, and met with 15 of the top 20 shareholders on at least one occasion. The key themes of these meetings centred on the future ambition and capability of the Group and capital foundation. The Group’s share register includes institutional investors predominantly from the UK, Europe and North America with a range of investment styles. Further information is set out in the Shareholder Information section on page 179.
RSA Annual Report and Accounts 2015 53Directors’ and Corporate Governance Report – Corporate governance
Committee composition I am supported on the Committee by Alastair Barbour, Hugh Mitchell and Johanna Waterous. Attendance at Committee meetings is shown in the table below. Derek Walsh, the Group General Counsel and Company Secretary regularly attends Committee meetings. In addition to the four scheduled meetings, two ad-hoc meetings were held during the year in relation to the ongoing recruitment of additional Non-Executive Directors.
Board Composition The Committee monitors the balance of skills, experience, independence and knowledge on the Board as well as gender diversity. The Board currently comprises 78% male and 22% female directors. We remain committed to Lord Davies target for female board composition however, all appointments are made on merit against the agreed selection criteria. On reviewing the diversity on the Board, the Committee agreed that there was no evidence during the year to suggest that a lack of gender diversity had compromised Board debate. However, as we announced at the 2015 AGM, we feel that the Board could benefit from two additional independent Non-Executive Directors. We are seeking individuals whose skills complement and strengthen the Board. Major shareholders have been engaged to understand their views on the skills required on the Board and The Zygos Partnership have been appointed to conduct the search. Zygos has no other connection with the Group. They are accredited by the Davies Review under the Enhanced Code of Conduct for Executive Search Firms as they have a strong track record in assisting boards to enhance their gender diversity. A search is ongoing and any appointments will be announced in due course.
Following Richard Houghton’s resignation, the Committee instructed Korn Ferry to search for suitable candidates for the role of Group Chief Financial Officer. A role specification was agreed and both the longlist and shortlist of candidates included women. Shortlisted candidates were interviewed by me, the Group Chief Executive, Group Human Resources Director and Chairman of the Audit Committee. The Committee was pleased to recommend Scott Egan’s appointment to the Board. Korn Ferry are regularly engaged by the Group to provide executive search services for roles across the Group but have no other connection with the Group. They follow the Code of Conduct for Executive Search Firms.
Introduction The Committee plays an important role in setting the tone from the top by ensuring that the Board comprises of individuals with a diverse yet relevant set of skills, knowledge and experience who will work well together to lead the Group. The Committee also monitors the Group’s compliance with the Code to ensure that there are clear governance processes in place to aid effective, efficient and risk-aware decision-making.
Role and responsibilities The Committee is responsible for: • Managing the process to identify Board candidates and advising and making recommendations to the Board on Board membership, Committee membership and related appointments
RSA Annual Report and Accounts 2015 55Directors’ and Corporate Governance Report – Committee reports
Succession Planning In addition to succession planning for the Non-Executive Directors through the ongoing recruitment described above, the Committee reviews succession plans for Executive Committee members to ensure that there are candidates internally that could provide short-term cover or replace each Executive Committee member. The aim of the succession plans is to develop a pipeline of talented individuals in each region in which the Group operates. The succession plans were utilised during the year when Ralph Daals, an internal candidate, was appointed as the Group Chief Auditor, and more recently with Charlotte Heiss’ forthcoming appointment as Chief Legal Officer and Company Secretary to succeed Derek Walsh.
Board and Committee Evaluation During the year, the Committee has tracked progress against the actions agreed from the 2014 internal evaluation of the Board, Committees and directors. Further information on these can be found on page 52. For 2015, an internal evaluation was carried out using questionnaires. The results were reported to the Committee and discussed. It was agreed that the Board should spend more time engaging with the business, both formally through the Board and informally through individual site visits and meetings with management. It was also agreed that, the Board should re-focus on the Group’s longer-term strategy as it is coming out of turnaround. Increased focus of the Board would be given to customer, people, brand and culture issues.
Martin A. Scicluna Chairman and Chairman of Group Nomination and Governance Committee
The Committee Chairman reports to the Board on the outcome of Committee meetings with the Board receiving the minutes of Committee meetings.
Breakdown of topics discussed at Committee meetings held during 2015 a. Risk and Compliance Updates 20% b. Capital and Solvency II 30% c. Specific Risk Deep Dives 20% d. Regional Deep Dives 20% e. Governance 10%
Introduction I am pleased to present to shareholders the Board Risk Committee Report for 2015. The key function of the Committee is to advise the Board on risk management issues, oversee the risk management arrangements of the Group and recommend the Group framework of risk limits and risk appetite for Board approval. The Committee ensures that the material risks facing the Group have been identified and that appropriate arrangements are in place to manage and mitigate those risks effectively.
During the year, Solvency II implementation and the Internal Model Approval Process (IMAP) have been a key focus for the Committee. I am pleased to confirm that, following a detailed exercise, the Group’s Internal Model was approved by the PRA in December 2015. The approval covered the Company and its principal subsidiaries.
Role and responsibilities The Committee is responsible for: • Reviewing the output from risk appetite assessments on a quarterly basis, including capital adequacy assessments, and where necessary approving actions to bring capital within appetite
• Reviewing the outputs and key assumptions from the Internal Model validation process as recommended by the Internal Model Governance Committee and, where satisfied, making recommendations to the Board
• Reviewing Solvency II compliance as recommended by the Solvency II Steering Committee, and making recommendations to the Board as the Committee may deem appropriate
• Working with the Group Remuneration Committee to ensure risk is properly considered in setting the remuneration policy for the Group
• On behalf of the Board, reviewing the Group ORSA approach and report, including the selection of appropriate stress and scenario tests and, if satisfied, recommend formal approval to the Board.
RSA Annual Report and Accounts 2015 57Directors’ and Corporate Governance Report – Committee reports
Solvency II and IMAP With Solvency II going live in January 2016, the new regime has been a key area of focus in 2015. In preparation the Committee have been receiving regular updates on the Group’s progress towards implementation as well as initial outputs including the Solvency II Balance Sheet and solvency positions, updated policies and IMAP.
Effectiveness of the enhanced Global Internal Control System I am pleased to confirm that the Group has successfully embedded the first phase of the enhanced Global Internal Control System during the year and is making solid progress on phase two. The success of this programme was noted by the Committee and supported by external assurance, with ongoing sustainability ensured through the establishment of regional control committees and biannual integrated three lines of defence reporting to the Group Audit Committee.
The Control and Governance Advisory Committee has delegated authority from the Committee to approve all revised policies and continually monitors any gaps in compliance which it reports to the Committee for approval.
Further information on the Group’s risk strategy and appetite can be found in the Risk Management section of the Strategic Report on pages 36 to 39.
Own Risk and Solvency Assessment (ORSA) Throughout the year, the Committee considered a range of activities in order to assess the risks and solvency needs of the Group which constitutes the ORSA process. A summary of these activities and associated decisions taken during the ORSA assessment were reviewed by the Committee.
In addition, key emerging risks and trends were considered with a focus on geo-political tensions, dependence on critical infrastructure and increasing cyber threats. Alongside the core stress and scenario testing programme the potential impact of a coordinated cyber-attack on the power grid was also examined in detail. In June a ‘deep dive’ on financial risk was presented to the Committee, which provided further insight into the exposure and effectiveness of asset liability management and hedging for equity, interest rate, credit spread and inflation risk. Pension risk had also been a key focus during the year.
The Committee reviewed the Group’s risk strategy and appetite where updates were made to the setting of capital appetite to maintain effectiveness during transition of the business to Solvency II.
RSA Annual Report and Accounts 201558 Directors’ and Corporate Governance Report – Committee reports
The Committee Chairman reports to the Board on the outcome of Committee meetings and the Board also receives the minutes of Committee meetings.
Against this background the Committee has continued to review strategy alternatives to enhance the return of the portfolios. In particular, the Group has continued to make measured allocations towards less liquid credit investments. These investments have been targeted to take advantage of the additional yield offered for illiquidity relative to traditional quoted bonds whilst maintaining a strong underlying credit quality and have included loans backed by property and trade receivables. In total the Group now has commitments to these assets approaching £1bn with around £700m of this invested at the year end. Investment in these assets has been subject to extensive due diligence with reporting to the Committee agreeing strategy limits and reviewing progress on implementation.
• Providing oversight of the operation of the Group’s investment portfolios within established strategy and risk frameworks.
Committee composition I am supported on the Committee by Alastair Barbour, Martin Scicluna, Stephen Hester and Scott Egan who became a member on his appointment to the Board. Richard Houghton was a member of the Committee until he ceased to be Chief Financial Officer on 10 July 2015 and I would like to thank him for his participation. The Group Investments Director attends all meetings of the Committee to provide an update on the economic and market background and outlook affecting the Group, the investment activities carried out since the Committee last met and any portfolio actions which require the Committee’s approval.
RSA Annual Report and Accounts 2015 59Directors’ and Corporate Governance Report – Committee reports
Introduction I am pleased to present the Group Audit Committee Report for 2015, which sets out the Committee’s responsibilities and its key activities during the year.
During the year the Committee has reviewed all scheduled results announcements; the 2014 Annual Report and Accounts; and management proposals to improve the clarity and conciseness of the financial statements in the 2015 Annual Report and Accounts.
The Committee has considered the new Code requirement to publish a ‘viability statement’, including reviewing and approving management’s proposals for the appropriate time period to be covered by the statement, the content of the statement and the information to be provided by management to the Committee and the Board to provide assurance for the statement made.
Key activities during the year In addition to the significant issues in relation to the Annual Report and Accounts set out below, the Committee considered the following issues during the year: • The results of an external review of the Group’s reserving and claims processes, conducted by PricewaterhouseCoopers LLP, and monitored management’s progress in implementing actions recommended in the review. The Group’s approach to reserving margin levels was assessed and compared to peers through work carried out on the Committee’s behalf by Towers Watson.
• The Committee considered whether it was appropriate to adopt the ‘going concern’ method of accounting for the 2015 Annual Report and Accounts and recommended to the Board that this was appropriate.
• At the half-year and year end, detailed discussion and consideration of their findings and opinions in relation to the key risk areas, judgements made, any changes to the plan and to materiality and discussion of the underlying reasons
• Consideration of their wider comments on governance, financial reporting processes and efficiencies and information systems and controls, with particular focus on general IT controls
• Consideration of their observations on controls and processes as reported to management and follow up with relevant management to be satisfied that the observations are being appropriately actioned.
The main matters and primary areas of judgement addressed and concluded on by the Committee were as follows: Valuation of insurance liabilities The Committee has ensured that management exercised appropriate judgement in estimating insurance contract liabilities including assessing the impact of claims trends and other influencing factors consistent with the prior year. This year the Committee again examined the appropriateness of discount rates on certain long-tail liabilities and assumptions on indexation particularly in light of falling bonds yields.
RSA Annual Report and Accounts 201562 Directors’ and Corporate Governance Report – Committee Reports
At the request of the Board, the Committee considered whether the 2015 Annual Report and Accounts are fair, balanced and understandable, and whether the disclosures were appropriate. To ensure that new accounting standards were understood and appropriately reflected in the financial statements, the Committee received quarterly updates of all relevant accounting standards that could impact the financial statements. The Group has not made any significant changes to its accounting policies during 2015 and has complied with new IFRS’s as required during the year. Taken as a whole, the Committee is satisfied that the 2015 Annual Report and Accounts are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company’s position and performance, business model and strategy.
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 and ensures 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 effectiveness of the Framework is regularly assessed by an independent team and any deficiencies in controls identified and remediation plans agreed with the local management and their progress monitored. It also addresses deficiencies identified by the external auditor during the audit process and monitors progress to remediate these.
The Committee received and considered detailed written and verbal reporting from KPMG setting out their observations and conclusions in respect of the recorded insurance contract liabilities based on their audit procedures as further described in their report on pages 99 to 102.
During 2015, the Committee also discussed with management the key conclusions reached as part of the triennial funding review. Areas of particular interest included the experience analysis carried out by the external scheme actuaries on the schemes membership and consistency with the demographic assumptions that were adopted by management for example with respect to longevity. The Committee was satisfied that the experience analysis supported the assumptions used by the Group.
IT Systems and controls The Group’s IT infrastructure, including retained legacy systems, is complex and financial reporting is dependent on the operational and financial IT systems operating correctly. This is a key area of focus for both Audit and Risk Committees and during the year they received updates from management on the progress to enhance IT general controls, the oversight
Regulatory risk and compliance The purpose of the Regulatory Risk and Compliance function is to ensure that the Group meets all relevant regulatory requirements in each jurisdiction in which it operates. They are an influencer in ensuring a strong regulatory compliance culture and ensure mechanisms are in place to monitor the regulatory environment, identify, report and resolve issues to avoid or minimise business impact and surprises. The function is part of the Group’s second line of defence which monitors and validates first line activities. The Group and UK Regulatory Compliance Director provides regular reports to the Committee.
During the year, the Committee has monitored the Senior Insurance Manager Regime and how it is being implemented in the UK business and at Group level; overseen the functions’ progress in developing and implementing a new Financial Crime Framework and implementation of new anti-money laundering screening software; and received updates on regulatory issues.
GIA’s planning process is risk based and takes into consideration the key strategic and emerging risks facing the Group. In 2015, GIA evolved its planning process from an annual to a six monthly rolling audit plan, allowing for a more frequent and dynamic risk assessment and the Committee requests additional audits during the year as required. GIA’s 2016 plan was reviewed, challenged and approved by the Committee in December 2015.
In February 2016, the Committee and the Board reviewed the Systems of Internal Control in operation during 2015. The Board concluded that the System of Internal Control was appropriate and operated effectively during the year.
The Committee received regular reports from the Group Chief Auditor on the integrity of the control environment, and from the external auditor based on its audit work. The Committee discussed findings and recommendations arising from internal and external audit work, together with any control improvements recommended.
Whistleblowing The Group’s whistleblowing policy and its effectiveness were reviewed by the Committee which was satisfied that the revised policy implemented in 2014 remained appropriate and fit for purpose and that it was sufficiently embedded across the Group. 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. Concerns can be raised by contacting local or Group senior management, including the Group Chief Auditor, or via an externally provided website and helpline. A summary of all whistleblowing incidents, underlying investigations and actions undertaken is provided to the Committee on an annual basis. Any incident considered material would be reported to the Committee immediately.
RSA Annual Report and Accounts 201564 Directors’ and Corporate Governance Report – Committee Reports
The Committee is responsible for the approval of GIA’s plans and budget, and reviews and confirms annually that GIA is staffed appropriately and operating effectively. The results of the latest assessment were reviewed by the Committee in December 2015 and it was satisfied that GIA remained independent, was operating effectively and that the risk to their independence and objectivity was low.
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. The Company also complies with the requirements of The Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014, which relates to the frequency and governance of tenders for the appointment of the external auditor and the setting of a policy on the provision of non-audit services.
Effectiveness The Company undertakes a thorough review of the effectiveness of the external auditor on an annual basis, usually on completion of the audit process. In the year under review, the process has been amended to incorporate the latest guidance issued by the Financial Reporting Council. The review has covered the mind-set and culture, skills and knowledge, quality control and judgement of the external auditor through an assessment of their perceived quality, effectiveness, objectivity and independence. It was conducted by both a questionnaire distributed to and completed by the Committee, senior management and members of the Group financial reporting team, sought opinions against set criteria and the performance of the external auditor against those criteria; and through Group Audit Committee meetings with the external auditor. The Committee challenged the auditor’s planning, strategy, risk identification process and conclusions. On the basis of the review, the Committee is satisfied with the work of KPMG and that they are effective, objective and independent.
Introduction On behalf of the Group Remuneration Committee, I am pleased to introduce this report covering the year to 31 December 2015.
The positive financial out-turn for the year is reflected in the key performance indicators, which are detailed on pages 22 to 23. The Group reported a pre-tax profit of £323m, Combined Operating Ratio was 96.9%, Net Written Premium was £6.8bn and Group underlying Return on Tangible Equity was 9.7%.
The capital indicators include IGD Surplus at £1.6bn, Solvency Capital Requirement coverage at 143% and the ratio of Tangible Net Asset Value to Net Written Premium (TNAV:NWP) at 42%.
Delivery of the business transformation programme is starting to yield clear benefits, despite challenging market conditions. Expense reduction has accelerated, attritional loss ratios have improved and process and systems optimisations have been driven forward. This has paved the way for further improvement in sustainable operating performance, as the Group progresses towards its medium-term goals.
Based on the performance out-turn, I can advise that: • The Group Chief Executive will receive a bonus for 2015 performance at 76.5% of the maximum, of which half is deferred into shares for three years, and
• The performance-based long-term incentive plan (LTIP) awards from the 2013–15 cycle will not vest (these were granted prior to the appointment of the current Executive Directors, and neither of them have awards in this cycle).
The conditional performance shares granted to the Group Chief Executive during 2015 are subject to stretching performance conditions. Awards which vest will do so after three years, after which a two-year retention period applies.
Remuneration Committee 69 3. Total remuneration 2015: ‘single figure’ tables 71 4. Components of Executive Directors’ remuneration 72 5. Directors’ shareholding 76 6. Payments to directors for loss of office 77 7. Payments to former directors 77 8. Historical TSR performance and executive remuneration 78 9. Percentage change in remuneration 78 10. Relative importance of spend on pay 78 11. Implementation of Remuneration Policy in 2016 79 12. Statement of voting at General Meeting 82 14. External directorships 82 15. Directors’ contracts 82
• Stephen Hester’s performance share grant in 2016 will be reduced from that in 2015 to the Group’s usual level of award for the Chief Executive, which is 230% of salary at maximum vesting. Scott Egan’s performance share grant in the 2016-18 cycle will be for 200% of salary at maximum vesting.
– Relative TSR will continue to be measured against an unweighted index of insurers as in the 2015-17 cycle, and the Business Review Scorecard will consist of a balanced set of long-term performance indicators covering capital, cumulative earnings, attritional loss ratio and controllable expense targets aligned to this stage of the business transformation.
• The Chairman’s fee will be maintained at its current level effective 1 January 2016. It will be reviewed on an annual basis going forwards.
Director changes Scott Egan joined RSA on 1 October 2015 as Group Chief Financial Officer. His remuneration comprises a base salary of £525,000, and a bonus opportunity, benefits and pension provision in line with the Remuneration Policy. He is covered by a shareholding requirement of 150% of salary.
On leaving his previous employer, Mr Egan forfeited a number of cash-based awards. The Committee carefully reviewed the nature and value of these awards and, in line with the principles outlined in the Remuneration Policy, determined a compensatory package of cash and share awards should be made reflecting those forfeited. By compensating part of the forfeited awards in the form of shares, Mr Egan is given an early stake in RSA to help build his shareholding to the required level. The compensatory awards are subject to repayment terms in the event of resignation or termination for gross misconduct within two years of appointment, as set out on page 73.
Shareholder engagement The Committee welcomes shareholder feedback on an ongoing basis. It has actively engaged with the Group’s largest shareholders, and the Investment Association, Pension and Lifetime Savings Association and ISS, during the year, and will continue to do so. Feedback from this has been considered when determining the incentive plan performance measures for 2016.
The Committee believes its executive remuneration decisions fairly reflect performance, and the substantial progress delivered towards making the Company focused, stronger and better for the long term.
I hope you find this report informative, and the Board looks forward to your support for it at the AGM.
• Other than exceptional circumstances such as a role change, salary increases will not exceed the level of increases applied to other RSA employees.
• Group Chief Executive salary increase of 2% effective 1 April 2016.
Annual Bonus Plan • Financial and non-financial targets. • Fifty per cent of the bonus deferred into shares for three years. • Subject to RSA’s Clawback Policy as detailed on page 75.
• 2015 performance measures: Group underlying ROTE and PBT, Group COR, Business Review and Personal Scorecards.
• Clawback Policy extended to allow recovery of cash bonuses awarded for 2015 onwards.
• Business Review Scorecard to include Solvency II coverage ratio in place of IGD and ECA as a measure of capital strength; and additionally measure reduction in attritional loss ratio to support continued performance improvement.
• Performance conditions: Relative TSR, Group underlying ROTE and Business Review Scorecard.
• Group underlying ROTE on-target point set higher up the 11-16% range compared to 2015-17, to reflect progress of turnaround and to continue to incorporate an appropriate degree of stretch.
Management actions including controllable expenses, disposals, risk items and strategic plan initiatives
Annual Bonus Plan 2015 Performance measures Actual performance Weighting (% total bonus) Stephen Hester award Group underlying ROTE, PBT, COR Performance targets, results and narrative on pages 72 to 73
Committee attendees The Chairman, Group Chief Executive and other senior executives attend Committee meetings by invitation to advise on Group strategy, risk, 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 2015; additional input was provided by the Group Chief Risk Officer.
Derek Walsh Group General Counsel and Company Secretary (Secretary to the Committee)
Committee advisors PricewaterhouseCoopers (PwC) was formally appointed by the Committee as its independent advisor in September 2012. It was selected following a market tender exercise. During 2015, PwC also provided wide-ranging advice and consultancy services across the Group globally on matters including business processes and transformation, IT, internal audit, corporate social responsibility, direct and indirect tax, and governance. PwC is a member of the Remuneration Consultants’ Group and a signatory to its Code of Conduct. In addition, the Committee has satisfied itself that the advice it receives is objective and independent as the firm has confirmed there are no conflicts of interests arising between it, its advisors and RSA. The fee paid for services to the Committee in the year was £80,000 excluding VAT, based on a fixed fee for a defined scope of work.
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.
Committee meetings held in 2015 In 2015, the Committee met on five occasions and the table below summarises the matters it discussed.
• Review of directors’ base salaries and approval to maintain current salaries from 1 April 2015
May • Review of the 2015 long-term incentive grant and an update on dilution levels
• Approval for a supplementary grant of conditional long-term incentive awards in November 2015 for non-Board employees
June • None • Appointment terms for Group Chief Financial Officer
• Review of Chairman’s fee and approval to maintain current fee level
Notes: 1. Taxable benefits: This includes reimbursement in respect of travel and accommodation. Stephen Hester received a car allowance and the use of a car and driver service which totalled £46,024 (2014: £39,999), Scott Egan and Richard Houghton received car allowances, and each of the Executive Directors were provided with medical benefits and life cover. Alastair Barbour received benefits of £20,936 (2014: £12,941) for taxable travel where relief under HMRC rules is not available.
2. Bonus: This comprises awards in respect of performance measures relating solely to the financial year shown, in accordance with the plan described on pages 72 to 73. Half of the bonus shown is awarded in Deferred Bonus Shares which vest three years from the date of grant, and are subject to malus adjustment under the Group’s Clawback Policy detailed on page 75.
10. Richard Houghton resigned from the Board effective 7 May 2015 and his employment ended effective 10 July 2015. The salary shown in the table is the pro-rated amount for the time he was a director, i.e. 1 January – 7 May 2015. Pay in lieu of notice is not included in this table, and is covered on page 77.
Annual Bonus Plan (audited) For the 2015 financial year, the Executive Directors’ Annual Bonus Plan consisted of financial and business targets aligned to the Group’s operational plans. These included: Group underlying Return on Tangible Equity (ROTE), Group underlying Profit before Tax (PBT), Group Combined Operating Ratio (COR), a Business Review Scorecard and role-specific personal objectives. Overall, these targets required demanding business improvements from the prior year.
The maximum bonus opportunity was 160% of salary, of which half of any award is deferred into RSA shares for three years. Bonus awards are subject to malus and clawback provisions under the Group’s Clawback Policy, as detailed on page 75.
In determining 2015 bonus awards under this Plan, the Committee considered how goals had been met, ensuring that performance also took account of key risk factors.
Business Review performance (30% weighting – achieved 27%) The Business Review Scorecard offered an opportunity of up to 30% of the overall award and is designed to capture progress against underlying improvements targeted by the turnaround plan, including restructuring actions. The Committee assessed performance taking into account capital, risk and disposal achievements together with the results of actions aimed at delivering the business turnaround targets.
The Committee was of the view that overall strong progress has been made, and as a result assessed an outcome of 27% out of a possible score of 30% in this category.
Personal element (30% weighting – achieved 30%) This element focuses on personal performance versus the priorities set by the Board for the Group Chief Executive in 2015; namely driving strategic refocus and disposals, capital strength and risk control, stakeholder engagement, customer focus and Executive team development.
Taking all of the above into account, and the personal leadership strengths required, the Committee determined that Stephen Hester would receive an award of 30% out of 30% for this element.
As a consequence, Mr Hester was awarded a bonus of 76.5% of the maximum available opportunity, being 122% of his annual base salary.
TNAV:NWP S&P credit rating –Group controllable expense ratio: –Group controllable expenses: –Portfolio actions and strategic plan initiatives: ≥1.75 times ≥1.15 times
Notes: 1. These measures are referenced in the capital disclosure on page 122 to 123.
2. Adjusted for timing of business disposals. 3. Stephen Hester’s bonus has been determined by the Committee relative to his gross annual basic salary of £950,000. 4. Half of the bonus shown is awarded in Deferred Bonus Shares. The shares vest three years from the date of grant, and are subject to malus adjustment under the Group’s Clawback Policy detailed on page 75.
Long-term incentives – awards vesting from 2013–15 cycle (audited) Conditional long-term incentive awards were made to Executive Directors in the 2013-15 cycle in the form of Performance Shares. Under the LTIP arrangements operated at that time, Executive Directors could also receive Matching Shares for each share deferred through the 2012 Annual Bonus Plan, via both compulsory and voluntary deferral.
The awards were granted prior to the appointment of the current Executive Directors, and neither of them have awards in this cycle.
Note: 1. The Relative TSR threshold target (25% vesting) is equal to the unweighted index of comparators which includes: ACE, Admiral, Allianz, Amlin, Aviva,
Direct Line, Gjensidige Forsikring, Hiscox, Intact, Mapfre, QBE, Topdanmark, Tryg and Zurich. The maximum target (100% vesting) is to outperform the index by at least 7% per annum (22.5% compound over three years) or to exceed the TSR of the highest performing company in the index. Catlin had originally been included in the index, however it was delisted during the performance period and so the Committee determined to exclude it from the calculation. The Group underlying ROE threshold target (25% vesting) is 9% and maximum target (100% vesting) is 14%, measured as a three-year average over the performance period.
Long-term incentives – awards granted in 2015 (audited) A conditional long-term incentive award was made to the Group Chief Executive on 7 April 2015 under the Performance Share Plan (PSP), which was approved by shareholders on 9 May 2014. These Performance Share awards will vest in 2018, subject to the satisfaction of the plan’s performance conditions based on Group underlying ROTE, relative Total Shareholder Return and a Business Review Scorecard. The Scorecard measures a range of indicators on an underlying basis, and includes: growth in Tangible Net Asset Value per Share (TNAV), cumulative earnings, controllable expenses and a range of capital strength metrics including the ratio of Tangible Net Asset Value to Net Written Premium (TNAV:NWP).
Tryg and Zurich. A straight-line calculation is applied to determine the portion of awards that vest for performance between the threshold and maximum targets. Amlin and Catlin were also originally included in the index, however they have since been delisted and the Committee will ratify their exclusion from the TSR index at the end of the performance period.
In summary, for awards issued in 2014 onwards, the Committee may reduce or forfeit awards that have yet to be paid or vest in the case of shares, to delay the payment or vesting date or to amend another form of award or benefit which has yet to be received (malus adjustment).
• 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
• Error or material misstatement leading to an overpayment • Material error or financial misstatement of results which has resulted in an overpayment
• Employee misconduct, including regulatory or other breaches • Gross or serious employee misconduct.
Shares owned outright1 Unvested scheme interests held at 31 December 2015 Required shareholding level
Notes: 1. Interests of directors in ordinary shares of £1.00 each of the Company, including those of connected persons. As at 23 February 2016, the interests in ordinary shares of Stephen Hester and Scott Egan have not changed since 31 December 2015. 2. Includes Performance and Matching Shares held under the legacy Long-term Incentive Plan 2006, and Performance Shares held under the
9. The directors had no share options that vested and remained unexercised, or were exercised in the year. 10. Full details of all directors’ shareholdings and options to subscribe for shares are recorded in the Group’s Register of Directors’ Interests which is open to inspection by shareholders at the AGM and at the Company’s registered office during standard business hours.
Notes: 1. The Company granted conditional awards over ordinary shares under the PSP at nil cost. The market price of ordinary shares on 7 April 2015, the date on which PSP interests were granted during the year, was £4.2588. 2. Richard Houghton’s scheme interests are shown as at 7 May 2015 (the effective date of his resignation from the Board) and not 31 December 2015.
3. Performance Shares granted in 2014 and 2015 have performance conditions of Group underlying ROTE, relative TSR and Business Review Scorecard ( weighting each).
6. No other directors of the Company held long-term incentive scheme interests in the PSP during the year.
Notes: 1. No long-term incentive plan interests were granted under the LTIP during 2015. 2. Richard Houghton’s scheme interests are shown as at 7 May 2015 (the effective date of his resignation from the Board) and not 31 December 2015.
3. Voluntarily Invested Deferred Shares were purchased on behalf of each participant using part of the net annual bonus paid to them and are held in trust for three years. They are not at risk of forfeiture and may be withdrawn from the Trust at any time but any associated Matching Shares lapse if this occurs.
4. Compulsory Deferred Shares have a service condition of three years from date of grant. 5. Voluntarily Invested Deferred Matching Shares granted in 2012 and 2013 have a performance condition of Group underlying ROE (100% weighting). 6. Compulsory Deferred Matching Shares and Performance Shares granted in 2012 and 2013 have performance conditions of Group underlying ROE
(70% weighting) and relative TSR (30% weighting). 7. The date by which performance conditions for LTIP awards were to be met is as follows: 2012 awards by 31 December 2014 and 2013 awards by 8. No other directors of the Company held long-term incentive scheme interests in the LTIP Plan during 2015.
7. Payments to former directors (audited) No payments were made to former directors in 2015, other than those disclosed in the Payments to directors for loss of office section.
Martin Scicluna3 39 n/a n/a 2013 Martin Scicluna3 21 n/a n/a
Notes: 1. Stephen Hester did not have any long-term incentive awards in the 2013-15 and 2012-14 cycles.
3. Martin Scicluna was appointed Executive Chairman effective 13 December 2013, until 4 February 2014. The single figures of total remuneration for 2013 and 2014 above are pro-rated for his time in the position.
The figures for the most senior Executive Director in 2015 include Stephen Hester’s remuneration for a full year, however the figures for 2014 include his remuneration for a portion of the year (as he was appointed in 2014), and Martin Scicluna for the period he was Executive Chairman. Stephen Hester received no salary increase in 2014 or 2015.
Note: 1. The figures for 2014 include Stephen Hester from the date of his appointment as Group Chief Executive (5 February 2014) and Martin Scicluna for the period he was Executive Chairman (1 January to 4 February 2014).
Total Spend on Employee Pay1 1,101 948 -14% Total Distributions to Shareholders2 9 65 622%
Group Chief Financial Officer Fixed remuneration Variable remuneration (short-term) Variable remuneration (long-term)
Notes: 1. The ‘below threshold’ scenario shows the minimum remuneration receivable. It includes the value of base salary and pension for 2016, and the value of benefits based on the single total figure of remuneration for 2015. No bonus is awarded and no LTIP vesting occurs. 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 230% of salary for the Group Chief Executive, and 200% of salary for the Group Chief Financial Officer.
3. The ‘maximum’ scenario shows the remuneration receivable with both the Annual Bonus Plan and the LTIP paying out in full (i.e. 160% of salary and 230%/200% of salary, respectively).
Year of cash bonus award, or share award granting Year of share award vesting Year when any restrictions or clawback provisions have ended
Note: 1. In accordance with his appointment terms, Scott Egan’s salary will first be reviewed effective 1 April 2017.
The Committee will assess performance for 2016 once the financial year has ended, taking into account material risk factors. All of the bonus targets are considered to be commercially sensitive because they signal the Group’s forward plan for the year, and therefore they are not provided in this document. Disclosure will be provided in the 2016 Directors’ Remuneration Report, to the extent that the targets do not remain commercially sensitive.
Long-term Incentive Plan 2016-18 The RSA Performance Share Plan (PSP) was approved by shareholders at the AGM on 9 May 2014. The plan directly supports the building of shareholder value by targeting Group underlying Return on Tangible Equity (ROTE), relative Total Shareholder Return (TSR) and a Business Review Scorecard. The Scorecard measures a range of indicators on an underlying basis, and includes: growth in Tangible Net Asset Value per Share (TNAV), cumulative earnings, controllable expenses, attritional loss ratio and a range of capital strength metrics including the ratio of TNAV:NWP and Solvency II coverage ratio.
For the 2016 grant, performance measures will be assessed against a performance period of 1 January 2016 to 31 December 2018, taking into account underlying business performance and material risk factors.
The Business Review Scorecard will be evaluated using a performance framework whereby each metric will be reviewed against its target, together with any other aspects connected to the business turnaround and judgement in the round used by the Committee to determine the level of vesting. The specific targets cannot be disclosed prospectively for commercial reasons, including price sensitivity. A performance narrative will be given to summarise the level of vesting on the Business Review Scorecard once the performance conditions have been tested.
Stephen Hester’s maximum LTIP opportunity in the 2016 grant will reduce to 230% of salary at maximum vesting compared to earlier years, which is the usual level of award for the Group Chief Executive. Scott Egan’s LTIP opportunity in 2016 will be 200% of salary at maximum vesting. Executive Directors must retain all vested shares arising from this incentive plan for two years post-vesting (except those sold to cover statutory deductions), and they are subject to the Group’s Clawback Policy. The table below summarises the LTIP’s structure.
Non-Executive Directors’ fees Under RSA’s Articles, the Non-Executive Directors’ remuneration is determined by the Board, within limits set by shareholders. The only exception is in respect of the Chairman, whose terms fall within the remit of the Group Remuneration Committee. The Chairman and Board (minus the Non-Executive Directors) discharges its accountability for setting and managing NonExecutive 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 88 to 89.
The Committee reviewed the Chairman’s fee 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 Chairman’s fee will remain unchanged at £400,000 per annum, effective 1 January 2016. Future reviews will take place annually.
12. Statement of voting at General Meeting The following voting was recorded at the AGM on 8 May 2015 regarding the resolution to approve the Annual Report on Remuneration: Resolution Votes for Votes against Total votes cast Votes witheld1
13. Dilution RSA monitors its dilution levels on a regular basis to ensure that they remain within the headroom limits set by the Investment Association (IA). As at 31 December 2015, the dilution levels were as follows: Limit RSA dilution %
14. External directorships Stephen Hester and Scott Egan do not hold outside directorships of FTSE 100 (or any other listed) companies but would be allowed to have one such appointment, subject to the approval of the Group Nomination and Governance Committee. In accordance with the Remuneration Policy, they would be permitted to retain any fees or expenses arising from such an appointment.
For ease of reference, the elements of the Policy referenced in Committee activity during 2015 are re-presented on the following pages 84 to 90, including the policy tables and information on directors’ contractual terms. The full Policy Report is contained in the 2013 Annual Report and Accounts (pages 71 to 79), which is available at www.rsagroup.com/ financial-reporting.
RSA’s remuneration philosophy and strategy RSA’s remuneration philosophy and strategy are directly informed by the business strategy, which is set out in the Strategic Report on pages 2 to 39 of this report.
• Each component of the total remuneration package is simple and transparent, so as to be effective and understood by executives, shareholders and regulators
• Benchmarked referencing competitive practice within two peer groups of listed international insurers and FTSE listed companies of broadly comparable market capitalisation to RSA, excluding banks and ‘heavy’ industries.
Benefits (fixed remuneration) Employment benefits are provided to support the executive and form part of a market competitive package.
• Assistance would be available under RSA’s relocation policy or global mobility policy should this be required. This may include tax equalisation in the event an executive is subsequently appointed to the Board as an expatriate, although the Committee would review if this was necessary long-term.
• Benefits are valued and determined with reference to the benchmarking peer groups and other surveys reviewed by the Remuneration Committee. Details of the benefits received by the Executive Directors for 2015 are provided on pages 71 to 72.
• Committee can adjust the employer pension contribution or cash allowance levels to ensure these remain appropriate and market competitive. It can also agree changes to the terms of the Directors’ pension plan(s), as appropriate.
• Under RSA’s Clawback Policy, cash and deferred share awards arising from the Annual Bonus Plan can be reduced or forfeited prior to receipt under a range of circumstances and other sanctions can apply. The policy is noted in detail on page 75. The Committee reviews the policy annually and may amend or update it, as required.
• The Executive Directors’ salaries effective 1 April 2016 are noted on page 80.
• Directors receive a variety of benefits, some of which are delivered as taxable cash-in-lieu allowances. Benefits cover the areas of: health and well-being, leave of absence, car and business travel, sickness benefit, insurances, professional subscriptions, external advice and employee discounts on certain insurance products. Home to work travel may be covered where appropriate. Tax changes are not compensated.
• Committee can amend any benefit or introduce new ones to ensure the remuneration package remains market competitive or to respond to regulatory, legal or best practice changes. Internal appointees to the Board may retain any legacy benefits they receive, at the Committee’s discretion, or a buy-out may be made depending on the benefit type and circumstance.
• Non-contributory pension plan membership or a full/partial cash allowance, where the Director is unable to join the Company’s pension plans. The RSA defined benefit pension plan is closed to all new entrants.
• No Executive Director will receive a pension benefit in excess of 30% of salary.
• Overall bonus opportunity is set at a level to be market competitive. Awards are calculated against stretching annual financial and non-financial targets, as well as the performance of the individual executive. Only superior performance will result in a bonus award which is above target.
• The Executive Directors’ maximum bonus opportunity is set having regard to the market median bonus opportunity of its benchmark peer groups.
• The performance conditions and targets that will apply to the 2016 grant are detailed on pages 80 to 81.
• 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 2013 and in this Report on page 77. There is no re-testing of the performance conditions.
• With effect from 1 January 2014, the shareholding levels to be reached are: Group Chief Executive: 300% of salary
• A two-year retention period will apply to the Executive Directors’ vested shares prohibiting their sale (excluding any sold to satisfy statutory deductions). This policy will cover performance-based awards granted through the LTIP and it will first be implemented for shares vesting in 2017 (i.e. the 2014 grant). The retention period only applies while the Director remains in employment.
• Under RSA’s Clawback Policy, unvested share awards granted from 2013 onwards can be subject to forfeiture (partial or full) covering a range of circumstances and other sanctions can apply. The policy is noted in detail on page 75. The Committee reviews the policy annually and may amend or update it, as required.
• For recruitment purposes, or in highly exceptional circumstances, such as for retention, the Committee may agree to a conditional performance-related award being made up to an additional 170% of salary. This would be considered a ‘one-off’ award. Where an exceptional award is made, full disclosure will be given on the rationale.
• Fees are paid in cash, subject to any required statutory deductions which are taken at source.
• The Company has the discretion to introduce new fees or change the Non-Executives Directors’ terms.
• Details of the Chairman’s fee and the Non-Executive Directors’ fees earned for 2015 are noted on page 71.
• The Non-Executive Directors may hold shares in RSA, but this is a personal matter and is not mandatory.
• Benefits, pension and contractual terms will be the same as those offered to current Executive Directors, but the Committee may exercise judgement to flex the package to accommodate any specific terms bespoke to the individual, e.g. related to health, annual leave, pension or insurance benefits.
• If the Director is entered into an RSA LTIP and made an award of performance shares, these will be subject to the same performance conditions and vesting date as applies to other plan participants.
• Directors who resign or are dismissed for cause are not eligible for an annual bonus if they have left or are under notice at the date of payment, and forfeit all unvested LTIP awards. They retain any shares they have voluntarily deferred in the LTIP under the 2006 Plan. Directors who resign can retain any compulsory deferred bonus shares awarded from 2014 onwards and any associated dividends or equivalents.
Fees Ensures competitive remuneration is paid to attract high calibre non-executives and recognise their time commitment on the Board.
• Non-Executive Directors may claim expenses in line with RSA’s business and travel policies; some of these expenses do not qualify for HMRC tax relief. They receive no other benefits, but they can have RSA insurance products at a discount.
Executive Directors may hold one external non-executive position of a FTSE 100 company provided this does not give rise to any conflict of interest, with the approval of the 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 82. Contracts are available for inspection by shareholders at the Company’s registered office.
The dates when each Non-Executive Director was appointed to the Board and the expiry dates of their current terms of office are shown in the table on page 82. Details of the Non-Executive Directors’ fees are noted on page 81. Appointment letters are available for inspection by shareholders at the Company’s registered office.
Ameriprise Financial, Inc. and its group 75,871,245 7.46% Direct & Indirect
2. Where the holding had not been re-notified to the Company since the share consolidation became effective on 12 May 2014 the number of ordinary shares shown is as notified pre-consolidation.
Distribution of shares by geography a. UK 51.09% b. Europe 17.54% c. US and Canada 22.51% d. Rest of World 4.11% e. Unanalysed 4.75%
The average total daily trading volume during 2015 was approximately 6.8m Ordinary Shares. The closing market price of an Ordinary Share on 2 January 2015 was 437.5p and the closing market price on 31 December 2015 was 426.5p. The highest daily closing price of an Ordinary Share was 526.5p on 4 August 2015 and the lowest daily closing price was 391.7p on 7 July 2015.
The Company operates a sponsored American Depositary Receipts (ADR) programme which is managed by JP Morgan Chase NA. The programme allows shareholders to invest in the Company through US dollar denominated funds. One ADR represents one Ordinary Share of £1.00 each.
Dividends As a result of recent regulatory changes applicable to the Group from 1 January 2016 under Solvency II, in order for the Company’s Ordinary Shares to be counted towards the new group capital requirements, any dividends declared by the Company must be capable of being cancelled and withheld or deferred at any time prior to payment, if the relevant capital requirements have been breached or payment of the dividend would lead to non-compliance with those requirements. Accordingly, the final dividend will be declared on a conditional basis and the Directors reserve the right to cancel or defer the recommended dividend. The directors do not expect to exercise this right, other than where they believe that it may be necessary to do so in light of the applicable legal or regulatory requirements. The Company is also proposing to amend its Articles of Association so as to make clear that any dividend declared in respect of the Company’s Ordinary Shares may be cancelled or deferred by the directors before payment in certain circumstances.
The Directors therefore recommend a final dividend (subject to the dividend being cancelled, withheld or deferred as described above) of 7.0p per Ordinary Share (2014:2p) to be paid on 13 May 2016 to holders of Ordinary Shares on the register at the close of business on 4 March 2016, subject to Ordinary Shareholder approval. An interim dividend of 3.5 p was paid during 2015, making the total dividend for the year 10.5p (2014: 2p). The Company will not be offering a Scrip Dividend alternative in respect of the final dividend.
Scope 3: Emissions from non-owned sources that are related to the Group’s activities, including business travel and the use of water, paper and waste generated.
Business travel: Emissions from flights, trains, taxis, hotels and vehicles not owned by organisation. This has been separately assured and reported in 2015.
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 2016. 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/AGM2016.
At the 2015 AGM, an average of 70.32% of the total issued share capital was voted across all resolutions, with an average of 96.03% voting for each resolution.
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 here and on our Corporate Responsibility webpages www.rsagroup.com/corporate-responsibility.
A full list of the Group’s subsidiaries and related undertakings is in Appendix C on pages 171 to 172.
Details of events which have occurred after the reporting period are set out in Appendix A on page 167.
The Directors are responsible for preparing the Annual Report and Accounts and consider that the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy. Further explanation on the assurances undertaken by the Group Audit Committee on behalf of the Board are set out in the Group Audit Committee Report found on pages 62 to 63.
A report from the external auditor can be found on pages 99 to 102.
The Directors have determined that a three year period is an appropriate period over which to provide its viability statement as this is the period focused on by the Board during the operational planning process and is also aligned to the short-tail nature of the business’ contracts.
The Group’s three year cashflow forecast demonstrates its ability to sustain positive cashflows in its businesses through targeted underwriting, portfolio and distribution actions, and to pay dividends as forecasted. This is further supported by the Group’s credit facilities and highly liquid investment portfolio which provide further sources of short term cash if needed.
As part of its operational planning process, the Group prepares annually a three year operational plan and capital forecast along with sensitivity analysis (based on the Group’s approved Internal Model for Solvency II reporting) which support the Group’s strategy. These forecasts are subject to review and challenge by the Directors on at least an annual basis.
Methodology Our disclosures cover all sources of greenhouse gas emissions as required by the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013, aligning to our financial control boundaries and including all emissions from operations with 50 or more full time equivalent employees, covering the period 1st January 2015 – 31st December 2015.
Statement by directors Section 414A of the Companies Act 2006 requires the directors to present a Strategic Report of the Company for the financial year ended 31 December 2015. The information that fulfils the requirements set out in Section 414C can be found on pages 1 to 39, and is incorporated by reference into this report.
RSA Annual Report and Accounts 201594 Directors’ and Corporate Governance Report – Other Statutory Information
The Company does not have agreements with any director or employee that would provide compensation for loss of office or employment resulting from a takeover except that provisions of the Company’s share schemes and plans may cause some options and awards granted to employees under such schemes and plans to vest in such circumstances.
Directors’ indemnity Article 140 of the Articles of Association provides that, among other things and insofar as permitted by law, the Company may indemnify its directors against any liability and may purchase and maintain insurance against any liability. The Company has granted an indemnity to each of the directors pursuant to the power conferred by Article 140 of the Articles of Association. The indemnities granted constitute qualifying third party indemnity provisions, as defined by section 234 of the Companies Act 2006 and is in addition to appropriate insurance cover.
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. The directors and officers of the Company and its subsidiaries also have the benefit of insurance which provides suitable cover in respect of legal actions brought against them.
In addition, the Company has indemnified the directors of SAL Pension Fund Limited, a majority owned subsidiary of the Group, in relation to its role as Trustee of an occupational pension scheme. This indemnity constitutes a qualifying indemnity provision under section 235 of the Companies Act 2006.
In addition the Group, as part its ORSA process, uses PRA set stress tests to assess the capital resilience of the Group to a range of severe but plausible scenarios including a reverse stress test (which includes a combination of insurance, market and economic stresses). These tests allow the Board to review and challenge the Risk Management strategy and consider potential mitigating actions.
Based on the results of this analysis, the Directors have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the three year period of their assessment.
Going concern In considering the appropriateness of the going concern basis, the Board has reviewed the Group’s ongoing commitments for the next twelve months and beyond. The Board’s review included the Group’s strategic plans and updated forecasts, capital position, liquidity and credit facilities and investment portfolio.
The Board confirms that it has reviewed the schedule of directors’ conflicts of interest during the year and that the procedure in place operated effectively in 2015. None of the directors had any interest in any contract of significance with the Company or any of its subsidiaries during 2015.
Articles of Association The Company’s Articles of Association may be amended by special resolution of the Company’s Ordinary Shareholders. The current Articles of Association were adopted at the 2014 AGM and are available on the Company’s website at www. rsagroup.com/articles. Changes proposed to the Articles of Association, as recommended by the Board for approval by the shareholders at this year’s AGM, are set out in the Notice of Meeting.
(ii) The total of the capital and revenue reserves of the Group (subject to certain adjustments).
Significant transactions and events 7 Discontinued operations and disposals 124 8 Reorganisation costs 127
Notes to the Statement of Financial Position 23 Goodwill and intangible assets 138 24 Property and equipment 141 25 Investment property 142 26 Financial assets 142 27 Fair value measurement 145 28 Interests in structured entities 148 29 Reinsurers’ share of insurance contract liabilities 149 30 Current and deferred tax 150 31 Insurance, reinsurance and other debtors 152 32 Cash and cash equivalents 152 33 Share capital 152 34 Non-controlling interests 154 35 Loan capital 154 36 Other borrowings 155 37 Insurance contract liabilities 155 38 Post-retirement benefits and obligations 160 40 Other liabilities 165
Other commitments and contingent Liabilities 42 Other commitments 166 43 Other contingent liabilities 166
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group and Parent Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Group and Parent Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and Parent Company and to prevent and detect fraud and other irregularities.
• the Strategic Report on pages 2 to 39, includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties they face.
Stephen Hester Scott Egan Group Chief Executive Group Chief Financial Officer
RSA Annual Report and Accounts 201598 Financial statements – Group consolidated financial statements
Insurance liabilities (provision for losses and loss adjustment expenses) £12,191 million (2014: £13,266 million) Refer to page 61 (Group Audit Committee Report), page 109 (accounting policy) and pages 155 to 160 (financial disclosures)
Insurance liabilities represent the single largest liability for the Group. Valuation of these liabilities is highly judgemental, and requires a number of assumptions to be made that have high estimation uncertainty. This is particularly the case for those liabilities that are recognised in respect of claims that have occurred, but have not yet been reported to the Group.
Certain lines of business also contain greater inherent uncertainty, for example those where claims emerge more slowly over time, or where there is greater variability in claim settlement amounts. This includes Abuse, Asbestos and Deafness classes, UK Professional and Financial Risk Classes, the Danish Workers Compensation class, the Swedish Personal Accident classes, the Canadian General Liability class and classes of business affected by emerging industry issues such as the impact of Periodic Payment Orders (which are akin to annuities with longevity and inflation risk) on UK motor business.
As a result of all of the above factors, insurance liabilities represent a significant risk for the Group.
• Re-performing reconciliations between the claims data recorded in the policy administration systems and the data used in the actuarial reserving calculations.
In addition, with the assistance of our actuarial specialists, we: • Assessed the key assumptions and reserving methodologies driving the value of the insurance liabilities. To do this we: – compared the assumptions to expectations based on the
– reviewed sensitivity analyses over key judgements and assumptions, such as the discount rates for longer tail classes of business and Periodic Payment Order projections.
• Evaluated the governance around the overall Group reserving process, including the scrutiny applied by the Local, Regional and Group Reserving committees, as well as Group level actuarial reviews. We assessed qualifications and experience of those responsible and examined the output of the reviews to assess the scope and depth of these processes. Our evaluation of the methodologies and key assumptions for the most significant and subjective classes of business enabled us to assess the quality of the challenge applied through the Group’s reserving process. This included evaluating the appropriateness of the Reserve committee’s determination of the appropriate margin to be applied to the actuarial best estimate of insurance liabilities. In particular we considered for the allowance for uncertainties inherent in the data and assumptions inherent in developing the actuarial best estimate.
Finally, we also assessed the Group’s disclosure in relation to insurance liabilities, including the discount rate and historic claims development.
RSA Annual Report and Accounts 2015 99Financial statements – Group consolidated financial statements
We compared the expected growth rates to the Group’s approved operating plan. We assessed the accuracy of that forecasting process in the past, and considered whether projected margins are achievable with reference to the business’s recent performance and revised operating plans, as well as our own industry knowledge. We also evaluated the internal review and challenge process the Group undertakes during the development of the operational plan, the extent to which the Group considered alternative outcomes and the depth of review and challenge performed by the Group Risk Function as part of the process to approve the operational plan.
We have evaluated the adequacy of the Group’s disclosures in respect of the assumptions supporting the deferred tax asset valuation and recognition.
Pensions and post-retirement obligations of £7,126 million (2014: £7,598 million) Refer to page 61 (Group Audit Committee Report), page 113 (accounting policy) and page 160 to 164 (financial disclosures).
The valuation of the defined benefit pension liabilities (before deducting scheme assets) depends on a number of critical assumptions and estimates, including the discount rate used to calculate the current value of the future payments the Group expects to pay to pensioners, the rate of inflation that must be incorporated in the estimate of the future pension payments, and the life expectancy of pension scheme members.
Small changes in these assumptions and estimates used in these valuations can have a significant effect on the valuation of the pension liabilities and therefore the amount of the net surplus/(deficit) of the pension and post-retirement obligations and the financial position of the Group.
Our audit procedures included, among others, challenging the discount rate, inflation rate and life expectancy against externally derived data. This work was supported by our own pension’s specialists.
IT systems and controls Refer to page 61 (Group Audit Committee Report).
RSA Annual Report and Accounts 2015100 Financial statements – Group consolidated financial statements
Goodwill and Intangible Assets In 2014, the valuation of goodwill and other intangible assets was separately identified in our audit report. The level of audit risk in this area has reduced through a combination of the write down of the carrying values of goodwill and other intangible assets recognised in prior years, additional amortisation of capitalised software and business disposals. While we continue to perform audit procedures over these balances, we no longer assess that the valuation of these assets represents one of the risks that has the greatest effect on our audit and, therefore, it is not separately identified in our audit report this year.
Based on their significance to the financial performance and position of the Group and the Group’s continuing operations, audits were performed by component auditors for six of the Group’s 19 geographical components, being those located within the UK, Ireland, Canada and Scandinavia. In addition, specified risk-focused audit procedures were performed by component auditors on five of the other components. These components, and the Group’s central functions, were not individually significant enough to require an audit for group reporting purposes, but did present specific individual risks that needed to be addressed. The nature and extent of these procedures varied in accordance with the assessed risk of misstatement, but were primarily focused on the investments and insurance liabilities recognised on the balance sheet, and the premiums and claims balances recognised in the income statement.
For the remaining components, no Group reporting was required from the local audit team as specific individual risks significant to the Group were not identified. We performed additional analysis at an aggregated Group level to re-examine this assessment.
5. We have nothing to report on the disclosures of principal risks Based on the knowledge we acquired during our audit, we have nothing material to add or draw attention to in relation to: • the Directors’ Viability Statement on page 94, concerning the principal risks, their management, and, based on that, the Directors’ assessment and expectations of the Group’s continuing in operation over the three years to 2018; or
6. We have nothing to report in respect of the matters on which we are required to report by exception Under ISAs (UK & 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.
In particular, we are required to report to you if: • we have identified material inconsistencies between the knowledge we acquired during our audit and the Directors’ statement that they consider that the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s position and performance, business model and strategy; or
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
• we have not received all the information and explanations we require for our audit.
• the part of the Corporate Governance Statement on pages 46 to 54 relating to the company’s compliance with the eleven provisions of the 2014 UK Corporate Governance Code specified for our review.
7. Scope of report and responsibilities As explained more fully in the Directors’ Responsibilities Statement set out on page 98, 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/auditscopeukco2014a, 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.
Stuart Crisp Senior Statutory Auditor for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants London
RSA Annual Report and Accounts 2015102 Financial statements – Group consolidated financial statements
Consolidated statement of comprehensive income for the year ended 31 December 2015
Fair value (losses)/gains on available for sale financial assets net of tax 10 (211) 243
Other comprehensive (expense)/income for the year from continuing operations (263) 128
Other comprehensive expense for the year from discontinued operations 7 (106) (19)
Total comprehensive (expense)/income for the year from continuing operations (175) 20
Consolidated statement of changes in equity for the year ended 31 December 2015
Other reserve transfer (note 33) (381) – – – – 381 – – – – –
Changes in shareholders’ interests in subsidiaries – – – – – – – – – (14) (14) Total transactions with owners of the Company 3 371 – – – 381 – (1) 754 (20) 734
Other reserve transfer – – – – – – 29 (29) – – –
Changes in shareholders’ interests in subsidiaries – – – – – – – 3 3 11 14 Total transactions with owners of the Company 2 2 – – – – 29 (78) (45) 8 (37)
The attached notes on pages 108 to 172 form an integral part of these consolidated financial statements.
The financial statements were approved on 24 February 2016 by the Board of Directors and are signed on its behalf by: Scott Egan Group Chief Financial Officer
RSA Annual Report and Accounts 2015106 Financial statements – Group consolidated financial statements
Consolidated statement of cashflows for the year ended 31 December 2015
Cash and cash equivalents at the beginning of the year 1,135 1,162
Cash and cash equivalents at the end of the year 32 902 1,135
RSA Insurance Group plc (the ‘Company’) is a public limited company incorporated and domiciled in England and Wales. The Company through its subsidiaries and associates (together the ‘Group’ or ‘RSA’) provides personal and commercial insurance products to its global customer base, principally in the UK & Ireland, Scandinavia and Canada.
1) Basis of preparation The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as endorsed by the European Union (EU). The consolidated financial statements are prepared under the historical cost basis. Where other bases are applied these are identified in the relevant accounting policy.
In line with industry practice, the Group’s statement of financial position is not presented using current and non-current classifications, but broadly in increasing order of liquidity. Most of the Group’s assets and liabilities are considered current given they are expected to be realised or settled within the Group’s normal operating cycle. The assets and liabilities considered as non-current include: investments in associates, deferred tax assets, property and equipment, intangible assets, goodwill, deferred tax liabilities, outstanding debt including loan capital and elements of financial investments, insurance contract liabilities and reinsurers’ share of insurance contract liabilities.
Except where otherwise stated, all figures included in the consolidated financial statements are presented in millions of pounds Sterling (£m).
IFRS 9 ‘Financial Instruments’ The IASB has issued the final version of IFRS 9 ‘Financial Instruments’ although the timing for its implementation is not yet clear as the standard has not yet been endorsed by the European Union. The new standard is stated to be effective from 1 January 2018, although depending on the outcome of consultations on IFRS 4, there may be a transitional period.
In December 2015, the IASB consulted on proposed amendments to IFRS 4 ‘Insurance contracts’. The amendments would permit entities whose predominant activity is issuing insurance contracts to defer the full application of IFRS 9 until the earlier of 2021 or adopting the revised IFRS 4, which is currently expected to commence in 2020.
The Group has not yet completed its evaluation of the impact of IFRS 16 on the financial statements but the undiscounted value of the Group’s lease obligations are disclosed in note 41.
Central Expenses £m Total £m 5) Significant accounting policies The significant accounting policies used in the preparation of these consolidated financial statements, as set out below, have been applied consistently to all periods presented in these consolidated financial statements, unless otherwise stated.
Premium income Premium written is recognised in the period in which the Group is legally bound through a contract to provide insurance cover. It represents the full amount of premiums receivable under the contract, including any estimates where the amounts are not known at the date written. These are recognised as unearned premiums until recognised as revenue principally computed on a monthly or daily pro-rata basis. Net premiums earned are stated net of amounts passed (ceded) to reinsurers. Premiums are shown before deduction of commission and exclude any sales based taxes or duties.
The provisions for losses and loss adjustment expenses, and related reinsurance recoveries, are discounted where there is a long period from incident to claims settlement or when nominal interest rates are high and where there exists a suitable claims payment pattern from which to calculate the discount. In defining those claims with a long period from incident to claims settlement, an average period of settlement of six years or more has been used as a guide. The discount rate used is based upon an investment return expected to be earned by assets which are appropriate in value and duration to match the provisions for insurance contract liabilities being discounted during the period expected before the final settlement of such claims.
RSA Annual Report and Accounts 2015 109Financial statements – Basis of preparation and significant accounting policies
At initial measurement, the Group classifies its financial assets and financial liabilities in one of the following categories: • Designated at fair value through profit and loss (FVTPL); • Held for trading; • Available for sale (AFS); • Cash and cash equivalents; • Loans and receivables; • Financial liabilities; or
Transaction costs that are directly attributable to the acquisition of financial assets and financial liabilities that are FVTPL are added to their fair value in their initial measurement.
Held for Trading Derivative assets/ (liabilities) not designated as hedging instruments.
Carried at fair value. Derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative.
Where the investment return on equity or debt securities is managed on the basis of the periodic cashflows arising from the investment.
Consist of cash and highly liquid investments that are readily convertible into a known amount of cash, are subject to insignificant risk of changes in value and have a maturity date of 90 days or less from the date of acquisition.
Loans and receivables Loans, reinsurance deposits, other deposits and financial assets arising from non-investment activities.
Loan capital. Financial liabilities with fixed or determinable payments and maturity date.
Hedge of a net investment in a foreign operation or hedge of future cashflows or hedge of fair value of fixed interest securities.
Hedge of future cashflows – effective portion is initially recognised in OCI; subsequently recognised in the income statement when the hedged cashflows affect profit or loss.
Investment Income Dividends on equity investments are recognised as investment income in the consolidated income statement on the date at which the investment is priced ‘ex dividend’. Interest income is recognised in the consolidated income statement using the effective interest rate method.
An impairment loss in respect of debt instruments is calculated as the difference between its carrying amount and the present value of the estimated future cashflows discounted at the original effective interest rate of the instrument. Interest on the impaired asset continues to be recognised using the effective interest rate method.
Taxation is based on profits and income for the year as determined in accordance with the relevant tax legislation, together with adjustments 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.
The value of the net defined benefit liability/(asset) recognised in the consolidated statement of financial position for each individual post-retirement scheme is calculated as the difference between the present value of the defined benefit obligations of the scheme and the fair value of the scheme assets out of which the obligations are to be settled.
The amounts charged (or credited where relevant) in the consolidated income statement relating to post-retirement defined benefit schemes are as follows: • The current service cost: this is the present value of additional benefits payable for employees’ services provided during the reporting period; • The past service costs and gains or losses on settlements: these are changes to the obligations already established for past service costs that have arisen from an amendment to the terms of the scheme amendment or a curtailment of the benefits payable by the scheme. These are recognised at the earlier of when the terms of the scheme are amended or the curtailment occurs or, where applicable, when the Group recognises related restructuring costs or termination benefits; • Net interest on the net defined benefit liability/(asset): this is determined by applying the discount rate applied to the defined benefit obligation for the period to the net defined benefit liability/(asset), and results in a net interest (expense)/income; • The administration costs of operating the pension schemes.
RSA Annual Report and Accounts 2015 113Financial statements – Basis of preparation and significant accounting policies
Goodwill Goodwill is the difference between the cost of a business acquisition and the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities acquired. Goodwill is initially capitalised in the consolidated statement of financial position at cost and is subsequently recognised at cost less accumulated impairment losses. The cost of the acquisition is the amount of cash paid and the fair value of other purchase consideration.
Other intangible assets Other intangible assets are valued at cost less accumulated amortisation, and less any accumulated impairment losses.
Other intangible assets comprise renewal rights, customer lists, brands, computer software and other acquired identifiable non-monetary assets without physical form. The useful economic lives are between one and five years and are estimated considering relevant metrics such as contract length, forecast period to technological obsolescence, and product life cycles. The asset is amortised on a straight-line basis across this period.
Discontinued operations A discontinued operation is a component of the Group that has either been disposed of, or is classified as held for sale, and represents a separate major line of business or geographical area of operation.
In the period in which an operation is first classified as discontinued, the consolidated income statement, statement of other comprehensive income, statement of cashflows, earnings per share and diluted earnings per share for the comparative prior period is re-presented to present those operations as discontinued. Further information can be found in note 4.
Insurance risk The Group is exposed to risks arising from insurance contracts as set out below: A) Underwriting risk
A) Underwriting risk Underwriting risk refers to the risk that underwritten business is less profitable than planned due to insufficient pricing.
B) Reinsurance risk Reinsurance risk refers to the risk of loss to the Group from the failure of one or more of its reinsurers to pay or the ability to enforce payment under the contracts.
The Group establishes a provision for losses and loss adjustment expenses for the anticipated costs of all losses that have already occurred but have not yet been paid. Such estimates are made for losses already reported to the Group as well as for the losses that have already occurred but are not yet reported losses together with a provision for the future costs of handling and settling the outstanding claims.
There is a risk to the Group from the inherent uncertainty in estimating provisions at the end of the reporting period for the eventual outcome of outstanding notified claims as well as estimating the number and value of claims that are still to be notified. In particular, the estimation of the provisions for the ultimate costs 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 business due to the slow emergence and longer settlement period for these claims.
and recommend the final level of reserves to be held by the Group. The Group has a Group Reserving Committee which is chaired by the Group Chief Financial Officer and includes the Group Chief Executive, Group Underwriting Director, Group Chief Actuary and Group Chief Risk Officer. A similar committee has been established in each of the Group’s major operating segments. The Group Reserving Committee monitors the decisions and judgements made by the business units as to the level of reserves to be held. It then recommends to the Group Board via the Group Audit Committee for the final decision on the level of reserves to be included within the consolidated financial statements. In forming its collective judgement, the Committee considers the following information: • The 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 2015 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 Group undertakes a number of strategies to manage these risks including the use of 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. The policy on use of derivatives is approved by the Board Risk Committee (BRC).
Credit risk Credit risk is the risk of loss resulting from the failure of a counterparty to honour its financial or contractual obligations to the Group. The Group’s credit risk exposure is largely concentrated in its fixed income investment portfolio and to a lesser extent, its premium receivables, and reinsurance assets.
In defining its appetite for credit risk the Group looks at exposures at both an aggregate and business unit level distinguishing between credit risks incurred as a result of offsetting insurance risks or operating in the insurance market (e.g. reinsurance credit risks and risks to receiving premiums due from policyholders and intermediaries) and credit risks incurred for the purposes of generating a return (e.g. invested assets credit risk).
The Group’s use of reinsurance is sufficiently diversified that it is not concentrated on a single reinsurer, or any single reinsurance contract. The Group regularly monitors its aggregate exposures by reinsurer group against predetermined reinsurer Group limits, in accordance with the methodology agreed by the BRC. The Group’s largest reinsurance exposures to active reinsurance groups are Munich Re, Lloyd’s, and Berkshire Hathaway Inc. At 31 December 2015, the reinsurance asset recoverable from these groups does not exceed 3% of the Group’s total financial assets. Stress tests are performed by reinsurer counterparty and the limits are set such that in a catastrophic event, the exposure to a single reinsurer is estimated not to exceed 7% of the Group’s total financial assets.
The credit profile of the Group’s assets exposed to credit risk is shown below. The credit rating bands are provided by independent rating agencies. The table below sets out the Group’s aggregated credit risk exposure for its financial and insurance assets as at 31 December 2015 and 2014.
Reinsurers’ share of insurance contract liabilities – 447 1,313 172 56 33 2,021 129 1,892
With the exception of AAA rated government debt securities, the largest single aggregate credit exposure does not exceed 3% of the Group’s total financial assets.
Market risk Market risk is the risk of adverse financial impact resulting, directly or indirectly from fluctuations from equity and property prices, interest rates and foreign currency exchange rates. Market risk arises in our operations due to fluctuations in both the value of liabilities and in the value of investments held. At Group level, it also arises in relation to the overall portfolio of international businesses. Market risk is subject to the Board Risk Committee risk management framework, which is subject to review and approval by the Board.
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.
ii. Interest rate risk Interest rate risk arises primarily from the Group’s investments in long-term debt and fixed income securities and their movement relative to the value placed on the insurance liabilities. This impacts both the fair value and amount of variable returns on existing assets as well as the cost of acquiring new fixed maturity investments.
Decrease in other comprehensive income 2015 £m 2014 £m 2015 £m 2014 £m
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 2016 and 1 January 2015.
iii. Currency risk The Group incurs exposure to currency risk in two ways: • Operational currency risk – by holding investments and other assets and by underwriting and incurring liabilities in currencies other than the currency of the primary environment in which the business units operate the Group is exposed to fluctuations in foreign exchange rates that can impact both its profitability and the reported value of such assets and liabilities.
RSA Annual Report and Accounts 2015120 Financial statements – Risk and capital management
Movement in shareholders’ equity at 31 December 2015 (34) 42 (45) 55 (12) 15
Changes arising from the retranslation of foreign subsidiaries’ net asset positions from their primary currencies into Sterling are taken through the foreign currency translation reserve and so consequently these movements in exchange rates have no impact on profit.
A large proportion of investments is maintained in short-term (less than one year) highly liquid securities, which are used to manage the Group’s operational requirements based on actuarial assessment and allowing for contingencies. In addition the Group has committed credit facilities available if needed as set out in note 36.
The following table summarises the contractual repricing or maturity dates, whichever is earlier. Provision for unearned premium and provision for losses and loss adjustment expenses are also presented and are analysed by remaining estimated duration until settlement.
Perpetual guaranteed subordinated capital securities - 375 - - - - - 375 359
Guaranteed subordinated step-up notes due 2039 - - - 500 - - - 500 496
RSA Annual Report and Accounts 2015 121Financial statements – Risk and capital management
Perpetual guaranteed subordinated capital securities - - 375 - - - - 375 349
Provisions for losses and loss adjustment expenses 3,755 1,719 1,104 736 516 1,204 2,040 11,074 9,828
The capital and interest payable on the bonds and notes have been included until the dates on which the Group has the option to call the instruments and the interest rates are reset. For further information on terms of the bonds and notes, see note 35.
Regulatory solvency position during 2015 The Group remained compliant with both the PRA’s risk based ICA requirements and Solvency I, which is used to calculate the Insurance Groups Directive (IGD) requirement.
As at 31 December 2015 the Group has an IGD surplus of approximately £1.6bn (unaudited) (2014: £1.8bn). The IGD surplus as at 31 December 2015 reflects capital generation including disposal gains offset by market movements (strengthening of GBP and rising yields). The coverage ratio stood at 2.2 times (unaudited) at 31 December 2015 (2014: 2.2 times).
The ICA was a forward looking, economic assessment of the capital requirements of the Group based on its assessment of the risks to which it is exposed. The internal model used to determine the ICA has been amended to calculate the Solvency II SCR, and this model was approved by the Group’s regulators in December 2015. These models have been integrated into the Group’s business processes and are used to enhance the management of the Group.
Solvency II Historically, economic capital has been the Group’s preferred measure of capital sufficiency. This has been focused around the Group conducting its own assessment of the amount of capital it needs to hold to meet its obligations given the Group’s risk appetite and has been referred to as the economic capital assessment (ECA). Given the introduction of Solvency II and the approval of the Group’s internal model in December 2015, the Group’s capital assessment is now focused on the SCR calculated by the internal model.
The first annual Solvency II reports will be in respect of the year ended 31 December 2016 including the publicly available Solvency and Financial Condition Report.
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; • the level of capital required to support those risks; and
The assessment considers both the current position and the positions that may arise during the planning horizon of the firm (typically the next three years). It looks at both the expected outcome and the outcome arising when the plan assumptions do not materialise as expected.
7) Discontinued operations and disposals The Group classified the following operations as discontinued because they have either been sold or classified as held for sale and they also represent a separate geographical area of operation.
Latin America Held for sale at 31 December 2015 Suramericana S.A.
Russia Held for sale at 31 December 2015 Sale completed 29 January 2016
Further information on the completion of the sale of the Russia operation can be found in Appendix A Events after the reporting period. The revenue, expenses and related income tax expense in 2015 and 2014 relating to these discontinued operations is set out below. The total profits on the sale of discontinued operations disposed of during the year after tax was £170m (2014: £172m).
Discontinued statement of comprehensive income for the year ended 31 December 2015 £m
Items from discontinuing operations that may be reclassified to the income statement: Exchange (gains)/losses recycled on disposal of discontinued operations net of tax (39) 8
Fair value (gains) recycled on disposal of discontinued operations net of tax (6) (8)
Fair value (losses)/gains on available for sale financial assets net of tax (9) 14
Items from discontinuing operations that will not be reclassified to the income statement: Movement in property revaluation, net of tax 4 –
Other comprehensive (expenses) for the year from discontinued operations (106) (19)
Held for Sale disposal groups The assets (including any goodwill allocated to the business) and the liabilities of the businesses held for sale are shown below.
RSA Annual Report and Accounts 2015 125Financial statements – Significant transactions and events
Profits on sale of discontinued operations after tax 103 26 17 24 170
Carrying value of net assets disposed of (18) (61) - (79) (44) (17) (140)
Gains on sale before recycling of items from other comprehensive income 22 82 24 128 27 19 174
Recycle of items from other comprehensive income on disposals: Unrealised gains on available for sale investments 1 4 - 5 4 - 9
Note: 1. Included in the consideration received are gains of £12m in respect of forward exchange contracts. The contracts were entered into at the date of announcement of the sales to reduce foreign exchange risk prior to the completion of the disposals.
8) Reorganisation costs Reorganisation costs represent external and clearly identifiable internal costs that are necessarily incurred and directly attributable to the Group’s restructuring programme. The aim of the restructuring programme is to both reduce operating costs and improve profitability.
In 2015, the reorganisation costs of £183m are directly associated with continuing operations (2014: £110m – £102m continuing operations and £8m discontinued operations). The amounts were directly attributable in respect of redundancy £59m (2014: £73m) and other restructuring activity of £124m (2014: £29m). Restructuring costs in 2015 relate to amounts incurred across the Group for activities such as process re-engineering, office footprint consolidation, reducing spans of control, and renegotiation of supplier contracts. These include the transition to a new IT infrastructure provider, Wipro, in the UK, Ireland and Scandinavia.
Core businesses The Group’s core businesses are Scandinavia, Canada, and UK & Ireland. These represent three separate operating segments, and the major geographical areas in which the Group continues to operate through established businesses in mature markets. Each operating segment is managed by a member of the Group Executive Committee who is directly accountable to the Group Chief Executive and Board of Directors, who together form the central decision making function in respect of the operating activities of the Group. The UK is the Group’s country of domicile and one of its principal markets. Amounts attributable to Central Functions are also included within the core business results.
As businesses become classified as discontinued (see note 7) their results on a segmental basis are re-presented from non-core and into discontinued operations including restating the 2014 comparatives.
Underwriting result, COR and Operating result are the key internal measures of profitability of the operating segments.
The COR reflects the ratio of claims costs and expenses (including commission) to earned premiums, expressed as a percentage.
RSA Annual Report and Accounts 2015128 Financial statements – Notes to the Income Statement and Other Comprehensive Income
Central costs and other activities – – – – (16) (8) (24) 5 (19)
Other loans and receivables: Loans secured by mortgages 1 1 – – – – – – 1 1
Unrealised gains and losses recognised in other comprehensive income for available for sale assets are as follows: Net unrealised gains/ (losses)
The £8m realised gain on discontinued operations (£6m gain net of tax) has been recycled to the gain on sale of discontinued operations as shown in note 7.
RSA Annual Report and Accounts 2015 131Financial statements – Notes to the Income Statement and Other Comprehensive Income
Reinsurers’ share of changes in provision for losses and loss adjustment expenses (60) 312
Total other operating income 142 188 13) Other operating expenses £m
Average number of employees during the year relating to discontinued operations 2,954 5,188
Further information on pension obligations of the Group can be found in note 38. Further information on employee share schemes can be found in note 19.
RSA Annual Report and Accounts 2015 133Financial statements – Notes to the Income Statement and Other Comprehensive Income
Fees payable to the auditor for audit of the Company’s annual accounts 0.9 – 0.8 –
Fees payable to the auditor and its associates for other services: The audit of the Company’s subsidiaries, pursuant to legislation 3.3 0.9 3.3 1.6
RSA Annual Report and Accounts 2015134 Financial statements – Notes to the Income Statement and Other Comprehensive Income
Different tax rates of subsidiaries operating in other jurisdictions 13 36
Remeasurement of net defined benefit pension liability - - (16) 2 (16) 2
Tax Rates The table below provides a summary of the current tax and deferred tax rates for the year in respect of the core tax jurisdictions in which the Group operates.
Deferred tax 19) Share based payments The total employment cost recorded in the consolidated income statement for all share scheme plans in 2015 is £14m (2014: £10m).
RSA Annual Report and Accounts 2015 135Financial statements – Notes to the Income Statement and Other Comprehensive Income
Performance Share Plan Awards of Performance Shares to executive directors and other selected executives are subject to performance conditions consisting of the Group’s underlying return on tangible equity relative to Total Shareholder Return and Business Review Scorecard targets over a three-year performance period. All awards vest on the third anniversary of the date of grant to the extent that the performance conditions have been met.
Profit/(loss) for the calculation of earnings per share 70 156 (124) 184
Weighted average number of ordinary shares in issue (thousands) 1,015,489 1,015,489 961,658 961,658
Financial statements – Notes to the Income Statement and Other Comprehensive Income
Profit/(loss) for the calculation of earnings per share relating to continuing operations 70 (124)
Total profit for the calculation of earnings per share 226 60
Weighted average number of ordinary shares in issue (thousands) 1,015,489 961,658
Diluted earnings per share (p) relating to discontinued operations 15.3 19.1
Preference dividend 9 9 22) Total other comprehensive income Year ended 31 December 2015
Exchange (losses)/gains net of tax (15) (1) – (16) (204) – (220) 5 (215)
Fair value (losses) net of tax (222) – (3) (225) – – (225) (1) (226)
Movement in property revaluation net of tax – 7 – 7 – – 7 – 7
Exchange (losses)/gains net of tax (26) (1) - (27) (112) - (139) 2 (137)
Movement in property revaluation net of tax - 4 - 4 - - 4 - 4
Total other comprehensive income/(expense) for the year 224 3 2 229 (112) (8) 109 - 109 23) Goodwill and intangible assets As at 31 December 2015
RSA Annual Report and Accounts 2015138 Financial statements – Notes to the Statement of Financial Position
Carrying amount at 31 December 2014 net of held for sale 412 3 43 217 125 800
Amortisation Amortisation expense of £63m (2014: £72m) has been charged to underwriting and policy acquisition costs with the remainder recognised in other operating expenses.
Goodwill of £12m in respect of the Group’s Argentinian business has been impaired prior to its classification as Held for Sale in order to reduce the carrying value of its CGU to its recoverable value in use amount, which was determined as its expected net disposal proceeds.
Less: Asset classified as held for sale 13 8 21 – 1 1
Carrying amount at 31 December net of held for sale 38 71 109 56 95 151
Group occupied property was revalued on 31 December 2015 by independent valuers using the basis of valuation as set out in note 27.
Depreciation expenses of £23m (2014: £29m) have been charged to underwriting costs and policy acquisition costs.
25) Investment property Investment property, consisting of £365m (2014: £346m) freehold and leasehold land and buildings, is held for long-term rental yields and is not occupied by the Group.
26) Financial assets The following table summarise the Group’s financial assets by classification as at 31 December 2015 and 31 December 2014.
Total financial assets net of held for sale 53 11,644 100 11,797
Total assets classified as held for sale – 401 – 401
Financial assets measured at fair value 11,746 495 (168) 12,073 13,144
RSA Annual Report and Accounts 2015 143Financial statements – Notes to the Statement of Financial Position
From 1 to 5 years £m Over 5 years £m Total £m
Cross currency interest swaps (fair value/ cashflow) - (39) - 160 158 318
The use of derivatives can result in accounting mismatches when gains and losses arising on the derivatives are presented in the income statement in accordance with the Group’s accounting policies and corresponding losses and gains on the risks being mitigated are not included in the income statement. In such circumstances the Group may apply hedge accounting in accordance with IFRS and the Group accounting policy on hedging. The Group applies hedge accounting to derivatives acquired to reduce foreign exchange risk in its net investment in certain major overseas subsidiaries. There was no ineffectiveness recognised in the income statement in respect of these hedges during 2015 or 2014.
The total losses on the fair value hedge instruments recognised in the income statement were £19m (2014: £11m) and the offsetting gains related to the hedged risk were £18m (2014: £8m).
The Group enters into derivative transactions under International Swaps and Derivatives Association (ISDA) master netting arrangements. In general, under such agreements the amounts owned by each counterparty on a single day in respect of all transactions outstanding in the same currency are aggregated into a single net amount that is payable by one counterparty to the other. In certain circumstances, such as a credit default, all outstanding transactions under the agreement are terminated, the termination value is assessed and only a single net amount is payable in settlement of all transactions.
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. In the occurrence of the future event, the related items not offset in the table above would total £nil (2014: £6m) assets and £79m (2014: £53m) liabilities. In 2014, the Group also entered into similar arrangements with Repurchase Agreements under a master repurchase agreement. The related items not offset in 2014 totalled £299m.
27) Fair value measurement Fair value is used to value a number of assets within the Consolidated Statement of Financial Position and represents its market value at the reporting date.
Derivative financial instruments Derivative financial instruments are financial contracts whose fair value is determined on a market basis by reference to underlying interest rate, foreign exchange rate, equity or commodity instrument or indices.
The fair value measurement of the subordinated guaranteed US$ bonds is also obtained from an indicative valuation based on the applicable risk free rate and appropriate credit risk spread.
Fair value hierarchy Fair value for all assets and liabilities which are either measured or disclosed is determined based on available information and categorised according to a three-level fair value hierarchy as detailed below.
• Level 2 fair value measurements are those derived from data 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)
A financial instrument is regarded as quoted in an active market (Level 1) if quoted prices for that financial instrument are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency and those prices represent actual and regularly occurring market transactions on an arm’s length basis.
In limited circumstances, the Group uses input parameters that are not based on observable market data. Unobservable inputs are based on assumptions that are neither supported by prices from observable current market transactions for the same instrument nor based on available market data. In these cases, judgement is required to establish fair values. Valuations that require the significant use of unobservable data are considered Level 3 valuations.
Total assets measured at fair value 7,266 4,369 883 380 12,138
Total liabilities measured at fair value – 89 – – 89
Total value of liabilities not measured at fair value – 1,361 8 – 1,369
Less: Assets of operations classified as held for sale £m Total £m
Group occupied property – land and buildings – – 56 – 56
Total liabilities measured at fair value – 57 – – 57
Total value of liabilities not measured at fair value – 1,424 7 – 1,431
RSA Annual Report and Accounts 2015 147Financial statements – Notes to the statement of financial position
Total losses recognised in: Other comprehensive income (2) – – – (2)
Total losses recognised in: Other comprehensive income (4) 3 – – (1)
Level 3 financial assets at 31 December 2015 269 154 38 15 476
The Group’s Property portfolio (including the Group occupied properties) is almost exclusively located in the UK. An increase of 100bps in the discount rate used to value the UK property portfolio would result in a decrease of £62m in the fair value of the portfolio.
The line items in the Consolidated Statement of Financial Position in which the items above are included are as follows: £m £m
Reinsurers’ share of provisions for losses and loss adjustment expenses 1,151 1,226
Total reinsurers’ share of insurance contract liabilities net of held for sale 1,988 1,897
The following changes have occurred in the reinsurers’ share of provision for unearned premiums during the year: £m £m
Total Reinsurers’ share of provisions for losses and loss adjustment expenses at 31 December net of held for sale 1,151 1,226 30) Current and deferred tax
Net current tax position at 31 December 56 21 63 83
Net current tax position at 31 December net of held for sale 51 21 31 83
Provisions and other temporary differences arise predominately in respect of capital expenditure £80m (2014: £65m) and amounts for which no relief is available until settled £46m (2014: £65m).
Net arising on acquisition/disposal of subsidiaries and other transfers (8) 5
Of the £123m (2014: £118m) net deferred tax asset recognised by the Group’s continuing operations, £117m (2014: £123m) relate to tax jurisdictions in which the Group has suffered a loss in either the current or preceding period. The assets have been recognised on the basis that future taxable profits will be available against which these deferred tax assets can be utilised. The evidence for the future taxable profits is a forecast consistent with the three-year operational plans prepared by the relevant businesses, which are subject to internal review and challenge. Where relevant, the forecast includes extrapolations of the operational plans using assumptions consistent with those used in the plans.
RSA Annual Report and Accounts 2015 151Financial statements – Notes to the statement of financial position
Total other debtors and assets net of held for sale 693 759
Total cash and cash equivalents (as reported in the Consolidated Statement of Financial Position) 816 1,011 33) Share capital The issued share capital of the Parent Company is fully paid and consists of two classes; Ordinary Shares with a nominal value of £1 each and Preference Shares with a nominal value of £1 each. The issued share capital at 31 December 2015 is: £m £m
Issued for cash – rights issue (Ordinary Shares of 27.5p) 1,380,976,863 380 367
Issued in respect of employee share options and employee share awards 1,572,969 2 2
34) Non-controlling interests The non-controlling interests (NCI) of the Group comprise the investments in the following Group entities: NCI shares at 31 December 2015
Royal & Sun Alliance (Middle East) Ltd owns 50% of the ordinary share capital of Al Alimaya for Cooperative Insurance Company, a company operating in the Kingdom of Saudi Arabia and 70% of Al Ahlia Insurance Company, a company operating in the Sultanate of Oman.
The dated guaranteed subordinated step-up notes were issued on 20 May 2009 at a fixed rate of 9.375%. The nominal £500m bonds have a redemption date of 20 May 2039. The Group has the right to repay the notes on specific dates from 20 May 2019. If the notes are not repaid on that date, the rate of interest would be reset at a rate of 8.475% plus the appropriate benchmark gilt for a further five-year period.
There have been no defaults on any bonds or notes during the year. The Group has the option to defer interest payments on the bonds and notes but has to date not exercised this right.
36) Other borrowings The Group’s borrowings as at 31 December 2015 are £11m (2014: £299m). The 2015 borrowings relate to bank accounts in overdraft where no right of offset exists. The 2014 borrowings related to loans from credit institutions under a repurchase agreement which were repaid during 2015. Further information is contained in note 26.
In selecting the method and estimate appropriate to any one class of insurance business, the Group considers the appropriateness of the methods and bases to the individual circumstances of the provision class and underwriting year.
The level of provision carried by the Group targets the inclusion of a margin of 5% for the core businesses on top of the Actuarial Indication outlined above. The appropriateness of the 5% target is subject to regular review as part of the Group reserving process at Group Corporate Centre.
Discount assumptions The total value of provisions for losses and loss adjustment expenses less related reinsurance recoveries before discounting for continuing operations is £8,766m (2014: £9,463m).
Discount rate Average number of years to settlement from reporting date
RSA Annual Report and Accounts 2015 155Financial statements – Notes to the statement of financial position
A decrease of 1% in the real discount rate for UK and Scandinavia annuities would reduce the value of the discount by approximately £86m. The sensitivity calculation has taken into consideration the undiscounted provisions for each class of business and the respective average settlement period.
Provision for losses and loss adjustment expenses at 31 December net of held for sale 9,084 (1,151) 7,933
Total insurance contract liabilities excluding held for sale 12,191 (1,988) 10,203
Provision for unearned premiums at 31 December net of held for sale 3,438 (671) 2,767
Provision for losses and loss adjustment expenses at 31 December net of held for sale 9,828 (1,226) 8,602
Provision for unearned premiums, gross of acquisition costs The provision for unearned premiums is shown net of deferred acquisition costs of £631m (2014: £787m). The movement in deferred acquisition costs during 2015 is attributed to £1,026m (2014: £1,084m) increase due to acquisition costs deferred during the year, £1,023m (2014: £1,079m) decrease due to amortisation charged during the year, £45m exchange losses (2014: £31m exchange losses), £40m (2014: £26m) reduction due to disposal, £50m (2014: £23m decrease) increase due to other movements, and £124m (2014: £67m) reduction due to assets transferred to held for sale. The reinsurers’ share of deferred acquisition costs is included within accruals and deferred income.
Provisions for losses and loss adjustment expenses at 31 December net of held for sale 9,084 9,828
Claims development tables The tables below present changes in the historical provisions for losses and loss adjustment expenses that were established in 2005 and the provisions for losses and loss adjustment expenses arising in each subsequent accident year. The tables are presented at current year average exchange rates on an undiscounted basis and have been adjusted for operations that have been disposed of.
The estimated provisions for ultimate incurred losses change as more information becomes known about the actual losses for which the initial provisions were set up and as the rates of exchange.
RSA Annual Report and Accounts 2015 157Financial statements – Notes to the statement of financial position
Present value recognised in the Consolidated Statement of Financial Position 9,084
prior £m £m £m £m £m £m £m £m £m £m £m
At end of accident year 7,956 2,066 2,088 2,169 2,075 2,245 2,370 2,324 2,480 2,259 2,151
RSA Annual Report and Accounts 2015 159Financial statements – Notes to the statement of financial position
Total insurance and reinsurance liabilities net of held for sale 945 904 38) Post-retirement benefits and obligations
The profile of the members of the two main UK schemes at 30 September 2015 (the latest date at which full information is available) is as follows: Number
Deferred members – members no longer accruing and not yet receiving benefits 25,980
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 main UK funds is 31 March 2015.
At the most recent funding valuations, the main UK funds had an aggregate funding deficit of £392m, equivalent to a funding level of 95%. The Group and the Trustees agreed funding plans at that time to eliminate the funding deficits by 2025. Details of the deficit contributions paid in 2014 and 2015 and that are due to be paid in 2016 under these plans are disclosed below. The funding plans will be reviewed again following the next triennial funding valuations which will have an effective date of 31 March 2018.
For the two main UK defined benefit schemes, the level of contributions in 2015 were £93m (2014: £93m) of which £65m (2014: £64m) was additional contributions in line with the plan to reduce funding deficits. Expected contributions to the two schemes for the year ending 31 December 2016 are approximately £85m including £65m of additional contributions to reduce the deficit.
The maturity profile of the undiscounted cashflows of the two main UK schemes is shown below: £m
The 2002 Scheme (which was the scheme to which new UK employees had been admitted following the closure of the main defined benefit schemes) has been closed to further accrual from 1 January 2006. It has been replaced by a stakeholder arrangement and members of the 2002 Scheme and future new employees in the UK now accrue future benefits on a defined contribution basis under the stakeholder pension scheme.
RSA Annual Report and Accounts 2015 161Financial statements – Notes to the statement of financial position
The value of scheme assets and the scheme obligations are as follows: UK £m
Securities with quoted market price in an active market 7,444 363 7,807 8,253
Other (including infrastructure, commodities, hedge funds, loans) 744 – 744 506
The following is a reconciliation of the Group’s pension schemes’ assets: £m £m
Return on schemes’ assets less amounts included in pension net interest cost (343) 821
Assumptions used in calculation of retirement benefit obligations: Annual rate of inflation (RPI) 3.02 3.00 – –
Assumptions used in calculation of pension net interest costs for the year: Note: 1. For the UK the annual rate of increase in pensions shown is the rate that applies to pensions that increase at RPI subject to a cap of 5%. For other schemes the weighted average assumption is shown.
Mortality rate The mortality assumptions are set following investigations of the main schemes’ recent experience by the schemes’ actuaries for the funding valuations. At the funding valuation in March 2015, the mortality assumptions adopted for the main UK schemes used the S2 base tables with percentage adjustments to reflect the schemes’ recent experience compared with that expected under these tables.
Reductions in future mortality rates are allowed for by using the CMI 2015 tables with a long-term rate of 1.25%. The weighted average assumptions imply that a current pensioner aged 60 has an expected future lifetime of 28.0 (2014: 27.6) years for males and 29.1 (2014: 28.9) years for females and a future pensioner aged 60 in 15 years’ time has a future expected lifetime from age 60 of 29.3 (2014: 28.7) years for males and 30.6 (2014: 30.1) years for females.
Of the above, £122m (2014: £252m) is due to be settled outside of 12 months.
See note 38 for further information regarding the pensions and post-retirement benefit obligations.
Provisions at 31 December 2015 net of held for sale 52 81 40) Other liabilities £m £m
41) Leases The operating lease payments recognised as an expense during the year are £54m (2014: £57m). The Group has no significant lease agreements that include contingent rent.
Operating lease commitments where the Group is the lessor The future aggregate minimum lease payments under non-cancellable operating leases are as follows: Land and buildings £m £m
43) Other contingent liabilities In Canada the Group has purchased annuities from regulated Canadian life insurers in order to pay fixed and recurring payments to certain claimants. This arrangement exposes the group to a credit risk that the life insurers are unable to make these payments which is mitigated by an industry compensation scheme which in that event would assume a significant majority of the remaining outstanding obligations. The likelihood of both a Canadian regulated life insurer and the industry compensation scheme being unable to pay their obligations is considered very remote and so no provision has been recognised in respect of this risk.
Appendix A: Events after the reporting period On 29 January 2016, the Group completed the sale of its entire 75% shareholding of ‘Intouch Insurance’ (RSA Russia) to Joint Stock Insurance Company BLAGOSOSTOYANIE for approximately £5m in cash.
Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases.
Translation of foreign operations The results and financial position of subsidiaries and associates whose functional currency is not Sterling are translated into Sterling as follows: • Assets and liabilities for each statement of financial position presented are translated at closing exchange rates at the end of the period; • Income and expenses for each income statement are translated at average exchange rates during each period; • All resulting exchange differences are recognised in other comprehensive income and accumulated in the foreign currency translation reserve.
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. Further information can be found in note 22. When a foreign entity is sold, the cumulative exchange differences relating to that foreign entity are recognised in the consolidated income statement as part of the gain or loss on sale.
Earnings per share Basic earnings per share is calculated by dividing the profit attributable to the ordinary shareholders of the Parent Company by the weighted average number of ordinary shares in issue during the period, excluding ordinary shares purchased by various share trusts of the Group and held as own shares.
Hedge of future cashflows Where a derivative is designated as a hedging instrument against the cashflows from a fixed interest security, the gains and losses arising from the change in fair value of the derivative are recognised initially in other comprehensive income in the cashflow hedge reserve. This amount is adjusted to be the lesser of the cumulative gain or loss on the derivative and the cumulative change in fair value of the expected future cashflows of the security, both since the inception of the hedge.
The useful economic life and residual value are reviewed on an annual basis. Where the carrying value of an asset is deemed to be greater than the recoverable amount, the asset is impaired as outlined in the significant accounting policies note. Gains and losses on disposal are recognised based on the carrying amount of the asset. On disposal of buildings, the associated revaluation surplus is transferred to retained earnings.
Provisions A provision is recognised when the Group has a present legal or constructive obligation as a result of past events that are more likely than not to result in an outflow of economic resources in order to settle the obligation, and the amount of that outflow can be reliably estimated.
Own shares Own shares are deducted from equity. No gain or loss is recognised on the purchase, sale, issue or cancellation of shares. Any consideration paid or received is recognised directly in equity.
Dilution levels for all schemes are held strictly within limits set by the Investment Association (IA).
Operating lease commitments The Group leases various outlets and offices under non-cancellable operating lease agreements. The leases have varying terms, escalation clauses and renewal rights. Payments made under operating leases are charged on a straight-line basis over the term of the lease.
Bahrain Royal & Sun Alliance Insurance (Middle East) BSC (c ) (50.00%)
Mexico Royal & Sun Alliance Seguros (Mexico) S.A. de C.V. (I Series M)
Royal & Sun Alliance Seguros (Mexico) S.A. de C.V. (I Series E)
Parent company statement of changes in equity for the year ended 31 December 2015
Loss for the year net of tax - - - - - (9) (9)
Fair value gains net of tax - - - 357 - - 357
Fair value gains net of tax - - - (91) - - (91)
Shares issued for cash (note 4) 1 2 - - - - 3
RSA Annual Report and Accounts 2015174 Financial statements – Financial statements of the Parent Company
Parent company statement of cashflows for the year ended 31 December 2015
1) Significant accounting policies RSA Insurance Group plc, (‘the Company’), incorporated in England and Wales, is the ultimate Parent Company of the RSA group of companies. The principal activity of the Company is to hold investments in its subsidiaries and the receipt and payment of dividends.
The subordinated loans to a subsidiary have the same terms as the external loan capital from which the loans to the subsidiary were financed. The fair values of these loans are based on the quoted prices for the external loan capital. The nominal values of the two loans are £78m (2014:£78m) and £492m (2014:£492m) with interest rates of 6.701% and 9.375% respectively.
RSA Annual Report and Accounts 2015176 Financial statements – Notes to the separate financial statements
Total other debtors and other assets 68 10 4) Share capital Full details of the share capital of the Company are set out in note 33 to the consolidated financial statements.
The current tax relating to items that are credited to equity is £2m (2014: £2m).