Welcome to our Annual Report and Accounts 2011. We are a leading general insurer operating in 33 countries and providing products and services in around 140 countries.
• Strong operations in the attractive mature markets of Scandinavia and Canada
The diversity of our portfolio is one of our key strengths. Looking forward, we are targeting to increase our exposure to our attractive overseas markets and our fast-growing Emerging Market operations.
We had set a target for our businesses outside of the UK to be c70% of Group NWP by the end of 2015. We now expect to be close to this in 2014 and to move beyond 70% in subsequent years.
Visit www.rsagroup.com for more information. This Annual Report and Accounts contains ‘forward-looking statements’ with respect to certain of the Group’s plans and its current goals and expectations relating to its future financial condition, performance, results, strategic initiatives and objectives. For further details, reference should be made to the ‘important disclaimer’ on the inside back cover.
Pages 2 to 37 constitute the business review of RSA and are incorporated by reference into the Directors’ and corporate governance report set out on pages 44 to 56. The Directors’ and corporate governance report has been drawn up and presented in accordance with and in reliance upon applicable English company law and the liabilities of the Directors in connection with that report shall be subject to the limitations and restrictions provided by such law.
18 Scandinavia business review 20 Canada business review 22 UK and Western Europe business review 24 Emerging Markets business review 26 Financial review 30 Risk review 34 Corporate responsibility
40 Board of Directors 42 Executive team 44 Directors’ and corporate governance report 57 Remuneration report
74 Directors’ responsibilities 75 Independent auditor’s report to the members of RSA Insurance Group plc 76 Consolidated income statement 77 Consolidated statement of comprehensive income 77 Consolidated statement of changes in equity 78 Consolidated statement of financial position 79 Consolidated statement of cashflows 80 Significant accounting policies 89 Estimation techniques, risks, uncertainties and contingencies 93 Risk management 103 Notes to the financial statements 142 Independent auditor’s report to the members of RSA Insurance Group plc 143 Parent Company statement of comprehensive income 143 Parent Company statement of changes in equity 144 Parent Company statement of financial position 145 Parent Company statement of cashflows 146 Notes to the separate financial statements
CANADA • 3rd largest general insurer overall, up from number 10 in 2005 • 2nd largest Affinity writer through Johnson • A leading Marine insurer.
• We operate as Codan in Denmark and Norway and as Trygg-Hansa in Sweden
• In the UK, we operate as RSA through intermediaries and as MORE TH>N in the Direct market
• Our Italian operation is purely intermediated, operating as RSA through brokers and non-tied agents
• We have RSA branded Specialty operations in Belgium, France, Germany, the Netherlands, Spain and Italy.
• In Latin America, we operate as RSA in Argentina, Brazil, Chile, Colombia, Mexico, Uruguay and the Dutch Caribbean
• In Asia and the Middle East, we operate as RSA in China, Hong Kong, Singapore, UAE and Bahrain and we operate as Al Alamiya in Saudi Arabia and as Al Ahlia in Oman.
CENTRAL AND EASTERN EUROPE • Number 1 general insurer across the Baltics • A leading Direct writer in Poland, Russia and the Czech Republic.
• Royal Sundaram, our associate in India, is the 4th fastest growing private insurer.
Direct insurer through 123.ie in Ireland • Small operation in Italy predominantly focused on Motor.
Our Personal lines products include • Motor • Household • Pet • Travel.
Our Commercial lines products include • Motor • Marine • Engineering • Liability • Property.
RISK SELECTION The Board defines the Group’s risk appetite, which determines the geographies we operate in and the products we offer. Our underwriters are licensed to write products within this appetite and we regularly review each portfolio of risks to ensure they are performing well or implement corrective measures where required.
RESERVING The Group continues to adopt a prudent reserving policy for both current and overall reserves. At 31 December 2011, reserves remain significantly to the right side of best estimate and, given our prudent reserving policy, we continue to expect positive prior year development to be a significant feature of the underwriting result.
WE FOLLOW A MULTI-CHANNEL DISTRIBUTION STRATEGY We sell Personal and Commercial lines products through a range of channels around the world.
AFFINITY CHANNELS We work with partners such as building societies, banks, retailers, motor manufacturers, charities, utilities and unions to offer their customers appropriate insurance products. Through affinity arrangements, we are able to offer a bespoke service to each partner, ranging from full underwriting to marketing support.
DIRECTLY We distribute our products and services directly to our customers, in person – through high street sales offices and direct sales, over the telephone – through our call centres and on line – through our own websites and through price comparison sites.
WE PROTECT PEOPLE AND BUSINESSES AGAINST THE RISKS THEY FACE IN THEIR DAILY LIVES. OUR GLOBAL NETWORK PROVIDES PROPERTY, CASUALTY, MOTOR AND HOUSEHOLD INSURANCE IN AROUND 140 COUNTRIES WORLDWIDE
WE ARE COMMITTED TO DELIVERING A PROFESSIONAL, FAIR AND SPEEDY CLAIMS SERVICE AT ALL TIMES
WE FOLLOW A HIGH QUALITY, LOW RISK INVESTMENT STRATEGY The Group continues to benefit from its low risk investment strategy with around 90% of the total portfolio invested in high quality fixed income and cash, with measured holdings in equities and property.
Our exposure to peripheral European government debt remains limited at £138m, or less than 1% of the total portfolio, the majority of which is held to back the liabilities of our Irish and Italian operations.
In 2012, we will continue to follow our high quality, low risk strategy.
An estimated US$380 billion of global economic losses were incurred, 60% higher than the previous record year in 2005, of which $105 billion were insured losses. Without insurance, there would have been even greater havoc and significant further impacts on world financial markets. As an industry, we play an essential role in the world economy and at a household level within society, which is why our industry will be around for another 300 years.
How did we perform in this demanding year? Whilst we had exposures on a global basis in Japan, Australia, New Zealand and Thailand, our insured losses were minimised due to our developed global risk and exposure strategies linked to careful use of reinsurance. We did less well in a few areas, with increases in more conventional exposures including weather impacts in Denmark and Ireland and large losses in a number of territories. Adverse weather, following the severe freeze in 2010, although less in total, was still significant in 2011.
COR moving from 96.4% to 94.9% against a background of continuing global weather events
• Increased underwriting performance by maintaining our discipline in pricing, risk and sustainable profit
A further announcement was made in November concerning our CFO George Culmer’s intent to take up future employment with Lloyds Banking Group. We were pleased to be able to confirm at our results announcement in February that we had appointed Richard Houghton, currently CFO of Aspen Insurance Holdings Limited, who will commence his role in June. Richard brings wide operational and financial experience of the insurance world. Accordingly, we have agreed to release George to take up his new position after the Annual General Meeting in May. This will allow him to be present at the Lloyds AGM later that month.
After the rescue, the more unspoken part of the task was to radically improve all RSA activities and operations, upgrade risk appetite processes, underwriting practices and focus on and develop a coherent portfolio of businesses that could generate a sustainable profit. This has required significant investment in expertise, management and computing technology and services. The ongoing business has performed well and been skilfully piloted in recent difficult times, but is not immune from the effect of uncertain financial markets, recessionary effects on growth and monetary policy aspects depressing financial returns on our £15 billion investment portfolio, necessarily held in the most secure type of financial assets so as to effectively match future liabilities.
The Non-Executive Directors are • Jos Streppel, who joins us from
Holland, our first non-domiciled Non-Executive Director. Jos has joined the Remuneration Committee
I am pleased to report that Simon Lee, our new CEO, has made a strong start and has “hit the road running”. He has completed a reorganisation which has deepened and increased our Executive Committee and further strengthened some aspects of the RSA operational and strategic approach. He brings an outward-facing client focus and value-added approach to the business which complements the strong pricing and risk disciplines we have embedded in the business. Our objective is to make sustainable and satisfactory returns for shareholders by increasing revenue and profitability.
• Alastair Barbour joins us from a professional audit career and will formally take over the Audit Committee Chair from Edward Lea after the AGM.
On the executive front, Adrian Brown who has been responsible for our UK business will now take up additional responsibility for Ireland and Italy. Adrian has had 23 years experience at RSA and brings additional front line experience to the Board.
A comprehensive external review of Board effectiveness in 2010 was also an integral part of our succession planning and this is reflected by the appointments made and the effective replacements of the CEO and CFO. At the end of the year, the Board carried out a further internal review of our effectiveness consistent with the requirements of the Corporate Governance Code. It also decided now would be an appropriate time to follow the new guidelines on re-electing all directors annually and as such, all directors will stand for re-election this year.
At RSA, we encompass all aspects of diversity including a relatively high ratio of women non-executives and senior executives within the Company.
In recent times, executive pay, particularly annual performance bonuses, has dominated public debate. This is understandable in the wake of the anecdotal evidence that excessive bonuses may have played a major role in the banking crisis, the related obligation put on taxpayers to support the banking sector and the averaged statistical evidence of an increased disconnect between senior management pay generally and FTSE companies’ performance over recent years.
There is a need for more objective analysis and action by individual companies, by industry and by sector. There is no simple generalisation that all bonuses are bad and no bonus is good. The vilification of people doing important and demanding tasks on behalf of taxpayers should be silenced by strong government support in those situations where they themselves have appointed people to such positions.
That brings me to the outlook and dividend. In the more mature economies in Europe, we face a slower rate of growth with general uncertainty over potential sovereign debt impacts still remaining. Despite a reduced rate of global growth, we expect to continue to make progress. We will maintain a prudent reserving and investment approach, continue to leverage our strong global footprint and leading market positions with expert risk pricing, claims handling and execution, and plan to achieve further forward momentum. Much of our essential focus remains unchanged.
On the dividend, while current economic and investment conditions persist, it is prudent to grow the divided at a more modest rate. The Board is recommending an increase in the final divided of 2% to 5.82p, which will give a total dividend of 9.16p up 4% on the prior year. Going forward, the Group is well placed to return to a higher level of dividend growth when investment yields move to more normal levels and economic growth returns.
My objective is to have RSA outperform against peers in each of our local markets and as a Group as a whole. I am confident that we can accomplish this goal.
Group net written premiums rose by 9% to £8.1bn in 2011. Five points of this growth came from our 2010 deals, including GCAN in Canada, 123.ie in Ireland and Tesco Pet in the UK, which all performed ahead of expectations. Rate on renewed business drove four points of premium growth as we continued to take positive rating action across the Group.
REGIONAL OVERVIEW With effect from 1 January 2012, we have restructured the business into four regions, Scandinavia, Canada, UK and Western Europe and Emerging Markets.
Profitability was once again excellent. We delivered an underwriting result of £264m and a combined operating ratio of 85.4% while maintaining a strong reserve position. The Personal underwriting result was very strong and was driven by Swedish Motor and Personal Accident where retention remains high. In Commercial, the underwriting profit was adversely impacted by storms in July and November, which hit our Property account.
Canada Canada reported excellent top line growth with premiums up by 19% to £1.5bn, driven by a combination of acquisitions, organic initiatives and rate. Personal premiums exceeded £1bn in 2011 with Personal Broker up by 7%, benefiting from strong rate and retention and led by growth in Household and the Travel book. Johnson again outperformed with 10% growth, 17 new affinity partners and two acquisitions. In Commercial, premiums were up by 50% to £471m, largely as a result of the GCAN acquisition but also from 10% organic growth with strong contributions from Risk Managed and SME.
UK and Western Europe In the UK, premiums were up 6% to £3.1bn. This was led by 10% growth in Personal lines, driven by Pet and Household.
In Pet, the Tesco deal is performing ahead of plan with around £130m of premium in its first full year. Home was up 11%, driven by growth in all distribution channels including a strong performance in Affinity, where we developed a new product for building societies. We recently secured a deal with the Home Retail Group which, together with a couple of other deals in the pipeline, will maintain momentum in 2012. In Motor, we continued to focus on profit over growth, pushing hard on rate and premiums dropped by 10%.
The UK underwriting profit was £40m. Personal delivered an underwriting profit of £60m, led by a strong contribution from Household along with a break-even result in Motor. In Commercial, the underwriting loss reduced to £20m. Positive contributions from Marine and Liability were offset by Property, which was impacted by large losses, and Commercial Motor, where a single large contract will continue to be a drag on profitability.
“ My objective is to outperform against peers in each of our local markets and as a Group as a whole.”
of years, we have changed the management team, pushed double digit rate increases, improved our risk mix and have cancelled a large number of unprofitable agents. We expect the impact of these actions to significantly reduce losses in 2012 and we now expect the business to be close to break-even in 2013.
In recognition of our strong competitive position and capitalisation, S&P upgraded the Group’s credit rating to A+ (stable outlook) in February 2012.
SUPPORTING CUSTOMERS As an insurer, we play a vital role in helping people and businesses recover when the worst happens. Helping customers get their lives back on track is our first priority.
During 2011, we helped customers recover from severe weather events in locations around the world including Ireland, Denmark, Thailand and the Baltics. In addition, the Slave Lake wildfire was the second most costly catastrophe in Canadian history. I am proud of how our staff handled all of these events, and what they did to help our customers get back on their feet as quickly as possible.
In 2011, we also laid the groundwork for the launch of our global Customer Engagement Survey, which will give us a consistent view of how our customers view us. This will help us to understand our customers better and make improvements to the services we offer.
INVESTING IN PEOPLE I want to create an environment where people are inspired, encouraged and rewarded to work together, develop themselves and be their best.
The launch of RSA’s Arctic Challenge in 2011 saw over 10,000 of our employees actively participate to reduce their carbon footprint, develop the best business ‘green ideas’ and fundraise for WWF or for other green charities. The campaign increased awareness of our partnership with WWF and highlighted the role insurers should play in combating climate change.
Across the Group, we also launched our Global Charitable Programme to support employees who help in their local communities. Employees anywhere within RSA can now apply for matched funding, a charitable grant or a charitable secondment for up to three months. The programme is aimed at helping improve employee engagement, supporting local charitable organisations and promoting RSA in the community.
REGULATION As an industry, European insurers are facing the largest regulatory change experienced in many years, in the form of Solvency II. We continue to make good progress on this and RSA is investing significant time and resources to meet all the requirements of the directive in the proposed time frame.
STRATEGY I am confident in our ability to deliver sustained outperformance. We have built a diversified general insurance business and are rightly known for the quality of our people, our focus on technical capability and our track record of delivering operational efficiencies. We have a strong and experienced management team who provide continuity and are determined to build on our existing track record of success.
Retain fundamental strengths We have transformed RSA since 2003 and, as we move forward, the qualities that have contributed to that success will stay in place. We will remain a pure-play general insurer with a well diversified portfolio of businesses; we will persist with our rigorous focus on underwriting discipline; we will maintain our conservative approach to reinsurance and reserving; we will stick with our high quality, low risk investment strategy; and we will continue to deliver sustainable underwriting profitability.
In the UK, we have leading positions in both Personal and Commercial lines. This is an extremely competitive market which brings real advantages to the Group in terms of technical expertise and pricing sophistication. However, it has also brought a challenge to deliver sustainable profitability and, while I am pleased with the progress made, there
Underlying return on average equity (%) 11.6 9.9 13.4 16.4 19.3
PURE-PLAY GENERAL INSURER WITH A DIVERSIFIED PORTFOLIO OF BUSINESSES IN MATURE AND EMERGING MARKETS
In Canada and Scandinavia, we have strong positions in attractive and mature markets. These businesses have driven the profitability of the Group and will continue to be significant contributors.
Diversified Portfolio One of our key strengths is our diversified portfolio with around 64% of NWP generated outside of the UK. I want to further drive the growth of our overseas businesses while enhancing their already strong profitability.
Canada In Canada, Rowan Saunders has done a great job for a number of years, taking us from number ten to number three in the market, while producing market-leading profitability. The priorities I have given Rowan are to continue to extract value from the GCAN deal, strengthen the geographical footprint of our business, including greater scale in Quebec, and build on our outstanding track record at Johnson, where I would expect continued double digit growth.
UK and Western Europe In the UK and Western Europe, Adrian Brown and I have been re-positioning the UK to maximise its contribution and make it a more focused business. We will do this by growing in areas of strategic advantage including Home, Pet and Risk Managed. In Motor, we will focus on fewer segments and in Commercial Property we will convert our leading market share into sustainable profit. We will also take a more targeted approach to our broker distribution.
In Italy, the focus will be on fixing the business and returning it to profit. Whereas in Ireland, we will create strong value from 123.ie and continue to deliver market-leading profitability and growth. With these steps, I am confident that our businesses in the UK and Western Europe will come to contribute much greater levels of profitability.
Across the Group, we have a range of actions that will drive the business forward and continue to deliver strong profitability. In terms of overall shape, last year we set a target for overseas premiums to be around 70% of total NWP by 2015. I now want to be close to that in 2014. I also want to make clear that this is a staging post rather than an end in itself.
In Commercial, growth has been more modest. The exception is Specialty, which has performed strongly. Even so, we have yet to fully capitalise on our global network and technical expertise. I really want to focus on developing our strengths in Marine, Renewable Energy, Construction & Engineering and Risk Managed business.
Summary I remain pragmatic about the challenges and opportunities that we face. Where I see underperforming businesses or lines of business with no viable routes to outperformance we will take decisive action.
CONFIDENT OUTLOOK In terms of 2012, it is clear that the external environment is going to remain tough, with record low yields and subdued economic growth in some of our markets. Despite this, we remain confident of driving another strong operating performance and expect to deliver good premium growth, a combined operating ratio of better than 95%, and investment income of around £500m.
Looking further ahead, we have a successful and diversified portfolio of operations, a high quality, low risk investment strategy, an excellent and experienced management team and a clear strategy to drive the Group forward. We have a resilient business and are strongly placed as economic growth returns and yields improve.
With our expertise in complex, non-conventional arrangements, we are able to arrange bespoke, multinational insurance programmes, giving customers consistency in cover while complying with local regulations.
Global Specialty Lines is represented in most of our key RSA operations around the world, utilising our network of partners to deliver solutions locally in around 140 countries, ensuring we can match the global footprints of our customers.
WE ARE THE THIRD LARGEST INSURER IN DENMARK AND SWEDEN, WITH A GROWING PRESENCE IN NORWAY
Reflecting this, the strategic priorities set by the management team include
• Improve operational efficiency with the right systems and processes We will continue to invest in upgrading our sales, claims and policy and administration systems to make it easier for customers to deal with us
Commercial lines Net written premiums are up by 6% (3% at constant exchange) to £842m, with particularly strong growth in Renewable Energy, Marine and Norway. Growth in Norway is principally from Care, supported by a new agreement with the agent Vertikal, which extended our distribution network.
Premium growth was driven by strong performances in Danish Motor and Swedish Personal Accident, which was supported by the launch of a new product during 2011. This was partly offset by Norway where our main focus was on improving the profitability of the portfolio.
CUSTOMER In 2011, Scandinavia launched its Think!Customer strategy. An important part of this is the Brilliant Service programme, through which customer research and feedback from partners and front line staff has been used to better understand customers’ needs. This has led to the development of a customer dashboard and delivery of actions to improve the customer experience. We are already seeing the benefit in the business, with improvements to customer satisfaction and retention.
Commercial Property * Movement in renewal rate for December 2011 v December 2010
PEOPLE Staff engagement is important to the success of the business. In 2011, we continued to invest in a wide range of technical and vocational training for our staff and we have had great involvement from them in events such as our ‘health’ and ‘climate’ weeks. We continue to complete the Gallup Engagement survey, where we again saw a significant improvement. Our Think!Customer strategy is about driving our people agenda, as we focus on recruiting and retaining people with a real customer mindset.
Trading conditions are therefore expected to continue to be challenging, although less so than in some other parts of Europe. Despite this environment, we are confident of delivering our new strategy and continuing to deliver strong underwriting profitability in 2012.
HIGHLIGHTS • Mike Holliday-Williams appointed as CEO, after a successful period running UK Personal lines business
• Personal lines growth of 5%, driven by Household, Personal Accident and Danish Motor
• Commercial lines NWP growth of 6% driven by Renewable Energy, Marine and Norway
• An excellent underwriting result of £264m and COR of 85.4% despite adverse weather
• Net loss of c£35m from Copenhagen cloudburst in July and November storms.
• Expanding our appetite in our core specialised segments through the development of new products.
2011 OVERVIEW During 2011, RSA Canada continued to outperform its peers through a combination of acquisition and organic growth across both Commercial and Personal lines.
Net written premiums grew by 19% (19% at constant exchange) to £1,483m, driven mainly by the GCAN acquisition, which was completed in January 2011, supplemented by strong growth in Johnson, Personal Broker and other Commercial lines.
Commercial lines Premiums grew by 50% to £471m (50% at constant exchange) driven by the acquisition of GCAN, which contributed around 40 points of the growth, retention and rate.
In terms of underwriting result, Commercial lines delivered another strong performance. The underwriting profit for the year was £42m, benefiting from the acquisition of GCAN and the COR was 89.8%.
Johnson also completed two acquisitions and advanced its corporate partnership strategy with the announcement in the fourth quarter of a new relationship with Canadian Tire, a leading national retailer.
Personal Broker Premiums grew by 7% (7% at constant exchange) driven primarily by rate and key account wins with global brokers in Property.
We continued to expand our Personal Specialty Insurance offering with the acquisition of etfs, a large Travel insurer, which solidifies RSA’s position as a top three Travel insurer in the Canadian market.
“ This was a great year for Canada, as well as successfully integrating GCAN, we became the third largest general insurer in the Canadian market, up from number 10 five years ago.”
PEOPLE In 2012, RSA Canada has moved its Toronto Head Office into a new, environmentallycertified building, creating a work environment that promotes engagement and fosters innovation for our employees.
2012 OUTLOOK 2011 was a great year for RSA Canada, as well as successfully integrating GCAN, we became the third largest general insurer in the market, up from number 10 five years ago.
By focusing on driving further value from the acquisition of GCAN, strengthening the geographical footprint of our business and building on Johnson’s outstanding track record, we are confident of delivering continued strong growth and profitability in 2012.
• Johnson growth of 10% with 17 new sponsorship groups and two acquisitions
KEY STRATEGIES UK The UK remains our most competitive market and our strategy of targeting profitable growth and withdrawing capacity in areas where we cannot achieve our target returns is unchanged.
In Ireland, we look to drive strong value from 123.ie and maintain our market- leading position.
The underwriting profit of £40m benefited from both management actions and improved weather and compares to a loss of £95m in 2010, which was impacted by the winter freeze.
We remain committed to cost control and have achieved our target expense ratio (excluding commissions) of around 14% a year ahead of schedule.
In Pet, premiums more than doubled to £197m with Tesco Pet exceeding expectations and generating around £130m of premiums.
Ireland Net written premiums grew by 16% to £353m driven by the acquisition of 123.ie, which generated premiums of £81m. The underwriting result was £24m and the COR 92.6% driven by a strong Personal lines result and despite significant flooding in November 2011.
MARKET CONDITIONS The UK remains one of the Group’s most competitive markets. Price comparison sites continue to expand beyond Motor, growing in Home and Pet. Commercial lines also remains tough, with a reduction in the volume of new business coming onto the market.
Both Ireland and Italy’s economies had a tough 2011 and we expect the resultant spending cuts to have a considerable impact in 2012.
In UK Commercial we continue to develop our broker relationships, launching e-Promise as a direct result of SME broker feedback.
PEOPLE Our UK business was recently ranked 6th in the Sunday Times ‘Best Big Companies to Work For’ and we’re one of only 17 companies within Gallup’s database of companies employing more than 1,000 people to achieve world-class engagement.
OUTLOOK In the UK, we are encouraged by indications that the Government is going to make regulatory changes which will improve what has become a dysfunctional Motor market. More broadly, we will continue to re-position the business to make it more focused and maximise its contribution to the Group’s underwriting profit.
In Italy, we expect losses to be significantly reduced in 2012 and the business to be close to break-even in 2013. In Ireland, we expect to continue to outperform peers and maintain our market-leading positions.
With the action we are taking, I’m confident that the UK and Western Europe will come to deliver greater levels of profitability.
UK COMMERCIAL • Net Written Premiums grew at 2% to £1,723m
UK PERSONAL • Net Written Premiums grew at 10% to £1,364m
• Expect losses to be significantly reduced in 2012 and to be close to break-even in 2013.
KEY STRATEGIES We remain committed to delivering profitable growth. We aim to achieve this through expanding distribution, ensuring disciplined underwriting and strong control whilst improving operational performance.
Our organic strategy is supported by targeted acquisitions, which bring us scale or enhanced technical capability in a market or segment.
2011 OVERVIEW In 2011, we set our target for Emerging Markets premium to double to around £2.2bn by the end of 2015 and we remain on track to achieve this.
Asia and the Middle East Premiums are up by 14% to £214m (16% at constant exchange), with Oman up by 48%, driven by the acquisition in 2010 of Al Ahlia and strong growth in Specialty across the region.
Our Indian associate grew by 19% to £138m (25% at constant exchange) mainly driven by Motor.
STRATEGIC PRIORITIES Affinity continues to be a key growth driver in Latin America, where we signed 17 new deals in 2011 and in Central and Eastern Europe, where we signed three new distribution partnerships.
In Specialty, Asia Middle East grew premiums by 24% and our Latin American Engineering business grew by 15% in 2011.
MARKET CONDITIONS In 2011, improved market conditions prevailed in most of the countries in which we operate. In Latin America, unemployment rates were at historical lows and consumer demand continued to increase in each of our markets. Across Asia and the Middle East, economies grew healthily. GDP grew across the Baltics and unemployment levels stabilised.
This focus on talent development helps provide a strong pipeline of leadership talent and I’m pleased to say that 9 of our 21 business CEOs were promoted from previous roles within the Group.
TECHNICAL EXCELLENCE We have enhanced and aligned our underwriting, claims and risk engineering technical capabilities to our target growth areas. We have recruited additional expertise focusing on bancassurance, retail and utility segments in Affinity. In Specialty, we have enhanced our proposition with dedicated risk consultants, who are specialists in the engineering segment. In addition, the skills of senior underwriters have been further enhanced through advanced technical training with their counterparts across the RSA Group.
2012 OUTLOOK Latin America remains buoyant and, as the largest region in the Emerging Markets portfolio, we are excited about the opportunities this presents.
In Asia and the Middle East, we expect Specialty to perform well as governments continue initiatives to stimulate domestic economies.
Emerging Markets offers huge growth potential for the Group and we will continue to invest in the region. We are confident of achieving our net written premium target of around £2.2bn by the end of 2015 and are looking to accelerate this.
“ Emerging Markets continues to deliver excellent top line growth and we remain confident of achieving our Net Written Premium target of £2.2bn by 2015.”
• On track for £2.2bn NWP by the end of 2015.
• Argentina, Brazil, Colombia, Mexico and Uruguay all delivered double digit growth
• Oman grew 48% due to the acquisition of Al Ahlia in May 2010
Annual Report and Accounts 2011 | RSA | 25 visit www.rsagroup.com
RESULTS OVERVIEW In 2011, the Group delivered a good result in challenging conditions. Despite historically low investment yields and record levels of catastrophe losses for the industry, we delivered premium growth of 9%, a 58% increase in the underwriting result to £375m, a COR of 94.9% and a 19% increase in the investment result to £642m.
NET WRITTEN PREMIUMS Net written premiums were up by 9% to £8.1bn (8% on constant exchange), with 5% growth driven by 2010 deals including GCAN, 123.ie and Tesco Pet. Rate on renewals has added 4 points as we continued to take action across the Group. Volumes were marginally down, with reductions in UK Personal Motor and Regional Mid-Market Commercial offsetting growth in Emerging Markets, Canada and Specialty lines. Overall volume reductions were offset by a 1% benefit from foreign exchange.
OPERATING RESULT The operating result was up by 38% to £884m (2010: £641m) with the movement on the prior year due primarily to the improved underwriting result.
The current year result again benefited from continued rate and management actions of around £240m, which was ahead of claims inflation, of around £140m. Large losses represented around 7pts of the loss ratio and were £55m higher than the prior year, despite 2010 including the Chilean earthquake net loss of £30m. Weather accounted for 2.4pts of the loss ratio and was around £130m better than 2010. This, however, was still worse than expected, particularly in the second six months of the year when weather accounted for 3.4pts of the loss ratio, due to the floods in Denmark, Ireland and Thailand.
The prior year result of £229m reflected positive run off from all regions and includes another strong contribution from International, with profits in Swedish Personal lines, Danish Liability and Canadian Motor and Liability.
Looking at the prior year result by accident year, 2010 has shown initial adverse deterioration of £36m, which primarily comprised £17m from Italy and £13m of late reported claims in the UK, from the winter freeze. We continue to see positive development across the earlier years and would highlight positive recent trends in the 2006 to 2009 accident years, which is after significant negative development in Italy. The 2001 and prior accident years have contributed significantly to the overall result. This development was mainly driven by Scandinavian Personal lines and Workers
In 2012, investment income is currently expected to be around £500m, which after excluding one-offs and the income on the ADC, represents a decline on the portfolio of just under 7%, reflecting the ongoing variance between maturing and reinvestment yields.
In 2012, we will restate the consolidated management income statement to exclude total gains from the operating result. Given the inherent volatility of investment gains, this action will provide greater transparency and predictability to the operating result.
Other activities Other activities of £133m were broadly in line with last year and included central costs, investment expenses and the ongoing investment in our Indian associate and our direct operations in Central and Eastern Europe.
Tax The tax charge was £186m and represents an effective rate of 30%. This was distorted
“ The Group is confident of delivering continued premium growth and sustainable underwriting profitability.”
2011 DIVIDEND The directors will recommend at the Annual General Meeting to be held on 14 May 2012, that a final ordinary dividend of 5.82p (2010: 5.7p) per share be paid. This together with the interim dividend of 3.34p (2010: 3.12p) paid on 25 November 2011 will make the total distribution for the year 9.16p (2010: 8.82p), an increase of 4% compared with the prior year.
We have actively sought to lock in gains and reduce our equity exposure and have now sold around £430m of equities. Overall, equities were down by over £500m and comprised 5% of the portfolio, compared with 9% at the start of the year. The percentage of the equity portfolio protected by derivatives remained high, with around 62% of the exposure hedged.
On reserving, the Group continues to adopt a prudent reserving policy for both current and overall reserves. As at 31 December 2011, reserves remained significantly to the right side of best estimate and, given our prudent reserving policy, we continue to expect positive prior year development to be a significant feature of the underwriting result.
Dividends could move further out. We still do not anticipate that Solvency II will cause any fundamental change to the way we run the business.
SUMMARY In what were again challenging industry conditions, 2011 was a good year for the Group. Market conditions are expected to again be difficult in 2012, with investment yields remaining at historical lows and subdued economic growth in some of our markets. Despite this, the Group expects to deliver good premium growth, a COR of better than 95% and investment income of around £500m.
RISK MANAGEMENT We ensure risk is managed to minimise losses and take opportunities for profitable growth.
System within which the Group policies and minimum standards are set
3rd line – Independent assurance • Providing independent and objective assurance of the effectiveness of the Group’s systems of internal control established by the first and second lines of defence.
RISK CATEGORIES Risks are viewed under categories that broadly correspond to those used in the Financial Services Authority’s Prudential Sourcebook for Insurers (INSPRU) and Senior Management Arrangements, Systems and Controls (SYSC). Additional information is provided in the Risk Management section on page 93. Some of the key current practices and tools for each risk category are set out overleaf alongside our risks and uncertainties.
Clear risk appetite • Underwriting and operating excellence • Strong control environment • Tight financial management • Protecting and managing the Group’s reputation.
• Comprehensive policy, procedures and controls • Clear delegation of authorities • Robust lines of defence • Regular and relevant reporting and assurance processes.
• Putting the customer at the centre of what we do • High quality and engaged staff.
• Enhanced the alignment of our Risk Management System to our strategic objectives and Solvency II regulatory requirements
• Further developed and embedded our processes to identify and measure emerging risks, including specific risk analysis on such issues as the weakening European economies
• Scenario modelling that is appropriate for the size and complexity of our portfolios
• Risk and control self-assessments • Key risk indicators to assess and manage operational risk • Scenario analyses to assess operational events that have occurred elsewhere and potential exposure to the Group
• Portfolio analytics • Requirements to maintain a minimum level of cash or highly liquid assets • Committees overseeing the Group’s investment strategy and risk limits.
• Effective and reliable operation of processes • Business continuity and disaster recovery • Information security management • Monitoring and control to prevent fraud and human error.
• Scenario and Stress Testing • Group Financial Risk policies aligned with strategy and appetite • Counterparty credit assessments.
Our insurance risk strategy has enabled us to continue delivering strong underwriting results.
Our response to regulatory changes and compliance has helped safeguard our business and we remain at the forefront of UK firms in respect of our Solvency II application process.
• Ensuring compliance in all geographical locations, with diverse regulatory requirements
• Retain focus on high quality, low risk investment strategy • Action taken to balance risk and return includes increasing our holdings in non government bonds, bond duration and having a significant percentage of our equity portfolio protected by derivatives.
• Reinsurance programmes limit net losses • Conservative reserving policy ensuring that claims reserves will be more likely than not to result in positive prior year development.
• Reviews assess each portfolio against key performance and risk indicators. Portfolios that trigger these indicators are investigated. Corrective measures are implemented where required.
• Inability to charge adequate rates places downward pressure on underwriting results.
CR SUPPORTS OUR STRATEGY Our approach to CR is practical and focused on three key themes: road safety, social inclusion and the environment. These issues have been identified as important by our customers, investors and employees. Forum for the Future, the sustainability charity, carries out an annual assessment to check we are focusing on the right issues.
We incorporate these key material issues into our strategic priorities. For example, our work on flood mapping helps us identify the appropriate prices for the risk, driving sustainable earnings, while also allowing us to prioritise our claims approach. The development of our renewable energy business has also been a key factor in delivering targeted profitable growth and establishing RSA as a leading Renewables insurer globally. The work we do on environmental management to reduce travel, paper consumption, energy and water usage not only helps us meet environmental targets but also reduces costs and supports our continued focus on operational excellence.
The principles by which we operate our business and our brand beliefs underpin our commitment to our customers, staff and other stakeholders and our Corporate Responsibility (CR) policies form an essential part of our broader risk and governance framework. Every country is required to confirm quarterly that they comply with our CR, environment, charity and human rights policies. Compliance with the policy framework is reviewed by the Group Executive Committee and Group Board in regular CR updates.
Our CR data, processes and external reporting are verified by our CR auditors PricewaterhouseCoopers (AA1000, ISAE3000) with an extra audit of the Group’s carbon footprint (GHG Protocol) by Ecometrica. We use a web-based environmental management system to help collect and analyse data across RSA.
Environmental, social and governance (ESG) risks are actively monitored and reviewed regularly by the Board. In 2011, the main risks identified included UK Carbon Reduction Commitment legislation, environmental impacts of shipping and flood risk in the UK. We set environmental improvement targets at a country level and as a Group we achieved 71% of 2011 targets. In 2011, we achieved our long-term target to reduce our CO
Further information on our approach, governance and policies can be found at www.rsagroup.com/rsagroup/en/ corporate-responsibility
CUSTOMERS As an insurer, we play a vital role in helping people and businesses recover when the worst happens. Helping customers get their lives back on track is our first priority. During 2011, our business helped customers recover from flooding in many locations around the world including Ireland, Denmark and Jeddah.
Our commitment to customers was underlined when our UK business won
• In Denmark, we worked with existing suppliers to launch a new energy efficient window replacement scheme, helping customers to save energy and reduce their CO
BUSINESS PARTNERS We work closely with our business partners and intermediaries to grow a successful business while reducing our collective environmental and social impact. In the UK, we asked a number of our suppliers about their management of CR issues and engaged in active dialogue to improve standards. We also held our second supplier workshop to discuss our approach to CR and what we expect from suppliers. In Scandinavia, we re-launched our supplier codes of conduct, ensuring strong action on environmental and social issues.
WWF RSA ARCTIC CHALLENGE In 2011, we focused our efforts on doing what we can as an organisation to tackle the challenges that climate change brings. We launched a new initiative to raise the profile of our WWF partnership and to bring it to life.
The results were impressive with over three billion steps walked, 6,600 hours of volunteering given and over £100,000 raised for charity. The green ideas being implemented in 2012 have the potential to save around 15,000 tonnes of carbon and up to £600,000 in costs.
EMPLOYEES A sustainable business needs to attract, develop and reward talented people, as well as making them accountable for their actions. All employees are assessed against our Brand Beliefs, including ‘Doing the Right Thing’ which encapsulates our CR work.
CLIMATE CHANGE AND THE ENVIRONMENT As an insurer, any change in the intensity or frequency of extreme weather conditions can have a significant impact on our customers and our business. We remain committed to leading the debate on climate change and collaborating with a range of forums, including the insurance working group of the United Nations Environment Programme for Financial Institutions and the ClimateWise initiative.
Our operations in the UK, Ireland and Group Corporate Centre remain carbon neutral, offsetting their equivalent emissions in renewable energy projects certified to the Voluntary Carbon Standard. Our commitment to reducing our environmental impact is on track to achieve a 40% reduction in CO
relative to our net written premiums by 2020 (based on 2006 levels).
We are working actively with WWF to integrate environmental risk considerations into our business. Through our international partnership spanning five countries we focus on key issues relevant to our business. These include marine risks through our shipping and aquaculture businesses, renewable energy and the impact on customers of water leaks in their property and flooding. For further information visit www.wwfrsapartners.com
COMMUNITY STRATEGY Our community strategy remains focused on the issues that are important to our customers and where we feel we can achieve most through our skills and experience.
In 2011, we gave over £2.6m in charitable donations (2010: £2.4m), with over 17,000 volunteer hours (2010: 58,000) donated by around 5,200 volunteers (2010: 13,160). (2010 included a significant increase in volunteer numbers and volunteers hours due to our 300 years birthday celebrations.)
ROAD SAFETY In 2011, we extended our work on Road Safety around the world. We launched a new eyesight campaign in the UK, encouraging stronger regulation around the need to have compulsory eyesight tests for driving licence renewals. This campaign focused on the UK political party conferences and around 5,000 employees across eight of our UK offices.
High visibility in the dark is also a priority for many of our countries when the clocks change. We continued our long running reflector programmes in Scandinavia and Lithuania, handing out over 170,000 high visibility vests and reflectors. Our UK business also launched reflector programmes for the first time with cyclists in Manchester and Peterborough and, through our pet insurance business, we distributed high visibility coats and collars for pets.
* Group carbon dioxide equivalent emissions (tonnes) 1. Scope 1: All direct GHG emissions 2. Scope 2: Indirect GHG emissions from consumption of purchased electricity, heat or steam 3. Scope 3: Other indirect emissions
Geographical breakdown of CO2e emissions for 2011 (Tonnes of CO2e *)
Social inclusion RSA employees from all over the Group are actively involved with poverty alleviation, education and crime reduction initiatives. Across Latin America, staff made donations to orphanages and helped build homes for the homeless. In the UK, over 100 employees signed up to help to mentor teenagers aspiring to a career in business from underprivileged backgrounds.
Environment During 2011, we supported a number of environmental volunteering projects including planting trees and cleaning up polluted beaches in the Middle East. In the UK, teams helped at local nature reserves and parks, with volunteers preparing a park in London to be the site of an urban river restoration project with WWF.
WWF PARTNERSHIP In 2009, we launched our partnership with WWF across the UK, Canada, Sweden, Denmark and China. Focusing on the risks of environmental change, RSA has been supporting conservation projects relevant to our business, developing new products and engaging our employees and external stakeholders on the environment. We are focusing on three key issues: Water Flooding remains a key issue for RSA because the increased frequency or intensity of rain has a direct impact on our customers. With increased pressure on flood defence budgets, insurers need to find environmentally sensitive and cost effective solutions. In 2009, we started work on a river restoration project at Mayesbrook Park in east London and have now completed the flood alleviation phase. Slowing down the river, and re-creating the natural meander and floodplain demonstrates a cost-effective, natural solution. We are also working to conserve water as a business. Water escapes in commercial and domestic property are a major source of loss and environmental impact. Through research with WWF we are making the business case to save water and protect customers.
We remain at the forefront in these industries, covering everything from bio energy developments to major transportation infrastructures. We provide instant access to the right specialists who have a real understanding of the challenges our customers face and can tailor insurance products to match their individual needs.
We have around 200 dedicated Construction and Engineering experts in 30 offices around the world. They provide specialist insurance and risk management services across construction, facilities management, engineering design and manufacturing through our extensive range of insurance products including cover for property, machinery and tools, legal liability as well as employees’ liability.
Skills and experience John Napier joined as a Non-Executive Director in January 2003 and became Chairman of the Board in March 2003. Previous roles include Chairman of Kelda Group plc (water utility), stepping down after its sale and subsequent de-listing from the London Stock Exchange. He has previously been Chairman of Booker plc (cash and carry) and Managing Director of Hays plc (business services) and AGB Research plc (international market research and information services).
Committee membership • Group Audit Committee (Chairman) • Remuneration Committee • Nomination Committee • Investment Committee
Skills and experience George Culmer joined the Board as Chief Financial Officer in May 2004 and is a member of the Group Executive Team and the Board Risk Committee, which he chaired until June 2009. Previous roles include Head of Capital Management of Zurich Financial Services (insurance) and Chief Financial Officer of its UK operation. Before that he spent ten years with Prudential. George will leave the Group in May 2012 to join Lloyds Banking Group as Group Finance Director.
Skills and experience Johanna Waterous was appointed as a Non-Executive Director in May 2008. Previous roles include Chairman of Tate Enterprises and over 20 years with McKinsey & Company, with roles including Co-leader of the Global Marketing and Sales Practice and Leader of their UK Consumer Practice and the European Retail Practice.
Skills and experience Noel Harwerth was appointed as a NonExecutive Director in March 2004. Previous roles include Chief Operating Officer of Citibank International plc (finance) and Director of Impellam Group plc (support services).
External appointments Director of Logica plc (IT and outsourcing), Harry Winston Diamond Corporation (mining and retail) and Deputy Chairman of Sumitomo Mitsui Banking Corporation Europe Limited (finance).
Committee membership • Board Risk Committee (Chairman) • Group Audit Committee • Investment Committee
Tim was appointed Group Underwriting and Claims Director in November 2007 when he joined the Group. Tim has nearly 40 years experience in the insurance industry. He joined RSA from Zurich Financial Services where senior underwriting roles included three years as Global Chief Underwriting Officer for General Insurance. Tim has also held senior management roles at AIG and Continental Insurance. Tim is a member of the Cheltenham Ladies College Council.
Rowan was appointed CEO of Canada in September 2003. Since joining RSA in 1987, Rowan has held leadership positions in the areas of underwriting, marketing, sales and finance. He is past Chair of the Board of Directors of the Insurance Bureau of Canada (IBC) and sits on the board of Codan A/S. Previously he was Vice President, Personal Insurance for RSA and also held the position of Vice President, Western Assurance Co., an Ontario-focused niche insurer. Rowan was previously President of Agilon Financial, an affiliated company of RSA Canada, where he was responsible for the company’s strategic development, operations and overall financial performance.
Paul was appointed Group Broker Relationship and Sales Director in July 2011. Paul has over 35 years experience in the insurance industry, having joined RSA in 1976. He has held a number of leadership roles in RSA, including CEO for the Republic of Ireland and most recently Managing Director, Commercial in RSA’s UK business.
2. Vanessa Evans was acting Group Customer and Human Resources Director from 20 September 2011 and took over the role permanently from 1 March 2012.
Anne has been with the RSA Group since 2001. She was appointed Group Chief Auditor in September 2008, having been Regional Chief Auditor for International, based in Denmark. Anne has more than 25 years experience within finance, assurance, risk management and corporate governance areas. Anne was previously CFO at Maersk Data (now part of IBM) for two years and spent 13 years with KPMG as a State Authorised Public Accountant, where she was involved in work with publicly listed companies, M&A and restructuring.
The Board is committed to maintaining high standards of corporate governance. It believes that a solid corporate governance framework enables effective and efficient decision making with clear responsibilities and leads to achievement of the Company’s objectives and delivery of long term value to shareholders.
Code compliance Throughout 2011, the Company has complied with the Principles and Provisions in section one of the Code (available from www.frc.org.uk) with the exception that no meetings took place between the Senior Independent Director and the Non-Executive Directors without the Chairman present. At least one such meeting will take place this year.
Further explanation of how the Main Principles in the Code have been applied is set out below and in the Remuneration Report, as applicable.
The Role of the Board The Board is responsible for organising and directing the affairs of the Company in a manner that is most likely to promote its success for the benefit of its members as a whole. Its role is to provide entrepreneurial leadership of the Company within a framework of prudent and effective controls. Matters reserved for the Board include: • Strategy and management of the Company • Changes to the structure and capital of the Company • Financial reporting and controls • Reviewing the effectiveness of internal controls • Approving significant expenditure and material transactions and contracts • Communicating with shareholders • Appointment and removal of Directors and the Group General
The Board held ten regular meetings during the year and 5 additional meetings. Consequently, not all Directors were available to attend all of these meetings but where possible their views were canvassed by the Chairman prior to the meetings and the Board informed of their opinions and observations. Robust discussions were held and advice sought as required prior to decisions being made. In addition, nine Board committee meetings were held during the year to finalise matters delegated by the Board such as final approval of financial statements and large operational contracts.
Notes: 1. The table above shows the number of Board meetings attended by each Director against the number of Board meetings that each Director was invited to attend. 2. Appointed to the Board on 10 October 2011. Mr Barbour was unable to attend one meeting after his appointment due to an existing diary conflict. 3. Appointed to the Board on 5 July 2011. 4. Mr Culmer resigned on 21 November 2011 but will remain as a Director and Chief Financial Officer of RSA until the close of business on 14 May 2012. 5. Mr Haste resigned as Group CEO on 1 November 2011 and as a Director on 31 December 2011. Mr Haste did not attend the December Board meeting. 6. Appointed to the Board on 3 October 2011.
Directors The names of the Directors together with their biographical and committee membership details are set out on pages 40 and 41 and are incorporated into this report by reference. Details of the Directors’ service contracts and terms of appointment, together with their interests in the Company’s shares, are shown in the Remuneration Report on pages 57 to 71 and are incorporated into this report by reference.
Division of Responsibilities – Chairman and Group CEO The roles of the Chairman and the Group CEO are separate, with responsibilities clearly divided between them and set out in role statements. The role statements of both the Chairman and the Group CEO were reviewed during the year and revised versions were approved by the Board in July 2011 and March 2011 respectively. The role statements for the Chairman and Group CEO explaining their responsibilities are available on the Company’s website.
The Chairman has held a number of meetings with the Non-Executive Directors without the Executive Directors present during 2011.
More than 50% of the Board, excluding the Chairman, comprises independent Non-Executive Directors. Edward Lea, John Maxwell, Noel Harwerth and Malcolm Le May were all first elected at the 2004 Annual General Meeting (AGM) and are currently serving their third three year term. The Board considers that each of them remains independent. The Chairman met the independence criteria on appointment.
Only members of the Board committees are entitled to attend committee meetings but Executive Directors and senior management may attend at the invitation of the relevant committee. This is made clear in the terms of reference of each of the committees.
Mr Haste, who resigned as a Director with effect from 31 December 2011, is a Non-Executive Director of ITV plc, a FTSE 100 company. Mr Brown, Mr Culmer and Mr Lee 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 Chairman.
These visits deepen the Non-Executive Directors’ understanding of the business and provide them with additional comfort that they have taken all the steps necessary as Directors to fulfil their statutory duties to the Company and their responsibilities in preparing the Annual Report and Accounts and ensuring that the external auditor is aware of all relevant information. During the year, Johanna Waterous attended Board and Audit Committee meetings in Canada and a site visit with the UK Engineering division. Edward Lea also attended Canadian board meetings. All Non-Executive Directors regularly host informal meetings with senior executives outside of the Executive Team. This gives participants the opportunity to meet and discuss the business.
The Board have discussed the subject matters where further professional development, including Solvency II training, will be provided in 2012.
Information and Support The Board considers that the information provided to the Board and its committees is supplied in a timely manner and in a form and of a quality appropriate to enable it to discharge its duties.
Performance evaluation In 2010, there was a formal and rigorous review of the Board, its committees and their effectiveness which was undertaken by an external consultancy. In 2011, the review was carried out internally, starting with the committees and concluding with the Board itself.
The 2011, Board review was discussed in December 2011 and took place at the Board Strategy away day in January 2012, to reflect the fact that, in accordance with the programme of planned changes to the Board, one new Executive Director joined the Board in July 2011, two new Non-Executive Directors joined the Board in October 2011 and the Board had a change of Group CEO from 1 November 2011. This allowed a sufficient period of time for the new Board members to provide input to the review process.
Financial and Business Reporting A balanced and understandable assessment of the Group’s position and prospects, an explanation of its business model and the strategy for delivering the objectives of the Company are contained in the Group CEO’s Review on pages 10 to 15 and the Business Review on pages 17 to 37. A statement of the Directors’ responsibilities can be found on page 74 and reports from the external auditor can be found on pages 75 and 142.
PRINCIPAL DUTIES OF THE GAC • To coordinate and oversee the integrity of the Company’s financial reporting process • To monitor compliance with regulations, industry codes and legal requirements of each territory in which the Group transacts business
2011 HIGHLIGHTS • Reviewed all results announcements and the 2010 Annual Report and Accounts • Reviewed the Financial Control Framework quarterly • Reviewed the effectiveness of internal controls • Received regular reports from the CFO, Disclosure Committee, regional audit or management control committees, the external auditor, the Group Chief Auditor and Regulatory Risk & Compliance
The GAC is comprised of Non-Executive Directors, all of whom have recent and relevant financial experience. The Deputy Group Company Secretary acts as the Secretary to the GAC. The Group CEO, CFO, Group General Counsel and Group Company Secretary, Group Chief Auditor, Group Head of Regulatory Risk & Compliance and representatives of the external auditor are regular attendees by invitation. The Chairman and other members of executive management are also invited to attend from time to time. The GAC holds regular meetings with the Group Chief Auditor, and Group Head of Regulatory Risk and Compliance and the external auditor without any members of management being present. The GAC also holds meetings which comprise only the GAC members with no other attendees.
The outcomes of meetings are reported to the Board and the Board receives the minutes of all the GAC meetings. The GAC has unrestricted access to Company documents and information, as well as to employees of the Company and external professional advisers. Regular reports are received and reviewed by the GAC from the Disclosure Committee and regional audit or management control committees and in relation to the Financial Control Framework and Enterprise Risk Management.
The GAC is satisfied that, during 2011, it has received sufficient, reliable and timely information from management to enable it to fulfil its responsibilities.
During 2011, the FSA conducted private meetings with several members of the Board and executive management as a part of their ‘close and continuous’ programme. The Group also engaged closely with the FSA regarding development of the Group’s Solvency II Internal Model application. More information on the Group’s approach to Solvency II can be found in the financial review on page 28 and in the report of the Board Risk Committee on page 50.
include accounting advice, regulatory returns, tax advice or due diligence work. All non audit work over £100,000 must be approved in advance by the CFO and all non audit work over £250,000 will be notified by the CFO to the GAC Chairman. With reference to the protocol, the GAC is satisfied that there are no matters that would compromise the independence of the external auditor or affect the performance of its statutory duties. Details of fees paid to Deloitte LLP during 2011 for audit and non audit work are disclosed in the auditor remuneration table in note 4 on page 108. There are no contractual obligations that restrict the Company’s choice of external auditor.
So far as each Director is aware, there is no relevant audit information (as defined in section 418(3) of the Companies Act 2006) of which the Company’s external auditor is unaware, and each Director has taken all steps necessary as a Director in order to make himself/herself aware of, and to establish that the external auditor is aware of, any relevant audit information.
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 will strengthen the Group’s finance environment by ensuring that the Group’s financial processes are managed effectively in order to mitigate the associated risks. This is done by documenting and testing the way that core elements of the business operate, providing a high degree of transparency around the Group’s financial control environment. The Group has people, procedures and tools embedded in the business to maintain and streamline the control environment and to provide ongoing reporting and assurance. Quarterly reports are presented to the GAC which include notification of any control deficiencies or breaches in the period and action taken.
The performance of internal control systems is reviewed regularly by the GAC and the Board annually reviews the effectiveness of the Group’s systems of internal control in order to safeguard the Group’s assets and shareholders’ investment. This system includes governance, financial controls, the risk management framework and the process to deliver regulatory and compliance requirements. The systems are designed to identify and mitigate, rather than eliminate, the potential risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material financial misstatement or loss. In February 2012, the GAC and the Board reviewed the systems of internal control in operation during 2011. No significant failings or weaknesses were identified.
Key features of the current internal control systems of the Group include internal audit, the corporate governance framework, dialogue with institutional shareholders, constructive use of the AGM and the areas described in this Accountability section.
PRINCIPAL DUTIES OF THE BRC • To recommend the Group framework of risk limits and risk appetite to the Board • To recommend the quantum of capital required for the Individual
The committee is comprised of two Non-Executive Directors, the Group CEO and CFO. The Group Operations and Risk Director, Group Risk Director, Group General Counsel and Group Company Secretary, Group Director of Corporate Finance, Group Underwriting & Claims Director, Group Head of Regulatory Risk & Compliance and Regional Risk Directors are all regular attendees. Other senior management with experience relevant to specific agenda items are invited to attend from time to time.
The minutes of the regional risk committees are provided to the BRC and the regional risk directors regularly present to the BRC.
The BRC oversees and challenges the results of stress and scenario tests carried out by the Group Risk team and the business. These tests are carried out each year with the involvement of senior executives to assess the Group’s resilience in relation to extreme but plausible events that could have a material impact on the Group. The aim is to enable management to better understand the dynamics of the Group’s risk profile, identify potential mitigation strategies for such events and act as a validation tool for both the Group’s ICA process and its risk appetite.
In addition to monitoring risks that are already recognised as material to the Group, the BRC monitors emerging risks that could threaten RSA’s position of competitive advantage or successful delivery of strategy to ensure that plans are put in place where possible to mitigate such risks.
Notes: 1 . Mr Barbour and Mr Streppel were appointed to the Investment Committee with effect from 27 October 2011 2. Mr Haste retired from the Investment Committee with effect from 1 November 2011 3. Mr Lee was appointed to the Investment Committee with effect from 1 November 2011.
2011 HIGHLIGHTS • Reviewed activity in the Group’s investment portfolio • Monitored investment strategy implementation and portfolio results.
The committee is authorised by the Board to manage all aspects of investment policy and strategy for the Group and provide oversight of the operation of the Group’s investment portfolios within established strategy and risk frameworks. The committee is comprised of the Group CEO, CFO, Chairman and Non-Executive Directors. The Group Investments Director attends all meetings of the committee to provide an update on the economic and market background and outlook as these affect the Group, the investment activities taken since the committee last met and any portfolio actions which require the committee’s approval.
Strategic themes relating to cash, bonds, equities and alternative yield assets were discussed during 2011, together with options for the Group to protect itself against inflation risks and the Group’s exposure to peripheral Europe’s sovereign debt. Details of the Group’s investment activities are contained in the Business Review on pages 17 to 37.
Notes: 1. Mr Lea and Ms Waterous were appointed to the Nomination Committee with effect from 1 February 2011 2. Mr Le May retired from the Nomination Committee with effect from 1 February 2011 and following the first meeting of the year
PRINCIPAL DUTIES OF THE NOMINATION COMMITTEE • To keep under review the capabilities required by the Board and the leadership needs of the Group • Review succession planning for the Board • To manage the process of identifying potential Board appointees, seeking advice from external advisers as appropriate for recommending candidates for assessment by the Board as a whole
2011 HIGHLIGHTS • Assessed the performance of the Chairman, the Group CEO
Directors to the Board • Following the resignation of Mr Haste, recommended the appointment of a new Group CEO.
The Board appointed Edward Lea as the Company’s Senior Independent Director on 27 January 2011. Adrian Brown was appointed to the Board as an Executive Director on 5 July 2011, having been the Chief Executive of the Group’s UK business since September 2008. Following changes to RSA’s operational structure which took effect from 1 January 2012, Adrian became the Chief Executive of the Group’s UK and Western Europe business. Further details of the changes to the operational structure are contained in the Group CEO’s Review on pages 10 to 15 and the Business Review on pages 17 to 37.
During the year, an external search agency specialising in the recruitment of Non-Executive Directors was engaged. A NonExecutive Director candidate specification was prepared setting out the role and capabilities required for the new appointments. Reports on potential appointees were provided to the committee members who, after careful consideration, made a recommendation to the Board. On 3 October 2011 and 10 October 2011, the Board appointed Jos Streppel and Alastair Barbour respectively as Non-Executive Directors. The appointment of the new Non-Executive Directors (as with the longer standing Non-Executive Directors) is subject to specific terms of appointment as detailed in their respective letters of appointment.
Dialogue with institutional shareholders The Board attaches considerable importance to its relationships and communication with shareholders and welcomed the introduction of the UK Stewardship Code in 2010. Senior management meet principal institutional shareholders on a regular basis and Non-Executive Directors are available to meet with institutional shareholders as required. Executive Directors held 67 meetings with investors during 2011. The Board receives regular reports from the Investor Relations team on the views of institutional shareholders. Presentations and meetings are conducted in compliance with the Company’s Inside Information Policy and the Disclosure and Transparency Rules to ensure that inside information is not disclosed prior to it being made available to shareholders generally. General shareholder information is also available on the Group’s website: www.rsagroup.com/rsa/pages/ir/ shareholderservices.
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 is the holder. Each resolution was put to a poll at the AGM in 2011. The results of the vote on each resolution are announced to the London Stock Exchange and are available on the Company’s website.
Employment policy The Group’s employment policy reflects its belief that motivated and skilled employees are critical to the Group’s success.
The Group continues to focus on the training and development of employees in order to ensure they can deliver high levels of performance and customer satisfaction. RSA believes it can create competitive advantage by building and maintaining a high performance culture across the Group.
The Executive Development Programme is a challenging, world class development programme for RSA’s top leaders which aims to build RSA’s strategic leadership capability. It is sponsored by the Executive Team who are actively involved in the programme and sponsor projects. Participants work in global teams on strategically important business challenges, researching the issues and recommending a solution. This programme has contributed to the expansion of both our Renewable Energy business and our Central and Eastern Europe operations.
The Leadership Development Programme, which recently won the Chartered Institute of Personnel Development (CIPD) award for the Organisational Learning category, aims to develop business, growth and people leadership skills in those with the potential to move into a country or regional senior management role. It is a nine month programme consisting of three modules, designed to build capability in core areas of leadership. This incorporates a strategic project based on current business challenges.
In addition to the Executive Development Programme, Leadership Development Programme and Fast Track Programme the Group has three Academies: Marketing, Technical and Operational Effectiveness and in 2010, launched an online ‘Learning Zone’ that offers a broad range of training and development to over 20,000 employees around the world.
Since 2008, we have achieved significant year on year improvements. In 2011, we achieved a Grand Mean score of 4.34 (out of a maximum score of five) which places RSA in Gallup’s top quartile of companies. We are the highest ranked insurer in the Gallup database and rank in the top three companies globally within the financial services sector.
RSA encourages employee share ownership through employee share plans. Employees from 22 of the 33 countries in which RSA operates are invited to participate in Sharesave (SAYE) and the overall take up by eligible employees is 39%. Sharebuild has now been running for two years in the UK and 33% of eligible employees participate. Further details on the Group’s share schemes can be found in the Remuneration Report on pages 57 to 71.
Business review and management report Section 417 of the Companies Act 2006 requires the Directors to present a business review in this Report. The information that fulfils this requirement can be found on pages 1 to 37, and is incorporated by reference into this Report.
The Business Review has been prepared to the best of the Directors’ knowledge in order to provide the Company’s shareholders with a fair review of the development and performance of the Company and the Group as a whole, together with a description of the principal risks and uncertainties which may affect the Group. It may not be relied upon for any other purpose.
Information about the use of financial instruments by the Company and its subsidiaries and its risk management policies is disclosed in the Introduction and the Business Review on pages 1 to 37, in the Significant Accounting Policies on pages 80 to 88, Risk Management on pages 93 to 102 and note 12 on pages 116 to 117.
Dividends The Directors recommend a final dividend of 5.82p per ordinary share to be paid on 25 May 2012 to holders of ordinary shares on the register at the close of business on 30 March 2012, subject to ordinary shareholder approval. This, together with the interim dividend of 3.34p per ordinary share, will make a total dividend for the year of 9.16p per ordinary share.
The preferential dividend at the rate of 3.6875% for the period from 1 October 2011 to 31 March 2012 will be paid on 30 March 2012 to holders of preference shares on the register at the close of business on 2 March 2012.
The Company has two classes of shares: ordinary shares of 27.5p each and preference shares of £1 each. Each ordinary share carries the right to one vote at general meetings of the Company and no right to fixed income. The rights attaching to the preference shares are detailed in note 18 on pages 121 to 122. As at 31 December 2011, the ordinary shares and the preference shares represented 96.6 % and 3.4 % respectively of the total issued share capital.
The Company operates four employee benefit trusts to hold ordinary shares in RSA which are used to satisfy exercises under the Group’s share incentive schemes and Capita Trustees Limited is the current Trustee of each trust. The Trustee may vote in respect of any shares held in the Trusts but has no obligation to do so and, in respect of the Royal & SunAlliance ESOP Trust No. 3, the Trustee may have regard to the financial interests of the beneficiaries in exercising its voting rights over the Company’s shares.
Supplier payment policy It is the Group’s policy to agree appropriate terms and conditions in advance with its suppliers and to make payment in accordance with those terms and conditions, provided the supplier has complied with them. In most cases, agreements for the supply of goods or services are made under standard terms of contract that lay down payment terms. In the UK, these are available on request from UK Strategic Sourcing, Leadenhall Court, 1 Leadenhall Street, London EC3V 1PP.
Related party transactions Related party transactions are set out in note 32 on page 140.
Directors’ conflicts of interest Each Director is required to notify the Group General Counsel and Group Company Secretary when a conflict of interest arises and the Board reviews Directors’ conflicts of interest annually. Under the Articles, the Board may authorise any conflict of interest. The conflicted Director shall not count towards the quorum or vote on any resolution to authorise the conflict of interest and, at the Board’s discretion, may be excluded from any meeting at which the conflict is under consideration. Where a conflict of interests is authorised, the Board may impose such restrictions on the conflicted Director as they deem appropriate, such as excluding the Director from receipt of information or discussions.
None of the Directors had any interest in any other contract with the Company or any of its subsidiaries during 2011 save that a number of Directors have taken out personal lines insurance with the Group.
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 2011.
Articles of Association The Company’s Articles may be amended by special resolution of the Company’s ordinary shareholders. New Articles were adopted at the 2010 AGM and are available on the Group’s website at www.rsagroup. com/rsa/pages/ir/governance/articles.
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.
Deloitte LLP has audited the following items, as stipulated by law: • The table of Directors’ emoluments and associated footnotes on page 67 and the disclosure of the items comprising benefits in kind
• The table of disclosure of Directors’ share options and share awards on pages 69 to 71 and associated footnotes.
The Committee’s responsibilities are set out in its terms of reference which are available to shareholders on request and on the Group’s website at www.rsagroup.com/rsa/pages/ir/governance/mgtcommittees. The Committee welcomes continuous and open dialogue with shareholders on remuneration policy.
• To consider and give advice to the Board on the Group’s broader remuneration policy in relation to the Executive Committee Directors (Executive Team) whose members are shown on pages 42 and 43
The Committee is required under its terms of reference to meet at least twice each year, but meets as often as is necessary throughout the year to ensure that it is able to fully report to the Board and shareholders on all relevant matters. In 2011, the Committee met seven times and discussed, amongst other things, the subjects described in the table on page 58.
Membership of the Committee Members of the Committee have no personal financial interest, other than as shareholders, in the Committee’s decisions and they have no conflict of interest arising from cross directorships.
January • Approval of the performance conditions and the Executive Directors’ conditional awards under the Long-Term Incentive Plan (LTIP) in 2011
• Review of Executive Directors’ base salaries. • Determining the outcome of annual bonuses for 2010 in the light of actual performance against agreed goals and objectives for each Executive Director
• Review of the forecast of share usage for LTIP awards and approval of the grant of awards in April 2011
• Review of proposals for the annual bonus plan for 2011.
July • Confirmation of the LTIP awards made in April 2011 • Approval for the grant of conditional LTIP awards in September 2011 • Approval to operate the all-employee share plans
• Review of TSR performance for LTIP grants in 2008 to 2010
September • Review of the level of take up under Sharesave and Sharebuild
• Review of share usage following the grant of awards under the LTIP in September 2011.
• Update on the impact of regulatory changes in Scandinavia affecting the remuneration arrangements of material risk takers.
December • Update on performance of the annual bonus plan 2011 and LTIP cycles for 2009, 2010 and 2011.
• Approval of minor revisions to the LTIP rules enabling the plan to be compliant with regulation in Sweden and Denmark
The key principles which underpin the remuneration policy are consistent with those applied across the Group, namely that: • Total remuneration is set at a competitive level which enables the recruitment, retention and reward of high-quality executive talent • There is a strong and visible link between remuneration and performance: only exceptional levels of performance will generate exceptional levels of total reward • A high proportion of the Executive Directors’ variable pay is made in the form of shares which aligns their interests with those of shareholders, and this is further strengthened by the share ownership guidelines which are detailed on page 65 • A balance of short and long-term performance measurement is used, incorporating appropriate financial and non-financial targets • Remuneration policy and practice is transparent to shareholders • Where relevant, there is consideration of environmental, governance and social risks when determining remuneration for Executive Directors and senior managers to ensure that positive and appropriate behaviours are reinforced.
The policies relating to each element of remuneration are set out in the table below
Annual incentive plan awards Annual incentive plan awards are related to stretching performance targets and are capped at 160% of base salary. For maximum bonuses to be achieved, outstanding Company and individual performance must be demonstrated.
Long-term incentive plan awards Conditional share awards are made on an annual basis to ensure alignment with shareholders’ interests. Other than in exceptional circumstances, grants of Performance Shares are capped at 150% of salary.
Pension provision and other benefits Employment benefits are set in line with arrangements made in similar companies to be market competitive. Pension provision is at a level which allows executives to plan effectively for their eventual retirement.
Annual performance bonus To incentivise the delivery of annual goals at Group, business division and individual levels.
LTIP To reward the creation of sustained growth in shareholder value and to align managements’ interests with those of shareholders.
Performance Shares are awarded subject to stretching underlying ROE and relative TSR performance conditions.
Matching Shares can vest according to the level of share deferral, subject to stretching performance conditions.
Cash payments are provided if pension participation cannot be maintained (in full or in part) due to HM Revenue and Customs tax limits.
The Committee has agreed that a review of the Company’s remuneration arrangements will be conducted during 2012, with a particular focus on short and long-term incentives. This review will seek to implement leading practice, where this is appropriate for the Company, and strengthen the alignment of managements’ interests with those of shareholders. It is anticipated that a new long-term incentive plan will be tabled for shareholder approval at the AGM in 2013.
Base salary Base salaries for Executive Directors and members of the Executive Team are set on appointment with reference to market data which is used as a guide alongside other relevant factors, such as level of experience and scale of role.
The following table sets out the base salaries of UK-based executives below Board level on a banded basis as at 31 December 2011. No executive within this group received a base salary in excess of £475,000 (i.e. the current salary of the lowest paid Executive Director).
The measures used for determining the amount of bonus payable to each executive are a combination of stretching financial targets and the results of a structured assessment of each executive’s performance against a set of defined and measurable role-specific objectives, many of which have a financial context.
In 2011, performance was measured against combined operating ratio (COR) and net written premium (NWP) targets. COR is a key indicator which captures the underlying strength and performance of an insurance business. COR targets account for three quarters of the financial targets. NWP is an indicator of growth and accounts for one quarter of the financial targets. To achieve focused incentivisation, financial targets for each Executive Director and members of the Executive Team are weighted towards the geographic areas of the business for which they have primary responsibility.
During the year, Andy Haste and George Culmer were incentivised to achieve a combination of targets relating to the overall Group COR and NWP results and the COR results of the regional operating businesses. The financial targets in relation to Simon Lee and Adrian Brown were weighted towards the International and UK businesses, respectively, while they also retained a target for the Group COR result as a whole. However, Simon Lee’s financial targets changed to reflect those given to Andy Haste from 1 November 2011, in line with his appointment as Group Chief Executive.
Long Term Incentive Plan (LTIP) The Group’s long-term incentive plan (LTIP) was introduced in 2006 to drive sustainable, long-term returns and it covers Executive Directors, the Executive Team and Top 100. There are three main types of award that can be granted to participants and these are covered on page 63. LTIP awards are funded through a combination of new issue and market purchase shares.
Performance Shares Executive Directors may receive a conditional award of Performance Shares with the grant level and performance condition determined by the Committee prior to each grant. Account is taken of personal performance in determining the scale of the award granted to each Executive Director. For executives below this level, awards are made based on a formula which relates the size of award to individual performance, as measured through the annual performance appraisal process. In any year, the face value of Performance Shares granted to any individual will be limited to 150% of base salary in normal circumstances, subject to an overriding cap of 250% of base salary in exceptional circumstances such as executive recruitment or retention.
Performance Shares vest following the testing of performance conditions which are measured over three financial years, and provided the executive remains in employment with the Group (other than in exceptional circumstances such as death or retirement at normal retirement age).
In 2012, awards of Performance Shares made to Executive Directors and the Executive Team will be limited to a maximum face value of 150% of base salary; however, the Committee has agreed that by exception, Adrian Brown’s award for 2012 will be granted at 250% of salary in recognition of the critical nature of his role.
Deferred Shares As described in the annual incentive plan section on page 62 Executive Directors may be granted Deferred Shares as part of their annual bonus award (compulsory Deferred Shares). These Deferred Shares are held in a Trust and normally vest three years from the date of grant, subject to continued employment with the Group. During the three-year holding period, the Deferred Shares must remain in the Trust.
Each year, Executive Directors, members of the Executive Team and the Top 100 may be invited to invest up to 33% of their net cash bonus award into shares (Voluntarily Invested Deferred Shares). Unlike the compulsory Deferred Shares, Voluntarily Invested Deferred Shares are not at risk of forfeiture.
The Remuneration Committee has determined that it will reduce the maximum award opportunity available to Executive Directors and the Executive Team through Matching Shares. In 2011 and 2012, at a threshold performance, the matching ratio will be 0.5:1. The maximum matching ratio for Matching Shares to Deferred Shares will be 2:1, calculated on the gross value of the bonus invested in Deferred Shares. Since 2006, the Matching Share ratio has been 0.625:1 at threshold performance up to 2.5:1 at maximum vesting.
The Committee reviews, on an ongoing basis, the composition of the comparator group and will consider adding companies for future awards in the event that the number of constituent companies drops below an acceptable level. The TSR condition is independently calculated and verified by the Committee in respect of each award that vests. The vesting of Matching Shares related to voluntary Deferred Shares will be determined solely with regard to the ROE performance condition.
For awards made in 2008 that vested in 2011, the ROE performance condition was partially met at a result of 13.8% and the relative TSR performance condition was achieved in full at 3.2%. A note of the shares that vested in relation to the Executive Directors is given on page 71.
Sharesave Executive Directors are able to participate in Sharesave (an HM Revenue & Customs approved Save as You Earn Plan), which the Group currently operates in 22 countries. Employees make monthly savings for a period of either three or five years and are granted an option to buy ordinary shares in the Company at the end of the savings period. The purchase price is set at the date employees are invited to join Sharesave and is discounted to the market value by 20%.
Details of the Executive Directors’ interests in Sharesave are noted on page 70.
Sharebuild Executive Directors are able to participate in Sharebuild (an HM Revenue & Customs approved Share Incentive Plan), which was adopted by shareholders at the 2009 AGM. Sharebuild is available to all UK based employees who are employed at 30 June each year. In 2011, one Matching Share was allotted and held in Trust for every one Partnership Share acquired with participants’ contributions. Participants re-invest the dividends paid on their Plan Shares held at the relevant dividend record date in order to purchase further Shares in the Plan.
Details of the Executive Directors’ interests in Sharebuild are noted on page 70.
10% over 10 years for all share schemes 6.93 5% over 10 years for discretionary schemes 4.24
The Group Chief Executive is required to maintain a minimum shareholding in the Company equivalent to 200% of base salary. The other Executive Directors have a target of 150% of base salary and other members of the Executive Team have a target of 75% of base salary. In order to ensure that progress is made towards this target, executives are required to retain shares to a value of 50% of the net of tax proceeds under all share schemes until the relevant guideline is attained.
The number of shares held by each Executive Director as at 31 December 2011 (excluding Voluntarily Invested Deferred Shares held under the LTIP and Matching Shares and Dividend Shares held under Sharebuild) is shown in the table on page 69.
Andy Haste became a deferred member of the pension scheme following his employment ceasing on 31 December 2011.
The Executive Directors receive a number of benefits available to other senior managers, including life assurance at the rate of four times base salary together with a spouse/dependant annuity, sickness and ill health early retirement benefits and private medical insurance. They also have a choice between a company car and a monthly cash allowance in lieu of a car.
Service contracts The Committee’s policy on service contracts is that they should be subject to a maximum notice period of one year. Generally, in the event of termination and in all cases of termination on performance grounds, the Committee’s policy would be to seek and apply mitigation and payments may be made on a phased basis. The Company has the right to pay Executive Directors in lieu of all or part of their notice period. None of the Executive Directors have current terms in their service contracts which allow them additional rights or payment in the event of a reconstruction or amalgamation of the Group. Under normal circumstances, the service contract in respect of each Executive Director continues until age 65. These contracts may, however, be terminated earlier by the Company or the individual, by the serving of 12 months’ notice.
Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11
Non-Executive Directors are not entitled to receive bonus payments or pension arrangements, nor do they participate in the Group’s long term incentive plans.
The Committee determines the Chairman of the Board’s remuneration. For the second consecutive year, the Chairman requested that his fee was not increased, and therefore it remains at £400,000 per annum.
Historical TSR performance The graph is included in the report of the Committee as a requirement of Schedule 8 to The Large and Medium-Sized Companies and Group (Accounts and Reports) Regulations 2008.
Directors’ emoluments Remuneration for the year ended 31 December 2011 was as follows: Base salary and fees
Notes: 1. The total figure includes all allowances chargeable to UK Income Tax.
2. 2011 bonuses were calculated in accordance with the plan described on page 62 of this Report and paid in March 2012. In 2011, a maximum cash bonus of 120% of salary was achievable.
4. George Culmer’s allowances include 15% of base salary as a retirement allowance, paid monthly. During 2011, the amount paid was £122k. He also received car benefits and additional taxable travel benefits worth £23k and medical benefits worth £1k.
5. Andy Haste’s allowances include an age-related percentage of base salary as a retirement allowance, paid monthly. During 2011, the allowance was 38% of salary and the amount paid was £363k. He also received car benefits, additional taxable travel benefits worth £54k and medical and life assurance benefits worth £15k. A taxable payment of £500k was made to him in compensation of the unexpired period of his notice and other contractual benefits.
The information required by paragraph 1, schedule 5 of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 is shown in note 32 of the Financial Statements.
4. The benefits shown above in respect of Andy Haste relate to his membership of a defined benefit pension scheme up to the earnings cap for benefits accrued prior to 28 February 2010, and up to a cap of £75k for benefits accrued from 1 March 2010. Andy Haste was a member of the defined contribution scheme for benefits between £75k and the earnings cap for the period from 1 March 2010.
5. For Andy Haste the increase in his accrued pension during the year, excluding the effects of inflation, was £1k p.a and the transfer value in respect of this less his contributions was £16k at 31 December 2011.
6. Andy Haste is required to contribute to the scheme and also has the option of paying Additional Voluntary Contributions (AVCs). Neither voluntary contributions nor the resulting benefits are included in the table.
7. The transfer value of the accrued benefits represents the value of assets that the pension scheme would need to transfer to another pension provider on transferring the scheme’s liability in respect of Andy Haste’s pension benefits. The transfer values do not represent sums payable or due to Andy Haste.
Shareholdings The interests of Directors in ordinary shares of 27.5p each of the Company were as follows: Director
Shares held as a percentage of salary as at 31 December 20113
Shares under Sharebuild which are not included in the above table. These are disclosed on pages 70 and 71. 2. As at 22 February 2012, the interests in ordinary shares of the Non-Executive Directors remained unchanged since 31 December 2011. 3. Assuming share price of 1.052p (the closing middle market price on the last dealing day of the year) and including Voluntarily Invested Deferred Shares of 27.5p each held under the LTIP and in the Matching Shares under Sharebuild which are disclosed on pages 70 and 71.
4. Adrian Brown was appointed as a Director on 5 July 2011. Accordingly, the table above shows shares held by him on 5 July 2011 and not 1 January 2011. 5. Jos Streppel was appointed to the Board on 3 October 2011 and Alastair Barbour was appointed to the Board on 10 October 2011. Accordingly, the table above shows shares held by them on the date of their respective appointments and not 1 January 2011.
Options 1999 ESOS The 1999 ESOS is an executive share option scheme under which options were granted with an exercise price equal to the fair value of the shares at the date of grant. Any outstanding options expire ten years from the date of grant. No grants have been made under the 1999 ESOS since 2006 and the 1999 ESOS expired in 2009 although a number of options remain outstanding in accordance with the rules of the scheme. The relevant performance conditions were achieved in respect of all options granted between those dates.
Outstanding options – ESOS and Sharesave None of the terms or conditions of any of the existing options over shares of the Group were varied during the year. Full details of all Directors’ shareholdings and options to subscribe for shares are recorded in the Group’s Register of Directors’ Interests which is open to inspection by shareholders at the AGM and at the Company’s registered office during standard business hours.
The official closing middle market price at its highest during the year was 143.5p per share and at its lowest was 99.6p per share. On the last dealing day of the year it was 105.2p per share.
Unexpired options held during 2011 in respect of the ordinary shares of the Company as a result of executive and Sharesave share option schemes are shown below. All options were granted for nil consideration.
Notes: 1. The market price of ordinary shares on 7 April 2011, the date on which long term incentive scheme interests were granted during the year, was 134.1p. 2. Deferred Shares are inclusive of Voluntarily Invested Deferred Shares and compulsory Deferred Shares. Voluntarily Invested Deferred Shares are purchased by Capita Trustees Limited on behalf of each participant using part of the net annual bonus paid to them and are held in trust for three years. These Deferred Shares are not at risk of forfeiture and may be withdrawn from the trust at any time, but the related Matching Share awards would lapse if the voluntary Deferred Shares are withdrawn within three years of acquisition. Compulsory Deferred Share awards are granted as part of the annual bonus. These Deferred Shares will normally vest in three years from the date of grant subject to continuous employment with the Group.
4. Performance conditions relating to awards of Performance Shares are the same as those relating to compulsory Deferred Matching Shares for the relevant year of grant as described above. 5. The date by which qualifying conditions for LTIP awards must be met is as follows: 2009 awards by 31 December 2011, 2010 awards by 31 December 2012, 2011 awards by 6. In respect of the awards made to George Culmer, Andy Haste and Simon Lee, the market price on the date of grant of awards (9 April 2008) was 135.7p, the market price on date of vesting of awards (9 April 2011) was 134.8p. In respect of the award made to Adrian Brown, the market price on the date of grant of awards (22 August 2008) was 146.8p and the market price on the date the award vested (22 August 2011) was 113.0p. For awards made in 2008, the ROE performance condition was partially met at a result of 13.8% and the relative TSR performance condition was achieved in full at 3.2%.
8. Adrian Brown was appointed as a Director on 5 July 2011. Accordingly, the table above shows the share awards held by him on 5 July 2011 and not 1 January 2011. The table also shows his share awards that have vested and lapsed since 5 July 2011.
John Maxwell Chairman of the Remuneration Committee, on behalf of the Board
• Yachts – Covering pleasure crafts of all shapes and sizes from small personal watercraft to ocean going yachts.
• Make an assessment of the Company’s ability to continue as a going concern.
• The business review on pages 3 to 37, which is incorporated into the Directors’ report, includes a fair review of the development and performance of the business and the position of the Group and
Opinion on financial statements In our opinion the consolidated financial statements: • Give a true and fair view of the state of the Group’s affairs as at 31 December 2011 and of its profit for the year then ended
Opinion on other matters prescribed by the Companies Act 2006 In our opinion: • The part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006 and
• Certain elements of the report to shareholders by the Board on Directors’ remuneration.
Other matters We have reported separately on the Parent Company financial statements of RSA Insurance Group plc for the year ended 31 December 2011 and on the information in the Directors’ Remuneration Report that is described as having been audited.
Issued for non cash consideration – – – – – – – – – 11 11
Treasury shares utilised – – 1 – – – – (1) – – –
Changes in shareholders’ interests in subsidiaries – – – – – – – (24) (24) 3 (21)
Total comprehensive income/ (expense) for the year (note 17) – – – – 21 – (56) 353 318 2 320
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME for the year ended 31 December 2011
The financial statements were approved on 22 February 2012 by the Board of Directors and are signed on its behalf by: George Culmer Chief Financial Officer
Proceeds from sales or maturities of: Property and equipment 14 –
Effect of exchange rate changes on cash and cash equivalents (25) 20
There are no new IFRS and interpretations of IFRS that have become effective during 2011 and that have a significant impact on the Group accounting policies. There are no significant other changes to Group accounting policies during 2011.
Except where otherwise stated, all figures included in the consolidated financial statements are presented in millions of Pounds Sterling, being the currency in the primary economic environment of the company, shown as ‘£m’, rounded to the nearest million.
Selection of accounting policies The Group exercises judgement in selecting each Group accounting policy. The accounting policies of the Group are selected by the Directors to present financial statements that they consider provide the most relevant information. For certain accounting policies there are different accounting treatments that could be adopted, each of which would be in compliance with IFRS and would have a significant influence upon the basis on which the financial statements are presented. The bases of selection of the accounting policies for the accounting for financial assets and for the recognition of actuarial gains and losses related to pension obligations are set out below: • The Group designates financial assets that are held as investments on the basis on which the investment return is managed and the performance is evaluated internally. Where the investment return is managed on the basis of the periodic cashflows arising from the investment, a financial asset is designated as an available for sale financial asset with unrealised gains recognised in the statement of comprehensive income. Where the investment return is managed on the basis of the total return on the investment (including unrealised investment gains), the financial asset is designated as at fair value through the income statement
• The Group accounting policy is to recognise actuarial gains and losses arising from the recognition and funding of the Group’s pension obligations in the statement of comprehensive income during the period in which they arise. This policy has been adopted as it provides the most relevant basis of recognition of such gains and losses.
The increased carrying amount of an asset other than goodwill attributable to a reversal of an impairment loss does not exceed the carrying amount that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised for the asset in prior years. An impairment loss recognised for goodwill is not reversed in a subsequent period.
Fair value is based on current prices in an active market for similar property in the same location and condition and subject to similar contractual terms of ownership. Valuations are performed by external professionally qualified valuation surveyors on at least an annual basis, with reference to current market conditions.
All other classes are stated at cost less accumulated depreciation. Cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset only when it is probable that future economic benefits associated to the item will flow to the Group and the cost can be measured reliably.
Investment property is recorded at fair value, measured by independent professionally qualified valuers who hold a recognised and relevant professional qualification and have recent experience in the location and category of the investment property being valued. Valuations are carried out on an annual basis or more frequently. For interim periods internal valuations are made by reference to current market conditions. Unrealised gains and unrealised losses or changes thereof are recognised in net investment return.
• For mortgage loans on real estate and collateral loans, fair values are estimated using discounted cashflow calculations based upon prevailing market rates
• For notes, bonds, loans payable and loan capital, fair values are determined by reference to quoted market prices or estimated using discounted cashflow calculations based upon prevailing market rates. Loan capital is carried at amortised cost and, when different, fair value is shown in the relevant note. For borrowings that carry a variable rate of interest (other than loan capital), carrying values approximate to fair values
• Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs).
Hedging Transactions are classified as hedging transactions when the following conditions for hedge accounting are met: • There is a formal designation and documentation of the hedging relationship and the Group’s risk management objective and strategy for undertaking the hedge
• The effectiveness of the hedge can be reliably measured • For cashflow hedges, a forecast transaction that is the subject of the hedge must be highly probable and must present an exposure to variations in cashflows that could ultimately affect profit or loss
• For equity securities fair values are based upon quoted market prices • If the market for a financial asset is not active, the Group establishes
Cash and cash equivalents Cash and cash equivalents are short term, highly liquid investments that are subject to insignificant changes in value and are readily convertible into known amounts of cash. Cash equivalents comprise financial assets with less than three months’ maturity from the date of acquisition.
Loan capital Loan capital comprises subordinated bonds which are initially measured at the consideration received less transaction costs. Subsequently, loan capital is measured at amortised cost using the effective interest rate method.
Acquisition costs comprise the direct and indirect costs of obtaining and processing new insurance business. These costs are recognised as deferred acquisition costs and are deducted from the provision for unearned premiums. Deferred acquisition costs are amortised on the same basis as the related premiums are earned.
The provisions for losses and loss adjustment expenses whether reported or not, comprise the estimated cost of claims incurred but not settled at the end of the reporting period. It includes related expenses and a deduction for the expected value of salvage and other recoveries. The provision is determined using the best information available of claims settlement patterns, forecast inflation and settlement of claims. The provisions for losses and loss adjustment expenses relating to long term permanent disability claims in the UK, Canada and Scandinavia are also determined using recognised actuarial methods.
The current service cost in respect of defined benefit schemes comprises the present value of the additional benefits attributable to employees’ services provided during the period.
• Minus any past service cost not yet recognised • Minus the fair value at the end of the reporting period of the scheme assets out of which the obligations are to be settled directly.
Deferred tax is provided in full using the liability method on temporary differences arising between the tax bases of assets and liabilities and the carrying amounts in the financial statements. However, if the deferred tax arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting, nor taxable profit or loss, it is not accounted for. Deferred tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the end of the reporting period and are expected to apply when the related deferred tax asset is realised or the related deferred tax liability is settled.
Assets and liabilities held for sale and discontinued operations Assets are classified as held for sale if their carrying amount is to be recovered principally through a sale transaction, that is highly probable to complete within one year from the date of classification, rather than through continuing use. Such assets are measured at the lower of carrying amount and fair value less costs to sell and are classified separately from other assets in the statement of financial position. Assets and liabilities of a disposal group are not netted. In the period where a non current asset or disposal group is recognised for the first time, the statement of financial position for the comparative prior period presented is not restated.
Provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is more likely than not that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated.
Dividends to equity holders The final dividend is recognised as a liability when approved at the Annual General Meeting. The interim dividend is recognised when paid.
• IFRS 11 addresses only two forms of joint arrangements (joint operations and joint ventures) where there is joint control. Because IFRS 11 uses the principle of control in IFRS 10 to define joint control, the determination of whether joint control exists may change
• IFRS 11 removes the option to account for jointly controlled entities using proportionate consolidation. Instead, jointly controlled entities that meet the definition of a joint venture must be accounted for using the equity method
• IFRS 12 includes all of the disclosure requirements for subsidiaries, joint arrangements, associates and structured entities. It introduces a number of new disclosures including the judgements made to determine whether one entity controls another entity and also providing more information about unconsolidated entities
• IFRS 13 defines fair value and sets out, in a single IFRS framework, the measurement of fair value and required disclosures.
IFRS 10, 11, 12 and the revised IAS 27 come into effect for annual periods beginning on or after 1 January 2013, but early adoption is permitted. The four standards must be adopted together with the exception of IFRS 12 which may be adopted earlier. They must be applied on a modified retrospective basis. These new standards have not yet been endorsed by the EU.
Recently issued accounting pronouncements Pronouncements issued by the International Accounting Standards Board (IASB) but which are not yet mandatory for adoption and have yet to be adopted in the Group financial statements are listed below: In November 2009 the IASB issued IFRS 9 ‘Financial Instruments’. This standard represents the completion of the first part of a larger project to replace IAS 39 ‘Financial Instruments: Recognition and Measurement’. The new standard reduces the complexity by replacing the many different rules in IAS 39. The key features for the new standard are as follows: • The option in IAS 39 allowing entities to classify financial instruments as available for sale is not available in IFRS 9
• All other financial assets are measured at fair value in the statement of financial position. Subject to an optional treatment for an equity investment, changes in fair value during the reporting period are recognised in the income statement
In December 2011 the IASB issued ‘Mandatory Effective Date of IFRS 9 and Transition Disclosures’, which amends IFRS 9 to require application for annual periods beginning on or after 1 January 2015, rather than 1 January 2013. The new standard has not yet been adopted by the EU.
• Unvested past service costs are no longer deferred and recognised over the future vesting period. Instead, all past service costs will be recognised at the earlier of when the amendment / curtailment occurs or when the entity recognises related restructuring or termination costs.
• Amendments to IFRS 1 ‘Replacement of ‘fixed dates’ for certain exceptions with ‘the date of transition to IFRSs’ ’ and ‘Additional exemption for entities ceasing to suffer from severe hyperinflation’ (issued December 2010)
• Amendment to IAS 1 ‘Presentation of Financial Statements – Presentation of Items of Other Comprehensive Income’ (issued June 2011)
• Offsetting Financial Assets and Financial Liabilities (Amendments to IAS 32) and Disclosures – Offsetting Financial Assets and Financial Liabilities (Amendments to IFRS 7) (issued December 2011).
In addition to the inherent uncertainty of having to make provision for future events, there is also considerable uncertainty as regards the eventual outcome of the claims that have occurred by the end of the reporting period but remain unsettled. This includes claims that may have occurred but have not yet been notified to the company and those that are not yet apparent to the insured.
The pension assets and pension and post retirement liabilities are calculated in accordance with International Accounting Standard 19 (IAS 19). The assets, liabilities and income statement charge, calculated in accordance with IAS 19, are sensitive to the assumptions made from time to time, including inflation, interest rate, investment return and mortality. IAS 19 compares, at a given date, the current market value of a pension fund’s assets with its long term liabilities, which are calculated
There may be significant reporting lags between the occurrence of the insured event and the time it is actually reported to the Group. Following the identification and notification of an insured loss, there may still be uncertainty as to the magnitude and timing of the settlement of the claim. There are many factors that will determine the level of uncertainty such as inflation, inconsistent judicial interpretations and court judgments that broaden policy coverage beyond the intent of the original insurance, legislative changes and claims handling procedures.
The Group has exposures to risks in each class of business within each operating segment that may develop and that could have a material impact upon the Group’s financial position. The geographic and insurance risk diversity within the Group’s portfolio of issued insurance policies mean it is not possible to predict whether material development will occur and, if it does occur, the location and the timing of such an occurrence. The estimation of insurance contract liabilities involves the use of judgments and assumptions that are specific to the insurance risks within each territory and the particular type of insurance risk covered. The diversity of the insurance risks results in it not being possible to identify individual judgments and assumptions that are more likely than others to have a material impact on the future development of the insurance contract liabilities.
Factors contributing to this higher degree of uncertainty include: • The long delay in reporting claims from the date of exposure (for example, cases of mesothelioma can have a latent period of up to 40 years). This makes estimating the ultimate number of claims the Group will receive particularly difficult
• The tendency for social trends and factors to influence court awards • Developments pertaining to the Group’s ability to recover reinsurance for claims of this nature • For US liabilities from the Group’s London market business, developments in the tactics of US plaintiff lawyers and court decisions and awards.
Potential change in discount rate for lump sum damages awards Legislative changes may affect the Group’s liability in respect of unsettled claims in the use of predetermined factors used by courts to calculate compensation claims. For example, in the UK, standard formulae are used as an actuarial measure by the courts to assess lump sum damages awards for future losses (typically loss of earnings arising from personal injuries and fatal accidents). The calibration of these standard formulae can be updated by the UK Government and the Lord Chancellor may review the methodology to be applied in determining the discount rate to calculate the appropriate settlements, or the discount rate itself, in due course. A reduction in the prescribed discount rate would increase the value of future claims settlements.
Investment risk The Group is exposed to market risk and credit risk on its invested assets. Market risk includes the risk of potential losses from adverse movements in market rates and prices including interest rates, equity prices, property prices and foreign exchange rates. The Group’s exposure to market risks is controlled by the setting of investment limits in line with the Group’s risk appetite. From time to time the Group also makes use of derivative financial instruments to reduce exposure to adverse fluctuations in foreign exchange rates and equity markets. The Group has strict controls over the use of derivative instruments.
The current economic crisis adds further uncertainty and volatility to underlying levels of market and credit risk in the Eurozone. The Group has, however, very limited direct exposure via its investment portfolio to the Eurozone and to the peripheral Eurozone countries in particular. As with all other invested assets, limits are set in line with the Group’s risk appetite. The Group continues to monitor the situation closely and take action to manage its exposure as required.
Contracts with third parties The Group enters into joint ventures, outsourcing contracts and distribution arrangements with third parties in the normal course of its business and is reliant upon those third parties being willing and able to perform their obligations in accordance with the terms and conditions of the contracts.
The new solvency framework for insurers being developed by the EU, referred to as ‘Solvency II’, is intended in the medium term to achieve greater harmonisation of approach across EU member states to assessing capital resources and requirements. There will be continued uncertainty until all the rules are finalised and the Group is actively participating in shaping the outcome through its involvement with European and UK regulators and industry bodies. The Group is actively progressing its implementation plans and the Directors are confident that the Group will continue to meet all future regulatory capital requirements.
Notes: 1. On 28 February 2012, after the signing of these financial statements, S&P upgraded the
The Group is exposed to financial risk through its financial assets, financial liabilities (borrowings), reinsurance assets and insurance contract liabilities. In particular the key financial risk is that the proceeds from the realisation of its financial assets are not sufficient to fund the obligations arising from its insurance contracts.
Underwriting limits are in place to enforce appropriate risk selection criteria. For example, the Group has the right not to renew individual policies, it can impose deductibles and it has the right to reject the payment of a fraudulent claim. In certain territories, legislation imposes a minimum amount for which employers can be liable for claims for compensation from employees injured at work. These liabilities are usually insured under an employer’s liability (or similar) insurance policy. All policies issued by the Group comply with minimum statutory requirements.
Reinsurers’ share of insurance contract liabilities 50 466 1,171 179 79 116 2,061
The following table provides information regarding the carrying value of financial assets that have been impaired and the ageing of financial assets that are past due but not impaired as at 31 December 2011.
Cash and cash equivalents 1,258 – – – – – 1,258 –
The Group is permitted to sell or repledge collateral held in the event of default by the owner, the fair value of which has been noted above at £936m. The terms and conditions of the collateral held are market standard. The assets held as collateral are readily convertible into cash.
At 31 December 2011, the Group had entered into short term sale and repurchase agreements for UK government securities. The Group continues to recognise the debt securities in the statement of financial position as the Group remains exposed to the risks and rewards of ownership. The carrying value of these debt securities recognised in the statement of financial position is £297m (2010: £294m) and the carrying value of the associated liabilities is £297m (2010: £294m).
Market risk The Group is exposed to the risk of potential losses from adverse movements in market rates and prices as follows: • Interest rate risk • Equity price risk • Property price risk • Currency risk • Derivatives.
Interest rate risk The fair value of the Group’s portfolio of fixed income securities is inversely correlated to changes in the market interest rates. Thus if interest rates fall, the fair value of the portfolio would tend to rise and vice versa as set out in the sensitivity analysis on page 100.
Equity price risk The Group’s portfolio of equity securities is subject to equity risk arising from changes in market price. Thus if the value of equities rise so will the fair value of its portfolio and vice versa as set out in the sensitivity analysis on page 100.
Currency risk The Group operates in 33 countries. Accordingly, its net assets are subject to foreign exchange rate movements. The Group’s primary foreign currency exposures are to the Danish Krone, Euro, Canadian Dollar and the Swedish Krona. If the value of Sterling strengthens then the value of non Sterling net assets will decline when translated into Sterling and consolidated.
The Group incurs exposure to currency risk in two ways: • Operational currency risk – by underwriting liabilities in currencies other than the currency of the primary environment in which the business units operate (non functional currencies) • Structural currency risk – by investing in overseas subsidiaries and operating an international insurance group.
At 31 December 2011, the Group’s total shareholders’ equity analysed by currency is: Sterling £m
Derivatives The Group may use derivative financial instruments for the purpose of reducing its exposure to adverse fluctuations in interest rates, foreign exchange rates and equity price risk. The Group does not use derivatives to leverage its exposure to markets and does not hold or issue derivative financial instruments for speculative purposes. Forward contracts and foreign exchange options are used to reduce the risk of adverse currency movements on certain forecast future cash transactions and for structural hedging. The policy on use of derivatives is approved by the BRC.
During 2011 the Group entered into a series of swap contracts which collectively provide limited cover against a sharp increase in long term inflation. In total, the swap contracts provide inflation cover over a nominal value of £180m and are split over different contract terms.
Sensitivity analysis The Group uses a number of sensitivity or stress test based risk management tools to understand the impact on earnings and capital in both normal and stressed conditions. These stress tests combine deterministic shocks, analysis of historical scenarios and stochastic modelling using the Individual Capital Assessment (ICA) models to inform the Group’s decision making and planning process and also for identification and management of risks within the business units.
Notes: 1. This analysis assumes that there is no correlation between equity price, interest rate and property market rate risks. It also assumes that all other assets and liabilities remain unchanged and that no management action is taken. This analysis does not represent management’s view of future market change, but reflects management’s view of key sensitivities. 2. The sensitivity of the fixed interest securities of the Group has been modelled by reference to a reasonable approximation of the average interest rate sensitivity of the investments held within each of the portfolios.
Maturity periods or contractual repricing The following table summarises the contractual repricing or maturity dates (whichever is earlier) for financial liabilities that are subject to fixed and variable interest rates. Insurance contract liabilities are also presented and are analysed by remaining duration.
Subordinated guaranteed perpetual bonds – – – – – 375 – 375 326
Interest on perpetual bonds and notes 112 112 112 73 73 132 11 625
Subordinated guaranteed dated notes – – – – – 500 – 500 492
Capital management The maintenance of a strong capital position of the Group is critical to its ability to conduct business.
The maintenance of a capital position in excess of regulatory requirements is an absolute requirement for all of the Group’s regulated entities. There is no tolerance for breaching capital requirements for any regulated entity.
The economic capital analysis compares the economic value of the Group’s assets with the total resources required in a range of adverse scenarios, calibrated to a defined risk tolerance consistent with the Group’s ‘A’ rating which is in line with target. The economic capital surplus is the amount by which the economic assets exceed the total resources required. The total resources required is the amount of assets the Group needs today to meet its liabilities under the defined risk tolerance. The Group defines the economic capital required as the difference between the total resource requirement and the accounting value of liabilities. At 31 December 2011, the Group’s surplus economic capital is approximately £0.8bn (2010: £1.1bn).
For the Group’s senior regulated insurance company, Royal & Sun Alliance Insurance plc, the capital position continues to be reported under Solvency I.
As at 31 December 2011 the Group has an IGD surplus of approximately £1.3bn (2010: £1.5bn). Whilst the IGD surplus remains strong it has experienced a small decrease in the year with retained earnings being offset by increases in both capital requirements resulting from higher business volumes and intangible assets. The coverage ratio stood at 2.0 times at 31 December 2011 (2010: 2.3 times).
During 2011, the Group was organised into three operating segments – the UK, International and Emerging Markets. The UK is the Group’s country of domicile and one of its principal markets. International comprised operations in Scandinavia, Canada, Ireland and Italy and Emerging Markets comprises the Group’s operations in Latin America, Asia and the Middle East and Central and Eastern Europe. All operations are engaged in providing personal and commercial general insurance services. Central functions include the Group’s internal reinsurance function and Group Corporate Centre.
This structure brought together operations with similar challenges and opportunities in order to give due focus to achieving the Group’s objective of profitable growth across the business. Each operating segment was managed by a Chief Executive Officer (CEO) who was directly accountable to the Group CEO and the Board of Directors.
On 11 November 2011, the Group announced changes to the Group’s operating structure and Executive Team. From 1 January 2012, the Group is organised into four regions, Scandinavia, Canada, UK & Western Europe, and Emerging Markets with each operating segment managed by a Chief Executive Officer (CEO) who is directly accountable to the Group CEO and the Board of Directors. The CEOs of Scandinavia and Canada have also joined the Group Executive Committee with effect from 1 January 2012. This new structure reflects the significant contribution that the Scandinavian and Canadian businesses make to the Group’s results and will drive improved performance across the UK & Western European region, which includes Ireland and Italy.
A reconciliation of the results reported under the new operating structure to the results reported under the previous structure is included at the end of this note. The business review is presented using the new operating structure.
The Group uses the following key measures to assess the performance of its operating segments: • Net written premiums • Underwriting result • Combined operating ratio (COR).
Net written premiums are allocated to the countries in which the business is underwritten or managed.
Other investments: Deposits, cash and cash equivalents 15 8 – – – (1) – – 15 7
During 2011 the accrued interest income on impaired financial assets was £nil (2010: £nil).
Direct operating expenses (including repairs and maintenance) arising from investment properties were not material in 2011 or 2010.
Gross changes in provisions for losses and loss adjustment expenses (853) 588
Reinsurance recoveries on losses and loss adjustment expenses paid (1,099) (1,035)
Reinsurers’ share of change in insurance contract liabilities for claims 717 (781)
Other lease payments The operating lease payments recognised as an expense during the year were £70m (2010: £64m). The Group has no significant lease agreements that include contingent rent.
Fees payable to Deloitte LLP for audit of the Company’s annual accounts 0.9 0.9
Directors’ emoluments The aggregate emoluments of the Directors, including amounts received from subsidiaries, were as follows: Emoluments of Executive Directors 5,230 4,270
Income tax expense 186 119 6. EARNINGS PER SHARE ATTRIBUTABLE TO THE ORDINARY SHAREHOLDERS OF THE PARENT COMPANY
Basic 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 the ESOP Trusts and Share Incentive Plan Trust and held as treasury shares.
Profit attributable to the shareholders of the Parent Company 426 346
Adjustments for share options and contingently issuable shares (thousands) 29,824 22,501
Net carrying amount at 31 December 2010 650 3 417 139 1,209
Amortisation expense of £67m (2010: £52m) has been charged to underwriting and policy acquisition costs and the balance is recognised in other operating expenses.
Impairment tests for goodwill Goodwill is allocated to the Group’s cash generating units (CGUs) as follows: £m £m
In Emerging Markets, the impairment charges reflects slower economic growth than originally anticipated in the Czech Republic and Poland. The key estimate assumption in determining the recoverable amount for both regions is the long-term growth rate, for which estimates of 5.1% and 6.3% in local currency for the Czech and Polish businesses respectively have been applied as at 31 December 2011 (2010: 8.0% and 10.0% respectively).
A number of other assumptions and estimates are involved in the application of a cashflow model to forecast operating cashflows, premium volumes, expenses and working capital requirements. Forecasts of future cashflows are based on the best estimates of future premiums, operating expenses using historical trends, general geographical market conditions, industry trends and forecasts and other available information. These assumptions are subject to review by management and the Group Audit Committee. The cashflow forecasts are adjusted by appropriate discount rates. Discount rates used are within a range of 8% to 21% (2010: 9% to 15%), are pre tax and reflect specific risks relating to the relevant segments at the date of evaluation. The weighted average growth rates used in 2011 are within a range of 3% to 13% (2010: 2% to 5%).
9. PROPERTY AND EQUIPMENT CONTINUED Group occupied property – land and buildings £m
The Group occupied property was revalued on 31 December 2011 by independent valuers.
Investment property consists of £362m (2010: £374m) freehold and long leasehold buildings.
Some associates have been omitted from this note to avoid providing particulars of excessive length but none materially affects the results or assets of the Group.
Fair value measurements recognised in the statement of financial position The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into Levels 1 to 3 based on the degree to which the fair value is observable, as explained more fully in Significant Accounting Policies: Fair value hierarchy
Available for sale financial assets: Financial assets at fair value through the income statement: Derivative assets: At fair value through the income statement – 45 – 45
At fair value through the income statement – 42 – 42
Financial assets at fair value through the income statement: Derivative assets at fair value through the income statement – 29 – 29
None of the Group’s insurance contract liabilities are measured at fair value. There were no transfers between Level 1 and Level 2 during 2011 or 2010.
Total gains/(losses) recognised in: Other comprehensive income 1 – – – 1
Level 3 financial assets at 31 December 2011 28 10 21 55 114
Reinsurers’ share of portfolio transfers and acquisitions/(disposals) of subsidiaries 27 16
Reinsurers’ share of provision for unearned premiums at 31 December 302 299
Reinsurers’ share of portfolio transfers and acquisitions/(disposals) of subsidiaries 125 16
To be settled after 12 months 137 157 16. CASH AND CASH EQUIVALENTS
The interest bearing financial assets included in cash and cash equivalents had an effective interest rate of 1.14% (2010: 1.05%) and had an average maturity of 33 days (2010: 19 days).
Pension fund actuarial losses net of tax – – (63) (63) – (63)
Total comprehensive income/(expense) for the year 21 (56) 353 318 2 320
Other comprehensive income for the year 58 40 58 156 1 157
During the year 18,409,921 (2010: 34,641,792) ordinary shares were issued on the exercise of employee share options and awards for a cash consideration of £4m (2010: £15m). The Parent Company also issued 16,660,432 (2010: 41,135,898) ordinary shares during the year under the scrip scheme as approved by shareholders. The total nominal value of ordinary shares issued during the year was £9m (2010: £21m).
Issued and fully paid 3,531,021,230 ordinary shares of 27.5p each (2010: 3,495,950,877 ordinary shares of 27.5p each) 971 962 125,000,000 preference shares of £1 each (2010: 125,000,000 preference shares of £1 each) 125 125
The Royal & Sun Alliance ESOP Trust No 2 holds ordinary shares in the Parent Company, which may subsequently be transferred to employees including Executive Directors. At 31 December 2011 the Trust held 328,285 ordinary shares (2010: 2,343,679) in the Parent Company with a nominal value of £0.1m (2010: £1m) and a mid market value of £0.3m (2010: £3m), based on the mid market closing value of the Company’s shares on 30 December 2011.
The Royal & Sun Alliance ESOP Trust No 3 holds 3,691,838 ordinary shares (2010: 3,336,230) in the Parent Company at 31 December 2011 with a nominal value of £1m (2010: £1m) and a mid market value of £4m (2010: £4m), based on the mid market closing value of the Company’s shares on 30 December 2011. Of this, 3,214,671 ordinary shares (2010: 3,238,297) are beneficially owned by Group employees as Voluntary Deferred Shares under the Long Term Incentive Plan. The remaining 477,167 ordinary shares (2010: 97,933) may subsequently be transferred to employees, including Executive Directors, under one of the Group’s employee share plans.
The RSA Share Incentive Plan Trust holds 6,464,048 ordinary shares (2010: 3,040,752) in the Parent Company at 31 December 2011 with a nominal value of £2m (2010: £1m) and a mid market value of £7m (2010: £4m) based on the mid market closing value of the Company’s shares on 30 December 2011. Of this, 3,415,976 ordinary shares (2010: 1,553,451) are beneficially owned by Group employees as Partnership Shares and Dividend Shares under Sharebuild. The remaining 3,048,072 ordinary shares (2010: 1,467,533) may subsequently be transferred to employees, including Executive Directors, under Sharebuild.
The Parent Company in general meeting may by ordinary resolution declare dividends, but no dividend shall exceed the amount recommended by the Directors or permitted by law. The Directors may also pay such interim dividends as they think fit and pay the fixed dividends payable on any shares of the Parent Company half yearly or otherwise on fixed dates. Subject to shareholder approval, the Directors may allow shareholders to receive new ordinary shares in lieu of dividends paid in cash.
• Any rights of conversion • Any right to participate in any issue of bonus shares.
The Directors may deduct from any dividend or other monies payable to any shareholder all sums of money presently payable by him to the Parent Company on account of calls or otherwise in relation to his shares in the Parent Company.
If the Parent Company is wound up, the liquidator may, with the sanction of an extraordinary resolution of the Parent Company divide among the shareholders the whole or any part of the assets of the Parent Company and may, for such purpose, set such value as he deems fair upon any property to be divided. The liquidator may also, with like sanction, vest the whole or any part of the Parent Company’s assets in trustees upon such trusts for the benefit of the contributories as the liquidator shall think fit. No shareholder shall be compelled to accept any shares or other securities or other assets that are subject to any liability.
The Directors may refuse to register any transfer of any share which is not a fully paid up share provided that such refusal does not prevent dealing in the shares from taking place on an open and proper basis. The Directors may likewise refuse to register any transfer in favour of more than four persons jointly.
• The instrument of transfer is in respect of only one class of share.
The subordinated guaranteed dated 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 Parent Company has the option 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 yield for a further five year period.
The aggregate fair value of total loan capital at 31 December 2011 is £1,325m (2010: £1,375m).
The provision for unearned premiums is shown net of deferred acquisition costs of £845m (2010: £783m). The movement in deferred acquisition costs during 2011 is attributed to £1,119m (2010: £964m) acquisition costs deferred during the year, £1,060m (2010: £922m) amortisation charged during the year, £13m exchange losses (2010: £20m exchange gains), and £16m (2010: £nil) due to acquisition of subsidiaries.
Provision for unearned premiums (gross of acquisition costs) at 31 December 4,514 4,229
Provisions for losses and loss adjustment expenses The following changes have occurred in the provisions for losses and loss adjustment expenses during the year: £m £m
Provisions for losses and loss adjustment expenses at 1 January 11,694 10,613
Total claims payments made in the year, net of salvage and other recoveries (6,448) (6,112)
Assumptions The total value of provisions for losses and loss adjustment expenses less related reinsurance recoveries before discounting is £9,939m (2010: £10,001m).
Claims development tables The tables below present changes in the historical provisions for losses and loss adjustment expenses that were established in 2001 and the provisions for losses and loss adjustment expenses arising in each subsequent accident year. The tables are presented at current year average exchange rates on an undiscounted basis and have been adjusted for operations that have been disposed of.
The estimated provisions for ultimate incurred losses changes as more information becomes known about the actual losses for which the initial provisions were set up and as the rate of exchange changes.
At end of accident year 9,807 3,466 3,441 2,903 3,048 2,714 3,096 2,986 2,863 3,849 3,498
Current year provision before discounting 2,293 195 374 218 277 426 572 690 980 1,642 3,498 11,165
The Group’s borrowings of £298m (2010: £298m) primarily relate to loans from credit institutions under a repurchase agreement. Further information is contained in the risk management section.
At 31 December 2011 total unsecured loans from credit institutions under committed credit facilities of £455m (2010: £455m) are available to the Group. There are no amounts outstanding at 31 December 2011 (2010: £nil). The facility expires in 2013.
(Charge)/credit to other comprehensive income for the year – (23) – 3 3 (17)
(Charge)/credit to equity for the year (2) – – – 3 1
Net credit arising on acquisition/disposal of subsidiaries and other transfers – – – – (2) (2)
Charge to equity for the year (2) – – – (2) (4)
Net credit arising on acquisition/disposal of subsidiaries and other transfers – – 8 – (15) (7)
Fair value gains and losses (18) (19) 17 5 (1) (14)
Total (charged)/credited to other comprehensive income (21) (11) 28 (19) 7 (30)
The aggregate current and deferred tax relating to items that are (charged)/credited directly to equity is £(3)m (2010: £1m).
Deferred tax assets of £199m (2010: £138m), which are in excess of profits arising from the reversal of existing taxable temporary differences and that relate to tax jurisdictions in which the Group has suffered a loss in either the current or preceding period, have been recognised on the basis that future taxable profits will be available against which these can be utilised. The evidence for the future taxable profits is a forecast consistent with the three year operational plans prepared by the relevant businesses, which are subject to internal review and challenge. Where relevant, the forecast includes extrapolations of the operational plans using assumptions consistent with those used in the plans.
Defined contribution pension schemes Costs of £65m (2010: £55m) were recognised in respect of defined contribution schemes by the Group. The Group’s Swedish subsidiaries are part of a multi-employer defined benefit scheme along with other financial institutions in Sweden. As it is not possible to determine the assets and liabilities in respect of any one employer under this scheme, it is included in these accounts as a defined contribution scheme. Contributions of £14m (2010: £12m) were paid to this scheme during 2011 and are included in the costs shown above. The latest information regarding the funding of this scheme is taken from the interim report for the first half of 2011, when the scheme funding rate was 115% (2010: 112%).
During 2009 the Group entered into arrangements that insured 55% of the retirement obligations relating to pensions in payment in the two main UK schemes. The arrangements comprise of assets and interest rate swaps combined with an insurance contract that provide for the full payment of the pensions in return for the actual investment return on a segregated portfolio of assets held by the pension funds at the inception of the arrangement. The pension schemes continue to benefit from the assets held in the portfolio and retain the obligation to meet the insured pension obligations. The assets and pension obligations are therefore not derecognised in the financial statements and an asset (representing the recovery of the insured pension obligations) and a liability (to pay the investment return on the portfolio of assets to the insurer) are recognised.
During 2010 changes were made to the benefit structure of the three main UK schemes. Changes affected future accrual from 1 March 2010 onwards. Accrual rates were reduced; the retirement age was increased; revaluation was subject to a cap of 2.5%; a cap was applied to the salary used for the defined benefit schemes and the schemes contracted back in to the State scheme. Employees were entitled to join the Stakeholder Pension scheme for earnings above the cap.
For the two main UK defined benefit schemes, the level of contributions in 2011 were 23% and 22% of pensionable salaries (2010: 23% and 22%). Additional contributions totalling £51m (2010: £45m) were made to the schemes, in accordance with the plan to reduce their funding deficits. Expected contributions to pension and post retirement benefit schemes for the year ending 31 December 2012 are approximately £54m, including a further £37m of additional contributions following the funding valuation in March 2009.
Net pension and post retirement (deficit)/surplus at 31 December (140) (142)
The actuarial gains/(losses) recognised in equity are as follows: UK £m
Actual return on assets in excess of/(below) expectations 385 (6) 379 257
Including the pension liabilities covered by the insurance arrangement and the assets and liabilities committed to the arrangement, the value of scheme assets and the residual scheme obligations are as follows: UK £m
Present value of funded obligations fully covered by insurance arrangement 1,510 – 1,510 1,431
Present value of defined benefit obligations 6,002 5,467 5,178 4,536 5,086
Assumptions used in calculation of retirement benefit obligations: Annual rate of general inflation 2.8 3.1 2.2 2.2
Assumptions used in calculation of income statement credit/charge in the year: Expected return on: | RSA | Annual Report and Accounts 2011134
Expected return on schemes’ assets The weighted average expected return on schemes’ assets across the Group for 2011 was 6.1% (2010: 6.4%). The expected return on schemes’ assets are determined for each asset class by considering both market conditions at the beginning of the reporting period and any expectations for longer term changes in current returns. All returns are net of investment expenses.
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 2009, the mortality assumptions adopted for the main UK schemes used the SAPS Light Normal base table with percentage adjustments to reflect the schemes’ recent experience compared with that expected under these tables. The next funding valuation is not due until 2012.
Commutation Each of the UK defined benefit pension schemes has changed its rules to allow for increased commutation following ‘A day’ in April 2006. In 2010 and 2011, the Group followed the funding valuation assumptions, and an allowance was made for future commutation using the current commutation factors.
Sensitivity analysis The discount rate, the assumed inflation rate and the mortality assumptions all have a significant effect on the IAS 19 accounting valuation. A 0.1% increase in the discount rate would reduce the defined benefit obligations in the UK not covered by the insurance arrangement by £55m (2010: £48m). A 0.1% increase in the inflation rate assumption would increase the defined benefit obligations in the UK not covered by the insurance arrangement by £51m (2010: £44m). An increase of one year in life expectancy would increase the defined benefit obligations (net of tax) in the UK not covered by the insurance arrangement by approximately £84m (2010: £65m). The Group has no material exposure to the effect of changes in medical costs.
The total employment cost recorded in the income statement for all plans is £9m in 2011 (2010: £28m).
For foreign exchange options the hedge designation is to hedge the value of the foreign operation at the strike price at the exercise date of the option.
Acquisition of subsidiaries On 7 January 2011, the Group acquired 100% of the share capital of Glenstone Capital Incorporated in Canada, the holding company of GCAN Insurance Company. The fair values of identifiable assets acquired comprise investments of £344m, intangible assets (excluding goodwill) of £51m, other assets of £205m and cash and cash equivalents of £9m. The fair values of liabilities assumed comprise insurance contract liabilities of £368m and other liabilities of £106m. The total cash consideration paid was £218m and goodwill of £83m arose on this acquisition.
During the year a number of small acquisitions were completed. On 22 March 2011, the Group acquired 51% of the share capital of Proteccion Garantizada LTDA. On 1 April 2011, the Group acquired 100% of the assets of Flewwelling Insurance Brokers Limited in Canada. On 6 April 2011, the Group acquired 100% of the share capital of Noble Marine (Underwriting Agencies) Limited and Noble Marine (Insurance Brokers) Limited in the United Kingdom. On 27 April 2011, the Group acquired 100% of the share capital of Oak Underwriting plc in the United Kingdom. On 14 July 2011, the Group acquired the business and underwriting assets of Expert Travel Financial Security Inc in Canada. On 30 November 2011, the Group acquired 100% of the assets of Haber Blain Insurance Brokers Limited in Canada. The acquisitions increase the Group’s insurance activity in each of the countries. The total cash consideration paid was £104m and goodwill of £29m arose on these acquisitions.
In addition to the acquisition of share capital, the Group acquired the rights to debt owed by Glenstone Capital Incorporated for consideration of £48m from its former parent.
The fair value of the financial assets acquired, included within other assets, includes premiums and insurance debtors of £32m, a reduction of £1m on their nominal value to take account of balances that are expected to be uncollectable.
Deferred consideration includes consideration which is contingent on the financial performance of the acquired business. The fair value of this consideration is estimated at £5m, with the minimum possible payment being £nil and the maximum possible payment being £26m.
During 2011 there were no significant changes in the recognised amounts of contingent consideration, and no changes in the range of outcomes, in respect of business combinations completed in earlier years.
Of the total goodwill recognised, £15m is expected to be deductible for income tax purposes.
Disposal of subsidiaries Disposals completed during the period resulted in a profit to the Group of £1m. The total consideration received in cash was £10m and the cash and cash equivalents included in the businesses sold was £4m. The values of other assets and liabilities disposed were not significant to the Group.
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
The Group has classified £17m (2010: £11m) office property within the International operating segment as assets held for sale. The Group is actively marketing these properties. No material gain or loss has been recognised in the income statement since the reclassification. Profit on disposal of assets held for sale of less than £1m (2010: £nil) in aggregate is recognised within other operating income.
We have audited the Parent Company financial statements of RSA Insurance Group plc for the year ended 31 December 2011 which comprise the Parent Company statement of comprehensive income, the Parent Company statement of changes in equity, the Parent Company statement of financial position, the Parent Company statement of cashflows and the related notes 1 to 11. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRS) as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006.
This report is made solely to the Parent Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Parent Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Parent Company and the Parent Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Parent Company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
Other matters We have reported separately on the consolidated financial statements of RSA Insurance Group plc for the year ended 31 December 2011 and on the information in the Directors’ remuneration report that is described as having being audited.
PARENT COMPANY STATEMENT OF CHANGES IN EQUITY for the year ended 31 December 2011
Fair value gains net of tax – – – (797) – – (797)
The movement in equity for the year net of tax includes a net tax charge of £1m (2010: £1m).
PARENT COMPANY STATEMENT OF COMPREHENSIVE INCOME for the year ended 31 December 2011
The separate financial statements were approved on 22 February 2012 by the Board of Directors and are signed on its behalf by: George Culmer Chief Financial Officer
PARENT COMPANY STATEMENT OF FINANCIAL POSITION as at 31 December 2011
Cash and cash equivalents at beginning of the year 3 1 Cash and cash equivalents at end of the year 8 3
These separate financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. Except where otherwise stated, all figures included in the separate financial statements are presented in millions of Pounds Sterling (‘Sterling’), shown as £m, rounded to the nearest million.
The investments in subsidiaries are recognised in the statement level financial position at fair value measured in accordance with the Company’s accounting policies. The Company’s investments are classified as Level 2 financial assets. Fair value of the Company’s significant subsidiary is determined by reference to the market value (derived from relevant indices) of the Company’s ordinary shares and loan capital instruments at the end of the reporting period, being the most transparent independent available indicator. The market value is adjusted for the fair value of the Company’s preference shares, assets and liabilities, excluding directly owned subsidiaries. The adjusting items have been fair valued by determining the present value of future cashflow projections, using an appropriate arm’s length discount rate. The remaining subsidiaries are held at fair value which has been determined to be net asset value.
The Directors believe that the methodology used supports the inclusion of the investments in subsidiaries in the statement of financial position, at the fair values ascribed to them. The market value of the Company’s ordinary shares at 31 December 2011 was 105.2p. A movement of 1% in the share price would have an impact of £37m on the fair value.
Deferred tax assets Deferred tax for the current year is based on a rate of 25.0% (2010: 27.0%). The following are the major deferred tax assets recognised by the Company and movements during the year: Other temporary differences £m
Deferred tax assets at 31 December 2010 12 11 2 25
Deferred tax assets at 31 December 2011 11 8 3 22
The following transactions were carried out with related parties: Provision of services and benefits RSA Insurance Group plc provides services and benefits to its subsidiary companies operating within the UK and overseas as follows: • Provision of technical support in relation to risk management, information technology and reinsurance services. Services are charged for annually on a cost plus basis, allowing for a margin of 5% (2010: 5%)
• Issue of share options and share awards to employees of subsidiaries. Costs are charged for annually, based on the underlying value of the awards granted calculated in accordance with the guidance set out within IFRS 2.
A number of the Directors, other key managers, their close families and entities under their control have general insurance policies with subsidiary companies of the Group. Such policies are available at discounted rates to all employees including Executive Directors.
Payable to related parties: Payable to subsidiaries, interest bearing loans 888 779
Interest is charged on interest bearing loans, which are repayable on 24 hours written notice. £618m (2010: £509m) at three months LIBOR plus 0.6% and £270m (2010: £270m) at three months LIBOR +200bp.
Additional loans to subsidiaries of £864m (2010: £871m) as disclosed within note 2 have been made. Of this, £294m (2010: £294m), £78m (2010: £78m) and £492m (2010: £492m) are subordinated loans on which interest is charged at 8.5%, 6.701% and 9.375% respectively with the remaining loan balance interest free with no specified repayment date.
The risks faced by the Company are derived from its investments in subsidiaries and are therefore the same as those of the RSA group of companies. Details of the key risks to the Group and the steps taken to manage them are disclosed in the Risk Management section of the consolidated financial statements.
OUR RISK MANAGED BUSINESS DEALS WITH LARGE, CORPORATE AND MULTI-NATIONAL COMPANIES, USUALLY WITH TURNOVERS IN EXCESS OF £100M. OUR TEAM PROVIDES CUSTOMISED INSURANCE AND RISK MANAGEMENT SOLUTIONS FOR BUSINESSES WHEREVER THEY OPERATE.
Risk management is a core part of our offering. By working closely with brokers and customers to identify and assess risks, we are able to build comprehensive and bespoke risk improvement programmes. This proactive focus on risk management and improvement can help minimize the likelihood of large and devastating losses, providing further reassurance to our customers.
Registered Office and Group Corporate Centre 9th Floor, One Plantation Place, 30 Fenchurch Street, London EC3M 3BD. Telephone: +44(0) 20 7111 7000. Registered in England and Wales No. 2339826.
You can elect to receive email notifications of shareholder communications by registering at www.shareview.co.uk where you can also set up a bank mandate to receive dividends directly to your bank account and submit proxy votes for shareholder meetings. Receiving the Company’s communications electronically allows the Company to communicate with its shareholders in a more environmentally friendly, cost effective and timely manner.
Share ownership RSA is listed on the London Stock Exchange under the code RSA. The average total daily trading volume during 2011 was approximately 4.1m ordinary shares. The closing market price of an ordinary share on 4 January 2011 was 128.8p and the closing market price on 30 December 2011 was 105.2p. The highest daily closing price of an ordinary share was 143.5p on 17 February 2011 and the lowest daily closing price was 99.6p on 16 December 2011. Further details of the ordinary and preference shares are found in note 18 on pages 120 to 122.
Managing your shareholding Share register fraud: protecting your investment It is required by law that our shareholder register is available for public inspection and we are unable to control the use of information obtained by persons inspecting the register. Shareholders are advised to be wary of any unsolicited advice, offers to buy shares at a discount, or offers of free reports about the Company. Details of any share dealing facilities that the Company endorses will be included in Company mailings or on our website. If you receive any unsolicited advice, make sure you get the correct name of the person and organisation and check that they are appropriately authorised by the FSA by visiting www.fsa.gov.uk/fsaregister. More information on protecting your investment can be found at www.fsa.gov.uk/consumerinformation/stay_safe.
Tips on protecting your shares • Keep any documentation that contains your shareholder reference number in a safe place and destroy any documentation which you no longer need by shredding it
• Inform Equiniti promptly when you change your address • Be aware of dividend payment dates and contact Equiniti if you do not receive your dividend cheque, or better still, make arrangements to have the dividend paid directly into your bank account
Amalgamation of accounts Shareholders who receive duplicate sets of Company mailings owing to multiple accounts in their name should contact Equiniti to request that their accounts be amalgamated.
ShareGift Shareholders with a small number of shares, the value of which makes it uneconomic to sell them, may wish to consider donating them to charity through ShareGift, a registered charity administered by The Orr Mackintosh Foundation, registered charity number 1052686. The relevant share transfer form can be obtained from Equiniti. Further details can be obtained from www.sharegift.org or by calling +44(0) 20 7930 3737.
28 March 2012 Ex dividend date for the ordinary final dividend for 2011.
Payment date for the first preference dividend for 2012 and record date for the ordinary final dividend for 2011.
4 May 2012 Deadline for the receipt of scrip dividend mandates by Equiniti in relation to the ordinary final dividend for 2011.
2 August 2012* Announcement of the half year results for the six months ended 30 June 2012, the ordinary interim dividend for 2012 and the second preference dividend for 2012.
10 August 2012* Record date for the second preference dividend for 2012.
Announcement of the scrip dividend price for the ordinary interim dividend for 2012.
26 October 2012* Deadline for the receipt of scrip dividend mandates by Equiniti in relation to the ordinary interim dividend for 2012.
Below is a simple explanation of some of the key technical terms used within this report.
• Percentage of Net Earned Premiums which is paid out in claims and Claims Handling Expenses.
Current Year Result • The underwriting profit or loss earned from business for which protection has been provided in the current financial period.
• The regulatory authority for the UK financial services industry (or its successor(s) for the UK insurance industry).
• Total premium written or processed in the period, irrespective of whether it has been paid.
Net Incurred Claims + Expenses (including commissions) Net Earned Premiums Net Written Premiums
• A measure of the profits the Group earns, adjusted for profit/loss on disposal of subsidiaries, reorganisation and integration costs and acquisition costs, relative to average funds attributable to ordinary shareholders.
Directors’ photography by Homer Sykes and Liam Bailey Executive Team by Liam Bailey Photography for the front cover supplied by Getty Images Photography for pages 16 and 17, 38 and 39, 72 and 73, 150 and 151 supplied by Shutterstock Images