Canada 5th largest overall, we are the largest Marine insurer and, through our Johnson operation, a leading direct insurer
Central and eastern europe We now own 100% of Intouch, the leading direct Motor insurer in poland, the czech republic and russia 5th largest no.1 direct
Middle east rsa Middle east has won ‘General Insurer of the Year’ for 3 consecutive years leading
We are a leadInG General Insurer operatInG In 34 countrIes and proVIdInG products and serVIces In oVer 130 countrIes.
2009 Was a Good Year For tHe Group In cHallenGInG condItIons and We delIVered anotHer stronG perForMance.
Business review 11 Group strategy 12 progress against strategic priorities 14 International business review 18 uK business review 22 emerging Markets business review 26 Financial review 30 risk management 33 corporate responsibility 38 executive team 40 Board of directors
| rSA | Annual Report and Accounts 200902 ouR peRfoRmAnce in 2009 hAS AgAin demonStRAted the BenefitS of ouR StRong And diVeRSified poRtfolio rSA At A GLAnce reGIonAL FootPrInt international comprises our businesses in the mature markets of Scandinavia, canada, ireland and italy.
MArKet PoSItIon through codan in denmark and trygg-hansa in Sweden, we are the third largest insurer in both markets. We also have a growing presence in norway and a niche marine business in finland.
Annual Report and Accounts 2009 | rSA | 03 reGIonAL FootPrInt We offer a wide range of insurance products and services to both commercial and personal clients in the uK.
We also provide bespoke insurance to multinational companies through our Risk Solutions network across Belgium, france, germany, italy, the netherlands and Spain.
We are the fourth largest personal lines insurer in the uK overall, as well as being fourth in motor, home and pet. We operate in the Broker and Affinity channels as well as directly through our moRe th>n® brand.
MArKet PoSItIon in latin America, we are the largest general insurer in chile, the largest private insurer in uruguay and a leading marine insurer in Brazil. We are also present in mexico, Argentina and colombia.
the second theme is to focus on growth opportunities, particularly where we have leading market positions and in emerging markets. We also continue to benefit from a combination of rigorous standards of management and specialisation in our core product sectors and our geographic footprint across the world.
We continue to invest in processes and technologies to improve service standards and reduce costs. We have also maintained our focus on management development and over recent years, the number of top 100 appointments made from within has increased significantly. the Board and shareholders are particularly well served by a dedicated team of management and staff, led by our chief executive Andy haste. i thank them all on our shareholders’ behalf.
As a policy, your Board actively and positively engages with regulators, currently adopting a chosen approach of an intensive and detailed regulation of risk activities. We keep reminding those who will listen that we are not a bank, that risk is our business and regulatory measures should be proportionate and not incur onerous costs or unnecessary increases in capital requirements because of over-negativity and fear.
John napier chairman create distortions in regulatory capital needs and create competitive disadvantages by country. the relocation pressure caused by variations in tax regimes may be superseded by unwelcome new pressures caused by changes in regulatory environments.
if certain public companies “cannot be allowed to fail” their board processes will need different controls than the great majority who don’t enjoy that protection. heavyweight bankingrelated regulatory competence should be more targeted and not thinly spread.
moving on, 2010 is a special year for RSA, one in which to celebrate our 300 years, to take great pride in the achievements of the company in both serving the interests of our shareholders and customers and fulfilling a role in society that helps indirectly to promote investment in growth and the future. We don’t take our success for granted, it will continue to depend on how well we exercise our stewardship on behalf of our shareholders and meet the needs of our policyholders with services that are appropriate and sustainable. Your Board continues to be wholeheartedly committed to those objectives and management is equally dedicated to their delivery.
on governance, we have further strengthened our Risk committee and appointed noel harwerth as non-executive chairman. over the next two years, we will add to the Board as we ensure continuity of corporate knowledge and experience and deal with the expected retirements required by the current guidelines on the “independence” of non-executives.
It’s with great pride that we celebrate our 300 year anniversary. our business started in 1710 with the establishment of the Sun Fire office. we believe that insurance should enable progress and this belief, together with our people and experience, will continue to drive us forward for the next 300 years.
We are confident of our ability to continue to deliver excellent results. We have a great portfolio of businesses with strong market positions and remain committed to driving top and bottom line growth.
A StronG FInAncIAL PerForMAnce in 2009, we increased premiums by 4% to £6.7bn, reflecting the impact of the economic downturn offset by our actions on targeted growth and rate.
the total investment result was £523m and income was in line with guidance at £595m. total gains were slightly ahead at £28m due to commercial property, which was up by £24m in the fourth quarter.
compared to 16.4% in 2008. net asset value per share was up by 5% excluding the pension fund and was 99p including the pension fund.
InternAtIonAL international, our largest region, again delivered an outstanding performance and continued to drive the group forward. premiums increased by 8% to £3.2bn (in line with 2008 at constant exchange), reflecting continued action on rate, targeted growth and the benefit of new deals offsetting the economic downturn. the coR was an excellent 91.7% with the underwriting result increasing by 8% to £282m.
in Scandinavia, 2009 was another great year. premiums increased by 4% to £1.7bn (down 2% at constant exchange), reflecting a strong performance in personal, offset by a 7% reduction in commercial, due to the impact of the downturn and reduced exposure.
in canada, once again we delivered strong growth, with premiums increasing by 15% to over £1bn (5% at constant exchange), achieved through positive rate increases across all lines of business, a retention level of over 87% and five acquisitions in the year.
| rSA | Annual Report and Accounts 200908 our continued focus on rate and risk selection ensured that we remain one of the most profitable insurers in Scandinavia, canada and ireland. We are confident that the international portfolio will continue to deliver good top line growth and sustained bottom line profitability.
in personal, we increased rate by 7% in motor and by 3% in household.
on claims, we continue to review lead and performance indicators and while there are pockets where we have taken action, we are still not seeing any systemic trends relating to the economic downturn.
As we move into 2010, the uK remains competitive but we have made a good start to the year with european Risk Solutions up by 10% and marine up by 5%. in personal we have won deals with homeServe and the West Bromwich Building Society.
in Asia and the middle east, premiums increased by 24%, due to contract wins in construction and engineering. While in our associate in india, personal motor grew by 14%, driven by new car sales.
in central and eastern europe, conditions remained tough in the Baltics. however, we maintained our market leading position, while intouch has continued to grow.
the emerging markets underwriting result of £29m increased by 26%, reflecting the early actions we took to protect profitability, including headcount reductions of around 600 across central and eastern europe and Asia and the middle east.
Annual Report and Accounts 2009 | rSA | 09 emerging markets remains an attractive place to do business. in the short term, conditions will remain tough, particularly in the Baltics, but emerging markets have huge potential. they will return to double digit growth and we will continue to invest in the region.
StronG FInAncIAL PoSItIon the group maintains a strong financial position with a regulatory capital surplus of £1.7bn, representing 2.4 times the requirement.
tecHnIcAL cAPAbILItIeS A sustainable business needs to attract, develop and reward talented people, as well as making them accountable for their actions. We continue to focus on developing employees.
the RSA technical Academy, which we launched in 2006, now has over 10,000 members across the group and i’m delighted that our marketing Academy, which we launched this year, was the winner of the ‘insurance times training programme of the Year 2009’.
InduStry overvIew finAnciAl SeRViceS WeRe undeR intenSe ScRutinY duRing 2009. Being ABle to diStinguiSh ouRSelVeS AS A puRe-plAY geneRAl inSuReR, With A cleAR StRAtegY And A RecoRd of StRong deliVeRY WAS A KeY diffeRentiAtoR.
Although conditions had improved by the year end, the position remains fragile, particularly for economies such as the uK and ireland, where the fundamental imbalances behind much of the recent turbulence, such as personal debt and trade imbalances, have not been fully resolved. A combination of consumers seeking to rebuild personal balance sheet strength and governments needing to repair their finances will weigh upon the growth outlook. it is likely that we will see further periods of weakness on the path to recovery.
economies that have not had these types of imbalances have been far more robust. in china and india, growth has recovered quickly after only a relatively modest slowdown. canada has also been a relative outperformer.
given this outlook, we continue to closely monitor economic trends and other indicators and their impact on the group. We have continued to take the right action on rate and expenses to mitigate the impact of the downturn. We also continue to pursue our high quality, low risk investment strategy.
from a legislative perspective, we welcome the adoption of the Solvency ii directive, which encourages the industry to better align capital requirements with the risks they take on their balance sheets. We look forward to working with the regulators to ensure that the implementation is consistent across eu member States and does not lead to unnecessary capital requirements.
GrouP ceo’S revIew contInued our executive development programme is entering its sixth year, bringing together leaders from across the group to work collaboratively on critical strategic issues and, in 2009, our graduate and fasttrack programmes provided structured support and career paths for 42 new starters and high potential individuals.
this year, we launched a road safety reflective programme for over 2,000 children in estonia and a new youth-focused crime prevention scheme in the uK. We also supported a number of environmental projects, including cleaning up polluted beaches in the middle east.
We officially launched our partnership with the WWf, focusing on the insurance risks of environmental change. over the next three years, RSA will be supporting conservation projects relevant to our business including a marine protection project in canada to help safeguard the long-term future of the fishing industry, a renewable energy project in china and a flood defence project in the uK.
RSA 97 out of 109, the highest score of all general insurers.
Broker satisfaction is also important to us and, in trygg-hansa in Sweden, we received top ratings in an independent survey of brokers’ perceptions of insurance companies and their products.
conFIdent outLooK 2009 was a good year for the group. We have great businesses with strong market positions and once again, we delivered excellent results in challenging conditions.
We will continue to drive the top line and we expect to see: mid-single digit growth in international• the uK moving to positive territory, and• double digit growth returning to emerging • markets over time.
in the first two months of 2010, we have announced the acquisition of Sveland in Sweden and Al Ahlia, making us the number one insurer in oman by net written premiums.
in targeting profitable growth, we will maintain our focus on underwriting discipline and continue to take action on rate and expenses. As it stands today, we expect to deliver a combined operating ratio in 2010 of around 95%.
We remain confident about the outlook for the group and our ability to continue to deliver excellent results.
GrouP StrAteGy our StrAteGy to continue to deliVeR SuStAinABle, pRofitABle peRfoRmAnce. thiS dRiVeS ouR cultuRe, the mARKetS We opeRAte in, the pRoductS We WRite, ouR pRudent ReSeRVing And ReinSuRAnce policieS And ouR high QuAlitY inVeStment StRAtegY. ouR StRAtegic pRioRitieS RemAin: deliVeRed thRough
We derive real advantage from being a pure-play general insurer. our focus is on doing one thing and doing it well, with rigorous control, attention to detail and the commitment to take the right action where required.
We seek to create leading positions in all our chosen markets, whether at an overall market level or segment level such as marine or construction & engineering.
We have a great portfolio of businesses with strong positions in attractive markets and see opportunities for targeted profitable growth in all regions.
each insurance portfolio has its own underwriting and pricing strategy. We hold in-depth portfolio and reserve reviews to ensure this strategy is being successfully executed or remediation plans put in place.
We also have a relentless focus on operational excellence and have a strong track record of delivering on our expense savings targets.
We invest in our people through our market leading technical and marketing Academies and other development programmes and continue to retain and attract high calibre employees.
We have a prudent reserving policy and continue to hold a significant margin over the best estimate of our liabilities. We therefore expect positive prior year reserve development to be a significant ongoing feature of our results.
We follow a high quality, low risk investment strategy. We have continued to take action to mitigate falling yields, whilst maintaining the overall high credit quality and diversification of the portfolio.
We hold significant regulatory and economic capital surpluses, as well as sufficient capital to deliver on our strategic objectives.
tArGeted GrowtH In ALL reGIonS Specialty lines including Risk Solutions and marine grew strongly in canada and the uK, as did bancassurance and Renewable energy in denmark and construction and engineering in Asia and the middle east.
our reputation for Affinity is strong and we signed over 50 new deals across the group including tesco in ireland and Santander in mexico.
StronG PortFoLIo wItH Good GrowtH ProSPectS We remain committed to continuing to drive top and bottom line growth. looking forward, we would expect mid-single digit growth in international, the uK to move to positive territory and emerging markets to return to double digit growth over time.
coSt SAvInGS ProGrAMMeS on trAcK We have already achieved the uK headcount reduction of 1,200 announced in february 2009 and, as a result, uK headcount is down by over 40% since 2003.
contInue to deLIver SuStAInAbLe ProFItAbLe PerForMAnce We’ve made a good start to 2010 and are confident of our ability to continue to deliver excellent results. We will continue to push hard on rate while maintaining underwriting discipline and expect to achieve a coR of around 95% in 2010. We will continue to operate a high quality, low risk investment strategy and expect investment income to be around £540m, with total gains around 2009 levels.
coSt SAvInGS ProGrAMMeS to be coMPLeted AHeAd oF ScHeduLe in february 2009, we announced a new uK cost savings target of £70m to be delivered by mid 2010. We expect to complete this, ahead of plan, in Q1 2010 and remain committed to achieving a uK expense ratio (excluding commissions) of around 14% by the end of 2012.
Key StRAtegieS International remains committed to delivering sustainable profitable performance and focuses on four key areas to drive the business forward and outperform the competition: Delivering profitable growth in target • segments through expanding distribution and selected acquisitions Leveraging our market leading capabilities • in underwriting and claims Driving continuous operational efficiencies • across the business, and Promoting a high performance culture, • where people want to give their best every day.
ScAndinAviA We are the third largest insurer in both Denmark and Sweden, with a growing presence in Norway.
In Personal lines, premiums are up by 8% to £944m (4% at constant exchange), as a result of our rating actions across all portfolios and continued good performance in Norway Affinity and Personal Accident. In Denmark, bancassurance continues to perform well, growing at 10%. In Sweden, we have recently strengthened our bancassurance proposition with the acquisition of Sveland, announced in January 2010.
Personal net written premiums increased by 17% to £778m (6% at constant exchange), with Personal Intermediated up by 14% (4% at constant exchange) and Johnsons, our direct business, up by 19% (8% at constant exchange), driven by excellent retention of 90%, rate and the addition of 20 new sponsorship groups during the year.
otheR euRoPe In Other Europe, premiums are up by 9% to £559m (down 2% at constant exchange). In Ireland, where the economy shrank by 10% in 2009, premiums have increased by 17% (5% at constant exchange) driven by action on rate, new Affinity wins and acquisitions. These include Tesco and the largest Irish nurses scheme, with access to over 80,000 members and the acquisition of Benchmark Insurance.
Our response to the L’Aquila earthquake demonstrates what typifies the Group. When the worst happens, we help keep people moving and we were able to play a significant role in getting life back to normal quickly.
The new management team has dealt with the move to Direct Indemnification and continued to take remediation action on our Motor book. We expect to see the benefit of these actions on the underwriting result during 2010.
In Ireland, economic conditions remain challenging, although we have achieved double digit rate increases in Personal Household.
2009 has been a challenging year in Italy as a result of changes in regulation and market practices in Personal Motor, which accounts for around 60% of the market. Our new CEO and his strengthened management team are tackling these issues.
‘INTERNATIONAL CONTINUES TO DRIVE THE GROUP FORWARD, DELIVERING A VERy STRONG TOP AND BOTTOM LINE PERFORMANCE IN CHALLENGING CONDITIONS.’
295 people died that morning. Hundreds of properties including houses, businesses, hospitals and churches were destroyed. Some 15,000 people lost their homes and were forced to seek shelter in tents or alternative accommodation.
We are proud to have played our part in helping the families of L’Aquila to start to rebuild their town and their lives, it’s something they’ve had to do many times over the centuries.
codan underwriters were instrumental in lightning protection measures that are now standard in every wind turbine globally.
We are the UK’s second largest Commercial and fourth largest Personal insurer with a reputation for technical excellence.
In Personal, we continue to focus on customer segmentation and targeted pricing to attract and retain customers who meet our preferred risk criteria. We continue to build a strong reputation for delivering quality Affinity propositions to our partners and their retail customers. In Personal Broker we are focused on the mid-net worth market and have strengthened our product and service proposition.
We continue to target an expense ratio of around 14% by the end of 2012, which we believe is an appropriate level for our mix of business. As part of this, in February 2009, we announced a cost savings programme of £70m to be delivered by mid 2010.
coMMeRciAl Net written premiums for Commercial lines were down by 5% to £1.5bn, as exposures declined with the impact of the economic downturn. Commercial Motor in particular was hit by a fall in new business sales. Mitigating this decline we have delivered strong growth in Specialty lines such as European Risk Solutions, up by 47% and Marine up by 21%.
We continue to push rate where required and have achieved renewal rate increases of 7% in Motor and 3% in Household. We also continue to push rate hard on Motor new business and have achieved double digit rate increases. The Personal COR was strong at 97.4%.
technicAl cAPABilitieS Building on our reputation for technical excellence, we aim to differentiate ourselves from our competitors and continue to develop the sophistication of our claims handling, with enhanced fraud detection capabilities.
MARKet conditionS Within Commercial, the mid-market sector remains competitive as customers look to control costs. In Personal, competition remains strong due to aggregators and the number of players in the market and we expect this to continue.
The UK experienced severe snow and flooding in 2009, however, the impact on our result was limited by our prudent underwriting and conservative reinsurance policy. Improved large losses and benign subsidence conditions were also positive factors.
We see targeted growth opportunities in Commercial in Specialty lines such as Risk Solutions and Marine and in Personal lines, we will continue to grow Affinity and strengthen our high and mid-net worth offerings.
We’ve made a good start to 2010, with growth in Specialty lines in January and new business wins in Personal. Looking ahead, with the actions we have taken to refocus and reorganise the business we are well placed and whilst maintaining our underwriting discipline we expect the top line to move to positive territory.
Potato crisps need to be light and golden, not black and burnt.
That’s what our Risk Assessor, Kumu Kumar, was thinking during a routine visit to one of our clients who is a major manufacturer of snack foods. While he was examining the different processes he noticed that one area was particularly susceptible to fire.
Kumu knew that sprinklers were a bad idea as the water would react and actually ‘fuel’ a fire. Instead, he suggested a much more effective solution, water mist technology.
Weeks after the new system was fitted, the deep fat fryer caught fire. The blaze was gaining momentum, threatening to burn the whole factory to the ground.
But just then, the Production Line Manager manually activated the new system and the fire was put out in seconds. Hardly any damage was caused, but more importantly, no lives were put at risk. The fat fryer was cleaned and back running again within a matter of hours.
All this shows that while the initial visit may have been routine, the attitude of Kumu, our Risk Assessor, was anything but.
we provided charles darwin’s home and contents cover for his house in Kent.
Emerging Markets covers 21 countries across Latin America, Asia and the Middle East and Central and Eastern Europe.
At 44%, Motor is a significant proportion of our portfolio. We are continuing to leverage the Group’s overall technical capability to improve our pricing and claims offering.
For SMEs, we are streamlining sales processes and developing simplified standard products, enabling this segment to be served more cost effectively and providing greater choice to SMEs themselves.
PRogReSS AgAinSt Key StRAtegieS Our results are strong, demonstrating the success of our strategy despite the impact of the economic downturn in a number of our markets. Emerging Markets premiums are up by 13% to £833m (2% at constant exchange). Including associates, premiums are £954m. The underwriting result is strong, up by 26% to £29m (2008: £23m), due to early action taken on rate and expenses. The COR is 95.1%, an improvement of 1.3 points on the prior year.
Asia and the Middle East increased premiums by 47% (24% at constant exchange), driven by several large contract wins by our Construction and Engineering hub in the region. We also saw good growth in Singapore and Oman, where we have recently announced the acquisition of Al Ahlia, making us the largest insurer in the market by net written premiums. Our IPO in the Kingdom of Saudi Arabia is progressing successfully, with the offering being seven times over-subscribed.
(10% at constant exchange), with Personal Motor growing at 14% on the back of buoyant new car sales.
outlooK In Latin America the economies in our markets are picking up with an immediate impact on insurance and in Asia and the Middle East we are seeing a move from private to governmentfunded infrastructure projects.
In Central and Eastern Europe, the Baltics has been particularly impacted by the economic downturn, however, we continue to maintain our market leading position.
In targeting profitable growth, we will maintain our focus on underwriting discipline and continue to take action on rate and expenses. We remain on track to achieve our £1bn premium target by the end of 2010.
‘OUR EMERGING MARKETS HAVE HUGE POTENTIAL AND WE REMAIN ON TRACK TO ACHIEVE OUR £1BN PREMIUM TARGET By THE END OF 2010. OVER TIME, WE ExPECT TO RETURN TO DOUBLE DIGIT GROWTH.’
Transporting this kind of cargo requires expertise and precision, so when a major pharmaceuticals manufacturer asked us to help, our Risk Managers set to work.
As a global company with local knowledge, we were also able to help with security and contingency measures on the ground.
Our efforts have paid off. There are now considerably fewer disruptions to the supply chain and we’re working hard to reduce the number even further.
RSA was instrumental in the foundation of Shanghai’s first fire service which was crewed by volunteers.
Profit after tax from continuing operations 419 586 641 479 635
Loss after tax from discontinued operations – – (13) (499) (30)
undeRwRiting ReSult The underwriting result is up by 1% to £386m (2008: £384m) and represents a strong performance in challenging conditions, with a current year underwriting profit of £100m (2008: £93m) and a prior year profit of £286m (2008: £291m). The current year result reflects the benefits of rate increases, other management actions and improved large losses (£34m better than 2008), offset by adverse weather (£55m worse than 2008).
The prior year result comes from all regions with particular strength from Scandinavia and Canada and the expected lower, but still strong, contribution from the UK.
‘ 2009 WAS A GOOD yEAR FOR THE GROUP IN CHALLENGING CONDITIONS. WE ARE CONFIDENT IN OUR ABILITy TO CONTINUE TO DELIVER ExCELLENT RESULTS.’
inveStMent ReSult The investment result is £523m, with investment income of £595m, in line with guidance, total gains of £28m and the discount unwind up to £100m primarily due to foreign exchange.
Total gains of £28m include £69m of realised gains, a loss on our equity hedge of £28m and impairments of £24m. Total gains also includes £7m of mark to market gains on commercial property, ahead of expectations due to a strong performance in the final quarter.
As reported at the half year, we will continue to charge the investment in these direct operations to Other Activities. In 2009, this investment was £29m, compared with £16m in the prior year, primarily reflecting the move from associate to wholly owned subsidiary. In 2010, we expect this investment to be around similar levels.
The £7m loss on disposal relates to the sale of the British Engine legacy business, announced on 30 September 2009, which will remove over £100m of net insurance liabilities from the Group’s balance sheet.
tAxAtion The tax charge is £135m and represents an effective rate of 24%. In 2009, there has been no allocation to the Swedish Security Fund. The effective rate has, however, benefitted by 1% following the domestication of our Irish branch into a subsidiary.
FinAnciAl Review continued 2009 dividend The directors will recommend at the Annual General Meeting to be held on 17 May 2010, that a final ordinary dividend of 5.33p (2008: 4.98p) per share be paid. This together with the interim dividend of 2.92p (2008: 2.73p) paid on 27 November 2009, will make the total distribution for the year 8.25p (2008: 7.71p).
Net financing relates to the subordinated debt issue in the first half of the year, offset by the Euro bond call in October. Corporate activity of £101m comprises our acquisitions in Central and Eastern Europe, Canada and Ireland.
liquidity And deBt ReFinAncing Our financing and liquidity position remains strong. The next call on any external financing is on the £450m subordinated guaranteed perpetual bonds in December 2014 and our committed £455m senior facility remains undrawn. New subordinated guaranteed Sterling dated notes were issued on 20 May 2009. The nominal £500m of notes have a redemption date of 20 May 2039 and bear interest at a fixed rate of 9.375% until 20 May 2019, after which the Group has the option to repay the notes on specific dates.
inveStMent PoRtFolio The total value of the investment portfolio is £14.3bn, down marginally from the start of the year, with the negative impact of foreign exchange and other movements offset by mark to market gains. The overall portfolio remains high quality, with 87% of the portfolio invested in fixed income and cash. The fixed interest portfolio remains concentrated on high quality short dated assets, with 99% of the bond portfolio investment grade and 80% rated AA or above. The average duration of the portfolio is 3.0 years.
cAPitAl PoSition The Group has again maintained a strong capital position. Shareholders’ funds were £3.5bn, with the movement on prior year due to after tax profits, offset by foreign exchange, the decrease in the pension surplus and the payment of dividends. Excluding the pension fund, shareholders’ funds are up by 5%.
PenSion Fund The pension scheme moved from a surplus of £363m at the start of the year to a deficit of £262m at 31 December 2009. This movement reflects the action taken to de-risk the UK schemes in July and changes in assumptions.
The de-risking provides protection against longevity, interest rate and inflation on around one third of the UK defined benefit schemes’ liabilities and significantly reduces the sensitivity of the schemes.
These included: Reducing the future rate of pension accrual • from 60ths to a choice of 80ths or 100ths Increasing the level of existing employee • contributions Reducing the cap on pensionable earnings • to £75,000 and Raising the schemes’ retirement age from • 62 to 65.
These changes will reduce the growth of the future liabilities and cut the annual cost of the schemes.
Solvency ii Solvency II is a fundamental overhaul of the capital adequacy regime for European insurers and reinsurers, which we expect to become law on 31 October 2012.
We have established a cross-functional team covering capital and risk management, modelling, actuarial, regulatory and IT to lead the implementation of Solvency II across the Group. The team report to a Steering Committee which provides oversight and governance on behalf of the Executive Management to the Board and Board Risk Committee. As Group CFO, I am the Board member responsible for Solvency II. There is still a long way to go but we believe that the eventual outcome will be a sensible one.
SuMMARy 2009 was a good year for the Group in challenging conditions. We will continue to drive top and bottom line growth and are confident of continuing to deliver excellent results.
RiSK MAnAgeMent oveRAll RiSK FRAMewoRK The Group operates under a risk management framework that is designed to identify, assess, measure and manage exposure to risk. This process is subject to continuous review and development.
RiSK FRAMewoRK The Group has a ‘3 lines of defence’ model for the oversight and management of risk: 1st Management: responsible for setting strategy, performance measurement and the establishment and maintenance of internal control and risk management systems 2nd Risk assessment: we operate a formal risk management framework within which the Group policies and minimum standards are set. Oversight and challenge are provided by the Board Risk Committee, supported by the Group risk functions and a Group wide network of regional risk committees 3rd independent assurance: the Group Audit Committee, supported by Group Internal Audit and regional audit committees, provides independent and objective assurance of the effectiveness of the Group’s systems of internal control.
Compliance with policy statements is mandatory. Policies are subject to regular review to reflect changes in circumstances and the Group risk appetite.
inSuRAnce RiSK The Group’s insurance activities are primarily concerned with the pricing, acceptance and management of risks arising from our contracts with customers. The management of underwriting and claims risks uses a number of key tools, including the review of the performance and management of individual insurance portfolios throughout the Group using the portfolio classification process and the investigation of potential emerging insurance risks.
2009 uPdAte oRgAniSAtion We strengthened the independence of the Board Risk Committee by appointing two Non Executive Directors, Noel Harwerth (Chair) and Malcolm Le May. We also made a number of appointments across the business to strengthen the Financial, Emerging Markets and International Risk teams.
We also reviewed our delegated authority framework policy and strengthened our financial authorisation processes.
oPeRAtionAl RiSK Major sources of operational risk include, but are not limited to, process reliability, information security, fraud and human error. The Group uses a suite of risk tools to help manage operational risk including risk and control self assessments, key risk indicators, scenario analyses, incident management and loss reporting.
cRedit, MARKet And liquidity RiSKS The primary sources of credit risk are investment and treasury activities and reinsurance counterparty risk. A range of bank counterparty concentration and credit quality limits, together with other controls, are in place to ensure that exposure is managed within the Group risk appetite. New reinsurance cover is placed with reinsurers that are authorised as approved reinsurance counterparties recommended by the Group Reinsurance Credit Committee under criteria approved by the Board Risk Committee.
Group liquidity is managed by Group Treasury and each operation is required to maintain a minimum level of cash or highly liquid assets. Contingency funding plans are prepared and monitored to ensure that these minimum levels are met even in stress conditions.
Inability to charge adequate • rates places downward pressure on operating results.
Diverse portfolio, provides exposure to markets at different stages • of development and at different points in the insurance cycle Continue to invest in technical skills, sales and marketing • capabilities and target profitable growth Each underwriting portfolio has a rate plan, reviewed regularly • to ensure achieved or corrective action taken Reviews of business won and lost to ensure underwriting discipline is • maintained and risks accepted are priced to achieve target returns, and Actively shift capacity to where we see the best returns.•
PRogReSS in 2009 Our progress in 2009 was recognised by Goldman Sachs, who named RSA as one of the top five global insurers in their GS: Sustain report, an upgrade from Bronze to Silver in the Dow Jones Sustainability Index, moving from ‘Gold’ to ‘Platinum’ in the Times Top 100 Companies and winning the CorpComms Best Corporate Responsibility Strategy award.
APPRoAch And goveRnAnce Behaving responsibly and ethically has a positive impact on people, communities and the environment in which we operate. We are committed to ‘Doing the Right Thing’, both as individuals and as a company and all employees are assessed against our brand beliefs to ensure that this forms part of the performance and remuneration structure at RSA.
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 comply with our CR, environment, charity and human rights policies on a quarterly basis. Compliance with the policy framework is reviewed by the Group Executive Committee and Group Board in regular CR updates.
Responsibility for CR lies with the Group CEO, who chairs the bi-annual Group Executive Committee review of CR and the annual review by the Board. Briefings and training on specific CR issues are provided on an ongoing basis. CR targets and objectives are included in the Group CEO’s goals, which are also cascaded to direct reports and relevant business functions.
Our CR data, processes and external reporting are verified by the Corporate Citizenship Company (AA1000, GRI, ISAE3000) with an extra audit of the Group’s carbon footprint forming part of our offsetting due diligence (GHG Protocol). We use a web-based environmental management system to help collect and analyse data across RSA.
WWF PARTNERSHIP In 2009, we officially launched our partnership with WWF across the UK, Canada, Sweden, Denmark and China focusing on the insurance risks of environmental change. Over the next three years, RSA will be supporting conservation projects relevant to our business, developing new products and engaging our employees and external stakeholders on the environment.
1. 2008 statistics restated. 2. Leak in Mexico caused a major increase in water consumption in 2009. 3. 2009 data includes Czech Republic, Poland and Russia for first time.
| RSA | Annual Report and Accounts 200934 coRPoRAte ReSPonSiBility continued usage, not only helps us meet environmental targets but reduces overall cost in our continued focus on operational excellence.
cuStoMeRS As an insurer, we play a vital role in helping people and businesses recover when the worst happens. Helping get their lives back on track is our first priority. During the 2009 earthquake in Italy and flooding in the UK and Mexico, we helped our customers through our rapid claims response.
Product innovation is also key to our success and across the business we have created tailored and relevant products for specific customer groups. Social and environmental changes create demands for innovative insurance solutions. For example: In Chile, the city of Santiago introduced vehicle • restrictions in a bid to tackle air pollution. We developed an SMS alert service to notify customers when they can’t drive their cars. The service attracted over 16,000 users and has been endorsed by the City Council and Chilean Environment Ministry, and Working with the reinsurer Munich Re • we launched insurance4renewables, a global service that offers standard and customised insurance products and services for renewable energy projects in developing countries. The service was developed in partnership with the United Nations Environment Programme to tackle the barriers many developing country projects face in securing investment.
In 2010, we will rollout this approach in Canada and Scandinavia, building on our responsible procurement agenda and sector wide collaboration through the Financial Services Procurement Forum.
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. 4. CO2 baselines 2006-08 restated in accordance with revised emission factors from DEFRA and GHG Protocol. 5. 2009 data includes Czech Republic, Poland and Russia for first time.
We continued to focus on employee engagement leveraging the insights from our Employee Engagement Survey. The feedback obtained has been used to generate ideas and create action plans to make changes across our business. The overall engagement score was up 0.19 to 3.99 (maximum of 5.00), which is classed as a significant improvement.
cliMAte chAnge & the enviRonMent As an insurer, any change in the intensity or frequency of extreme weather conditions is a significant issue. RSA, together with WWF, hosted an event at the COP15 talks in Copenhagen, focusing on risks to the Arctic region.
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 ABI ClimateWise initiative.
Road Safety We continue to support programmes in Chile, Lithuania, UAE, Sweden, Denmark and the UK and in 2009, launched a road safety reflective clothing programme for over 2,000 children in Estonia. We also continue to develop our children’s accident prevention foundations in Denmark and Sweden, which promote accident prevention measures and support families who have been affected by their child’s accident.
environment During 2009, we supported a number of environmental 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.
coRPoRAte ReSPonSiBility heR city iS choKed By tRAFFic. ouR SiMPle Solution helPed cleAR thingS uP.
How would it feel to live your life behind a mask? To know that the air you breathe damages your health, and your children’s health, because of the shocking pollution caused by traffic.
we insured the first offshore windfarm in the world and to date have been involved in insuring around 80% of the world’s offshore turbines.
2. clARe SheiKh gRouP StRAtegy, MARKeting And cuStoMeR diRectoR Clare joined as Group Strategy, Marketing and Customer Director in June 2007. Previously she was Director of Marketing and Commercial Strategy at ITV plc and a member of the Executive Management Board, Managing Director of AA Financial Services and has held senior commercial roles at Prudential and British Gas. She is a Non-Executive Director of Alliance Trust plc. . 3. MARK chAMBeRS geneRAl counSel And gRouP coMPAny SecRetARy Mark Chambers joined as General Counsel and Group Company Secretary in October 2004. Previously, Mark led the legal team at American Express for Europe, Middle East and Africa. Prior to that he held senior positions in the consumer finance and insurance businesses at GE and worked for Slaughter and May, a leading international law firm. Mark is a trustee of WWF-UK and Chairman of their Audit Committee.
5. dAvid weyMouth gRouP oPeRAtionS And RiSK diRectoR David joined as Group Operations and IT Director in June 2007. David spent 27 years with the Barclays Group, where senior roles included Chief Operating Officer for Corporate Banking and Group Chief Information Officer. He was also on the Group Executive Committee. He recently spent two years consulting to blue chip and government organisations and acting as an independent board member at the DTI and Chordiant Inc, the US Nasdaq quoted software business.
Annual Report and Accounts 2009 | RSA | 39 6. PAul whittAKeR chieF executive, eMeRging MARKetS Paul was appointed Chief Executive of Emerging Markets in 2006, having been Group Human Resources Director since April 2003. He has over 20 years’ senior management experience in the financial services sector including three years at AxA and ten years at GE Capital, including work in Asia and Eastern Europe on acquisition integration and business development.
7. Anne JÆgeR gRouP chieF AuditoR 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. She was part of the Codan Group Executive Leadership Team and the International Central Leadership Team. Anne was previously CFO at Maersk Data for two years and spent 13 years with KPMG as a State Authorised Public Accountant, where she was involved in work with public listed companies and M&A and restructuring.
9. tiMothy Mitchell gRouP undeRwRiting And clAiMS diRectoR Tim was appointed Group Underwriting and Claims Director in November 2007 when he joined the Group. He has over 30 years’ experience in the insurance industry. He joined RSA from Zurich Financial Services, where senior underwriting roles included Global Chief Underwriting Officer for General Insurance. Tim has also held senior management roles at AIG and Continental Insurance. Tim is on the Cheltenham Ladies College Council.
11. oRlAgh hunt gRouP huMAn ReSouRceS diRectoR Orlagh joined the Group as Human Resources Director for International in September 2003 and was appointed Group Human Resources Director in October 2006. She was previously Head of Human Resources for AxA Sun Life and has worked at Walkers and Tesco in a variety of Human Resources management roles.
FRoM leFt to Right: 1. John nAPieR Age 67. John joined as a Non-Executive Director in January 2003 and became Chairman of the Board and Nomination Committee in March 2003. He is a member of the Investment Committee and joined the Remuneration Committee in January 2009. He was appointed Non-Executive Chairman of Aegis Group plc (media) in June 2008 and interim Chief Executive of Aegis Group plc in December 2008. From 1999 to 2008 John was 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).
4. noel hARweRth Age 62. Appointed as a Non-Executive Director in March 2004, Noel joined the Board Risk Committee as Chairman in June 2009 and is a member of the Audit and Investment Committees. Noel is also a Director of Logica plc (IT and outsourcing), Impellam Group plc (support services), Harry Winston Diamond Corporation (mining and retail) and Deputy Chairman of Sumitomo Mitsui Banking Corporation Europe Limited (finance). Noel was formerly Chief Operating Officer of Citibank International plc (finance).
5. edwARd leA Age 68. Appointed as a Non-Executive Director in July 2003, Edward is Chairman of the Group Audit Committee and a member of the Remuneration and Investment Committees. Edward is currently a Director of Redbourn Group Limited (property management and investment), Powertraveller Limited and MacIntyre Care (charity). He was previously a Director of BUPA.
principal activity The Company is the holding company of the RSA group of companies (the ‘Group’) whose principal activity is the transaction of personal and commercial general insurance business. The Group operates in 34 countries and provides general insurance products and services in over 130 countries.
Business review The Companies Act 2006, section 417 requires the Directors to present a business review in this report. The information that fulfils this requirement can be found in the sections below, which are incorporated by reference into this report: The Group CEO’s review on pages 6 to 10• The Group strategy on pages 11 to 13• The regional business reviews on pages 14 to 25• The financial review on pages 26 to 29• The key performance indicators throughout the introduction and • business review The discussion of future developments of the business in the Group • CEO’s review on pages 6 to 10 and in the regional business reviews on pages 14 to 25 The discussion of principal risks and uncertainties facing the Group • set out in the estimation techniques, risks, uncertainties and contingencies on pages 82 to 84, and in the risk management section on pages 30 to 32 and The corporate responsibility report on pages 33 to 37.•
The Group uses Key Performance Indicators (KPIs) to provide a well balanced and comprehensive review of the Group’s overall performance. KPIs are monitored in a number of areas including financial, employee, customer, strategic priorities and the environment and community. Financial KPIs include the Group’s combined operating ratio, expense ratio, operating result and net written premium growth. Employee KPIs include the percentage of staff that have performance related pay, the percentage of staff taking part in the employee survey and the increase in overall employee engagement levels as measured by the survey. Customer KPIs include the levels of customer retention and the Group’s position in the annual benchmarking survey on complaints handling by the Association of British Insurers. Environment and community KPIs include targets on energy, travel, waste and levels of CO2 emissions and the amount of the Group’s charitable donations. Financial KPIs are highlighted on page 1 and are detailed throughout the introduction and business review. The employee, customer and the environment and community KPIs are detailed in the regional business reviews on pages 14 to 25, the corporate responsibility report on pages 33 to 37 and in this report.
Dividends The Directors recommend a final dividend of 5.33p per ordinary share in respect of the year ended 31 December 2009 to be paid on 4 June 2010 to holders of ordinary shares on the register at the close of business on 5 March 2010, subject to ordinary shareholder approval. This, together with the interim dividend of 2.92p per ordinary share, will make a total dividend for the year of 8.25p per ordinary share.
employment policy The Group’s employment policy reflects our belief that motivated and skilled employees are critical to our success.
The Group is committed to fostering a constructive dialogue with recognised independent trade unions, ensuring a regular and open dialogue on business issues and early consultation on changes affecting the workforce. In the UK, Unite is formally recognised through a partnership agreement which covers collective consultation and bargaining on behalf of non management employees. The Management Association (TMA) represents managerial employees under a separate consultative agreement. The European Consultative Forum (ECF) is a cross European body created to enable information sharing and consultation on transnational issues with the European workforce.
In 2009 we have continued to deliver our leadership development programmes. We have continued to accelerate the development of our in house executive talent through the Executive Development
Programme which enters its sixth year in 2010. During 2009 we set up a Marketing Academy to train and develop our marketing staff and support our ambition of building a best in class marketing function.
Now into its third year, the Global Technical Graduate Programme covers business and technical essentials, continuing our commitment to growing the next generation of underwriters, claims handlers and actuaries.
We also encourage employees to participate in our discount schemes for employees and their families. Our Staff Saver Scheme in the UK currently has approximately 7,800 Staff Saver policies in force (2008: approximately 6,000 policies in force).
The Group actively encourages employees to become involved in supporting their local communities. Further details are provided in the corporate responsibility report on pages 33 to 37.
supplier payment policy It is the Company’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.
annual general meeting The AGM will be held at the Queen Elizabeth II Conference Centre, Broad Sanctuary, Westminster, London SW1P 3EE on Monday, 17 May 2010 at 11.00 am.
Enclosed with this report is a letter from the Chairman to shareholders. Attached to the letter is the Notice convening the AGM which will include items of ordinary and special business as detailed in the Notice.
Further details on the share capital of the Company are incorporated into this report and are set out in note 18 on pages 110 to 112.
substantial share interests At the date of this report the Company had been notified by the following companies of their and their clients’ voting interests in the ordinary share capital of the Company in accordance with Disclosure and Transparency Rule 5 (the number of shares and percentage interests are shown as at the relevant notification dates): Number of shares Interest in issued share capital
Details of Directors’ powers are set out in the corporate governance report on page 47 and are incorporated into this report by reference.
Directors’ indemnity Article 144 of the Articles provides that, among other things and insofar as permitted by law, every Director shall be indemnified by the Company against all costs, charges, expenses, losses or liabilities incurred in the execution and discharge of the Director’s duties, power or office.
essential contracts The Company does not consider that it, or any of its subsidiaries, has any key dependency or essential contract that is fundamental to the success of the Company that is required to be disclosed pursuant to section 417 of the Companies Act 2006.
The figure includes a donation of £100,000 to the Thames Rivers Restoration Trust for a flood management project in London. There is a formal Group policy currently in place which prohibits any donations to political parties.
By order of the Board mark r chambers General Counsel and Group Company Secretary
the Board The Board is accountable to shareholders for the creation and delivery of strong sustainable performance and the creation of long term shareholder value. The Board meets frequently and is responsible for organising and directing the affairs of the Company and the Group in a manner that will promote the success of the Company and is consistent with good corporate governance practice, and for ensuring that in carrying out its duties the Company and the Group meet legal and regulatory requirements.
The business of the Company is managed by the Directors, who may exercise all the powers of the Company subject to the Articles, relevant law and any directions as may be given by the Company in general meeting by ordinary shareholder resolution. The Directors may delegate any of their powers or discretions to committees.
The Directors restrict the borrowings of the Company so that the aggregate amount, for the time being, remaining borrowed by the Group is not, without the previous sanction of an ordinary resolution of the Company, more than one and a half times the aggregate of: The amount paid up on the issued share capital of the Company and• The total of the capital and revenue reserves of the Group • (subject to certain adjustments).
2. Noel Harwerth and Malcolm Le May were appointed to the Board Risk Committee with effect from 3 June 2009 and have attended all three meetings of the Committee since their appointment.
The specific duties of the Board are clearly set out as a formal schedule of matters specifically reserved to it, which can only be amended by the Board itself and which is reviewed annually. Matters reserved to the Board include: Approval of the Group’s long term objectives and commercial strategy• Approval of changes to the Group’s senior management structure• Approval of the Group’s overall risk appetite• Annual review of the effectiveness of internal control arrangements• Approval of the annual operating and capital budgets• Changes to the Group’s capital structure and• Approval of the Group’s financial results and any significant • changes to accounting practices or policies.
The Board met twelve times during the year ended 31 December 2009. The attendance of Directors at meetings of the Board and at Board Committees of which they were members during the year is set out in the table on page 47.
Board balance and independence Details of the Directors who served during the year can be found on pages 40 and 41.
induction and professional development On appointment to the Board, Directors undertake an induction programme and receive a range of information about the Company when they join the Board. This includes background information on the Group and details of Board procedures, governance issues and directors’ responsibilities. The induction programme also includes a series of meetings with members of the Board and executive management, together with various briefings and presentations regarding the business and regulatory matters from executives.
The Non-Executive Directors are responsible for the evaluation of the Chairman’s performance and take into account the views of the Executive Directors in their evaluation. As part of the ongoing performance evaluation process the Chairman has regular one to one meetings with each of the Non-Executive Directors.
The Directors confirm that they have complied with the above requirements in preparing the financial statements.
Dialogue with institutional shareholders The Board attaches considerable importance to its relationships and communication with shareholders. Senior management meet principal institutional shareholders on a regular basis and small shareholder groups on request, and Non-Executive Directors are available to meet with institutional shareholders as required. Over 70 meetings with investors were held during 2009. General shareholder information is also available on the Group’s website www.rsagroup.com.
constructive use of the annual general meeting All ordinary shareholders are invited to attend the Company’s AGM. The AGM Notice is despatched to ordinary shareholders at least 20 working days before the meeting and contains separate resolutions on each substantive issue, including a resolution to adopt the Annual Report and Accounts. All Directors are requested to attend each AGM. The Chairman and the chairmen of the key Committees of the Board make themselves available to take questions from ordinary shareholders at and after the AGM. Details of the circumstances in which preference shareholders are entitled to receive notice of, attend, speak and vote at general meetings is contained in the Articles.
corporate governance framework The Group’s corporate governance framework describes and prescribes how the Group is directed and managed by setting out the matters reserved for the Board, the terms of reference of the Board and management committees, role statements, policies, systems, procedures and controls.
group audit committee (gac) Chaired by Edward Lea, the GAC’s principal duties are as follows: To coordinate and have oversight of the Group’s financial • reporting process To monitor compliance with relevant regulations, industry codes and • legal requirements To have oversight of internal and external audit functions• To manage the effectiveness of the systems of internal controls• To review the Group’s financial performance and• To provide assurance on the effectiveness of the Group’s risk • management arrangements.
Regular reports are received and reviewed by the GAC from the Disclosure Committee, regional audit committees and in relation to the Financial Control Framework and Enterprise Risk Management.
The GAC annually reviews its effectiveness. In 2009 this review was carried out using a questionnaire circulated to the Committee members, regular attendees and the Chairman of the Company and a report of the results was discussed at a GAC meeting. Overall the self assessment was strong and outcomes included an agreement to review the Enterprise Risk Management Plan twice a year and the organisation of a briefing session for Non-Executive Directors which was held in October 2009.
external auditor During the year, Deloitte was engaged as an advisor on a number of occasions. In order to maintain their independence, such appointments are only made in accordance with a protocol developed and embedded by the GAC. This provides that the external auditor should not carry out work where the output or recommendations are then subject to its review as external auditor. Work may be given to the external auditor where it is closely allied with the audit function or it is advantageous to the Group to use its external auditor in view of its knowledge and experience of RSA. This could 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 the external auditor’s statutory duties. Details of fees paid to Deloitte during 2009 for audit and non audit work is disclosed in the external auditor remuneration table in note 4 on page 100.
The GAC has reviewed the independence, effectiveness and objectivity of the external auditor in 2009 and concluded that Deloitte provided a service that was robust and fit for purpose.
The internal audit function reports to management on the effectiveness of the Company’s systems of internal controls, the adequacy of these systems to manage business risk and to safeguard the Group’s assets and resources. The GAC reviews and approves the Group Internal Audit Plan for each year and in December 2009 approved a revised mandate and three year strategy of the internal audit function. The internal audit function is periodically evaluated and the next external assessment will be carried out in 2010.
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. Following the review of the internal control systems, the Board confirmed that the actions it considered necessary to rectify any significant failings or weaknesses have been or are being taken.
nomination committee Chaired by John Napier the principal duties of the Committee are as follows: To regularly review the structure, size and composition of the • Board including the balance of skills, knowledge and experience of the Board To keep under review the leadership needs of the organisation, • both executive and non-executive and satisfy itself that appropriate succession plans and processes are in place for Board and senior appointments To prepare a description for the role and capabilities required • for a particular appointment and to seek advice from external advisers in relation to any appointments To identify and nominate candidates for the approval by the Board • to fill Board and Committee vacancies as and when they arise To ensure that existing Directors seeking permission to join other • public company boards have the approval of the Committee, taking account of capacity, work involvement and any perceived conflicts of interests and To make recommendations to the Board on the continuing • appointment and re-election of Directors.
Details of the members of the Committee and their attendance at Committee meetings are shown in the table on page 47. The Committee met once during 2009.
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 work, 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.
In constitution and operation the Committee complies fully with the Combined Code as described in the corporate governance section of this report on page 47.
remuneration report membership of the remuneration committee During the year the Directors who served on the Committee were John Maxwell (Chairman), Edward Lea, Malcolm Le May and John Napier.
All of the Non-Executive Directors on the Committee were determined by the Board to be independent. The attendance of members in 2009 is shown in the table on page 47. Malcolm Le May was also a member of the Board Risk Committee during the year. As a result, decision making on remuneration matters is consistent, with risk being properly taken into account.
The Group CEO is invited to attend all meetings of the Committee to provide context and advice to the Committee on Group strategy and performance and senior executive pay strategy. The Group Human Resources Director and the Group Director, Reward and Recognition normally attend meetings to provide information on wider remuneration strategy and practice within the Group. The Chairman became a member of the Committee with effect from 1 January 2009. The General Counsel and Group Company Secretary acts as Secretary to the Committee. None of the non Committee attendees are present as of right, and do not attend when their own remuneration is discussed.
The Committee is required by its terms of reference to meet at least twice each year, but meets as often as necessary throughout the year to ensure that it is able to fully report to the Board and shareholders on all relevant matters. In 2009, the Committee met eight times and discussed, amongst other things, the subjects described on page 55.
Discretionary awards• Participation reviewed • annually ROE measure, together • with TSR performance measured against a peer group of companies Full details of performance • measures and vesting described on page 58
Financial targets are measured • against key financial measures for Group and business areas Individual targets are • approved by the Remuneration Committee Up to a further 33% of net • cash bonus paid may be reinvested in voluntary Deferred Shares under the LTIP
remuneration policy principles The Committee’s remuneration policy is consistent with the high performance culture across the Group. The key principles which underpin the remuneration policy are: Total remuneration is set at a level which enables the recruitment, • retention and motivation of high quality executive talent There is a strong and visible link between remuneration • and performance Executive remuneration and shareholder interests are strongly • aligned. This is reflected in the design of the LTIP, which provides a co investment opportunity The observation of existing share ownership guidelines to further • enhance the alignment of shareholder interests with those of Executive Directors Incentive arrangements are leveraged so that only exceptional • performance attracts the highest levels of award A balance of short and long term performance is used, incorporating • measures of financial performance, delivery of shareholder value and a robust assessment of personal contribution Remuneration policy and practice is transparent to shareholders• That, where relevant, there is consideration of environmental, • governance and social risks when determining remuneration for Executive Directors and senior managers to ensure that positive behaviours are reinforced.
Base salaries for Executive Directors and members of the Executive Team are set on appointment with reference to market data. To enable the Group to compete for the most talented executives, the Committee relates base salary levels to the median level for equivalent roles in similar companies facing similar levels of complexity and challenge in the UK and internationally. In the UK, the comparator group most frequently used is a selected group of financial services companies within the FTSE 100. The Committee also has regard to levels of base pay within European and international companies.
The Committee is alert to market concerns surrounding base pay increases and closely monitors basic pay (and total remuneration) for Executive Directors in the light of both the market and individual and corporate performance, as well as the levels of pay increases available for all employees. In 2009, Executive Directors were eligible for a base pay increase at the same level as any other UK based employee with the same performance rating. The Committee is confident that the structures and processes in place for reviewing annual salary increases are robust.
| rsa | Annual Report and Accounts 200956 remuneration report continueD
Base salary range Number of employees £250,001 and over 13 annual performance bonus policy: Bonus payments are related to stretching performance targets and are capped at 180% of base salary. For maximum bonuses to be achieved outstanding performance must be demonstrated.
Financial targets in 2009 were measured against combined operating ratio (COR) targets which are the preferred measures for the Group. COR is a key indicator which captures the underlying strength and performance of an insurance business. To achieve focused incentivisation, for each Executive Director financial targets are weighted towards the area of the business for which they have primary responsibility.
Personal targets are reviewed and approved by the Committee early in the financial year. The Group CEO’s performance is assessed annually by the Chairman of the Board and members of the Committee. The Group CEO carries out a similar assessment for each of his direct
Annual Report and Accounts 2009 | rsa | 57 reports, subject to review and sign off by the Committee in the case of Executive Directors. Assessments also take account of appropriate leadership style and each executive receives a performance rating against the standard scale used at all levels in the business.
Bonuses paid to Executive Directors in respect of the performance year 2009 are included in the table of Directors’ emoluments on page 61. The Committee is satisfied that the bonus payments made in respect of 2009 reflect the consistently strong COR results across the Group throughout 2009, and the contribution made by each Executive Director.
UK based executives who are members of the Top 100 participate in a bonus plan which is structured in the same way and measured using the same metrics as the plan described above. For outstanding performance a cash bonus of up to 80% of base salary and Deferred Shares worth up to 33% of the cash bonus are achievable.
In 2009 (under the LTIP) an award of Matching Shares was made on a pro rata basis to the Deferred Shares. Matching Shares may vest subject to the performance conditions described on page 58 of this report.
The Committee reserves the right to reduce the permissible investment below this level. However, the LTIP will continue to operate on the same terms in 2010.
Prior to the approval of the LTIP, two share incentive plans were operated: The 2004 Share Matching Plan, which was designed to operate for • two years. The final awards under this plan were made in 2005 The Executive Share Option Scheme (1999 ESOS). Regular awards • under the 1999 ESOS were discontinued from 2006 and as the 1999 ESOS expired in 2009, a renewed Executive Share Option Scheme (‘new ESOS’) was adopted by the Company and approved by shareholders at the 2009 AGM. As with the 1999 ESOS, it is intended that the new plan will initially be used only in exceptional circumstances, such as executive recruitment. Performance conditions will attach to all options granted under the new ESOS, and will be determined by the Committee at the appropriate time.
Awards under the LTIP will be funded through a combination of new issues and shares purchased in the market.
conditional awards of performance shares Participants may receive a conditional award of shares with the grant level and performance condition determined by the Committee prior to each grant. Executive Directors, members of the Executive Team and the Top 100 will be eligible for awards of Performance Shares.
In 2010, awards of Performance Shares to Executive Directors and the Executive Team will be limited to a maximum face value of 150% of base salary, other than in exceptional circumstances. Account will be taken of personal performance in determining the scale of the award to each Executive Director and members of the Executive Team. For executives below this level, awards are made based on a formula which relates the size of award to performance and potential, 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 an executive recruitment.
Performance Shares will vest after three years subject to the performance condition (see below) and provided the individual remains in employment with the Group (other than in exceptional circumstances such as death or retirement at normal retirement age).
conditional awards of matching shares Executives may receive a conditional award of Matching Shares pro rata to the number of Deferred Shares held. At threshold performance the matching ratio will be 0.625:1. The maximum matching ratio for Matching Shares: Deferred Shares will be 2.5:1, calculated on the gross value of the bonus invested in Deferred Shares. Details of the performance condition used are described on page 58.
Executive Directors, members of the Executive Team and the Top 100 will be eligible for awards of Matching Shares.
70% of the shares comprising the award will vest according to ROE performance. For awards made in 2009, the ROE target range was 10% to 16%. If the average annual ROE over three years is 10%, 25% of that element of the award will vest. If underlying average ROE over three years is 16% or more, all of that element of the award will vest. There will be a straight line vesting scale between these two points. The range of ROE performance targets has varied from year to year, and is summarised below: Year of grant Range start Range end
Additionally, before any shares subject to the TSR condition vest, the Committee must be satisfied that the Company’s TSR performance is reflective of underlying financial performance.
The vesting of Matching Shares related to voluntary Deferred Shares will be determined solely by the ROE performance condition.
Annual Report and Accounts 2009 | rsa | 59 share ownership guidelines Strengthened share ownership guidelines were introduced in 2004 for Executive Directors and members of the Executive Team.
The Group CEO is required to build and 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 gain under all executive schemes until the relevant guideline is attained. This requirement will apply to awards under the LTIP and will continue to apply to awards under all existing long term incentive plans.
The following table shows the number of shares (including voluntary Deferred Shares held under the LTIP) held by each Executive Director at 31 December 2009 and the increase in shareholding over the year.
*Assuming share price of 120.6p (the closing middle market price on the last dealing day of the year).
Andy Haste is a member of the SAL Pension Scheme (SAL), a contributory defined benefit occupational pension scheme. In 2010, the Group restructured the provision of defined benefit pensions for all UK based employees. From 1 March 2010, Andy Haste’s benefit accrual will be calculated with reference to capped salary of £75,000. Benefit will then accrue under the RSA Stakeholder Plan (a defined contribution plan) in respect of base salary from £75,000 up to the previous salary cap (£123,600 for the tax year commencing 6 April 2009). Participation in the Stakeholder plan will generate employer contributions worth 15% of base salary, subject to an employee contribution of 5% of base salary. In addition to his benefits within SAL and the RSA Stakeholder Plan, Andy Haste receives an age related taxable cash allowance to enable him to make his own provision for retirement above the cap. In 2010 he will be paid an allowance of 36% of base salary for this purpose.
George Culmer is a member of the RSA Stakeholder Plan. In 2010, as in 2009, he will receive employer contributions worth 15% of base salary, subject to an employee contribution of 5% of base salary up to the HM Revenue & Customs annual allowance as applicable.
In addition, the Executive Directors participate in 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 car allowance. In common with other employees, the Executive Directors are eligible to participate in Sharesave and Sharebuild.
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. 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.
Andy Haste is a Non-Executive Director of ITV plc. During the year he received a fee of £65,000. At the date of this report Mark Chambers held a directorship in a not for profit organisation.
Va lu e of h yp th et ic al £
Historical TSR performance - Growth in the value of a hypothetical £100 holding over �ve years, based on spot values.
Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09
non-executive Directors Under the Company’s Articles, the remuneration paid to Non-Executive Directors is determined by the Board, within limits set by shareholders. The fee structure for Non-Executive Directors is shown below: £
The Committee determines the Chairman’s remuneration. The fee payable to John Napier in respect of his appointment as Chairman of the Board was £325,000 p.a. until the end of his previous term of appointment which ended on 31 December 2008, and was not increased for three years. In 2009, the fee payable to John Napier was £400,000 for the first year of his current appointment and is subject to annual review by the Committee. As at 1 January 2010, the Chairman’s fee has not been increased.
Directors’ emoluments (audited part) Remuneration for the year ended 31 December 2009 was as follows: Notes
5. Simon Lee received an annual performance bonus of £487,262 in respect of performance year 2009. His allowances include 17.5% of basic salary as a retirement allowance, paid monthly. During 2009 the amount paid was £74,000. He also received car benefits and additional taxable travel benefits worth £24,000 and medical benefits worth £1,000.
pension benefits (audited part) Non-Executive Directors are not entitled to any pension benefits. The pension benefits earned by the Executive Directors, as members of Group defined benefit schemes, were as follows: change in accrued pension in year £
3. The accrued pension figures shown are the annual amounts of member’s pension payable from normal retirement age. Increases to pensions when in payment are applied in accordance with the relevant scheme rules. On the death of the member leaving a surviving spouse and/or children, spouse’s and/or children’s pensions are payable in accordance with scheme rules.
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. 5. For Andy Haste the increase in his accrued pension during the year, excluding the effects of inflation, was £2,035 p.a. and the transfer value in respect of this less his contributions was 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.
The Company contributions paid in respect of Executive Directors who are members of Group defined contribution scheme, were as follows: company contribution paid in 2009 £
options (audited part) Movements in option holdings during 2009 were as follows: Options held at 1 January options granted during the year options exercised during the year market price on date of exercise options cancelled during the year options held at 31 December notes: 1. The aggregate gain made by Directors during the year on the exercise of share options amounted to £20,175.
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.
sharesave Sharesave is an HM Revenue & Customs approved Save as You Earn Plan, which is operated in 17 countries. Employees make monthly savings for a period of either 3 or 5 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 the employees are invited to join Sharesave and is discounted to market value.
outstanding options 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 in accordance with the provisions of the FSA Listing Rules.
The official closing middle market price at its highest during the year was 148.1p per share and at its lowest was 113.4p per share; on the last dealing day of the year it was 120.6p per share.
Sharebuild Shares held at 31 December 2009 notes: 1. As at 31 December 2009, the Sharebuild Trust held 253,352 shares.
Share awards held at 1 January share awards granted during the year share awards vested during the year share awards exercised during the year share awards lapsed during the year share awards held at 31 December
notes: 1. The market price of ordinary shares on 8 April 2005, the date on which the above Share Matching Plan awards were granted, was 100p. 2. Matching Share awards are capable of vesting in respect of a maximum of three times the number of Deferred Shares awarded, subject to the achievement of TSR targets over a single two year period. TSR performance is measured relative to other companies specified by the Remuneration Committee. For awards granted in 2004 and 2005, TSR was measured partly relative to FTSE 100 companies and partly relative to the following financial services comparator group companies: Aegon, Legal & General Group, Allianz Group, Old Mutual, AXA, Prudential, AVIVA, RAS, Generali and Zurich Financial Services Group. For 50% of the Matching Share awards, where TSR is measured against the FTSE 100, full vesting will only occur at upper decile performance, vesting will occur in the ratio of shares under Matching Share awards to shares under Deferred Share awards of 2:1 at upper quartile performance and vesting in the ratio 1:1 will occur at median performance. For the other 50% of the Matching Share awards, where TSR is measured against the financial services comparator group, full vesting will occur if TSR is highest in the comparator group, vesting in the ratio 2:1 will occur at upper quartile performance and vesting in the ratio 1:1 will occur at median performance. Matching Share awards will not vest at below median performance. For awards granted in 2005, the targets were measured over the period from 1 April 2005 to 31 March 2007. The relevant TSR figures were averaged over the three months before the beginning and end of this performance period. Additionally, no Matching Shares vest unless the Committee is satisfied that there has been a sustained improvement in the underlying performance of the Company over the performance period.
3. The aggregate value of Share Matching Plan awards exercised during 2009 is £1,359,617.
Date by which qualifying conditions must be fulfilled notes: 1. The market price of ordinary shares on 6 April 2009, the date on which long term incentive scheme interests were granted during the year, was 121.2p. 2. Deferred Shares are inclusive of voluntary Deferred Shares and compulsory Deferred Shares. Voluntary Deferred Shares are purchased by Lloyds TSB Offshore Trust Company
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.
3. Matching Shares are capable of vesting in respect of a maximum of 2.5 times the number of Deferred Shares awarded, subject to the achievement of performance conditions over a three year period. For grants awarded in 2009, 30% of the Matching Shares relating to compulsory Deferred Shares are subject to TSR performance relative to other companies specified by the Remuneration Committee. For grants awarded in 2006, 2007 and 2008, 50% of the Matching Shares relating to compulsory Deferred Shares are subject to TSR performance relative to other companies specified by the Remuneration Committee. For awards granted from 2006, TSR will be measured relative to the following comparator group companies: Aegon, Allianz Group, AVIVA, AXA, Baloise, Generali, Legal & General Group, Munich Re, QBE, Swiss Re and Zurich Financial Services. Full vesting will only occur at upper quintile performance; at median performance 25% of the Matching Shares will vest. Vesting will be on a straight line basis in between. The remaining balance of the Matching Shares relating to compulsory Deferred Shares (and all of the Matching Shares relating to voluntary Deferred Shares) are subject to a ROE performance condition. If underlying ROE over three years commencing in the year of grant is below 10% (12% for awards granted in 2008), no part of the award subject to ROE performance will vest. If underlying ROE over three years is 10% (12% for awards granted in 2008), 25% of the award will vest. If underlying average annual ROE over three years is 16% or higher (18% for awards granted in 2008), 100% of the awards will vest. Vesting will be on a straight line basis in between. For the purpose of establishing the number of Matching Shares relating to voluntary Deferred Shares that may be awarded, the gross value of that part of the annual bonus payment that a participant elects to voluntarily defer is used.
6. The market price on the date of grant of awards (12 June 2006) was 125p, the market price on the date of vesting of awards (12 June 2009) was 121.80p. 7. The aggregate value of share awards vested for Directors during the year under the LTIP amounted to £3,973,885. Voluntary Deferred Shares which are shown in the table above are not included in this value. 8. No other Directors of the Company held long term incentive scheme interests during 2009.
We confirm to the best of our knowledge: The financial statements on pages 69 to 141, prepared in accordance with International Financial Reporting Standards as adopted by the EU, • give a true and fair view of the assets, liabilities, financial position and profit of the Group The business review on pages 6 to 29, 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 The risk framework section on pages 30 to 32, which is incorporated into the Directors’ report, includes a description of the principal risks • and uncertainties faced by the Group.
Signed on behalf of the Board andy haste Group Chief Executive Officer george culmer Chief Financial Officer
We have audited the consolidated financial statements of RSA Insurance Group plc for the year ended 31 December 2009 which comprise the consolidated income statement, the consolidated statement of comprehensive income, the consolidated statement of changes in equity, the consolidated statement of financial position, the consolidated statement of cashflows and the related notes 1 to 34. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRS) as adopted by the European Union. We have also audited the information in the remuneration report that is described as having been audited.
This report is made solely to the 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 Company’s members those matters we are required to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Under the Listing Rules we are required to review: The directors’ statement contained within the directors’ report • in relation to going concern The part of the corporate governance statement relating to the • Company’s compliance with the nine provisions of the June 2008 Combined Code specified for our review.
other matters We have reported separately on the Parent Company financial statements of RSA Insurance Group plc for the year ended 31 December 2009.
Less: change in provision for unearned premiums, reinsurers’ share 50 8
Other comprehensive (expense)/income for the year (615) 337 total comprehensive (expense)/income for the year (196) 923
Attributable to: Equity holders of the Parent Company (193) 901 conSolIdAted StAtement of compRehenSIve Income for the year ended 31 december 2009 conSolIdAted StAtement of chAnGeS In equIty for the year ended 31 december 2009
Assets held for sale 34 201 3 equity, reserves and liabilities equity and reserves total equity and reserves 3,588 3,920 liabilities
conSolIdAted StAtement of cAShflowS for the year ended 31 december 2009
Effect of exchange rate changes on cash and cash equivalents (49) 167 cash and cash equivalents at end of the year 17 1,105 1,614
The attached notes form an integral part of these consolidated financial statements.
Except where otherwise stated, all figures included in the consolidated financial statements are presented in millions of British Pounds Sterling, shown as ‘£m’, rounded to the nearest million.
The Group has also adopted the amendment to IFRS 7 ‘Financial Instruments: Disclosures’, which is mandatory for accounting periods beginning on or after 1 January 2009. The effect of the amendment is to introduce new disclosures in respect of financial instruments recognised at fair value in the statement of financial position, namely an analysis of such instruments based on a three level measurement hierarchy and disclosures regarding those instruments which have significant unobservable inputs (classified as Level 3).
The above changes have no impact on the result or the earnings per share for the current period, the comparative period or earlier periods, or the Group’s financial position at the end of each such period.
The Group’s shares of its associates’ post acquisition profits or losses are recognised in the income statement and its share of post acquisition movements in reserves is recognised in the statement of comprehensive income. The cumulative post acquisition movements are adjusted in the carrying amount of the investment. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate.
Annual Report and Accounts 2009 | RSA | 75 property and equipment Property and equipment comprise Group occupied land and buildings, fixtures, fittings and equipment (including computer hardware and motor vehicles). These assets are depreciated over their estimated useful life after taking into account residual values.
financial assets A financial asset is initially recognised, on the date the Group commits to purchase the asset, at fair value plus, in the case of all financial assets not classified as at fair value through the income statement, transaction costs that are directly attributable to its acquisition. A financial asset is derecognised when the rights to receive cashflows from the investment have expired or have been transferred and when the Group has substantially transferred the risks and rewards of ownership of the asset.
Where the cumulative changes recognised in equity represent an unrealised loss the individual asset or group of assets is reviewed to test whether an indication of impairment exists.
Where loan capital or a forward foreign exchange contract is designated as a hedging instrument against the net investment in foreign entities, the effective portion of the hedge is recognised in equity; the gain or loss relating to the ineffective portion is recognised immediately in the income statement. Gains and losses accumulated in equity are included in the income statement when the underlying hedged item is derecognised.
SIGnIfIcAnt AccountInG polIcIeS contInued estimation of the fair value of financial assets and liabilities The methods and assumptions used by the Group in estimating the fair value of financial assets and liabilities are: For fixed maturity securities, fair values are generally based upon • quoted market prices. Where market prices are not readily available, fair values are estimated using either values obtained from quoted market prices of comparable securities or estimated by discounting expected future cashflows using a current market rate applicable to the yield, credit quality and maturity of the investment For equity securities fair values are based upon quoted market prices• If the market for a financial asset is not active, the Group establishes • fair value by using valuation techniques. These include the use of recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cashflow analysis and option pricing models For mortgage loans on real estate and collateral loans, fair values are • estimated using discounted cashflow calculations based upon prevailing market rates For cash, loans and receivables, commercial paper, other assets, • liabilities and accruals, carrying amounts approximate to fair values 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 For derivatives, fair values are generally based upon quoted • market prices.
For disclosure purposes, fair value measurements are classified as Level 1, 2 or 3 based on the degree to which fair value is observable: Level 1 fair value measurements are those derived from quoted prices • (unadjusted) in active markets for identical assets or liabilities Level 2 fair value measurements are those derived from inputs other • than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices) 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).
Recognition of income Premiums written are accounted for in the period in which the contract is entered into and include estimates where the amounts are not determined at the end of the reporting period. Premiums written exclude taxes and duties levied on premiums and directly related expenses, e.g. commissions. Premiums are earned as revenue over the period of the contract and are calculated principally on a daily pro rata basis.
The provisions for claims outstanding, 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 claims outstanding relating to long term permanent disability claims in Canada and Scandinavia are also determined using recognised actuarial methods.
The provisions for claims outstanding, and related reinsurance recoveries, are discounted where there is a particularly long period from incident to claims settlement and where there exists a suitable claims payment pattern from which to calculate the discount. In defining those claims with a long period from incident to claims settlement, those categories of claims where the average period of settlement is six years or more from the end of the reporting period has been used as a guide. The discount rate used is based upon an investment return expected to be earned by assets, which are appropriate in magnitude and nature to cover the provisions for claims outstanding being discounted, during the period necessary for the payment of such claims.
(net of deferred acquisition costs). The unexpired risk provision is assessed in aggregate for business classes which, in the opinion of the directors, are managed together.
An exchange with an existing lender of loan capital with substantially different terms is accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability. The terms are substantially different if the discounted present value of the cashflows under the new terms, including any fees paid net of any fees received and discounted using the original effective interest rate, is at
The amounts charged (or credited where relevant) in the income statement relating to post retirement benefits in respect of defined benefit schemes are as follows: The current service cost• The past service cost for additional benefits granted in the current • or earlier periods The interest cost for the period• The impact of any curtailments or settlements during the period• The expected return on scheme assets (where relevant).•
Annual Report and Accounts 2009 | RSA | 79 of scheme liabilities and investment performance of scheme assets being different from previous assumptions. Actuarial gains and losses are recognised in the statement of comprehensive income.
termination benefits Termination benefits are payable when employment is terminated before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises termination benefits when it is demonstrably committed to either: terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal; or providing termination benefits as a result of an offer made to encourage voluntary redundancy. Benefits falling due more than 12 months after the end of the reporting period are discounted to present value.
Share based payments The value of the employee share options and other equity settled share based payments is calculated at fair value at the grant date using appropriate and recognised option pricing models. The value of liabilities in respect of cash settled share based payment transactions is based upon the fair value of the awards at the end of the reporting period.
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.
current and non current distinction Assets are classified as current when expected to be realised within the Group’s normal operating cycle of one year. Liabilities are classified as current when expected to be settled within the Group’s normal operating cycle of one year. All other assets and liabilities are classified as non current.
Recently issued accounting pronouncements Pronouncements issued by the International Accounting Standards Board (IASB) but which are not yet mandatory for adoption in the Group financial statements are listed below: On 10 January 2008 the IASB issued a revised version of IFRS 3 ‘Business Combinations’ and an amended version of IAS 27 ‘Consolidated and Separate Financial Statements’. The revisions include the following changes to existing accounting practice: An equity interest in a subsidiary entity that is not held by the • reporting and controlling entity is now described as a non controlling interest (currently described as a minority interest) The relevant proportion of total comprehensive income is • attributed to a non controlling interest even if this results in the non controlling interest having a deficit balance In a business combination, the acquiring company must measure the • non controlling interest at either fair value or as the non controlling interest’s proportionate share of the identifiable net assets. Currently only the second basis is permitted Costs incurred by the acquirer in connection with a business • combination must be accounted for separately from the business combination. This will result in such costs being expensed and not being included in goodwill
The Group will adopt the revised standards from 1 January 2010. They will be applied prospectively and so they will have no impact on the results and the earnings per share of the current period, the comparative period or earlier periods, and on the Group’s financial position at the end of each such period. It is not possible to assess the impact the changes will have on future periods.
It is expected that the IASB will issue the new standard covering the remaining two parts of the project, together with a revised standard on the recognition and measurement of financial liabilities, during 2010.
The new standard comes into effect for the annual periods beginning on or after 1 January 2013, but early adoption is permitted. The new standard has not yet been adopted by the EU. The new standard relies on the Group business model objective and may also be influenced by the basis of the measurement of the Group’s insurance liabilities at the time that the new standard is adopted. The latter may change prior to adoption of IFRS 9 and so it is not possible to determine the overall impact on the results and the earnings per share of the current period, the comparative period or earlier periods, and on the Group’s financial position at the end of each such period. It is not possible to assess the impact the changes will have on future periods as in addition to the factors above, these will be impacted by future market conditions and management actions.
In addition to the above, the IASB has issued the following interpretations of, and revisions to, existing standards that are not expected to have a material impact on the Group’s financial statements: Improvements to IFRS (issued 22 May 2008)• Amendment to IAS 39 ‘Financial Instruments: Recognition • and Measurement: Eligible Hedged Items’ (issued 31 July 2008) Interpretation IFRIC 17 ‘Distributions of Non cash Assets • to Owners’ (issued 27 November 2008) Revised IFRS 1 ‘First Time Adoption of IFRS’ (issued • 27 November 2008) Improvements to IFRS (issued 16 April 2009)• Amendments to IFRS 2 ‘Group Cash Settled Share Based • Payment Transactions’ (issued 18 June 2009) Amendments to IFRS 1 ‘Additional Exemptions for First • Time Adopters’ (issued 23 July 2009) Amendment to IAS 32 ‘Financial Instruments: Presentation • – Classification of Rights Issues’ (issued 8 October 2009) Revised IAS 24 ‘Related Party Disclosures’ (issued • 4 November 2009) Amendment to IFRIC 14 ‘Prepayments of a Minimum • Funding Requirement’ (issued 26 November 2009) Interpretation IFRIC 19 ‘Extinguishing Financial Liabilities • with Equity Instruments’ (issued 26 November 2009) Amendments to IFRS 1 ‘Limited Exemption from Comparative • IFRS 7 Disclosures for First Time Adopters’ (issued 28 January 2010).
In addition, the Group uses other methods such as the BornhuetterFerguson method, which combines features of the above methods. The Group also uses bespoke methods for specialist classes of business. In selecting its best estimate, the Group considers the appropriateness of the methods and bases to the individual circumstances of the provision class and underwriting year. The process is designed to select the most appropriate best estimate.
It should be emphasised that the estimation techniques for the determination of insurance liabilities involve obtaining corroborative evidence from as wide a range of sources as possible and combining these to form the overall estimate. This technique means that the estimate is inevitably deterministic rather than stochastic.
Annual Report and Accounts 2009 | RSA | 83 uncertainties and contingencies The uncertainty arising under insurance contracts may be characterised under a number of specific headings, such as: Uncertainty as to whether an event has occurred which would give • rise to a policyholder suffering an insured loss Uncertainty as to the extent of policy coverage and limits applicable• Uncertainty as to the amount of insured loss suffered by a • policyholder as a result of the event occurring and Uncertainty over the timing of a settlement to a policyholder for • a loss suffered.
The establishment of insurance liabilities is an inherently uncertain process and, as a consequence of this uncertainty, the eventual cost of settlement of outstanding claims and unexpired risks can vary substantially from the initial estimates, particularly for the Group’s long tail lines of business. The Group seeks to provide appropriate levels of claims provision and provision for unexpired risks taking the known facts and experience into account.
contracts with third parties The Group enters into joint ventures, outsourcing contracts and distribution arrangements with third parties in the normal course of its
litigation, disputes and investigations The Group, in common with the insurance industry in general, is subject to litigation, mediation and arbitration, and regulatory, governmental and other sectoral inquiries and investigations in the normal course of its business. In addition the Group is exposed to the risk of litigation in connection with its former ownership of the US operation. The directors do not believe that any current mediation, arbitration, regulatory, governmental or sectoral inquiries and investigations and pending or threatened litigation or dispute will have a material adverse effect on the Group’s financial position, although there can be no assurance that losses or financial penalties resulting from any current mediation, arbitration, regulatory, governmental or sectoral inquiries and investigations and pending or threatened litigation or dispute will not materially affect the Group’s financial position or cashflows for any period.
Reinsurance The Group is exposed to disputes on, and defects in, contracts with its reinsurers and the possibility of default by its reinsurers. The Group is also exposed to the credit risk assumed in fronting arrangements and to potential reinsurance capacity constraints. In selecting the reinsurers with whom we do business our strategy is to seek reinsurers with the best combination of financial strength, price and capacity. We publish internally a list of authorised reinsurers who pass our selection process and which our operations may use for new transactions.
Income and expenses for each income statement item are translated at average exchange rates. Assets and liabilities, as reported in the statement of financial position, are translated at closing exchange rates at the end of the reporting period.
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 our 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.
The Group is exposed to financial risk through its financial assets, financial liabilities (investment contracts and borrowings), reinsurance assets and insurance 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 and investment contracts.
The Group has a Group Reserving Committee consisting of the Group Chief Executive Officer, Chief Financial Officer, Group Underwriting and Claims Director and Group Chief Actuary. A similar committee has been established in each of the Group’s major operating segments. The Group Reserving Committee monitors the decisions and judgments made by the business units as to the level of reserves recommended and makes the final decision on the reserves to be included within the consolidated financial statements (‘Management Best Estimate’). In making its judgment, the Group Reserving Committee’s aim is that, over the longer term, reserves should be more likely to run off favourably than adversely. However, there can be no assurance that reserves will not develop adversely and exceed the Management Best Estimate. In making its judgment of the Management Best Estimate of reserves to include in the consolidated financial statements, the Group Reserving Committee adopts the following approach: The Group’s actuaries provide an indication of ultimate losses together with an assessment of risks and possible favourable or adverse • developments that may not have been fully considered in calculating these indications. At the end of 2009 these risks and developments include: the possibility of future legislative change having retrospective effect on open claims; changes in claims settlement procedures potentially leading to future claims payment patterns differing from historical experience; the possibility of new types of claim, such as disease claims, emerging from business written several years ago; general uncertainty in the claims environment; the emergence of latent exposures such as asbestos; the outcome of litigation on claims received; failure to recover reinsurance and unanticipated changes in claims inflation Consideration is also made of the views of internal peer reviewers of the reserves and of third parties including actuaries, legal counsel, risk directors, • underwriters and claims managers Consideration is made of how previous actuarial indications have developed.•
The Group uses financial analysis models to assess the risk and reward effects of different reinsurance structures and prices.
Debt securities 7,212 1,856 1,819 381 83 141 11,492 Loans and receivables and short term investments – – 60 1 2 77 140 Reinsurers’ share of insurance contract liabilities 108 325 861 145 68 271 1,778 Insurance and reinsurance debtors1 41 21 50 89 9 2,338 2,548 Derivative assets – – 22 – – – 22 Other debtors – – – – – 285 285 Cash and cash equivalents 286 226 255 41 10 178 996 notes: 1. The insurance and reinsurance debtors classified as not rated comprise personal policyholders and small corporate customers that do not have individual credit ratings. The overall credit risk to the Group is deemed to be low as the cover could be cancelled if payment were not received on a timely basis.
The Group is exposed to concentrations of risk with individual reinsurers, due to the nature of the reinsurance market and the restricted range of reinsurers that have acceptable credit ratings. Reinsurance counterparties are subject to a rigorous internal assessment process on an ongoing basis to ensure that their creditworthiness continues to be satisfactory and the potential impact from reinsurer default is measured regularly and managed accordingly. The Group Reinsurance Credit Committee oversees the management of these risks. Group standards are set such that reinsurers that have a financial strength rating of less than ‘A-’ with Standard & Poor’s, or a comparable rating, are removed from the Group’s authorised list unless the Group’s internal review discovers exceptional circumstances in favour of the reinsurer. Collateral is taken to mitigate exposures, where appropriate, to acceptable levels or the size or credit quality of the exposure. At 31 December 2009 the Group held collateral against £93m (2008: £64m) of reinsurers’ share of insurance contract liabilities.
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 2009.
Debt securities 11,492 5 – 3 3 5 11,508 4 Loans and receivables and short term investments 140 – – – – – 140 – Reinsurers’ share of insurance
Derivative assets 22 – – – – – 22 – Other debtors 285 7 2 1 30 5 330 – Cash and cash equivalents 996 – – – – – 996 –
Cash and cash equivalents 1,614 – – – – – 1,614 –
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 £1,008m. The terms and conditions of the collateral held are market standard. The assets held as collateral are readily convertible into cash.
Operational foreign currency exchange risk is managed within the Group’s individual operations by broadly matching assets and liabilities by currency.
At 31 December 2009, the Group’s total shareholders’ equity analysed by currency is: Sterling Danish
Shareholders’ equity is stated after taking account of the effect of forward foreign exchange contracts. On this basis, a 10% change in Sterling against Danish Krone/Euro, Canadian Dollar or Swedish Krona would have the following impact on shareholders’ equity: in Sterling against Danish
The analysis aggregates the Danish Krone exposure and the Euro exposure as currently the Danish Krone is closely pegged to the Euro. The Group considers the aggregate exposures when reviewing its hedging strategy.
At 31 December 2009 there were derivative contracts in place to protect the value of the UK and European equity portfolios of the Group. These provided limited protection against declines in market levels whilst also capping participation in any appreciation of the market. In total, this strategy covered an underlying equity value up to approximately £640m. If UK and European equity markets decreased by 15%, the impact of these derivatives as of 31 December 2009, would be to decrease the impact of the decline by £46m (2008: £32m).
Changes in the income statement and equity: Increase/(decrease) in income statement Decrease in equity £m £m £m £m
Impact on fixed interest securities of increase in interest rates of 100bps – – (350) (290)
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.
In addition the Group has committed credit facilities available as set out in note 22.
As at 31 December 2009 less than one year £m one to two years £m two to three years £m three to four years £m four to five years £m five to ten years £m
Greater than ten years £m total £m carrying value in the statement of financial position* £m
Subordinated guaranteed US$ bonds – – – – – – 15 15 14 Subordinated guaranteed perpetual bonds – – – – – 375 – 375 315 Subordinated guaranteed perpetual notes – – – – 450 – – 450 497
Subordinated guaranteed dated notes – – – – – 500 – 500 491
Subordinated guaranteed Euro bonds 484 – – – – – – 484 481
Subordinated guaranteed perpetual bonds – – – – – 375 – 375 310
Interest on bonds and notes 97 65 65 65 65 146 16 519
The capital and interest payable on the bonds and notes has been included until the dates on which the Group has the option to call the instruments and the interest rates are reset. For further information on the terms of the bonds and notes see note 19 to the financial statements.
capital management The maintenance of a strong capital position of the Group is critical to its ability to conduct business.
economic capital Economic capital is the Group’s preferred measure of capital sufficiency. It is the Group’s own assessment of the amount of capital it needs to hold to meet its obligations given the Group’s risk appetite. Assets and liabilities are valued on an economic basis providing the most realistic representation of the Group’s financial condition.
For the Group’s senior regulated insurance company, Royal & SunAlliance Insurance plc, the capital position continues to be reported under Solvency I.
This structure brings 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 is managed by a Chief Executive Officer (CEO) who is directly accountable to the Group CEO and the Board of Directors.
Other activities primarily comprise administration expenses, ongoing investment in our operations in Central and Eastern Europe and other expenses of £84m (2008: £67m), the Group share in the loss after tax of its associates of £18m (2008: £18m) and investment expenses and charges of £30m (2008: £26m).
Amortisation (25) Reorganisation costs (75) Add: net share of losses after tax of associates 18
Other segment items included in the income statement: Year ended 31 December 2008
Other segment items included in the income statement: No other material non cash expenses are reported internally by segment.
International £m emerging markets £m central functions £m total Group £m total assets of continuing operations 7,635 10,330 2,495 1,380 21,840
Capital expenditure: Property and equipment 7 21 5 3 36 Goodwill – 23 131 – 154 Intangible assets 53 62 17 – 132
Annual Report and Accounts 2009 | RSA | 99 2. net InveStment RetuRn
Other investments: Deposits, cash and cash equivalents 17 57 – 3 – 1 – – 17 61
During 2009 the accrued interest income on impaired financial assets was £nil (2008: £nil).
Direct operating expenses (including repairs and maintenance) arising from investment properties were not material in 2009 and 2008.
Reinsurers’ share of change in insurance contract liabilities for claims (108) 421 net claims and benefits 4,387 4,142
The following items have been included in arriving at the profit before tax on continuing operations: other operating income £m £m
other lease payments The operating lease payments recognised as an expense during the year were £60m (2008: £53m). The Group has no significant lease agreements that include contingent rents.
Details of directors’ remuneration and pension benefits, including that of the highest paid director (Andy Haste), and details of directors’ interests in the Parent Company are shown in the remuneration report.
The tax amounts charged in the income statement are as follows: £m £m
Release of tax provided in respect of prior periods (28) (14)
Different tax rates of subsidiaries operating in other jurisdictions (4) (26)
Profit attributable to the ordinary shareholders of the Parent Company 418 574
Weighted average number of ordinary shares in issue (thousands) 3,349,321 3,273,492 basic earnings per share (p) 12.2 17.3 diluted Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. The Parent Company has share options and contingently issuable shares as categories of dilutive potential ordinary shares.
Weighted average number of ordinary shares in issue (thousands) 3,349,321 3,273,492
Interim paid in respect of current year 2.92 2.73 99 90
At the Annual General Meeting (AGM) on 17 May 2010, a dividend in respect of 2009 of 5.33p per share amounting to a total dividend of £182m is to be proposed. The proposed dividend will be paid and accounted for in shareholders’ equity as an appropriation of retained earnings in the year ending 31 December 2010.
The trustees of the Royal & SunAlliance ESOP Trust and the Royal & SunAlliance ESOP Trust No 2 waived their entitlement to dividends which reduced the total dividend paid by £1m (2008: £1m).
net book amount at 31 december 2008 344 22 291 87 744
Additions of software development comprise £3m (2008: £13m) of external software and £93m (2008: £57m) of internally developed software.
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 14% (2008: 8% to 16%), are pre tax and reflect specific risks relating to the relevant segments at the date of evaluation. The weighted average growth rates used in 2009 are within a range of 1.0% to 3.5% (2008: 0.9% to 3.5%).
Group occupied property – land and buildings £m other £m total £m cost/valuation At 1 January 2009 187 427 614 Additions 1 35 36 Acquisition of subsidiaries – 5 5 Disposals – (19) (19) Revaluation adjustment (4) – (4)
Accumulated impairment net book amount at 31 december 2009 159 125 284
Depreciation expenses of £34m (2008: £35m) have been charged to underwriting and policy acquisition costs.
Syn Mun Kong Public Limited Company is listed on the Stock Exchange of Thailand. The fair value of the Group’s holding at 31 December 2009 is £6m (2008: £5m).
Some associates that do not materially affect the results or assets of the Group have been omitted from this note.
Loans and receivables and short term investments 140 166 total financial assets 12,900 12,748
12. fInAncIAl ASSetS And fInAncIAl lIAbIlItIeS contInued 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: fair value hierarchy level 1 £m level 2 £m level 3 £m total £m
None of the Group’s insurance liabilities are measured at fair value. There were no transfers between Level 1 and Level 2 during the year.
Level 3 financial assets at 1 January 2009 68 13 6 92 179 Total gains/(losses) recognised in: level 3 financial assets at 31 december 2009 26 18 8 81 133
There were no transfers into or out of Level 3 during the period.
Of the total gains/(losses) for the period recognised in other comprehensive income (shown in the reconciliation above), £1m relates to assets held at the end of the reporting period and is reported in movements in the revaluation reserves in the statement of changes in equity.
Reinsurers’ share of provision for unearned premiums at 31 december 301 259
Reinsurers’ share of provision for losses and loss adjustment expenses at 31 december 1,494 1,500 14. InSuRAnce And ReInSuRAnce debtoRS
Total insurance debtors 2,625 2,629 total insurance and reinsurance debtors 2,812 2,890
The Group records acquisition costs recovered from reinsurers as a deduction from deferred acquisition costs.
To be settled after 12 months 146 671 17. cASh And cASh equIvAlentS
The interest bearing financial assets included in cash and cash equivalents had an effective interest rate of 1.09% (2008: 2.64%) and had an average maturity of 25 days (2008: 15 days).
The total nominal value of ordinary shares issued during the year was £26m (2008: £20m).
Rights attaching to the shares The rights attaching to each class of share may be varied with the consent of the holders of 75% of the issued shares of that class.
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.
The Parent Company has a first and paramount lien on every share that is not fully paid for all monies called or payable in respect of such share. The Parent Company may sell any share on which the Parent Company has a lien passed following service of a notice on the shareholder demanding payment of the sum and giving notice of the Parent Company’s intention to sell in default of such payment.
No shareholder is, unless the directors otherwise determine, entitled to attend or vote either personally or by proxy at any general meeting if: Any call or any sum presently payable by him to the Parent Company in respect of such share remains unpaid or• The shareholder has failed to comply with a notice under section 793 of the Companies Act 2006 and is in default for a period of 14 days from the • date of service of such notice.
The directors may also refuse to register any transfer of any certificated share unless: A duly stamped instrument of transfer is delivered to the Parent Company’s registered office together with the certificates of the shares to which • it relates and any other evidence that the directors may reasonably require to show the right of the transferor to make the transfer The instrument of transfer is in respect of only one class of share.•
Subordinated guaranteed perpetual notes 497 505 total loan capital 1,317 1,311
The subordinated guaranteed US Dollar bonds (‘Yankee Bonds’) have a nominal value of $24m and a redemption date of 15 October 2029. The rate of interest payable on the Yankee Bonds is 8.95%.
Assumptions The total value of outstanding claims provisions less related reinsurance recoveries before discounting is £9,806m (2008: £10,391m).
Claims on certain classes of business have been discounted as follows: Discount rate Average number of years to settlement
claims development tables The tables below present changes in the historical provision for losses and loss adjustment expenses that were established in 2001 and the provision for losses and loss adjustment expenses arising in each subsequent accident year. The tables are presented at current year cumulative average exchange rates and have been adjusted for operations that have been disposed of.
The estimated provision 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. The 2009 redundancy/(deficiency) represents the claims development of earlier accident years in the current accounting period.
Annual Report and Accounts 2009 | RSA | 115 consolidated claims development table gross of reinsurance 2001 and prior £m £m £m £m £m £m £m £m £m Total £m estimate of cumulative claims At end of accident year 9,598 3,383 3,360 2,816 2,954 2,629 2,997 2,874 2,750 One year later 10,149 3,118 3,195 2,573 2,874 2,655 2,984 2,886
20. InSuRAnce contRAct lIAbIlItIeS contInued consolidated claims development table net of reinsurance 2001 and prior £m £m £m £m £m £m £m £m £m Total £m estimate of cumulative claims At end of accident year 7,437 2,630 2,418 2,258 2,419 2,441 2,532 2,582 2,482 One year later 7,731 2,577 2,454 2,122 2,297 2,423 2,538 2,576
Current year provision before discounting 2,167 275 454 350 505 724 1,008 1,287 2,482 9,252
At 31 December 2009 total unsecured loans from credit institutions under committed credit facilities of £455m (2008: £455m) are available to the Group. There are no amounts outstanding at 31 December 2009 (2008: £nil). The facility expires in 2013.
At 31 December 2009 and 2008 the Group had in place a one billion US Dollar Euro commercial paper program. There are no amounts outstanding at 31 December 2009 (2008: £nil).
(Charge)/credit to the income statement for the year – (19) (48) 14 120 67
Fair value gains and losses (53) 12 (10) 47 (63) 59
Pension fund actuarial gains and losses – – 269 (83) 269 (83)
At the end of the reporting period, the Group has unused tax losses of £1,584m (2008: £1,582) and unused tax credits of £11m (2008: £14m) available for offset against future profits. A deferred tax asset of £41m (2008: £16m) has been recognised in respect of losses included within other temporary differences at 31 December 2009. No deferred tax asset has been recognised in respect of £1,428m (2008: £1,523m) tax losses and unused tax credits of £11m (2008: £14m) due to the unpredictability of future profit streams. Included in unrecognised tax losses are losses of £115m (2008: £68m) which will expire between 2010 and 2027. Other tax losses and unused credits may be carried forward indefinitely.
Deferred tax assets of £129m (2008: £nil), 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.
Annual Report and Accounts 2009 | RSA | 119 movements during the year on reorganisation and other provisions
Provisions at 1 January 2009 14 130 Exchange adjustment – (1)
In 2003 a subsidiary of the Group wrote an Adverse Development Cover (ADC) contract with its former US subsidiary. The liabilities arising under the ADC contract comprise an insurance component and a deposit component. The liability arising under the insurance component of £0.1bn represents the timing risk on the settlement of those liabilities. The financial liability arising under the deposit component is offset by the value of funds held in a trust fund whose trust deed only permits the trust fund assets to be used to settle amounts due under the ADC. The value of the funds held in trust at 31 December 2009 is £0.4bn and the value of the liability of the deposit component is £0.4bn.
defined contribution pension schemes Costs of £49m (2008: £39m) 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 £9m (2008: £9m) were paid to this scheme during 2009 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 2009, when the scheme funding rate was 113% (2008: 119%). The Group’s Swedish subsidiaries’ share of the total multi employer scheme was less than 2% (2008: less than 2%).
26. RetIRement benefIt oblIGAtIonS contInued defined benefit pension schemes and other post retirement benefits The major defined benefit pension schemes are located in the UK. The assets of these schemes are held mainly in separate trustee administered funds.
In addition to these changes, the 2002 Scheme (which was the scheme to which new UK employees had been admitted following the closure of the defined benefit schemes to new members) has been closed to further accrual from 1 January 2006. It has been replaced by a stakeholder arrangement and members of the 2002 Scheme and future new employees in the UK accrue future benefits on a defined contribution basis under the stakeholder scheme.
The accumulated actuarial losses since 1 January 2004 are £613m (2008: £349m gains).
Excluding 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 other £m total £m
Present value of obligations not covered by insurance arrangement 3,399 343 3,742 4,536
Total assets in the schemes (excluding those used to fund insurance arrangement) 3,087 287 3,374 5,042
Assumptions The principal actuarial assumptions used are as follows: UK Other
Assumptions used in calculation of income statement credit/charge in the year: Expected return on: expected return on schemes’ assets The weighted average expected return on schemes’ assets across the Group for 2009 was 5.5% (2008: 5.7%). 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.
26. RetIRement benefIt oblIGAtIonS contInued commutation Each of the UK defined benefit pension schemes has changed its rules to allow for increased commutation following ‘A day’ in April 2006. The commutation factors are broadly cost neutral (i.e. when valued on the IAS 19 basis, the amount of cash taken is approximately equal to the value of the pension being given up). For this reason there is no change made to previous practice whereby the accounting valuation makes no allowance for commutations.
post retirement medical benefits The valuation of liabilities for non pension post retirement liabilities in Canada assumes health care cost trend rates of 4.5% per annum for hospital, other medical and vision care, 4.0% per annum for dental, and 9.0% per annum in 2009 grading down to 4.5% per annum in and after 2029 for prescription drugs (2008: 7% decreasing to 5% in 2017).
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 £49m. 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 £43m. An increase of one year in life expectancy would increase the defined benefit obligations in the UK not covered by the insurance arrangement by approximately £68m.
The performance conditions in respect of awards under the Executive Share Option Scheme are described on page 63. The exercise price of all options is the fair value of the ordinary shares on the date of grant. All options expire 10 years after the date of the grant.
Sharesave plan Under the Group’s Sharesave Plan (savings related) eligible employees can receive options to purchase ordinary shares at a price equal to 80% of the fair value of the ordinary shares on the date of grant. All options vest either three or five years from the grant date and expire six months after vesting. The number of shares available for purchase from the plan by each participant is limited to the whole number of shares purchasable from the aggregate value of the individual’s savings contract upon maturity. An individual’s maximum monthly contribution to all current savings contracts is £250.
Under the Sharesave Plan, the weighted average estimated fair value per option granted by the Parent Company during 2009 was 33.55p (2008: 42.31p). The fair value of share options granted under the Sharesave Plan during 2009 was £5m (2008: £6m). The value of the awards is charged in the income statement over the vesting period. The weighted average share price on the dates the options were exercised in 2009 was 133.66p (2008: 147.21p).
Share matching plan The Group’s Share Matching Plan for executive directors and other selected executives was adopted following approval obtained at the 2004 AGM. Awards were made between 2004 and 2006.
Additional information with respect to Deferred and Matching Share awards at 31 December is as follows: number of shares
Outstanding and exercisable Deferred Share awards at 1 January 926,431 2,992,113
Potential Matching Share awards 671,220 2,412,825 total potential share awards outstanding at 31 december 894,960 3,339,256 long term Incentive plan The Long Term Incentive Plan for executive directors and other selected executives was adopted following approval obtained at the 2006 AGM. Awards have been made each year since 2006 following shareholder approval.
Share awards outstanding at 1 January 11,828,733 2,343,040 5,140,097 15,137,344 34,449,214 Granted 3,669,375 1,013,127 2,311,079 7,512,814 14,506,395 Exercised (3,114,875) (663,031) (1,331,692) (4,026,292) (9,135,890)
Share awards outstanding 31 December 10,808,261 2,693,136 5,716,424 17,101,040 36,318,861 Potential Matching Shares awards – 11,235,958 13,620,714 – 24,856,672 total potential share awards outstanding 31 december 10,808,261 13,929,094 19,337,138 17,101,040 61,175,533
Share awards outstanding at 1 January 8,063,261 1,372,433 3,102,956 9,274,148 21,812,798
Under the Long Term Incentive Plan, the weighted average estimated fair value of each Restricted Share award granted by the Parent Company in 2009 was 101.81p (2008: 116.68p). The weighted average estimated fair value of each Voluntary Deferred Share award was £nil (2008: £nil) and the weighted average estimated fair value of each potential associated Matching Share was 121.00p (2008: 136.50p). The weighted average estimated fair value of each Compulsory Deferred Share award was 121.00p (2008: 136.50p) and the weighted average estimated fair value of each potential associated Matching Share was 84.35p (2008: 91.40p). The weighted average estimated fair value of each Performance Share award granted was 99.04p (2008: 92.03p). The total fair value of the awards granted under the plan in 2009 was £24m (2008: £24m).
Fair values of the awards granted under the Long Term Incentive Plan scheme during 2009 are taken to be the share price on the day preceding the grant date, except for the Restricted Shares where the share price is reduced by an estimate of the value of dividends that will not be received. A dividend yield of 6.0% (2008: 5.7%) was assumed. Market related performance criteria were based on an arithmetic mean estimate of performance against a specified group of 13 competitors and it is assumed that all non market related performance criteria would be met such that all awards would be exercisable. An estimate based on past experience is made of the number of forfeitures during the vesting period due to employees leaving the Group.
Sharebuild Sharebuild (a HMRC approved Share Incentive Plan) was adopted by shareholders at the 2009 AGM and launched in August 2009 with the first Partnership Shares purchased in December 2009. Sharebuild is available to all UK based employees employed at 30 June each year. In 2009 one Matching Share was allotted and held in trust for every one Partnership Share acquired with participants’ contributions. The total potential share awards issued during the year and outstanding at 31 December 2009 is 126,682 shares.
Under the Sharebuild plan, the weighted average estimated fair value of each Matching Share award granted by the Company in 2009 was 98.80p. The total fair value of the awards granted under the plan in 2009 is insignificant.
The Group designates certain forward exchange contracts as hedging instruments against the net investment in designated subsidiaries to reduce the foreign currency exchange risk exposure. On designation, the interest element is separated from the forward exchange rate and is excluded from the hedge relationship. Effectiveness of the hedge is then measured using the spot rate, which is also the exchange rate used when measuring the net investment in the designated subsidiaries. The fair value of the hedging instruments at 31 December 2009 is a liability of £9m (2008: £74m). The hedge ineffectiveness recognised in the income statement during 2009 is £nil (2008: £nil).
Until its repayment in October 2009, the Group designated the loan capital denominated in Euros as a hedging instrument against the net investment in designated subsidiaries to reduce the foreign currency exchange risk. The book value and the fair value of the hedging instrument at 31 December 2008 were £481m and £459m respectively. The hedge ineffectiveness recognised in the income statement during 2009 is £nil (2008: £nil).
Bahrain Royal & Sun Alliance Insurance (Middle East) Limited E.C. (50.0%) General insurance
Uruguay Royal & Sun Alliance Seguros (Uruguay) SA General insurance notes: 1. 100% direct subsidiary of RSA Insurance Group plc.
2. Except where indicated all holdings are of equity shares and represent 100% of the nominal issued capital. In all cases the proportion of voting power held equals the proportion of ownership interest.
Acquisition of subsidiaries On 8 April 2009 the Group also acquired 100% of the share capital of Benchmark Underwriting Limited in Ireland. On 15 June 2009 the Group acquired the remaining 50% of the share capital of Intouch Insurance Group BV (Intouch). On 1 July 2009 the Group acquired 100% of Atrens Counsel Insurance Brokers Incorporated and also made a number of other smaller acquisitions in Canada during the period. The total consideration was £104m and goodwill of £154m arose after taking into account goodwill arising from purchases in earlier years.
The goodwill arising from purchases in earlier years includes the goodwill arising on the acquisition of the original 50% shareholding of Intouch in 2007.
Fair value adjustments to the book value of the net assets of the subsidiaries acquired immediately before the combinations resulted in the recognition of £33m of intangible assets. The intangible assets recognised as a result of the combinations consist of a brand and customer lists.
Goodwill is individually assessed on each acquisition. The goodwill on the acquisition of Intouch arose from the premium paid for acquiring market leading businesses in direct insurance in Poland, Russia and the Czech Republic, their future growth opportunities, and for acquiring the skilled workforce to drive future profitability in these markets. The goodwill in Canada and Ireland arose from the premium paid for strengthening the Group’s market position in targeted business segments and acquiring the skilled workforce to drive future profitability in those segments. Goodwill also represents the future cost saving from expected synergies and economies of scale.
Annual Report and Accounts 2009 | RSA | 131 31. cAShflowS fRom opeRAtIonS
Adjustments for: Fair value losses (including loss on disposal) on property and equipment 1 1
capital commitments The Group’s significant capital commitments in respect of property and equipment and intangible assets are detailed in the table below: £m £m
operating lease commitments where the Group is the lessee The future aggregate minimum lease payments under non cancellable operating leases are as follows: Land and buildings Other £m £m £m £m
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
After five years 103 109 noteS to the fInAncIAl StAtementS contInued
During 2009 the Group has classified one of its subsidiaries within the UK operating segment, British Engine Limited, as a disposal group. The sale of the company has been agreed, subject to regulatory approval and the Group expects to complete the sale within one year. A provision for a pre-tax loss of £7m has been recognised on reclassification. No gain or loss has been recognised in the income statement since reclassification.
The Group has classified office property within the UK and Scandinavian operating segments as assets held for sale. The Group is actively marketing the properties. No gain or loss has been recognised in the income statement since the reclassification.
The analysis of the non current and disposal group assets and liabilities held for sale is as follows: £m £m
Independent AudItoRS’ RepoRt to the membeRS of RSA InSuRAnce GRoup plc
We have audited the Parent Company financial statements of RSA Insurance Group plc for the year ended 31 December 2009 which comprise the Parent Company statement of financial position, the Parent Company statement of comprehensive income, the Parent Company statement of changes in equity, the Parent Company statement of cashflows and the related notes 1 to 10. 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.
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 auditors’ 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.
opinion on other matters prescribed by the companies Act 2006 In our opinion: The information given in the directors’ report for the financial year for • which the financial statements are prepared is consistent with the Parent Company financial statements.
other matters We have reported separately on the consolidated financial statements of RSA Insurance Group plc for the year ended 31 December 2009.
Annual Report and Accounts 2009 | RSA | 135 pARent compAny StAtement of compRehenSIve Income for the year ended 31 december 2009 £m £m
Profit for the year net of tax 345 483 total recognised expense for the year (327) (280)
pARent compAny StAtement of chAnGeS In equIty for the year ended 31 december 2009
The movement in equity for the year net of tax includes a net tax charge of £nil (2008: £nil).
pARent compAny StAtement of fInAncIAl poSItIon as at 31 december 2009
Accruals and other liabilities 86 71 total equity, reserves and liabilities 6,486 6,824
The separate financial statements were approved on 24 February 2010 by the Board of Directors and are signed on its behalf by: George culmer Chief Financial Officer
Annual Report and Accounts 2009 | RSA | 137 pARent compAny StAtement of cAShflowS for the year ended 31 december 2009
dividend income Dividend income from investments in subsidiaries is recognised when the right to receive payment is established.
The investments in subsidiaries are recognised in the statement of financial position at fair value measured in accordance with the Company’s accounting policies. 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 arms 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 2009 was 120.6p. A movement of 1% in the share price would have an impact of £41m on the fair value.
3. otheR debtoRS And otheR ASSetS – to be Settled wIthIn 12 monthS
Deferred tax assets at 1 January 2008 2 18 1 21
Deferred tax assets at 31 December 2008 7 16 2 25
RSA Insurance Group plc (incorporated in Great Britain and registered in England and Wales) is the ultimate Parent Company of the RSA group of companies.
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% (2008: 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.
As at 31 December 2009, there are interest free loans totalling £10,000 (2008: £5,000) outstanding to two members of the key management team under standard terms of the Group’s UK Car Ownership Scheme, which is open to all UK managers within a qualifying salary band.
Payable to related parties: Payable to subsidiaries, interest bearing loans 442 345
Payable to subsidiaries, non interest bearing 121 91 total payable to related parties 563 436
Full details of share based payment plans are provided in note 27 to the consolidated financial statements.
company website The Annual Report and Accounts, Interim Management Statements, Half Year Report and other useful information about the Company, such as the current share price and frequently asked questions and answers in respect of shareholder matters, are available on the website www.rsagroup.com.
Please quote your shareholder reference number (on your share certificate and dividend tax vouchers) when contacting or corresponding with Equiniti. (Calls are charged at 8p per minute from a BT landline. Other telephone providers’ costs may vary). Telephone lines are open from 8.30am to 5.30pm Monday to Friday.
Annual General meeting Ordinary shareholders are invited to attend the Company’s Annual General Meeting (AGM), which will be held at The Queen Elizabeth II Conference Centre, Broad Sanctuary, Westminster, London SW1P 3EE at 11.00am on 17 May 2010. Ordinary shareholders who are unable to attend the AGM to ask a question in person are invited to send the Chairman an email via the Company’s website or to write to the Chairman at the Registered Office address above.
electronic communications RSA provides shareholder information including the Annual Report and Accounts, AGM Notice, an events calendar and governance information via the Company’s website www.rsagroup.com. You can elect to receive 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.
Scrip dividend Scheme RSA offers shareholders the opportunity to use their dividends to buy more ordinary shares in the Company by participating in the Company’s Scrip Dividend Scheme. The Scheme applies to both interim and final dividends and enables shareholders to increase their holding in the Company without incurring dealing costs or stamp duty. If you wish to receive a scrip dividend instead of a cash dividend for future dividends on which a scrip alternative is offered, please contact Equiniti.
Share ownership RSA is listed on the London Stock Exchange under the code RSA. The average total daily trading volume during 2009 was approximately 12.4m ordinary shares. The opening market price of an ordinary share on 2 January 2009 was 138.00p and the closing market price on 31 December 2009 was 120.60p. The highest daily closing price of an ordinary share was 148.10p on 12 January 2009 and the lowest daily closing price was 113.40p on 10 July 2009. Further details of the ordinary and preference shares are found in note 18 on pages 104 to 105.
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. More information on protecting your investment can be found at www.moneymadeclear.fsa.gov.uk.
low cost share dealing facilities A telephone and internet dealing service is available through Equiniti which provides a simple way of buying and selling RSA shares. Commission is 1.5% with a minimum charge of £25 for telephone dealing and 1% with a minimum charge of £20 for internet dealing. For telephone sales call +44 (0)845 6037 037 between 8.30am and 4.30pm, Monday to Friday, and for internet sales log on to www.shareview.co.uk/ dealing. You will need your shareholder reference number as shown on your share certificate. Share dealing services are also widely provided by other organisations.
Announcement of the full year results for 2009, the ordinary final dividend for 2009 and the first preference dividend for 2010
Ex dividend date for the ordinary final dividend for 2009 and the first preference dividend for 2010
Payment date for the ordinary final dividend for 2009 (subject to shareholder approval at the AGM)
5 August 2010* Announcement of the half year results for the six months ended 30 June 2010, the ordinary interim dividend for 2010 and the second preference dividend for 2010 11 August 2010* Ex dividend date for the ordinary interim dividend for 2010 and the second preference dividend for 2010 13 August 2010* Record date for the ordinary interim dividend for 2010 and the second preference dividend for 2010 19 August 2010* Announcement of the scrip dividend price for the ordinary interim dividend for 2010 1 october 2010* Payment date for the second preference dividend for 2010 29 october 2010* Deadline for the receipt of scrip dividend mandates by Equiniti Limited in relation to the ordinary interim dividend for 2010 26 november 2010* Payment of the ordinary interim dividend for 2010 * provisional date
Director’s photography by Homer Sykes and Liam Bailey Executive Team by Liam Bailey Photography for front cover by Liam Bailey
Printed by Royle Print on Revive 50/50 Silk which has 50% Recovered Fibre and Revive Uncoated which is 100% post consumer waste. The paper and the printer are FSC accredited. The printer is accredited ISO 14001 and is a Carbon Neutral Printing Company.