Direct operating expenses (including repairs and maintenance) arising from investment properties were not material in 2018 or 2017.
RSA Annual Report and Accounts 2018130 rsagroup.com 9) Net investment return continued
Reinsurers’ share of changes in provision for losses and loss adjustment expenses 76 (74)
Total net claims 4,480 4,350 11) Other operating income £m £m
Total other operating income 138 150 12) Other operating expenses, reorganisation costs and impairments £m £m
Total other operating expenses, reorganisation costs and impairments 54 234 1 Impairment of intangible assets and similar charges in 2017 includes a £20m impairment charge on internally generated software and a £3m charge for related deferred acquisition costs.
The average number of employees during the year are as follows: Number
Key management personnel comprise members of the Group Executive Committee, executive directors, and non-executive directors.
A number of the directors, other key managers, their close families and entities under their infl uence have general insurance policies with subsidiary companies of the Group. General insurance policies are available at discounted rates to all employees including executive directors.
Tax at the UK rate of 19.0% (2017: 19.2%) 91 86
Tax effect of: Income/gains not taxable (or taxed at lower rate) (7) (8)
Different tax rates of subsidiaries operating in other jurisdictions 11 11
The current tax and deferred income tax credited/(charged) to each component of other comprehensive income is as follows: Current Tax Deferred Tax Total £m £m £m £m £m £m
Fair value gains and losses 41 20 (18) (18) 23 2
There are no material uncertain tax provisions in the Group as at 31 December 2018 (2017: £nil).
The table below provides a summary of the current tax and deferred tax rates for the year in respect of the core tax jurisdictions in which the Group operates.
The total amount included within staff costs in the consolidated income statement in respect of all share scheme plans in 2018 is set out below.
Weighted average number of ordinary shares in issue (thousands) 1,026,040 1,021,418
Adjustments for share options and contingently issuable shares (thousands) 4,410 7,081
The fi nal dividend to equity holders is recognised as a liability when approved at the Annual General Meeting (AGM). The Company and its subsidiaries may be subject to restrictions on the amount of dividends they can pay to shareholders as a result of regulatory requirements. However, based on the information currently available, the Company does not believe that such restrictions materially limit its ability to settle obligations as and when they fall due and pay dividends. At the AGM on 10 May 2019, a fi nal dividend in respect of the year ended 31 December 2018 of 13.7p per ordinary share amounting to a total dividend of £141m 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 2019.
Exchange (losses)/gains net of tax (3) – – (3) (18) – (21) 8 (13)
Fair value (losses)/gains net of tax (201) – 5 (196) – – (196) (1) (197)
RSA Annual Report and Accounts 2018136 rsagroup.com 22) Goodwill and intangible assets continued
Amortisation expense of £75m (2017: £79m) has been charged to underwriting and policy acquisition costs with the remainder recognised in other operating expenses.
When testing for goodwill impairment, the carrying value of the Cash Generating Unit (CGU) to which goodwill has been allocated is compared to the recoverable amount as determined by a value in use calculation. These calculations use cash fl ow projections based on operating plans approved by management covering a three year period and using the best estimates of future premiums, operating expenses and taxes using historical trends, general geographical market conditions, industry trends and forecasts and other available information as discussed in more detail in the strategic report section. Cash fl ows beyond this period are extrapolated using the estimated growth rates which management deem appropriate for the CGU. The cash fl ow forecasts are adjusted by appropriate discount rates. Where a sales price has been agreed for a CGU, the sales proceeds less costs to sell are considered the best estimate of the value in use.
Where the value in use is less than the current carrying value of the CGU in the statement of fi nancial position, the goodwill is impaired in order to ensure that the CGU carrying value is not greater than its future value to the Group.
Change to each year of the planning period (2019 to 2021)
The range of pre-tax discount rates used for goodwill impairment testing, which refl ect specifi c risks relating to the CGU at the date of evaluation and weighted average growth rates used in 2018 for the CGUs within each operating segment are shown below. The growth rates include improvements in trade performance, where these are forecast in the three year operational plan for the CGU.
Depreciation expenses of £16m (2017: £20m) have been charged to underwriting and policy acquisition costs.
Investment property, consisting of £310m (2017: £308m) freehold and leasehold land and buildings, is held for long term rental yields and is not occupied by the Group.
The following tables analyse the Group’s fi nancial assets by classifi cation as at 31 December 2018 and 31 December 2017.
The following table analyses the cost/amortised cost, gross unrealised gains and losses, and fair value of fi nancial assets.
Financial assets measured at fair value 11,061 345 (197) 11,209 11,424
The following table presents the fair value and notional amount of derivatives by term to maturity and nature of risk.
Currency risk (net investment in foreign operation) 1,064 – – 1,064 18 (11)
Currency risk (cash fl ow) 4 11 – 15 1 –
Currency risk (cash fl ow) 1 5 – 6 1 –
Cross currency interest swaps (fair value/cash fl ow) 4 159 181 344 3 (44)
The Group applies hedge accounting to derivatives acquired to reduce foreign exchange risk in its net investment in certain major overseas subsidiaries. There was no ineffectiveness recognised in the income statement in respect of these hedges during 2018 or 2017.
The total losses on the fair value hedge instruments recognised in the income statement were £44m (2017: £45m) and the offsetting gains related to the hedged risk were £45m (2017: £50m).
Effect of offsetting in statement of fi nancial position Related items not offset
The fair value at 31 December 2018 and change during the year of fi nancial assets that are held to collect cash fl ows on specifi ed dates that are solely for payment of principle and interest (SPPI) and are not held for trading as defi ned under IFRS 9, nor are managed or evaluated on a fair value basis, is set out below, together with the same information for other fi nancial assets: As at 31 December 2018
Cash and cash equivalents, loans and receivables, other assets and other liabilities
Group occupied properties are valued annually on a vacant possession basis using third party valuers. Investment properties are valued, at least annually, at their highest and best use.
These cash fl ows are discounted at an appropriate rate of interest to determine their present value.
The Group uses prices received from external providers who calculate these prices from quotes available at the reporting date for the particular investment being valued. For investments that are actively traded the Group determines whether the prices meet the criteria for classifi cation as a level 1 valuation. The price provided is classifi ed as a level 1 valuation when it represents the price at which the investment traded at the reporting date taking into account the frequency and volume of trading of the individual investment together with the spread of prices that are quoted at the reporting date for such trades. Typically investments in frequently traded government debt would meet the criteria for classifi cation in the level 1 category. Where the prices provided do not meet the criteria for classifi cation in the level 1 category, the prices are classifi ed in the level 2 category.
In limited circumstances, the Group does not receive pricing information from an external provider for its fi nancial investments. In such circumstances the Group calculates fair value which may use input parameters that are not based on observable market data. Unobservable inputs are based on assumptions that are neither supported by prices from observable current market transactions for the same instrument nor based on available market data. In these cases, judgement is required to establish fair values. Valuations that require the signifi cant use of unobservable data are classifi ed as level 3 valuations. In addition, the valuations used for investment properties and for Group occupied properties are classifi ed in the level 3 category.
Available for sale fi nancial assets: Financial assets at FVTPL: Debt securities – – 19 19
Total value of liabilities not measured at fair value – 460 – 460
Group occupied property – land and buildings – – 35 35
RSA Annual Report and Accounts 2018144 rsagroup.com 26) Fair value measurement continued
The movement in the fair value measurements of level 3 fi nancial assets is shown in the table below: Available for sale investments Investments at FVTPL
Total gains/(losses) recognised in: Other comprehensive income (12) (6) – – (18)
Investment properties1 Cash fl ows; discount rate 310 (51) 308 (48)
Debt securities2 Cash fl ows; discount rate 410 (10) 327 (9)
1 The Group’s property portfolio (including the Group occupied properties) is almost exclusively located in the UK. Reasonably possible alternative valuations have been determined using an increase of 100bps in the discount rate used in the valuation.
A structured entity is an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements.
However, the Group invests in unleveraged entities created by and managed by external specialist investment managers where investments are pooled within an investment vehicle to provide a diversifi ed exposure to particular classes of underlying investments. The use of these products allows the Group to broaden the diversifi cation of its investment portfolio in a cost-effi cient manner. The Group normally limits its exposures in individual structured entities to less than 20% of the total capital of the entity.
In addition, the Group has commitments for future undrawn subscriptions limited to the amounts set out in the subscription agreements. The Group has no obligations to provide any other additional funding or other fi nancial support to these entities. The Group has determined that its maximum exposure to structured entities is the sum of the carrying value and the undrawn commitments. These exposures at 31 December 2018 are summarised in the table below: Class of investments Nature of the underlying investments of the vehicle
Mortgage backed securities Mainly consists of commercial mortgage backed securities 17 – 17 35 – 35
Reinsurers’ share of portfolio transfers and disposals of subsidiaries – (27)
Reinsurers’ share of provisions for losses and loss adjustment expenses at 1 January 2,159 1,530
Net arising on acquisition of subsidiaries and other transfers (5) –
Effect of change in tax rates – income statement 1 –
At the end of the reporting period, the Group’s continuing operations have unused tax losses of £2,509m (2017: £2,326m) for which no deferred tax asset is being recognised. The Group’s unused tax losses are predominantly located in the UK and Ireland. The Group’s unused losses includes capital losses of £1,195m (2017: £1,189m); almost all of which relate to the UK. No deferred tax asset is recognised for these losses as it is not considered probable that they will be utilised in the future, as most UK capital gains are exempt from tax. None of the Group’s unused tax losses are subject to expiry. In addition, the Group has deductible temporary differences of £196m (2017: £198m) for which no deferred tax has been recognised; predominantly unclaimed UK tax depreciation.
The Group has temporary differences in respect of the retained earnings of overseas subsidiaries not held for sale of £501m (2017: £509m) on which overseas taxes, including withholding taxes, might be incurred on the remittance of these earnings to the UK. This amount relates to the Group’s subsidiaries in Canada. The Group is able to control the remittance of earnings to the UK and there is no intention to remit the retained earnings in the foreseeable future if the remittance would trigger a material incremental tax liability. As such the Group has not recognised any deferred tax in respect of the potential taxes on the temporary differences arising on unremitted earnings of continuing overseas subsidiaries.
Of the £155m (2017: £220m) net deferred tax asset recognised by the Group, £204m (2017: £233m) relate to tax jurisdictions in which the Group has suffered a loss in either the current or preceding period; £189m (2017: £217m) of which relates to the UK. Although a UK tax loss arose in 2018, this was due to a one off pension defi cit contribution of £45m in December 2018.
Deferred tax assets have been recognised on the basis that management consider it probable that future taxable profi ts will be available against which these deferred tax assets can be utilised. The evidence for the future taxable profi ts is a seven year forecast based on the three year operational plans prepared by the relevant businesses, which are subject to internal review and challenge, including by the Board. Key assumptions in the forecast are subject to sensitivity testing which, together with additional modelling and analysis, support management’s judgement that the carrying value of deferred tax assets continue to be supportable.
Total other debtors and assets net of held for sale 673 559
To be settled after 12 months 310 188 31) Cash and cash equivalents £m £m
Cash and cash equivalents and bank overdrafts (consolidated statement of cash fl ows) 781 1,049
Total cash and cash equivalents (consolidated statement of fi nancial position) 788 1,048
The issued share capital of the Parent Company is fully paid and consists of two classes; Ordinary Shares with a nominal value of £1 each and Preference Shares with a nominal value of £1 each. The issued share capital at 31 December 2018 is: £m £m
Issued and fully paid 1,026,937,928 Ordinary Shares of £1 each (2017: 1,022,835,039 Ordinary Shares of £1 each) 1,027 1,023 125,000,000 Preference Shares of £1 each (2017: 125,000,000 Preference Shares of £1 each) 125 125
During 2018, the Company issued a total of 4,102,889 new Ordinary Shares of £1 each ranking pari passu with Ordinary Shares in issue (2017: 3,280,053 new Ordinary Shares of £1 each), on the exercise of employee share options and in respect of employee share awards. The number of Ordinary Shares in issue, their nominal value and the associated share premiums are as follows: Number of shares
Employee share schemes 123,336 Ordinary Shares (2017: 157,866 Ordinary Shares) are held by the Share Incentive Plan Trust which may subsequently be transferred to employees (including Executive Directors) to satisfy Sharebuild Matching Share awards. These shares are presented as own shares. Own shares are deducted from equity. No gain or loss is recognised on the purchase, sale, issue or cancellation of the own shares. Any consideration paid or received is recognised directly in equity.
At 31 December 2018, the total number of options over Ordinary Shares outstanding under the Group employee share option plans is 4,465,067 (2017: 4,996,149) and the total number of potential shares outstanding under the long term incentive plan and under the Sharebuild is 10,897,021 Ordinary Shares (2017: 11,940,129 Ordinary Shares). Further information on the employee share schemes is provided in note 18 and in the Directors’ Remuneration Report within the Directors’ and Corporate Governance Report.
Interest on the Notes is due and payable only at the sole and absolute discretion of the Company, subject to certain additional restrictions set out in the terms and conditions, and is non-cumulative. In addition the terms and conditions of the Notes will require the Company to cancel interest payments in certain circumstances. The Notes are redeemable (subject to certain conditions) at the option of the Company in whole but not in part on the fi rst call date, being the fi fth anniversary of the issue date, or any interest payment date thereafter or in the event of certain changes in the tax, regulatory or ratings treatment of the Notes. Any redemption is subject, inter alia, to the Company giving notice to the relevant regulator and the regulator granting permission to redeem. The Notes convert into ordinary shares of the Company, at a pre-determined price in the event that certain solvency capital requirements are breached, or in the event of a winding up occurring earlier, would be entitled to a return of capital in preference to Ordinary shareholders but behind the rights of the existing Preference shareholders, as more fully set out in the terms and conditions of the Notes. Accordingly, the Notes are treated as a separate category within Equity and coupon payments are recognised as distributions, similar to the treatment of preference share dividends.
Royal & Sun Alliance Insurance (Middle East) BSC (c) 50 158 50 139
During 2018 the dividends paid to the non-controlling interests in the Middle East were £12m (2017: £4m) and British Aviation Insurance Company £2m (2017: £6m).
The dated guaranteed subordinated notes were issued on 10 October 2014 at a fi xed rate of 5.125%. The nominal £400m bonds have a redemption date of 10 October 2045. The Group has the right to repay the notes on specifi c dates from 10 October 2025. If the bonds are not repaid on that date, the applicable rate of interest would be reset at a rate of 3.852% plus the appropriate benchmark gilt for a further fi ve year period.
The bonds and the notes are contractually subordinated to all other creditors of the Group such that in the event of a winding up or of bankruptcy, they are able to be repaid only after the claims of all other creditors have been met.
The provisions for losses and loss adjustment expenses are estimated using previous claims experience with similar cases, historical payment trends, the volume and nature of the insurance underwritten by the Group and current specifi c case reserves. Also considered are developing loss payment trends, the potential longer term signifi cance of large events, and the levels of unpaid claims, legislative changes, judicial decisions and economic, political and regulatory conditions.
The level of provision carried by the Group targets the inclusion of a margin of 5% for the core businesses on top of the actuarial indication outlined above. The appropriateness of the 5% target is subject to regular review as part of the Group reserving process at Group Corporate Centre.
The total value of provisions for losses and loss adjustment expenses less related reinsurance recoveries before discounting for continuing operations is £8,494m (2017: £8,520m).
Claims (excluding annuities) on certain classes of business have been discounted as follows: Category
As at 31 December 2018, the value of the discount on net claims liability reserves is £92m (2017: £111m) excluding held for sale, annuities and periodic payment orders. All other factors remaining constant, a decrease of 1% in the discount rates would reduce the value of the discount by approximately £60m (2017: £70m).
Gross insurance contract liabilities and the reinsurers’ share of insurance contract liabilities
The gross insurance contract liabilities and the reinsurers’ (RI) share of insurance contract liabilities presented in the statement of fi nancial position comprise the following: Gross £m
Total insurance contract liabilities excluding held for sale 12,712 (2,271) 10,441
Total insurance contract liabilities excluding held for sale 12,793 (2,252) 10,541
Provision for unearned premiums (gross of acquisition costs) at 31 December 3,919 3,986
Total claims payments made in the year net of salvage and other recoveries (5,123) (5,093)
Provisions for losses and loss adjustment expenses at 31 December net of held for sale 9,468 9,477
Present value recognised in the consolidated statement of fi nancial position 9,468
Present value recognised in the consolidated statement of fi nancial position 7,936
Costs of £70m (2017: £63m) were recognised in respect of defi ned contribution schemes by the Group.
The Group’s Swedish subsidiaries are part of a multi-employer defi ned benefi t scheme along with other fi nancial 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 defi ned contribution scheme. Contributions of £6m (2017: £8m) were paid to this scheme during 2018 and are included in the costs shown above. The expected contributions in 2019 are £6m. Total estimated contributions to the scheme from all employers in 2018 were £61m. The latest information regarding the funding of this scheme is taken from the interim report for the fi rst half of 2018, when the scheme funding rate was 122% (2017: 121%).
Defi ned benefi t pension schemes and other post-retirement benefi ts
The amounts recognised in the consolidated statement of fi nancial position are as follows: UK £m
Fair value of plan assets 7,841 424 8,265 8,344 455 8,799
Net IAS19 surplus/(defi cits) in the schemes 231 (69) 162 (51) (90) (141)
Defi ned benefi t pension schemes 231 (21) 210 (51) (30) (81)
Independent actuaries calculate the value of the defi ned benefi t obligations for the larger schemes by applying the projected unit credit method. The future expected cash outfl ows (calculated based on assumptions that include infl ation and mortality) are discounted to present value, using a discount rate determined at the end of each reporting period by reference to current market yields on high quality corporate bonds (‘AA’ rated) identifi ed to match the currency and term structure of the obligations.
The actuarial valuation involves making assumptions about discount rates, future salary increases, future infl ation, the employees’ age upon termination and retirement, mortality rates, future pension increases, disability incidence and health and dental care cost trends.
The major defi ned benefi t pension schemes are located in the UK. The assets of these schemes are mainly held in separate trustee administered funds. The UK defi ned benefi t schemes were effectively closed to new entrants in 2002 and subsequently closed to future accruals with effect from 31 March 2017. UK schemes in surplus have been reduced for the 35% tax cost of an authorised return of surplus, classifi ed as ‘Other net surplus remeasurements’. Our judgement is that the authorised refund tax charge is not an income tax within the meaning of IAS12 and so the surplus is recognised net of this tax charge rather than the tax charge being included within deferred taxation.
Accrued benefi ts are revalued up to retirement in accordance with Government indices for infl ation. A cap of 2.5% per annum applies to the revaluation of benefi ts accrued post March 2010 (a cap of 5% per annum applies for benefi ts which accrued prior to this date).
RSA Annual Report and Accounts 2018156 rsagroup.com 38) Post-retirement benefi ts and obligations continued
The Group is exposed to risks through its obligation to fund the schemes. These risks include market risk (assets not performing as well as expected), infl ation risk and longevity risk over the lives of the members. The Group and the trustees of the schemes work together to reduce these risks through agreement of investment policy including the use of interest rate, infl ation rate and longevity swaps.
During 2009 the Group entered into arrangements that provide coverage against longevity risk for 55% of the retirement obligations relating to pensions in payment of the two largest UK schemes at that time (c.40% coverage based on current pensioner population). The arrangement provides for reimbursement of the covered pension obligations in return for the contractual return receivable on portfolios of assets (including some interest rate swaps) held by the pension funds at the inception of the arrangement. The arrangement is accounted for as a longevity swap. The longevity swap is measured at fair value under IFRS 13 by discounting all future cash fl ows using a discount rate that appropriately refl ects the terms of the arrangements. The pension schemes continue to hold the original assets used to fund the arrangements.
In October 2018 the UK’s High Court ruled in the Lloyds Banking Group case that unequal benefi ts in respect of different Guaranteed Minimum Pensions (GMPs) for male and female pension scheme members must be equalised. Estimates of the impact of equalising these benefi ts for RSA’s UK defi ned benefi t schemes have been made by independent actuaries with an expected cost of c£8m (c0.1% liabilities). This increase in IAS 19 liabilities has been recognised in 2018 and is expected to be suffi cient to cover the actual cost of equalising these benefi ts in accordance with the requirements set out in the Lloyds case judgement.
Each scheme is subject to triennial valuations, which are used to determine the future funding of the schemes by the Group including funding to repair any funding defi cit. The funding valuations, which determine the level of cash contributions payable into the schemes and which must be agreed between the Trustees and the Group, are typically based on a prudent assessment of future experience with the discount rate refl ecting a prudent expectation of returns based on actual investment strategy. This differs from IAS 19, which requires that future benefi t cash fl ows are projected on the basis of best-estimate assumptions and discounted in line with high-quality corporate bond yields. The Trustees’ funding assumptions are updated only every three years, following completion of the triennial funding valuations. The effective date of the most recent valuations of the main UK funds is 31 March 2018.
The weighted average duration of the defi ned benefi t obligation of the two main UK schemes at the end of the reporting period is 16.5 years (2017: 18 years).
The Group also operates defi ned benefi ts schemes in other countries. The most signifi cant of these schemes are in Canada and Ireland.
Effect of changes in fi nancial assumptions 515 – – 515
RSA Annual Report and Accounts 2018158 rsagroup.com 38) Post-retirement benefi ts and obligations continued
Effect of changes in fi nancial assumptions (309) – – (309)
Other (including annuity contracts, infrastructure and growth alternatives) 460 26 486 519 26 545
Value of asset and longevity swaps (2,506) – (2,506) (2,387) – (2,387)
Total assets in the schemes 7,841 424 8,265 8,344 455 8,799
Other (including annuity contracts, infrastructure and growth alternatives) – 486 486 – 545 545
Total assets in the schemes 7,270 995 8,265 7,408 1,391 8,799 1 The 2017 assets have been re-presented to refl ect the investment characteristics of the underlying assets. Specifi cally, £433m of ground rent and long lease property assets are now reported in Property and £413m of non UK sovereign debt is now reported in Government debt. These assets had all previously been classifi ed as non-government debt.
Assumptions used in calculation of retirement benefi t obligations: Annual rate of infl ation (RPI) 3.18 3.13 – –
Assumptions used in calculation of pension net interest costs for the year: 1 For the UK the annual rate of increase in pensions shown is the rate that applies to pensions that increase at RPI subject to a cap of 5%. For other schemes the weighted average assumption is shown.
Reductions in future mortality rates are allowed for by using the CMI 2017 tables (2017: CMI 2016 tables) with a long term improvement rate of 1.25% (2017: 1.25%). The weighted average assumptions imply that a current pensioner aged 60 has an expected future lifetime of 27.2 (2017: 27.8) years for males and 28.7 (2017: 28.9) years for females and a future pensioner aged 60 in 15 years’ time has a future expected lifetime from age 60 of 28.2 (2017: 28.9) years for males and 29.9 (2017: 30.1) years for females.
Sensitivities for the defi ned benefi t obligations of the two main UK schemes are shown below: Changes in assumption £m £m
2 Reducing the core mortality rates by 12% is the equivalent of increasing the life expectancy of a male aged 60 years by 1 year.
Of the above, £109m (2017: £308m) is due to be settled outside of 12 months.
See note 38 for further information regarding the pensions and post-retirement benefi t obligations.
Additional provisions during the year 10 21 40) Other liabilities £m £m
The reconciliation of net profi t before tax to cash fl ows from operating activities is as follows: Note £m £m
Impairment charge/(reversal) on available for sale fi nancial assets 10 (4)
The future aggregate minimum lease receipts under non-cancellable operating leases are as follows: Land and buildings £m £m
The Group’s signifi cant capital commitments in respect of property and equipment and intangible assets are detailed in the table below: £m £m
The future commitments to structured entities are disclosed in note 27 of these fi nancial statements. In addition, the Group has committed to invest £188m (2017: £22m) in other classes of investments.
The Group receives liability claims and may also become involved in actual or threatened litigation, during the ordinary course of its business operations. The Group reviews and, in the opinion of the directors, maintains suffi cient provisions, capital and reserves in respect of such claims.
· the ability to use its power over the subsidiary to affect its returns.
The Group’s shares of its associates’ profi ts or losses are recognised in the consolidated income statement and its share of comprehensive income is recognised in the consolidated 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.
Foreign currency transactions are translated into the functional currency of the Group’s business operations using the exchange rates prevailing at the time of the transaction. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the consolidated income statement.
Basic earnings per share are calculated by dividing the profi t attributable to the ordinary shareholders of the Parent Company by the weighted average number of ordinary shares in issue during the period, excluding ordinary shares purchased by various share trusts of the Group and held as own shares.
Transactions are classifi ed as hedging transactions when the following conditions for hedge accounting are met: · There is a formal designation and documentation of the hedging relationship and the Group’s risk management objective and strategy for undertaking the hedge
Where a derivative is designated as a hedging instrument against the cash fl ows from a fi xed interest security, the gains and losses arising from the change in fair value of the derivative are recognised initially in other comprehensive income in the cash fl ow hedge reserve. This amount is adjusted to be the lesser of the cumulative gain or loss on the derivative and the cumulative change in fair value of the expected future cash fl ows of the security, both since the inception of the hedge.
The accumulated amount in the cash fl ow hedge reserve, is reclassifi ed to the consolidated income statement in the period in which the hedged cash fl ows affect profi t or loss.
Where a derivative is designated as a hedging instrument in a fair value hedge of the changes in value of a fi xed interest security, the gains and losses arising from the change in fair value of the derivative are recognised in the consolidated income statement. The change in fair value of the hedged investments that are attributable to the hedged risk is transferred from the revaluation reserve to the consolidated income statement.
Property, plant and equipment is comprised of Group occupied land and buildings and other equipment (comprising of fi xtures, fi ttings and other equipment including computer hardware and motor vehicles) and is initially recognised at cost.
Group occupied property is stated at fair value, less subsequent depreciation for buildings. The fair value methodology is set out in note 26. Increases in the carrying amount arising on revaluation are recognised in other comprehensive income and credited to a separate revaluation reserve within equity. Decreases in the carrying amount arising on revaluation are recognised in other comprehensive income and reduce the revaluation reserve, to the extent they offset previous revaluation increases; further decreases are charged to the consolidated income statement. Buildings are depreciated to their residual value on a straight line basis over the useful economic life of the building; depreciation is charged to the consolidated income statement except where a building has been revalued upwards, in which case the amount of the depreciation relating to the difference between the buildings revalued amount and the original cost is transferred from revaluation reserve to retained earnings. Land is not depreciated.
The estimated useful lives of property, plant and equipment is as follows: Group occupied buildings normally 30 years Fixtures and fi ttings 10 years Equipment 3–5 years
The useful economic life and residual value are reviewed on an annual basis. Where the carrying value of an asset is deemed to be greater than its recoverable amount, the asset is impaired as outlined in the signifi cant accounting policies note. Gains and losses on disposal are recognised based on the carrying amount of the asset. On disposal of buildings, any associated revaluation surplus is transferred to retained earnings.
Investment property is stated at fair value. The fair value methodology is set out in more detail in note 26. Unrealised gains and unrealised losses or changes are recognised in net investment return in the consolidated income statement. Rental income from operating leases on investment property is recognised in the consolidated income statement on a straight line basis over the length of the lease.
Loan capital comprises subordinated bonds which are initially measured at the consideration received less transaction costs. Subsequently, loan capital is measured at amortised cost using the effective interest rate method.
A provision is recognised when the Group has a present legal or constructive obligation as a result of past events that are more likely than not to result in an outfl ow of economic resources in order to settle the obligation, and the amount of that outfl ow can be reliably estimated.
A contingent liability is recognised if the Group has a possible future obligation as a result of past events, and either the amount of the expected future outfl ow of economic resources or the likelihood of payment cannot be reliably estimated.
Termination benefi ts are payable when either employment is terminated by the Group before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefi ts. Termination benefi t expenses are recognised in the income statement at the earlier of the date when the Group can no longer withdraw the offer and the date when any related restructuring costs are recognised. Benefi ts falling due more than 12 months after the end of the reporting period are discounted to present value.
Further information on the share schemes the Group operates can be found in note 18 and in the Directors Remuneration Report.
The Group leases various properties and equipment under non-cancellable operating lease agreements. The leases have varying terms, escalation clauses and renewal rights. Payments made under operating leases are charged on a straight line basis over the term of the lease.
Unless otherwise stated, the share capital disclosed comprises ordinary shares (or equivalent) which are 100% held within the Group. All of the subsidiaries listed are wholly owned within the Group and included in the consolidated accounts.
The proportion of voting power held equals the proportion ownership interest unless indicated.
Al foo, Building, offi ce no. 21, 2nd fl oor, Building no. 662, Road no. 2811, Black no. 428, Al Seef, Manama, Kingdom of Bahrain
MRM Solutions Limited(4) (6) Class B Common 555 West Hastings Street, Suite 1900, Vancouver BC V6B 4N6, Canada
Class of shares held % held 2475 Laurier Blvd., Quebec City, Québec G1T 1C4, Canada
Dixcart House, Sir William Place, St. Peter Port, Guernsey, GY1 4EY
RSA House, Dundrum Town Centre, Sandyford Road, Dublin 16, Ireland 123 Money Limited(4) (9) B1 Ordinary 123 Money Limited(4) (9) B2 Ordinary 123 Money Limited(4) (9) B3 Ordinary 123 Money Limited(4) (9) B4 Ordinary 123 Money Limited(4) (9) B5 Ordinary 123 Money Limited(4) (9) C Ordinary 123 Money Limited(9)
Jubilee Buildings, 1 Victoria Street, Douglas, IM99 1BF, Isle of Man
United Kingdom 5th Floor, United Kingdom House, 180 Oxford Street, London, W1D 1NN, United Kingdom
Punchbowl Park Management Limited(3) (5) 65.09 82 King Street, Manchester, England, M2 4WQ, United Kingdom
Caunce O’Hara & Company Limited(3) 39.00 c/o UCL Business Plc, The Network Building 97, Tottenham Court Road, London, W1T 4TP, United Kingdom
Clinton House, 12 Lombard Street, Newark, Nottinghamshire, NG24 1XB, United Kingdom
1 Directly owned by the parent company RSA Insurance Group plc. 2 No subsidiary holds a disclosable interest in the shares of RSA Insurance Group plc. 3 Indicates that the holding represents an Investment or is an Associate of the Group. 4 Indicates ownership of non-voting shares. 5 There is no subsidiary where the Group holds less than 50% of the voting rights.
6 The percentage held relates to the actual percentage of the share capital held and not the effective percentage held (85.42%).
Issue of Tier 1 notes (note 10) – – – – – – – 297 297
Profi t for the year net of tax – – – – – – 213 – 213
Fair value losses net of tax – – – – (1,292) – – – (1,292)
Share based payments 3 – – – – – 9 – 12
The separate fi nancial statements were approved on 27 February 2019 by the Board of Directors and are signed on its behalf by: Scott Egan
Cash and cash equivalents at the beginning of the year 3 3
Except where otherwise stated, all fi gures included in the separate fi nancial statements are presented in millions of Pounds Sterling (‘Sterling’), shown as £m, rounded to the nearest million.
The additional accounting policies that are specifi c to the separate fi nancial statements of the Company are set out below.
The Company accounts for its investments in directly owned subsidiaries as fair value through other comprehensive income, which are included in the accounts at fair value.
In terms of the new fi nancial asset classifi cation: · the Company has elected to treat its investment in directly owned subsidiaries which are not held for trading, previously classifi ed as available for sale, as fair value through other comprehensive income, the accounting policy for which is set out below; and
Neither of the above classifi cations under IFRS 9 resulted in a change to the carrying value of the fi nancial assets from would it would have been under IAS 39.
The Company’s principal activity of receiving dividend income from it investment in subsidiaries is outside the scope of this standard and so consequently implementing this standard has not had a signifi cant impact on the Company’s result for the year or its fi nancial position.
The risks faced by the Company are derived from its investment in subsidiaries and are therefore the same as those of the RSA Group of companies. Details of the key risks to the Group and the steps taken to manage them are disclosed in the risk and capital management section of the consolidated fi nancial statements.
The following transactions were carried out with related parties: RSA Insurance Group plc provides services and benefi ts 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 6% (2017: 6%).
Interest received from subsidiaries is £34m (2017: £37m), and interest paid to subsidiaries is £2m (2017: £1m).
RSA Annual Report and Accounts 2018174 rsagroup.com 4) Share based payments
The subordinated loan to a subsidiary has the same terms as the external loan capital from which the loan to the subsidiary was fi nanced. The fair value of the loan is based on the quoted price for the external loan capital. The nominal value of the loan is £32m (2017: £32m) with an interest rate of 9.375%.
8) Other debtors and other assets – to be settled within 12 months £m £m
Full details of the share capital of the Company are set out in note 32 to the consolidated fi nancial statements.
Full details of the loan capital of the Company are set out in note 35 to the consolidated fi nancial statements.
Announcement of the half-year results for the six months ended 30 June 2019 15 August 2019*
Ex-dividend date for the second preference dividend for 2019 16 August 2019*
Ex-dividend date for the ordinary interim dividend for 2019 6 September 2019*
Payment date for the second preference dividend for 2019 11 October 2019*
Payment date of the ordinary interim dividend for 2019 7 November 2019*
Alternative performance measures (APMs) are complementary to measures defi ned within International Financial Reporting Standards (IFRS) and are used by management to explain the Group’s business performance and fi nancial position. They include common insurance industry metrics, as well as measures management and the Board consider are useful to enhance the understanding of its performance and allow meaningful comparisons between periods and business segments.
APMs are identifi able within Group tables by the symbol ◊, and are defi ned in the below jargon buster. Further defi nition, commentary and outlook of those APMs considered important in measuring the delivery of the Group’s strategic priorities can be found on pages 22 and 23 of the Annual Report and Accounts 2018. Detailed reconciliations of APMs to their nearest IFRS Income Statement equivalents and adjusted APMs can be found after the below jargon buster. APMs used to determine management and executive remuneration are identifi ed below with ◊*.
Affi nity Selling insurance through a partner’s distribution network, usually to a group of similar customers e.g. store-card holders, alumni groups, unions and utility company customers.
Attritional Loss Ratio This is the underlying loss ratio (net incurred claims and claims handling expense as a proportion of net earned premium) of our business prior to volatile impacts from weather, large losses and prior-year reserve developments.
Claims Handling Expenses The administrative cost of processing a claim (such as salary costs, costs of running claims centres, allocated share of the costs of head offi ce units) which are separate to the cost of settling the claim itself with the policyholder.
Gross Written Premium (GWP) Total revenue generated through sale of insurance products. This is before taking into account reinsurance and is stated irrespective of whether payment has been received.
Group Volatility Cover (GVC) Reinsurance purchased by the Group to protect against large losses. Individual losses are covered in full when they exceed a certain amount and the aggregate of such losses over the fi nancial year exceed an agreed limit.
Managing General Agent (MGA) A specialised type of insurance agent or broker that has been granted underwriting authority by an insurer and can negotiate contracts on behalf of the insurer.
Costs that are dependent on the level of defi ned benefi t pension scheme plan funding and arise from servicing past pension commitments
Gains and losses arising from the disposal of businesses and impairment of goodwill
Reorganisation To allow assessment of the performance of ongoing business activities
Policies in Force The number of active insurance policies for which Group is providing cover.
Prior Year Underwriting Result Updates to premium, claims, commission and expense estimates relating to prior years.
Proforma Adjusted profi tability measures to enhance understanding of the reported result and of future potential performance. Proforma profi tability metrics show; – the impact of the new regional reinsurance programmes
– the results for our ongoing business given the signifi cant portfolio exits undertaken in the UK business
– regional results after allocation of group volatility cover reinsurance premiums and claims recoveries
Pull to Par The movement of a bond's price toward its face value as it approaches its maturity date.
Reported Exchange (RFX) Prior period comparative translated at exchange rates applicable at that time.
Return on Tangible Equity Profi t attributable to ordinary shareholders (profi t after tax excluding non-controlling interests, coupon on tier 1 notes and preference dividend) expressed in relation to opening tangible net asset value.
Solvency II Capital adequacy regime for the European insurance industry which commenced in 2016 and is based on a set of EU wide capital requirements and risk management standards.
Scrip Dividend Where shareholders choose to receive the dividend in the form of additional shares rather than cash. The Group would issue new shares to meet the scrip demand.
Tangible Net Asset Value (TNAV) Tangible net asset value comprises shareholders’ equity, less preference share capital and goodwill and intangible assets.
It takes profi t after tax, excluding the proportion that is attributable to noncontrolling interests, preference shareholders and Tier 1 note holders and adds back non-operating charges (reasons for exclusion above) before adjusting for the tax difference between effective and underlying rate.
A key measure of the underlying earnings power of the group as it excludes shorter-term and temporary changes, such as restructuring costs.
Underlying earnings per share is calculated as underlying profi t after tax divided by the weighted average number of shares in issue during the period.
Weather Losses Weather claims incurred with a net cost of £0.5m or higher and losses of less than £0.5m where extreme weather has been identifi ed over an extended period.
Investment income 322 D 322 Realised gains on investments 22 22 Unrealised gains 9 9
Interest costs (25) O (25) Finance costs (25) (25) Acquisitions and disposals (2) (2) Net share of profi t after tax of associates 1 1
Income tax expense (108) Z AA AB AC AD Profi t for the year 372 C+J+L+N P 165 PY Underwriting Z – P Q 85 CY Underwriting 250
Net investment return 350 Other insurance income 146 E 146 Other non-insurance income 4 4 Other operating income 150 Total income 7,105 Expenses Gross claims incurred (5,136) (5,136) Less: claims recoveries from reinsurers 786 786 Net claims, analysed as (4,350) F (4,350)
Earned CY commission (883) K (883) Earned PY commission (28) L (28) Earned CY operating expenses (1,093) M (1,093) Earned PY operating expenses (3) N (3) Underwriting and policy acquisition costs (2,007) (2,007) Unwind of discount (34) (34) Investment expenses (13) (13) Non-insurance expenses (3) (3) Central expenses (17) (17) Amortisation of intangible assets (15) (15) Pension net interest and administration costs (7) (7) Reorganisation costs (155) (155) Foreign exchange losses (1) (1) Impairment of intangibles (23) (23) Other operating expenses (234)
Interest costs (43) O (43) Debt buy back costs (59) (59) Finance costs (102) (102) Acquisitions and disposals 69 69 Net share of profi t after tax of associates 1 1
B Underlying profi t after tax attributable to ordinary shareholders 350 444
E Weighted average no. share issue during the period (un-diluted) 1,026 1,021
B/E K Underlying earnings per share 34.1 43.5 3. Balance sheet reconciliations £m £m
Comprised of: Volume change including portfolio actions and standard reinsurance (153) (25)
Less tax effect of: Withholding tax on intercompany dividend 0 (5)
Occasionally management report additional or adjusted APMs when circumstance requires to further enhance understanding of reported results and of future performance potential. Additional proforma profi tability metrics provided show: · the impact of the new 2019 regional reinsurance programmes
· results after allocation of reinsurance premium and claims recoveries under group volatility cover
The Group reported result adjusted for the estimated impact of UK exits and new regional reinsurance programmes.
The Company is registered in England and Wales under Company No. 2339826. Its registered offi ce address is 20 Fenchurch Street, London EC3M 3AU.
The Company’s corporate website provides shareholders with a broad range of information about the Group’s heritage, social and environmental responsibilities and investor information such as the Group’s fi nancial statements, current and historic share prices, Annual General Meeting (AGM) materials, events, governance information and answers to frequently asked questions in respect of shareholder matters. Visit the investor website at www.rsagroup.com/ investors for further information.
The Company’s share register is maintained by Equiniti Limited (Equiniti). Any administrative enquiries relating to shareholdings, such as dividend payment instructions or a change of address, should be notifi ed to Equiniti, Aspect House, Spencer Road, Lancing, West Sussex BN99 6DA. Telephone: 0371 384 2048.
The opening market price of an ordinary share on 2 January 2018 was 633.0 pence and the closing market price on 31 December 2018 was 513.6 pence. The highest daily closing price of an Ordinary Share during 2018 was 681.8 pence on 22 June 2018 and the lowest daily closing price was 496.6 pence on 17 December 2018.
Any enquiry relating to the sponsored ADR programme should be addressed to JPMorgan Chase & Co, PO Box 64504, St Paul, MN 55164-0504 USA or visit adr.com/shareholder and select Contact Us.
Information on how to manage your shareholding can be found at www.help. shareview.co.uk. If you do not fi nd the information you require, you can send your enquiry via secure email from these pages. You will be asked to complete a form providing your name, address and shareholder reference number. If you require an email response, you will need to provide your email address.
If you would like to join, please call Equiniti on 0371 384 2048 to obtain an application form today or visit www.shareview.co.uk/ info/csn for more information, including the CSN terms and conditions. Lines are open 8.30am to 5.30pm (UK time), Monday to Friday, excluding public holidays in England and Wales.
You can elect to receive email notifi cation 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. Shareholders may elect to receive a printed copy of the Annual Report and Accounts at any time by contacting Equiniti.
UK law requires that our shareholder register is available for public inspection. We are unable to control the use of information obtained by persons inspecting the register. Details of any share dealing facilities that the Company endorses will be included in Company mailings or on our website.
Shareholders with a small number of shares, the value of which makes it uneconomic to sell them, may wish to consider donating them to charity through ShareGift, a registered charity (number 1052686). The relevant share transfer form can be obtained from Equiniti. Further details can be obtained from www.sharegift. org or by calling + 44(0) 20 7930 3737.
The Group’s actual future fi nancial condition, performance and results may differ materially from the plans, goals and expectations set forth in such forward-looking statements and, as a result, these forward-looking statements are not guarantees of future performance of the Group and undue reliance should not be placed on them. Forward-looking statements speak only as of the date they are made. The Group undertakes no obligation to update any forward-looking statements, save in respect of any requirement under applicable law or regulation. Neither the content of RSA’s website nor the content of any other website accessible from hyperlinks on RSA’s website is incorporated into, or forms part of, this document.
Both manufacturing mill and the printer are registered to the Environmental Management System ISO4001 and are Forest Stewardship Council® (FSC) chain of custody certifi ed.