Visit us online to see summary information and listen to our Group Chief Executive’s statement at: www.rsagroup.com/annualreport
Our 2018 Strategic Report, on pages ifc to 43, has been reviewed and approved by the Board of Directors on 27 February 2019 and signed on its behalf by Stephen Hester, Group Chief Executive.
RSA is a leading international general insurer, operating in Scandinavia, Canada, and the UK & International (including Ireland, Middle East and European branches). We are focused on strengthening our existing areas of market leadership and growing profi table lines.
In the UK and Europe, we operate through our MORE TH>N and RSA brands and in Ireland through our 123.ie and RSA brands. In the Middle East, we operate through Al Alamiya and Al Ahlia.
Dear shareholders, 2018 was a mixed year for RSA. Whilst we did not achieve targeted improvements in our Group underwriting result, there were some signifi cant positives in our performance, and good reasons for optimism for the future. We have continued to show growth in our most profi table areas, set in train actions to address areas of persistent underwriting challenge, and maintained a strong balance sheet.
Importantly, RSA’s strategy is the right one. The Group continues to be well-balanced across geographies, business lines and distribution channels, and focused on achieving outperformance by pursuing excellence in customer service, underwriting and cost.
Brexit and changes in international trading norms continue to generate political and economic uncertainty. In December 2018, we completed the transfer of our European branches into a newly established Luxembourg entity, ensuring our European businesses can continue to concentrate on their core offering, mitigating risk of disruption arising from the UK’s exit from the EU. We continue to plan for and mitigate other potential implications. Around 70% of RSA operates outside the UK, and is locally incorporated, reducing our exposure to depreciation in sterling, and our vulnerability to protectionist activity.
Consumer confi dence faces various challenges, and data suggests that the economy is slowing somewhat in many geographies. In this context, we are focused on maximising the effi ciency of our operations alongside the quality of our customer offer and experience, to maintain our competitiveness.
I’m delighted that this focus has been refl ected in our Board appointments: we have welcomed Charlotte Jones and Sonia Baxendale to RSA as Non-Executive Directors, each bringing signifi cant fi nancial services and accounting experience. Following Scott Egan’s appointment as CEO of our UK & International division, Charlotte will take up the position of Group CFO later this year. In her new role she retains her position on the Board, now as an Executive Director, as does Scott.
Our ambition is to win for all our stakeholders, through striving to perform at best-in-class levels in our chosen markets.
We can achieve this through success in our business goals and living our People Principles: building a culture of high performance, working together effectively, and sustaining the diverse capabilities we require to succeed.
We aim to fulfi l our purpose, ambition and strategy by consistently building our core business values: RSA’s strategy is to: ∙ Concentrate on the complementary regional insurance markets where we are strongest
∙ Sustain a platform of fi nancial strength that enables our ambition
∙ Consistently develop the capabilities of our people and our use of data, technology, and capital resources.
RSA is the product of our strong relationships with our customers, employees and broader stakeholder groups. I am delighted to outline the plans of the Board for ongoing engagement with all of our stakeholders as part of this report. Dialogue with employees and customers will continue to be a particular focus for the Board in 2019.
For our shareholders, we are pleased to propose a fi nal dividend of 13.7 pence per share, making a total of 21.0 pence per share for the year. This is a 7% increase on 2017, refl ecting the confi dence we have in the business and its future prospects.
WHAT WE DO AND HOW WE CREATE VALUEThe resources we rely on
Relationships and partnerships: Our relationships with brokers and partner organisations help us to distribute 53% of our business.
Data: Advancements in data and analytics help us to improve our pricing speed and accuracy, as well as the effi ciency of our operations.
Best-in-class ambition: We have an outward looking, high performance culture, aiming to consistently invest in our people and their development. The collective drive of our workforce supports our ambition and potential to continue improving and benchmark alongside the best in our chosen markets.
We protect our customers against risk 1 Products that protect our customers: Our business is built around our customers. We constantly challenge ourselves to serve them better and address their evolving needs.
3 Understanding risk and pricing appropriately: To make sure that our prices and terms are accurate, competitive and sustainable, we are always working to better understand the risks our customers face.
To serve customers well, we need to be resilient ourselves. This means having a strong capital base and being wellreserved. Those funds are prudently invested in lowrisk assets, and reserves are available to pay claims when the worst happens.
We are committed to making a positive impact on the communities in which we operate.
The value we create for our stakeholders 1 Payments to charities, employee fundraising, value of volunteering and gifts in kind
Details of the Board’s engagement with shareholders are set out on page 56.
“ Getting it right for customers is at the heart of our business strategy.”
The Board recognises the importance of positive relationships between RSA and its shareholders and other stakeholders, and is committed to fostering and maintaining strong engagement with them. Open and collaborative dialogue and interaction is in the best interests of RSA and helps us to make a positive contribution to society. During 2018, the Board undertook work to map the current engagement between the Board and its stakeholders and to identify opportunities to improve further. In 2018, the Board took steps to further improve its engagement with stakeholders, including more direct interaction with employees in Canada during the Board’s visit in September.
1 Share price movement from 25 February 2014–25 February 2019 inclusive.
RSA is a people-centred business, with an ambition to perform at best-in-class levels. We have 12,244 employees and we aim to recruit and retain talented individuals from diverse backgrounds by offering them fulfi lling careers. We aim for a culture of high performance, where working together as a team is valued and the business invests in its people. We want our culture to be inclusive, where we can all bring our very best selves to work every day. During 2018, we launched our new People Strategy architecture under the Employer brand ‘Your Best U’, details of which can be found on page 38. We also developed and implemented several new leadership training programmes, enhanced our approach to performance management and created our Group-wide diversity and inclusion vision.
RSA is committed to working with the regulators in an open, cooperative and transparent manner. We seek to ensure a strong regulatory compliance culture throughout the Company in order to resolve regulatory issues and to avoid or minimise business impact and surprises. Senior management interacts regularly with Standard & Poor’s and Moody’s, two key rating agencies.
Further details of the Board’s engagement with the regulators and rating agencies are set out on page 56.
International Monetary Fund. However, growth patterns are becoming less predictable and the tightening of fi nancial conditions and ongoing global tensions are affecting the longer-term outlook. The US is expected to continue to grow well, while Europe, China and emerging economies are showing signs of slowing. Some central banks are tightening domestic monetary policy.
· Global insurance volumes are relatively insensitive to normal fl uctuations in GDP growth.
· We are focused on a small number of core, mature markets. Our businesses are diversifi ed and low risk, and we maintain a well-matched approach to investments, which provides some resilience against negative economic developments.
Traditional products and business models are being challenged as new entrants focus on bespoke propositions, personalisation, ease and simplicity.
Our telematics, cyber insurance and commercial e-trade propositions are examples of how we are adapting our offer to match customer demand.
· Our business serves a mainstream customer base in personal insurance across the age spectrum. Our focus is on building our digital approach while continuing to differentiate our support for vulnerable customers.
More protectionist policies are straining relations between countries. These rising tensions, overlaid with existing tensions in Russia, the Middle East and Asia, could impact on global growth, introduce economic or fi nancial shocks, or fuel social unrest.
· Our balanced regional footprint enables us to be resilient to macro-political risks, and most of our business is local and locally incorporated.
· Our new Luxembourg hub helps insulate our UK business from the potential operational risks of Brexit.
Climate change poses short-term physical risk and mid-term transition risk: Catastrophic weather and wildfi res have increased in frequency and intensity.
Signifi cant action is needed to achieve targets set by the 2015 Paris Agreement1, and this may incur transition risk.
We also promote preventative action and invest in risk pooling schemes to preserve access to insurance.
We work to reduce our own environmental impact, support our customers to respond to climate change and use our expertise to assist transition to a low-carbon economy. We are a specialist in insurance for renewable energy programmes.
We have strengthened our cyber underwriting capability, including recruiting a new Group Cyber
New technologies are enabling effi ciency gains through increased automation and self-service: Automation and robotics are increasingly driving effi ciency and supporting an enhanced customer experience. For example, automation can enable self-service, while robotics can be used to support customer interaction.
Automation is also affecting customer needs, e.g. vehicles we insure become autonomous or commercial customers become reliant on technology for their operations.
RSA is actively investing in and supporting innovation through projects like the UK GATEway
Leaving the European Union could extend economic uncertainties and introduce new challenges, especially if disorderly: Brexit continues to generate uncertainty, with potential for economic shocks, capital impacts, claims infl ation and supply chain disruption.
Scenario analysis indicates capital measures remain inside risk appetite even in adverse outcomes.
RSA continues to track new technologies and to innovate, particularly connected products like
Sterling has continued to remain weak and, despite some build in infl ationary pressures, yields remain low: The continuation of the low yield environment mandates a higher focus on underwriting discipline and cost management for all insurers.
Weaker sterling benefi ts our income statement while balance sheet and capital exposure to FX is well-matched.
Our business is alert to infl ationary pressures in terms of both claims and operational costs.
1 The Paris Agreement is an agreement within the United Nations Framework Convention on Climate Change (UNFCCC) to combat climate change and to accelerate and intensify the actions and investments needed for a sustainable low-carbon future.
However, for us 2018 was a disappointing year since RSA posted the fi rst decline in underwriting profi ts since 2013, driven primarily by higher weather costs and a range of loss challenges in our Commercial Lines businesses, most notably through our London Market results. While we can never be immune from external volatility, we have taken decisive action to address these losses and expect a good recovery in 2019.
Since 2013, a wide range of fundamental improvements have transformed RSA’s competitive position and capabilities. These programmes, aimed towards our best-in-class strategic ambitions, continued to deliver across 2018. While there are many positive examples, the strong results from our Personal Lines businesses (57% of the Group) are a fi ne example – delivering for both customers and shareholders despite weather headwinds.
RSA is a focused international insurance group. We have complementary leadership positions in the major general insurance markets of the UK, Scandinavia and Canada together with ‘supporting’ international business. The Group is well balanced between personal (57%) and business customers (43%), across our regions, product lines and distribution channels.
RSA’s strategy remains a strong one, best suited for our markets. However, tough conditions in Specialty and Wholesale insurance markets in 2017 and 2018 have prompted a reassessment and substantial cutback of our London Market presence (4% of 2018 Group premiums) which forms part of the UK & International Commercial Lines business.
2018 was a year with some major external underwriting challenges for the insurance industry. In common with 2017, it was an unusually poor year for both ‘Nat Cat’ losses and commercial large loss activity. Other weather related losses were also higher than long-term averages. Additionally, selected insurance lines continue to see claims infl ation higher than CPI, motor most notably. Despite this backdrop, for many participants overall profi tability is robust and hence competitive intensity remains high. Nevertheless, there are now real signs of pricing increases and capacity withdrawals in the worst performing lines which should help portfolio remediation where necessary.
2018 actions 2018 was an active year at RSA with our actions falling broadly into two categories – continued operational improvement in pursuit of our best-in-class ambitions and specifi c underwriting actions to address the underperforming areas of our business.
Insurers are the original ‘data scientists’ – that is what actuaries do – and capability development through technology and data remains at the heart of our improvement efforts. Hand-in-hand goes the contribution of our people who are increasing productivity every year through technology and better ways of working, and in so doing raising their own skills and value-added contribution.
· In Commercial Lines more extensive action is needed. We announced portfolio exits for c.50% of our London Market business and the two remaining UK generalist MGAs. Across all our remaining Commercial Lines businesses, underwriting action and rate increases are being deployed against underperforming areas. And for 2019 we have added new reinsurance aggregate covers aiming to reduce large loss volatility in each of our regional businesses.
Our Personal Lines businesses (57% of total) showed a combined ratio of 92.4% despite higher weather costs than 2017.
On a geographic basis, our Scandinavian business continues to be the most important profi t contributor. A combined ratio of 86.8% was behind the 2017 record, held back by Commercial Lines large losses, but strong nevertheless. Canada fell back due to adverse weather costs and poor Commercial Lines results. A signifi cant recovery is targeted for 2019.
RSA benefi ts enormously from the support of our stakeholders every year. Customers and shareholders represent our key audience. However, the contributions of my colleagues are what makes possible all we accomplish. My sincere thanks to them for their efforts in 2018. The future for RSA is bright if we make it so.
Group Chief Executive 1 Proforma for UK exits and/or reinsurance, see defi nition on page 185.
1. RSA’s strategy is to build up best-in-class capabilities. Why do you see that as the best course to follow?
Like many other industries, Personal and Commercial insurers operate in relatively mature and consolidated business lines, and without patents. The result is that undiscovered market segments are rare and leading players operate with very similar business models. Despite this, there are widely differing performance levels across competitors. The most successful are set apart by consistently superior and focused execution, rather than a differentiated strategy.
RSA is set up as a leader in three complementary geographies, with excellent business balance. This gives us the focus and platform to succeed. We aim to create and sustain high performance through consistent development of our customer appeal, underwriting skills and cost effi ciency to achieve best-in-class performance in each of our markets.
We exist to absorb losses on behalf of customers when needed, and so underwriting will always be the key battleground for general insurers. To be there for our customers as well as succeed for our shareholders, we need advanced skills in risk assessment and pricing, strong discipline in portfolio management and balance in our business. In addition, we can actively use reinsurance markets to further manage volatility.
As outlined in this report, RSA is intensively managing its portfolio to move away from business areas and individual risks that offer poor returns and expand where we can grow profi tably. We are steadily advancing our underwriting and pricing skills and tools, using the best of modern data science and insights. And, reinsurance purchases have been increased to mitigate particular areas of volatility.
The evolution of mankind is a story of growth and development through automation and greater information usage. At every stage, opportunities have outweighed threats but there have always been both losers and winners. Insurance is the original ‘data science’ industry and if we fail to make the most of technology and data to improve, we will fall back.
Across all our businesses we are determined to grasp technology’s opportunities in our mission to perform well for customers and shareholders. It is a tool to enhance customer service and convenience, it helps us to improve underwriting and pricing speed and accuracy, and it enables us to simplify and automate business processes.
Our business can only do well in those areas where we combine serving customers well with attractive profi tability for shareholders. Our industry is relatively mature and unlikely to grow fast. We therefore see growth not as a primary target, but as an outcome of success in delivering for our customers and shareholders.
“ Insurers are the original ‘data scientists’ – and capability development through technology and data remains at the heart of our improvement efforts.”
... and we have several critical assets which help us to create value...
... the combination of which results in our ambition to achieve best-in-class combined operating ratio
Focused on our customers We are committed to delivering great service and outcomes for our customers.
· RSA is committed to treating customers fairly. This year we established a new UK Customer Committee to further strengthen the voice of the customer in our decision-making.
· In Personal Lines, we are improving retention and sales effi ciency by investing in digital: an IT-hub is being established in Malmö to build capabilities for the future with a primary objective of creating an effortless customer experience in Scandinavia; Auto Express was launched in Canada to fast track simple claims; and in the UK, we migrated c.600,000 affi nity and M> customers over to Unity our new digital servicing platform. New business and migration for our major Home distribution deals will be live in 2019. Unity has supported very positive feedback, evidenced by a strong retention rate of 85% for our Nationwide customers, the fi rst partner to migrate to the platform.
It used to take over three weeks to process simple repeat prescription claims. In 2018, we introduced a process to automate them, which means that customers can now process a claim in as little as 12 minutes, from registering the claim to approval of the payment. We’re now focusing on maximising adoption across all our affi nity partners.
· Our UK GRS segment upgraded RSAred4 which uses real-time data and our insight to give customers greater visibility and control over risks. 1 Industry-wide customer satisfaction measure as at 2017 and 2018.
4 Web-based application that allows customers to manage risk engineering data in real time.
Disciplined, expert underwriting We are investing in our underwriting tools and capabilities, so we can constantly improve our understanding and pricing of the evolving risks that our customers face.
· We are already starting to see the benefi ts of this disciplined approach. Attritional ratios in Danish Personal Lines have improved 1.1% in the year and the UK Household attritional loss ratio has improved 4.1% compared with 2017, following rating and claims indemnity actions.
· Our three-year aggregate reinsurance cover was renewed at the beginning of 2018 on competitive terms and protects us well from frequency in super-large losses.
In addition, we have developed a mandatory eLearning module with real case examples to ensure we are reaching all underwriters globally. All underwriters will undertake this training on an annual basis starting in early 2019. By better understanding the nature of the risk, we can better support our customers by ensuring they have the most appropriate risk mitigation plans in place.
We are harnessing data analytics and AI to underpin our expert underwriting
· RSA have achieved the Group target of > £450m savings a year early and will now move cost effi ciency into ‘business as usual’ mode.
· In 2018, the Group earned underwriting controllable cost ratio of 20.4% was 0.6% lower than 2017 and has improved by over 4 points1 since 2013.
· Controllable expense ratio improved in Canada as well, despite the costs of capability investments coming through.
· Cost mix changing: Product development and IT costs increasing in the short term, but offset by savings elsewhere in the value chain.
· Lean management showing material improvements in effi ciency across the Group: now implemented in c. 95% of our Canadian operations.
· Selective outsourcing (BPO2): Outsourced voice calls in UK Motor and BPO projects implemented in Canada and Scandinavia for the fi rst time.
· Site consolidation programmes optimising geographical footprint: Canadian operations consolidated into two major hubs and fi ve key branches and relocations in Europe have facilitated premises cost savings.
Our Scandinavian operations established a dedicated BPO management function to identify operational expenditure savings. Working towards a target run rate saving of c.£7m, the business has standardised processes to lower the cost base and engage staff in a cost-saving culture.
Attritional loss ratios are a key lever in the Group’s fi nancial performance.
Operating profi t less interest costs, tax, noncontrolling interests, preference dividends and coupon on 2017 issued restricted Tier 1 instrument, per share.
Measuring our progress towards best-in-class The following nine key performance indicators are important in measuring the delivery of our strategic priorities.
The Solvency II coverage ratio represents total eligible capital as a proportion of the
The Solvency II coverage ratio is a measure of the capital adequacy of insurance companies. Our SCR is calculated on our risk profi le using the Group’s internal capital model.
We target a Solvency II coverage ratio in the range of 130–160%.
mode. We target continued progress towards our ambition of an earned controllable expense ratio of less than 20%.
Strong customer satisfaction translates to high retention levels and improved underwriting results.
Note: For the executive remuneration an underlying measure of profi t before tax is used. See page 72 for further detail.
A strong and resilient balance sheet We remain confi dent in our strategy and determined to deliver
Our strategy remains unchanged and we believe in it. Our execution capability needs to continue to improve and we are determined to do this. We have already taken strong action to target improved performance levels in 2019.
Customer satisfaction measures, such as net promoter score (NPS), and sales and service metrics are generally good, although with improvement still targeted. We continue to see a strengthening of underlying customer activity where capability improvements take effect.
For example, in Canada, our direct and affi nity channel, Johnson, reported customer retention of 90%. We also announced our important new partnership with Scotiabank on 31 July and expect to start writing new business in Q2 2019. In Scandinavia, our profi table Swedish Motor portfolio reported policies in force (PIFs) growth of 4%. In the UK, Personal Lines PIFs are up 2% primarily driven by our new partnership with Nationwide.
We have also added new reinsurance covers to try and reduce volatility of claims between £1m and £10m in each of our regions for 2019. Had these covers been in place in 2018, they would have had a net benefi t of over £10m on continuing portfolios.
· Profi t after tax of £372m, up from £322m in 2017 Underlying earnings per share of 34.1 pence (2017: 43.5 pence) but c.42 pence on a proforma basis2.
· Underwriting profi ts at £250m (2017: £394m) down 33% at constant FX. Proforma underwriting profi t was £344m2 excluding losses on exit portfolios and adjusting for reinsurance additions in 2019.
· Net written premiums down 1% at constant FX but up 1%3 net of changes in reinsurance.
· Triennial UK pension review concluded successfully, stable mediumterm agreement in place until the schemes are fully funded on a lower-risk basis.
Group net written premiums of £6.5bn were down 3% at reported FX, but up 1%3 at constant FX and excluding the impact of changes in reinsurance.
Reported premiums were dampened by c.£180m due to costs for the triennial Group Volatility Cover renewal and a reduction in retention levels for certain reinsurance programmes. These were budgeted in our plans. Foreign exchange movements provided a 2% headwind to premiums.
Find out more about the changes we have made to our UK business on pages 32 to 34
Group weather costs were £242m or 3.7% of net earned premiums (2017: 2.6%; fi ve-year average5: 3.1%) with Canada most affected with a weather ratio of 6.8%. Insured damage for severe weather events across Canada in 2019 reached $1.9bn6 for the industry, the fourth-highest loss year on record. UK and Ireland experienced a series of severe winter storms, with Storm Emma costing an estimated £50m. Finally, the UK experienced an increase in subsidence claims as a result of the hot and dry summer weather.
2 Preference dividends of £9m (2017: £9m) and coupons on Tier 1 securities of £14m (2017: £11m).
Group written controllable costs were down 2% at constant FX to £1,343m. This comprised 4% cost reductions, offset by 2% infl ation.
Scandinavia delivered year-on-year ‘real’ cost reductions of 10%, with 2% in Canada and 3% in UK & International.
Group FTE2 is down 26% (excluding disposals) since the start of 2014 to 12,244 at 31 December 2018. FTE decreased by 3% during the course of 2018.
Our cost reduction programme has now delivered total gross annualised cost reductions of £460m since 2013, reaching our target of £450m in savings a year early, and we have moved cost effi ciency into ‘business as usual’ mode.
Investment income was down 3% on prior year, primarily refl ecting the impact of reinvestment at lower yields which was partly offset by increased income from actions taken on the portfolios to increase exposure to less liquid credit investments. The average book yield across our major bond portfolios was 2.5% (2017: 2.5%). At current market forward rates, we expect investment income of c.£285-300m in 2019.
1 Stated on a proforma basis. See pages 185 and 186 for further details.
The taxes borne by the Group in 2018 were a total of £355m from our four largest territories (UK £88m, Ireland £9m, Scandinavia £147m and Canada £111m). Taxes collected by the same territories were an additional £607m.
RSA is a diversifi ed, multi-channel, multiproduct general insurer and its business mix reduces exposure to signifi cant volatility. However, the UK pension scheme provides a degree of volatility under Solvency II for RSA. We consider a target Solvency II operating range of 130-160% capital coverage to be appropriate to the Group’s risk profi le.
The Solvency II surplus2 increased to £1.2bn (2017: £1.1bn) with the coverage ratio of 170%, up 7 points.
The challenges encountered have not changed our view of RSA’s performance potential or fi nancial targets. 2018 has seen growth in headline profi t and attractive return on shareholder capital despite disappointing underlying results. We have been decisive and taken action where appropriate, and target substantially improved results in 2019 and beyond.
2 The Solvency II capital position at 31 December 2018 is estimated.
CEO, Scandinavia “ A strong year in Scandinavia – our trusted brands have continued to thrive, as we invest in areas where we see growth.”
Our business is split into approximately 60% Personal and 40% Commercial Lines. We distribute mainly direct to customers, but also leverage strong agency relationships.
Scandinavia delivered operating profi t of £306m, down 19%1. The combined ratio of 86.8% was 3.9 points higher than last year and just above our <85% best-in-class ambition. Personal Lines continued to deliver excellent performance with a combined ratio of 78.9% (2017: 77.0%), however, Commercial Lines increased by 7.3 points to a combined ratio of 97.9%. The Interconnector segment of ‘Tech Lines’ contributed 4.7 points to the Commercial Lines combined ratio and is being exited, while a property fi re in Denmark added 1.6 points.
As a result of this strategy, we have seen a substantial growth in digital sales in Sweden. Trygg-Hansa customers are now able to self-serve online, with customer visits to the online portal increasing 53% year-on-year. More customers than ever now rate their engagement with us as ‘effortless’, recording a better than the industry score (72% vs 69% overall benchmark). We gather daily customer feedback to guide us on where we can make further improvements.
Since 2014, our focus on improving profi tability and reducing costs has resulted in a stronger, more stable Scandinavian business, despite a disappointing Commercial Lines performance in 2018.
Our 2018 result is just outside the target combined ratio of <85% but we see scope for further improvements as we build the appeal of our brand, customer service levels, operational excellence and underwriting skills. We expect our Scandinavian operations to achieve medium-term growth in line with local economies.
RSA is the sixth largest general insurer in Canada. We operate across all provinces, with a broad offering of products and channels to both Personal and Commercial customers. Our portfolio is balanced at around 70% Personal and 30% Commercial Lines. Our Johnson brand is market leading, with an agent NPS2 of +70.
Our multi-channel distribution model means we are in a good position to take advantage of shifting consumer behaviour. Today, affi nity partnerships and direct channels deliver the majority of our Personal Lines premiums, though broker distribution remains an important channel here as well as in Commercial Lines.
The Canadian market remains competitive, with modest economic growth. Despite online and digital entrants driving pricing pressures, rate is hardening in both Personal and Commercial Lines as claims costs increase.
The weather loss ratio increased by 3.1 points to 6.8%, compared to a fi ve year average of 4.7%. Insured damage for severe weather events in 2018 reached $1.9bn4 for the industry, the fourth-highest loss year on record. The large loss ratio was 9.4% for 2018, compared to a fi ve year average of 6.4%; losses increased in H2 mainly in the Property classes. The attritional loss ratio of 58.1% increased by 1.3 points.
Net written premiums of £1,652m were up 6% at constant FX (2017: £1,565m1). In Personal Lines, policy counts were up 1% and Johnson, our direct and affi nity business, continued to grow organically (up 4%). Volumes also increased by 1% in Commercial Lines.
In 2018, we made good progress in the implementation of our Radar Live tool, which enables the use of more complex algorithms in rating and signifi cantly increases speed to market with new prices. More than 85% of our Personal Lines business now uses this tool.
Our Personal insurance brand Johnson is a market leader in the affi nity space and a brand refresh completed in 2018 will help us to cut through to stand out and elevate our positioning. Johnson secured a national white-label partnership to underwrite Home risks with InsureLineBrokers, a partner to Dominion Lending Centres and one of Canada’s largest mortgage broker networks.
We continued to invest in customer experience to secure long-term customer loyalty. For our Personal Lines customers we have continued to offer support at their times of greatest need: in May we rallied to provide additional call and online support for customers affected by windstorms in Ontario that saw us handle 40,000 calls, a quarter of which were out of hours.
In order to maintain momentum on positive premium and underwriting trends, we will concentrate on three key areas: we will look to expand our successful affi nity partnerships through Johnson, we will focus on our pricing, underwriting and analytics, and we will continue to enhance our digital capabilities, improving effi ciency and customer experience.
Our investment in our relationships with brokers, customers and employees will continue to be the foundation of our success. We continue to target a best-in-class combined ratio, underpinned by steady growth and continued cost effectiveness over the next three-year period.
RSA’s UK & International division spans Personal and Commercial Lines, with Personal Lines accounting for just under half of annual premium in 2018.
In Ireland, we are a leading Personal and Commercial insurer distributing through affi nity partners, brokers and our direct to consumer business, 123.ie.
UK & International delivered an operating profi t of £105m in 2018, up 60%1. The combined ratio (101.4%) improved by 1.2 points, despite a 0.9 points increase in weather costs.
In the UK and Ireland, Personal insurance is price-sensitive as a result of comparison websites and a growing number of digitalonly entrants. Motor insurance is particularly competitive. In addition, the digital capabilities required to support policy administration and claims to meet with customer expectations are increasing.
The UK Commercial market has experienced prolonged soft conditions, increasing the importance of brand reputation, strong broker relationships and differentiating focused expertise for successful players.
The UK generated an underwriting loss of £106m in 2018 (2017: £116m loss). London Market portfolio exits, together with a number of domestic exits, would have improved the 2018 underwriting result by £120m had they been in effect for the full year. The combined ratio would have improved by 4.6 points to 99.4%2. Net GVC recoveries were £25m, but this would be zero proforma for portfolio exits, so has no impact on the proforma numbers.
Commercial Lines premiums were down 6% excluding reinsurance changes. Rate has been positive in all major classes; for example, Motor achieved rate of 5% and Marine achieved 6%. However, this has meant a trade-off with top line (volumes down 9%) in ongoing soft market conditions. The decrease in premiums also refl ected our exit from certain large schemes as we restructure our delegated authority book, underwriting decisions on some large individual risks (notably in Property and Marine) and the restructuring of Specialty and Wholesale. The latter is expected to reduce premiums written through the London Market by c.£150m per annum versus 2017.
Read some of our other success stories here: rsagroup.com/casestudy 1 At constant FX.
2 Proforma for UK exits and/or reinsurance, see defi nition on pages 185 and 186.
In Household, we tightened claims handling processes and applied rate to address escape of water infl ation, helping to return attritional losses to healthier levels. In Commercial Lines, we took a more robust approach with our partners and brokers on rate and underwriting terms, to ensure that we remain competitive but sustainable in our pricing. Recognising an unacceptable underwriting performance, in November we announced we would move away from broad servicing of the London Market, focusing our international Specialty and Wholesale portfolio on core lines where we have or see the potential to achieve a profi table leadership position.
Finally, we mobilised an important long-term programme to improve our underwriting capability through enhanced data infrastructure, integration and storage, improved portfolio management and more advanced real-time pricing models.
In 2018, we continued the implementation of our new digital policy-servicing platform Unity, which brings Personal Lines customer policies and servicing onto one easy-to-use platform. Initially launched alongside our Nationwide Building Society partnership, Unity will be expanded across our Personal insurance products in 2019, with a particular focus on our MORE TH>N business.
We are also progressing wider digitisation of claims processes and improvements to management information to deliver benefi ts for customer service and productivity. For example, our online pet insurance platform now allows owners to claim for their animals’ repeat prescriptions, turning a process which once took weeks into a simple transaction that can be completed in minutes, improving customer experience and reducing operating costs.
Digitisation is also affecting our product mix as customers seek support in new areas. Refl ecting increasing demands for support beyond risk transfer and protection, we released an improved version of our awardwinning risk management software, RSAred. The service allows Commercial customers, brokers and RSA underwriters to manage risk engineering data in real time, and offers the ability to benchmark against peers.
In Personal Lines we have begun using smart data technology to help our Household customers minimise escape of water, the most costly category of home claims that we process. We have partnered with LeakBot to identify leaks before they become more serious, minimising potential damage to homes and associated claims costs. We have trialled the tool with 2,000 customers to gather insight and feedback ahead of a wider roll out in 2019.
Volunteering is at the heart of our community investment work in the UK, with colleagues donating 5,080 hours during the year and supporting over 445 charities. This year, we highlighted the value of skills-based and practical volunteering opportunities in our fi rst dedicated Community Action Month, which inspired 330 colleagues to get involved and give their time to worthy causes.
Our fi ve-year partnership with the School for Social Entrepreneurs continues to encourage entrepreneurship and provide valuable mentoring opportunities. We highlighted some of the milestones of this partnership in our recent impact report, published on our website. We also recognise the importance of supporting the next generation in the communities we operate in. To that end, we continue to partner with Enabling Enterprise, hosting eight events across the country in 2018, positively impacting 215 young people and highlighting the opportunities available in the insurance industry to children of all ages.
The Middle East delivered an underwriting profi t of £33m (2017: £25m) and another record combined ratio of 83.4% (2017: 87.7%). The attritional loss ratio improved by 2.5 points.
We will continue to improve our customer proposition and develop our technical insurance capability, focusing our attention more rigorously on scaling our most profi table portfolios and direct businesses. Our ongoing investments in digital and data infrastructure are required to improve our productivity, adapt and succeed in markets that will remain highly competitive. Over the next plan period, we must redouble our efforts to streamline and automate manual processes, replace our legacy technology and draw on new pricing and underwriting tools to deliver consistent and sustained profi tability.
Digital investment and actions to reshape our UK Commercial portfolio, combined with a relentless focus on quality of execution, should return the business to better profi tability in 2019. Our medium-term ambition for a sustainable best-in-class combined ratio of <94% in UK & International remains.
During 2018, we undertook a broad consultation with internal and external stakeholders to refl ect on the knowledge we have gained and review our response to key responsible business issues. We have used this to develop our Confi dent Futures strategy which will guide the actions we take over the next fi ve years to drive further progress.
Our Group-wide Human Rights policy commits us to the principles set out in the Universal Declaration of Human Rights (UDHR) and the International Labour Organization (ILO) core conventions on labour rights, covering freedom of association, the abolition of forced labour, equality and the elimination of child labour.
All employees must comply with Human Resources policies and procedures which ensure human rights principles are upheld. Our procurement teams consider human rights when reviewing new supplier tenders, third-party contracts and business partners. Our human rights due diligence processes include a supplier questionnaire requiring information on human rights policies and management practices which is reviewed by procurement teams during the tender process and ongoing supplier monitoring. To help ensure our suppliers meet our ongoing expectations on human rights, they are expected to comply with our ‘Supplier Code of Conduct’ which is embedded in new contracts.
Bribery and corruption are not tolerated anywhere in our operations. Our ‘Anti-bribery and corruption’ and ‘Confl icts of interest, gifts and hospitality’ policies cover all parts of our business and set out detailed guidance on facilitation payments, gifts and hospitality and relationships with third parties, as well as establishing systems and controls to ensure effective implementation. These policies are supported by our ‘Broker remuneration’ and ‘Third-party contracts’ policies which set out specifi c requirements for payments to brokers and procurement, including conducting appropriate due diligence on business partners and suppliers.
Our Group-wide risk management framework sets the policies and standards we expect of our employees in all markets. We monitor completion of mandatory training, and operating countries complete risk assessments that are regularly reviewed and updated, supported by a central team to enable continuous improvement to controls.
In 2018, we reduced our own carbon emissions by 3.4% per FTE against a target of 4%; full emissions data can be found on page 94. During 2018, we reduced our environmental impact through a focus on using online meeting software to avoid business travel, programmes to reduce paper use and working with our supply chain in Scandinavia to improve reuse of waste materials.
Our investments are governed by our Group Community and Charitable Donation policy, which is monitored through our corporate responsibility function to ensure compliance and that no confl icts of interest exist. During 2018, we reviewed and updated this policy to follow best practice guidelines in our reporting of community investments. No political donations are made by RSA Group.
We manage our operations responsibly and sustainably. Our focus areas: responsible investment & underwriting, sustainable operations, responsible supply chain, customer privacy & data security, business integrity.
We develop supportive and enduring relationships with our customers, colleagues and communities. We do this by providing customers excellent care and support, developing our people, and making a positive contribution to the communities we’re part of.
Our focus themes are supporting education and employability, working with social enterprise and social entrepreneurs, and enabling our employees to support local causes they are passionate about.
We work in partnership with charities and enable our employees to contribute to their local communities by sharing skills, volunteering up to two days of time and fundraising for local causes.
As an insurer we are well aware of the risks presented by climate change. We are working actively to support the transition to a lowcarbon economy and improve society’s resilience to extreme weather.
We manage the impact of our business on the environment by committing to reducing our own carbon emissions. We’re supporting our customers to adapt and respond to climate change and insuring renewable energy projects around the world, using our knowledge to help reduce risks and costs associated with technologies and enable the transition to a low-carbon economy.
Danish teachers to use in classrooms with 7–10 yearolds, reaching 12,500 young people.
· Organised Sweden’s largest ‘Cardiovascular rescue course’ to teach resuscitation techniques.
Society) to raise awareness of mental health issues among young people.
Entrepreneurs in the UK and Canada, mentoring social entrepreneurs, supporting 58,500 benefi ciaries.
· Engaged in industry-wide discussions on climate change through ClimateWise, the ABI and CBI.
producing an industry-leading paper on climate change and the role of insurance in supporting resilience.
We are open and transparent about how we manage our operations. We work collaboratively with customers, employees and suppliers to deliver positive outcomes.
· 330 suppliers assessed against due diligence questions on environmental, social and ethical issues.
The UK has introduced ‘Your Best Award’ which is a new bonus structure for UK customer operations, technical and business support roles. It is designed to recognise and reward individual performance and commitment to delivery in role (including levels of attendance). From 2019, awards will be made twice a year with the fi rst payment in June and the second in December.
The UK has established Your Best U Shining Stars awards in all large site locations to recognise and celebrate colleagues who demonstrate exceptional performance, embody our values and are driving our best-in-class ambitions. All category fi nalists of the Shining Stars Awards are invited to a dinner where the winners are announced and everyone celebrates the achievements of all the fi nalists.
We want to build an organisation in which our people can work together effectively – with our values guiding everything we do. Decisions about how our people work are guided by four principles: Delivering our promises to customers, Leadership, Collaboration and Flexibility. During 2018, we made several changes to how we work.
Canada has empowered its Accident Benefi ts claims adjusters to pilot innovative ways to better deliver for customers (Take Flight project). Employees are given dedicated time to work on an idea to better investigate, adjudicate, process or settle claims. They hang a paper airplane above their desk to symbolise they have ‘taken fl ight’ and to encourage colleagues to ask questions about their idea. The hope is that it will inspire others to fi nd effi ciencies for customers in their own areas of the business.
Our People Principles underpin the people strategies in each of our three regions and inform all people decisions across the Group. They provide the foundations of our people proposition and ensure consistency of approach across RSA, under our Group-wide employer brand ‘Your Best U’. Our People Principles cover three key areas: how we approach performance, how we work and how we build capability.
We seek to build a culture of high performance driven by passionate team players who earn their place in the team by pushing their own individual performance. We believe collective success and individual success go hand in hand. Decisions about how we achieve high performance among our people are shaped by three principles: Performance management, Pay and reward, and Celebrating success. During 2018, we made several changes to how we approach performance.
During 2018, Canada launched an innovative executive development programme in partnership with a leading Canadian Business School. This programme refl ects and embeds Canada’s Leader Expectations which were created in collaboration with senior leaders. To complement this, a 360 assessment process has been launched for all senior leaders designed to address specifi c capability gaps in relation to the Leader Expectations.
Since January 2018, there has been increased focus and investment on technical capability across the Group, with the launch of a Technical Capability Programme. This additional investment has provided the technical community with enhanced tools and the environment needed to deliver towards the overall best-in-class ambition. This has led to increased collaboration across all regions in terms of knowledge and experience sharing. In 2019, we will continue to heavily invest in our technical capability.
Throughout 2018, Ireland has continued to collaborate across the regions by being an incubator of talent, importing and exporting talent across the Group, supporting greater collaboration and a culture of working together.
The Middle East encourages collaboration across regions wherever possible. It has been collaborating with the UK on its digital journey and has been sharing best practices and encouraging employee development by assigning employees to support the region in RMS, RI and Broker relationships.
Notes: Based on Group permanent and non-permanent headcount. In line with FRC Guidance, the headcount information shown in the table above covers RSA's wider workforce, including contractor, temporary and agency workers.
Senior management refl ects the same group reported in Women in Finance Charter goals. As at 31 December 2018 there were 134 males and 29 females who were directors of subsidiary undertakings included in the consolidation. This includes dormant companies. It is not a reference group that RSA uses and we do not believe it is an accurate indicator of diversity; however, it is disclosed to comply with regulatory requirements.
Scandinavia has refurbished its offi ce spaces to create a more fl exible and collaborative environment for employees to work in.
Our success depends on building capability among our employees, so they are equipped to do the job. Our approach to building capability enables our people to pursue exciting careers at RSA. Decisions about how we build capability are guided by four principles: Learn and grow, Technical expertise, Access to talent and Inclusion. During 2018, we have made several changes to how we build capability.
The UK has introduced a Coaching and Mentoring Hub containing a wealth of tools, guides, videos and advice to ensure employees get the most of any coaching/ mentoring relationship whatever their level of experience.
The Group Technical Academy has signifi cantly increased the number of training events across the Group with twice the number of delegates attending in 2018 compared with 2017. In addition to the Group Technical Academy, each region has an academy which delivers localised tailor-made training programmes throughout the year.
In addition, the Group, as part its Own Risk and Solvency Assessment (ORSA) process, uses Prudential Regulatory Authority stress tests to assess the capital resilience of the Group to a range of severe but plausible scenarios including a reverse stress test (which includes a combination of insurance, market and economic stresses). These tests allow the Board to review and challenge the Risk Management strategy and consider potential mitigating actions.
The directors have also considered the prospects of the Group through review of the longer term strategy as set in the Strategic Report on pages 01 to 43 and the principal risks and uncertainties that are of a longer term nature (set out on pages 40 to 43), including the impact of Brexit. In their judgement the potential impacts such as claims infl ation and supplier disruption would be covered by the circumstances envisaged under the stress test scenarios detailed above.
The Group’s operating plan provides a platform for ensuring the business remains aligned with its strategic goals, including delivery of profi table growth while maintaining a robust capital base. Risk takes an active role in challenging the plan, informed by economic projections, peer reviews, expert judgement/experience and current risk assessments. Risk also assesses the ability to deliver planned change activity and consider alignment with existing mitigation activities.
Our risk management and controls frameworks were created to ensure we identify, measure and manage risks in all parts of the Group before they adversely impact the business. This information, together with the strength of the Group’s capital position, allows the Board to set a risk strategy and appetite that articulates the level of risk the Board is prepared to take in delivering strategic objectives.
· The UK customer risk approach was reviewed and enhanced with a new Customer Committee and a new risk appetite statement supported by key risk indicators.
· As part of the annual risk appetite refresh, capital surplus targets were updated to be considerate of capital quality, and reputational risk measures were revised.
In 2018, RSA actively engaged in the climate change debate through membership of organisations such as ClimateWise, UN PSI1 and
Volatile capital markets negatively impact on the value of assets and potential increase capital requirements for market/credit risk.
Risks exist associated with a disorderly Brexit with potential for economic shocks, capital impacts, claims infl ation and supply chain implications.
PPO and in relation to pensions risks. Several factors including medical advances could shift the risk in the future.
Autonomous machines are likely to change insurance needs and could have varying effects on frequency and severity of losses.
2 The CRO Forum is a group of professional risk managers from the insurance industry that focuses on developing and promoting industry best practice in risk management.
In a rapidly developing business environment we strive for best-in-class risk management in order to protect our customers from loss and poor outcomes, while maximising shareholder risk-adjusted returns. We leverage our core expertise in order to be selective in the risks we wish to retain, while ensuring we manage, mitigate and avoid risks we are not adequately rewarded for. As a pure general insurer our key area of expertise is insuring property and casualty risks. This means we can provide our customers with competitive products, while serving them well and ensuring the risks we accept are collectively managed to maximise our long-term performance.
We consider the foundation of an effective risk management framework to be the cultivation of a risk culture that promotes accountability and openness (a willingness to admit mistakes and learn from the past), within an organisation built on respect, integrity and a clear focus on customer and employee outcomes. At RSA, the senior management team has been instrumental in setting the right ‘tone from the top’, which is further underpinned by the Group’s quarterly cultural health check and annual staff survey.
Signifi cant changes in risk assessments are considered by the Internal Model
Board sets the business strategy which is incorporated in the three-year operational plan. Risk Strategy provides robust challenge of validity and achievability of plan.
Risk Strategy creates the overarching principles for setting the Risk Appetite
Committees track actions for risks outside appetite, and escalate to local and
· Our reinsurance programme signifi cantly reduces our exposure to catastrophe risks, with historical losses being well covered by our programme. The programme is designed to cover at least 1-in-200-year events.
(SCR) primarily comprises insurancerelated risks, including higher than anticipated underwriting losses, large retained catastrophe losses and deterioration in our stock of reserves for future claims.
driver. Cyber remains one of our key operational risks. The last few years have seen the volume, nature and capabilities of would-be attackers increase signifi cantly, meaning the risk is ever present. In response,
RSA has been investing heavily in our technology and capability to counter such threats and building employee awareness through briefi ngs and training. These efforts continue at pace driven by a refreshed Group
This is the risk that the Group’s estimate of future claims is insuffi cient. Longer tail-lines of business present more uncertainty on the size and timing of payments, with our largest exposure being the Swedish Personal Lines (including motor).
· The reserve assurance programme has independently verifi ed >90% of the Group’s net reserves over a three-year period.
· Claims case reserves are prudently set and reviewed at quarterly case reserving committees.
This is the risk that underwritten business is less profi table than planned due to insuffi cient pricing and setting of claims case reserves. Key exposures arise from large portfolios where claims trends are slow to emerge, such as UK Commercial and Marine.
· Extensive control validation and assurance activities performed over underwriting pricing and claims.
This is the risk to our insurance funds arising from movements in macroeconomic variables, including widening credit spreads, fl uctuating bond yields and currency fl uctuations.
· RSA adopts a prudent investment strategy with the investment portfolio favouring high-quality fi xed income bonds.
· Investment positions are regularly monitored to ensure limits remain within appetite.
· Asset Managers positioning assets to minimise Brexit risk where possible.
· The tri-annual valuation process is complete and a new long-term de-risking plan has been agreed.
· Possible market impacts of Brexit are examined and well understood with a specifi c focus on Pension risk.
This risk relates to customer and/or reputational damage arising from operational failures such as
· Operational risk processes and procedures are in place, including incident management.
Solvency II regulatory regime. For RSA, this is calculated using our own internal model and is a key component of the annual Own Risk and Solvency Assessment
In 2018 enhancements were made to the internal model to better refl ect the dependencies between certain risks, together with improvements in overall model governance and model validation. A Group level major model change application is anticipated in 2019 refl ecting these changes and the Group SCR already includes allowances for the expected impact. A model application has also been submitted in respect of our
Standard Formula in the event of a hard Brexit. This has no impact on the modelled Group SCR.
D iv e rs ifi c a ti o n w it h in in s u ra n c e r is k
The primary responsibility of the Board is to provide effective leadership to ensure that it promotes the long-term success of the Company for the benefi t of its members as a whole. The Board is responsible for setting the Group’s strategy and oversees the Executive in the delivery of this ambition. It monitors the Group’s performance and the commitment to best- in-class with careful consideration of the interests of the Group’s shareholders, while having regard to the Company’s other stakeholders.
During the year, the UK Corporate Governance Code (the Code) was updated to put the relationships between companies, shareholders and stakeholders at the heart of long-term sustainable growth. The Board has received a number of updates in preparation for the new Code applying to the Group in 2019.
In further response to the challenges in the UK & International business, the Board has received deep dives to understand and review underwriting and ensure suffi cient risk management processes are in place. Alongside this focus, the Board and its committees have considered the following key areas: 1. Customers and people; 2. Strategy and execution; 3. Finance, capital and investor relations; 4. Governance, risk and regulatory.
Open and collaborative dialogue and interaction with all our stakeholders is in the best interests of the Company and helps us to make a positive contribution to society. In 2018, the Group Nomination and Governance Committee undertook a stakeholder mapping exercise to review the current engagement between the Board and its stakeholders and to identify opportunities to improve further the Board’s engagement with its key stakeholders in 2019 and beyond.
Communication with shareholders is extremely important to the Board. By maintaining dialogue with you, we aim to ensure that your views are considered and our objectives are understood. I would like to thank you for your support and look forward to discussing the Group’s progress with you at our forthcoming Annual General Meeting (AGM) on 10 May 2019. Further information on the Board’s engagement with its stakeholders can be found on pages 08, 09 and 56.
In addition to Scott and Charlotte’s appointments, the Board was pleased to announce the appointment of Sonia Baxendale as an independent non-executive director with effect from 1 March 2019. Further information relating to the appointment process for Sonia can be found on page 62. Hugh Mitchell stepped down from the Board with effect from the 2018 AGM and Joseph Streppel has decided to retire from the Board and not seek re-election at the 2019 AGM. I would like to thank Joseph for his signifi cant contribution.
Chairman of National House Building Council and non-executive director of BT plc.
Scott Egan Group Chief Financial Offi cer (appointed CEO, UK & International, on 5 February 2019)
Scott has substantial fi nancial services experience and understanding of the fi nancial sector, which he brings to the Board when overseeing fi nancial operations of the Group and setting the fi nancial strategy. Before RSA, Scott was Interim Chief
MBA from Cranfi eld University and is a member of the ClimateWise Insurance Advisory Council.
Founding Partner of TGI-Think Global Investments, non-executive director of Piraeus Bank and
Charlotte Jones Non-executive director (announced as Group CFO in February 2019, subject to regulatory approval. Charlotte will assume the role by Summer 2019).
Charlotte has over 25 years’ fi nancial services experience in the banking and asset management sectors. She is currently Chief Financial Offi cer of
Jupiter Fund Management plc, a position she has held since September 2016. Prior to joining Jupiter,
Chairman, he ensures the Board operates effectively, promoting constructive engagement with shareholders and other stakeholders. Previous roles include Senior
Independent Director and Chair of the Audit Committee of Worldpay Group plc, non-executive director and
J Sainsbury plc (Chairman from the beginning of their new fi nancial year in March 2019).
Stephen was previously Chief Executive Offi cer of The Royal Bank of Scotland Group plc, 2008 to 2013, where he led the largest ever corporate restructuring and recovery programme. Prior to that, he held positions as Chief Executive at British Land plc from 2004 to 2008, Chief Operating Offi cer of
Since stepping down from Canadian Imperial Bank of Commerce in 2011, Sonia has built a successful portfolio of non-executive positions.
Joseph has a comprehensive understanding of the insurance market globally, extensive fi nancial services expertise and a good knowledge of international and emerging markets. Previously, he was Chief Financial Offi cer of Aegon until 2009 and
* Joseph will retire as a director with effect from 9 May 2019
Alastair has extensive experience in advising on accounting and fi nancial reporting, corporate governance and management issues in the fi nancial sector. He brings in-depth knowledge and understanding of global governance. He is a Fellow of the Institute of Chartered Accountants in England and Wales. Alastair retired from KPMG in March 2011. In the last 20 years of his 36-year career with the fi rm, in the UK and overseas, he led their fi nancial services team in Scotland with a primary focus on insurance and investment management.
Martin has over 25 years’ experience in insurance and fi nancial services. He encourages constructive challenges of matters discussed. Martin was Chief
Executive Offi cer of Baloise Group, a position he held for seven years to 2015. He joined Baloise
Consulting Group, Düsseldorf, advising business in the banking and the insurance sectors.
Non-executive director of Anivo 360 AG and member of the supervisory board MSG Life AG.
Biographical details of the individuals fulfi lling these roles can be found at: rsagroup.com/thegroupexecutive
Offi cers of the Canadian and Scandinavian regional businesses and senior management in key functional roles.
Committee in June 2014 following his appointment to CEO of RSA Scandinavia. Previously CFO for
Charlotte was appointed Group Chief Legal Offi cer and Company Secretary and joined the Group
LLP, specialising in corporate advisory, public and private M&A and equity capital market transactions.
Previously, Martin was Senior Vice President, commercial insurance and global specialty lines, with RSA Canada. Martin has held progressively senior roles, including director, underwriting and risk with RSA’s Scandinavian operations, since joining the Group in 1997.
Ralph was appointed Group Chief Auditor in June 2015 with responsibility for leading the Group
Internal Audit Function. Previously, he held the post of Chief Auditor for the UK and Western Europe.
and Corporate Services. Before Prudential, she held senior HR leadership roles at HM Revenue and
*Cathy will retire from the Group on 31 March 2019 and will be succeeded by Karen Caddick.
December 2014. Since joining RSA in 2006, William has also held the roles of Group Risk Director,
In order that it can operate effi ciently and give the right level of attention and consideration to relevant matters, the Board delegates authority to its Board committees, as set out in the diagram below. The key functions of Risk, Actuarial, Compliance and
Following each committee meeting, a verbal update is presented to the Board ensuring that all directors are aware of the deliberations and challenges on relevant topics and specifi c matters.
The composition of each committee is reviewed by the Group Nomination and Governance The
The composition of each committee is reviewed by the Group Nomination and Governance
The Board receives updates on the development of diversity, inclusion and equal opportunities within the business and is supportive of an agreed programme of actions that focus on improving Group-wide diversity.
The Board met with members of the Canadian Diversity & Inclusion (D&I) Council to discuss issues which affect the Group’s workforce on a day-to-day basis and how the Company supports and encourages employees from a range of backgrounds in their career aspirations. The Board received and discussed enhanced reporting on diversity and inclusion metrics and also met with members of the D&I Council to discuss progress against our diversity and inclusion ambitions and the initiatives being established to support them.
The Board met with a range of employees to understand their roles within the business, any concerns or opportunities they see, and discuss how their work infl uences Board decisions.
Throughout the year, the Board and its committees have focused on a number of key areas, including: customer and people; strategy and execution; fi nance, capital and investor relations; and governance, risk and regulatory.
The Board holds an annual two-day strategy meeting at which the Board discusses trends in the insurance market and the Group’s strategy. Senior management attend to present on business issues and various innovations in support of the long-term strategy and vision of the Group. This year, the presentations included a detailed focus on people and culture, cost effi ciencies and macro insurance trends.
The Board met with each of the regional businesses to discuss business strategy, customer and people, progress towards best in class ambitions, cyber and digital developments, developing market trends and emerging risks. The Board also spent time in the business, both collectively and individually, to gain a greater insight of the operational side of the business, including a Board visit to Canada to meet with the Canadian Executive team as well as customers, employees and the local Board.
Members of the Board joined the annual Senior Leaders’ Conference, which focused on key priorities and challenges facing the Group.
Following a discussion on the long-term strategic priorities and after challenging management on the plans and progress made in achieving the best in class status, the Board approved the operational plan.
The Chairman and Senior Independent Director met with Standard & Poor’s in October 2018.
The Board reviewed the results of the European Insurance and Occupational Pensions Authority stress-test exercise. Having challenged management on the risk to the Group’s assets and the impact of certain scenarios in the exercise, it approved the results for submission to the PRA.
NOTES: 1 Joseph Streppel was unable to attend the January 2018 Board and Committee meetings due to ill health.
2 Hugh Mitchell resigned as a director with effect from 11 May 2018.
3 Charlotte Jones joined the Board and GAC on 1 April 2018 and BRC on 1 June 2018. She was unable to attend the Board and BRC meetings in June and December 2018 and the June 2018 GAC meeting due to prior commitments predating her membership of the Board and committees. Unfortunately, the Board and committees were unable to reschedule the meetings. Charlotte ceased to be independent in February 2019 when she agreed to assume the role of Group CFO.
6 BRC regular attendees: Chairman, Group CFO, Group Chief Legal Offi cer and Company Secretary, Group & UK Regulatory Compliance Director and Group Underwriting Director.
7 NomCo regular attendees: Group CEO and Group Chief Legal Offi cer and Company Secretary.
No individual or small group of directors is able to dominate the Board’s decision-making.
Role statements defi ne the separation of responsibilities between the Chairman and Group Chief Executive and provide a mandate to independent non-executive directors to debate and challenge strategy, execution and performance and bring an independent, objective opinion. The role statements for the Chairman and Group Chief Executive are approved by the Board annually.
The role of the non-executive director is to challenge and approve the Group’s strategy and to assess and challenge performance against business plans, bringing an independent, objective view to the discussion.
The Chairman is responsible for the leadership and effectiveness of the Board, including conducting Board meetings. He promotes a culture of openness and debate, ensuring effective decision-making and the provision of timely, accurate and clear information. The Chairman, who was independent on appointment, is responsible for the leadership and management of the Board and its governance. He makes sure the Board is effective in its role by promoting a culture of openness and debate, facilitating the effective contribution of all directors and helping to maintain constructive relations between executive and non-executive directors. He regularly meets with the non-executive directors, without management present, in advance of Board meetings to discuss the upcoming agenda and provide the opportunity for open dialogue.
The NomCo Report on page 62 sets out more details of the appointment process for Charlotte Jones, and the Committee’s role in succession planning and diversity.
The letters of appointment for the Chairman and each of the non-executive directors set out their anticipated time commitment, which includes attending Board and committee meetings, spending time in the business, training and briefi ngs with senior management as part of their induction and ongoing development programme, and attendance at the AGM. Details of the directors’ service contracts and terms of appointment, together with their interests in the Company’s shares, are shown in the Directors’ Remuneration Report on pages 83 and 84. The service agreements and letters of appointment, for all the executive and non-executive directors, are also available for inspection at the Company’s registered offi ce and at the AGM.
The NomCo considered all new external appointments relating to the Chairman and the non-executive directors which included the committee’s conclusion that the directors are able to continue to devote suffi cient time to the role as a Board member of the Company. See page 63 for more details. The Board is satisfi ed that Martin Scicluna, Alastair Barbour and Martin Strobel’s external appointments did not give rise to a confl ict of interest and are not a constraint on their time or ability to carry out their duties.
Following her appointment to the Board, Charlotte Jones undertook a tailored induction programme, receiving a broad range of information about the Group. This included information on the operational performance and business of the Group, including the Group’s approach to corporate responsibility, and details of Board procedures, corporate governance and directors’ responsibilities. Meetings with senior management covering all aspects of the business, including capital, claims, company secretarial and legal, HR, internal audit, investments, IT and e-business, regulatory compliance, reserving, risk and underwriting, were also organised. Charlotte was invited to attend each Board committee as part of her induction programme to familiarise herself with the remit of each committee and the matters discussed.
The evaluation process was designed to include consideration of the balance of skills, experience and composition of the Board, how the Board works together as a collective, as well as other factors relevant to the continued effectiveness of the Board and its committees.
The Board is responsible for ensuring the effectiveness of the Group’s System of Governance, which is approved on an annual basis.
The Board Risk Committee has responsibility for reviewing and recommending the System of Governance to the Board and has specifi c responsibilities for the Group’s Risk Management System, including the Internal Model and Solvency II capital ratios, setting the Group’s overall risk strategy and risk appetite, and for approving the risk management policies. For further details, refer to the Board Risk Committee Report on pages 64 and 65.
The Group Audit Committee reviews the effectiveness of the Internal Control System on an annual basis. The Group has an effective Internal Control System in place which sets out the processes and frameworks required to ensure effective and effi cient delivery of the Group’s strategic objectives, including reliability and availability of information to identify and mitigate any potential risk of failure to achieve business objectives, but it does not eliminate risk. In addition, assurance of the Financial Control Framework is carried out on a quarterly basis by the Group Audit Committee. For further details, refer to the Group Audit Committee Report on pages 57 to 60.
· Risk Management System is underpinned by the ‘Three Lines of Defence’ model: First line of defence: activities undertaken to ensure that risks are identifi ed and controlled to bring them within appetite
· Authority delegated from the Board to the Group CEO through the Delegated Authority Framework
· Mitigates risk of the Group being exposed or committed to material fi nancial, operational, legal, reputational, regulatory risk and/or loss and provides clarity on who can make what type and level of decisions.
· Ensures that the Group deals with regulators in an open and cooperative manner
The Chairman and each Board committee chair make themselves available to take questions from shareholders.
The Board recognises the key role of the Group’s employees in delivering the Group’s strategy and values the time spent with them. Members of the Executive Committee and senior management host regular ‘town hall’ meetings to update employees on topical issues, including giving updates on company performance each quarter following the announcement of results or a trading update. The Board hosted a ‘town hall’ meeting during its visit to Toronto to hear directly from the workforce as well as a number of events with employees to discuss issues of importance to the Group. Further ‘town halls’ and meetings are planned for 2019, including during the Board visit to Scandinavia in September 2019.
The Chairman and the Chief Executive are also attending the European Works Council, RSA’s European employee representative body, during 2019.
The Board is committed to dealing with regulators in an open, cooperative and transparent manner and takes its regulatory responsibilities seriously. During the year, the PRA and FCA conducted routine meetings with several members of the Board and executive management. Similar meetings take place with regulators in other jurisdictions. Regular management information is provided to assist the regulators with the supervision of the Group.
The Group is rated on an interactive basis by Standard & Poor’s and Moody’s. Their insurance fi nancial strength ratings as at 25 February 2019 are A (stable outlook) and A2 (stable outlook) respectively. These ratings were affi rmed following the 2018 half-year results and refl ect RSA’s improving performance, strong competitive positions, diverse business mix and the completion of balance sheet actions undertaken. In addition, both agencies have spent a day with senior management discussing Group strategy, fi nancial plans, capital and risk management.
· Group Remuneration Committee members receive background information on the remuneration of the Group’s employees in general to provide context when considering executive directors’ remuneration.
· The Directors’ Remuneration Policy, approved by shareholders, supports operational plans, business strategy and short and long-term performance.
· Performance measures are aligned to business strategy, customer metrics and risk and control, and have stretching targets.
The Committee also visited the Liverpool offi ce to meet the UK Finance team where it had the opportunity to meet with the Group Finance and UK Finance Centre of Excellence teams, receiving presentations on a variety of important topics, including fi nance systems infrastructure, fi nance operations, accounting regulatory change (i.e. IFRS 9, 16 and 17) and the undertaking and development of the Financial Control Framework (the Framework).
As reported in the Board Risk Committee Report on page 64, members of the Group Audit Committee attended a meeting of the Canadian Audit and Risk Committee as part of the Board’s site visit to Toronto.
The Committee comprises fi ve non-executive directors and the Board is satisfi ed that the Committee has competence relevant to the insurance sector and at least one member has recent and relevant fi nancial experience as required by the Code.
I am confi dent that the Committee is well briefed and continues to fulfi l its duties to shareholders and other stakeholders through an enquiring approach and high-quality management challenge throughout the year.
· The level of reserves held for areas with greater inherent uncertainty, e.g. abuse, deafness, UK professional and fi nancial risk, Danish workers compensation and Canadian general liability
Alastair Barbour FCA Non-executive director and Chairman of the Group Audit Committee
RSA Annual Report and Accounts 201858 rsagroup.comRSA Annual Report and Accounts 201858 rsagroup.com
· The results of the internal reserving assurance programme which provides independent validation of reserves set at a regional level and which in 2018 covered UK Personal and Commercial and Swedish Motor.
The Committee received quarterly reports on the Solvency II Technical Provisions and reviewed the bridge from IFRS results as well as quarterly and annual movements. The Committee satisfi ed itself that the calculations had been conducted according to the Group’s Basis of Preparation.
The Committee also received and considered detailed written and verbal reporting from KPMG setting out its observations and conclusions in respect of the reported insurance contract liabilities based on its audit procedures as further described in its report on pages 98 to 105.
The Committee was satisfi ed that management exercised appropriate judgement and control in estimating insurance contract liabilities refl ecting available and reliable information when setting the reserves and that an appropriate margin for uncertainties was maintained.
The Committee reviewed the key assumptions supporting the UK deferred tax asset. The forecasts presented by management were assessed and, in particular, the longer-term profi t projections were challenged given recent performance of the UK business. The Committee is satisfi ed that the assumptions supporting the valuations are appropriate and that the asset is reasonably stated. The Committee will continue to monitor the UK deferred tax asset on a quarterly basis with reference to the actual performance of the UK business versus profi t projections.
The Committee concluded that the changes proposed by management in relation to morality assumptions were appropriate and supported the conclusion that the assumptions used overall were reasonable and within an acceptable range of other companies with schemes of a similar duration. The Committee will continue to review movements in the pension scheme valuation on a quarterly basis, together with a deep dive assessment of all key valuation assumptions on an annual basis.
The Committee reviewed the key assumptions supporting the assessment of the carrying value of goodwill and intangibles. This included review of the reasonableness of future profi t projections and the appropriateness of the discount rate used. The Committee approved an impairment to the carrying value of the Norwegian business to the value of £7 million in 2018. The Committee will continue to review carrying value assessments on an annual basis with a review for any indications of impairment performed at the half year.
The Group’s IT infrastructure, including retained legacy systems, is complex and fi nancial reporting is dependent on the operational and fi nancial IT systems operating correctly and the control environment in which they operate. This is a key area of focus for both Group Audit and Board Risk Committees and during the year they received updates from accountable management, both in Finance and Technology, on progress to enhance IT general controls, the oversight of IT testing processes and improvements in documentation and standards, together with regular reporting from internal audit on the results of its reviews and testing.
With respect to fi nancial reporting controls, the Committee received updates from KPMG on its assessment of general IT controls, including information on areas where additional controls or substantive testing was required and the conclusions reached in support of the audit. After consideration and discussion with management and KPMG, the Committee concluded that the fi nancial results as prepared were appropriate and reliable.
In addition to the signifi cant issues set out above, the Committee undertook the following key activities during the year: · Considered whether it was appropriate to adopt the ‘going concern’ basis of accounting for the 2018 Annual Report and Accounts and the basis on which the viability statement is made, recommending to the Board that both were appropriate. The viability statement, included in the Strategic Report on page 40, helps demonstrate how the Group’s prospects and viability have been assessed.
· Received quarterly updates on relevant accounting standards that could impact the fi nancial statements to ensure that new accounting standards were understood and appropriately refl ected in the fi nancial statements. The Group has not made any signifi cant changes to its accounting policies during 2018.
· At the half year and year end, considered and discussed KPMG’s fi ndings and opinions in relation to the key risk areas, judgements, changes to the audit plan and materiality, and discussed the underlying reasons.
· Reviewed and considered the arrangements for monitoring and reporting of whistleblowing activities. Alastair Barbour has oversight of whistleblowing arrangements in accordance with the PRA’s Senior Insurance Managers Regime and a senior manager in Group Human Resources has also been appointed as the FCA Whistleblowing Champion.
· Held regular private meetings of Committee members to discuss issues on which to concentrate with management and advisers in the subsequent meeting.
· The Committee was subject to an internal effectiveness evaluation as part of the wider review of the Board and its committees during 2018, see page 54.
The primary focus of the Framework is the production of information for the Group Annual Report and Accounts. In addition, the Framework mitigates material risks at the local operational level.
The Internal Control System forms part of the System of Governance as set out on page 55. The Board has overall responsibility for the effectiveness of the Group’s Internal Control System, which is designed to identify and mitigate, rather than eliminate, the potential risk of failure to achieve business objectives and can only provide reasonable not absolute assurance against material fi nancial misstatement or loss. Implementation and maintenance of the Internal Control System is delegated to senior management.
To continually assess the effectiveness of the Internal Control System, the Committee received regular reports from the Group Chief Auditor, external auditor and the Group Chief Risk Offi cer on the integrity of the control environment and Regulatory Compliance Framework and discussed the fi ndings, recommendations and proposed control improvements set out in these reports. The Committee reviewed the effectiveness of the Internal Control System during 2018 and concluded that it was appropriate and operated effectively during the year.
The Committee considers that an effective and appropriate ongoing process for identifying, evaluating and managing the signifi cant risks faced by the Group was in place during 2018 and for the purposes of approving the Annual Report and Accounts. See page 42 for more information on the Group’s Risk Management Framework.
Group Internal Audit’s (GIA) primary purpose is to ‘keep RSA safe and improving’. Specifi cally, GIA helps the Board and executive management to protect the assets, reputation and sustainability of the Group. GIA does this by assessing whether all signifi cant risks are identifi ed and appropriately reported by management and the second line of defence to the Board and executive management; assessing whether they are adequately controlled and by challenging executive management to improve the effectiveness of governance, risks management and internal controls.
GIA is an independent and objective function reporting to the Board. The Group Chief Auditor is a member of the Group Executive Committee and has a primary reporting line to the Chairman of the Committee, with a secondary reporting line to the Group Chief Executive. Regional Chief Auditors report directly to the Group Chief Auditor, while recognising local legislation or regulation.
GIA’s scope of activities is unrestricted, and its audit universe extends to all legal entities, jointventures and other business partnerships, outsourcing and reinsurance arrangements. It includes fi rst line of defence control validation and second line of defence assurance activities, as well as the risk and control culture of the Group.
On an annual basis, GIA hosts an informal meeting for members of the Committee and the Regional Audit Committee Chairs, providing further opportunity for detailed discussion concerning GIA plans for the forthcoming year. The Group Chairman and members of the Committee, together with the chairmen of the regional audit committees in Canada, Scandinavia and Ireland, attended the 2018 meeting in November. The considerations raised at that meeting were included in the development of the audit plans for 2019. Rolling audit plans were approved by the Committee in May and December 2018.
GIA operates an ongoing Quality Assurance (QA) programme that is outsourced to Deloitte. Deloitte reports a summary of the QA results annually to the Committee. Further, GIA performs an annual assessment of compliance with professional standards of which the results were reported to the Committee in December 2018. The Committee was satisfi ed that GIA was operating effectively, suffi ciently resourced and that the risk to their independence and objectivity was low.
KPMG was appointed as the Group’s external auditor in 2013 and has been reappointed at each subsequent AGM. There are no contractual obligations restricting the Company’s choice of external auditor nor limitation of liability in the terms of their appointment.
· The rotation of the lead engagement partner at least every fi ve years; Daniel Cazeaux took over as the Group’s audit engagement partner in 2018
To maintain audit quality, the Committee reviews the strategy and plan for the audit of the fi nancial statements prior to approval, to make sure that KPMG has identifi ed all key risks and developed robust audit procedures and communication plans.
In assessing the mindset, professional scepticism and degree of challenge to management, the Committee took into account the observations, recommendations and conclusions drawn by KPMG at the half year and year end. The Committee also considered its fi ndings and opinions in relation to the key risk areas, judgements made, any changes to the plan and to materiality and discussion of the underlying reason.
The non-audit fees for 2018 were £1.5 million, £0.9 million of which related to audit-related assurance services in respect of Solvency II reporting. The Committee considered that KPMG is best placed to complete the Solvency II assurance work given its knowledge and understanding of the business and IFRS reported position. Full details of the remuneration paid to KPMG during 2018, including for non-audit services and the ratio to audit fees, is provided in the notes to the fi nancial statements on page 131.
In refl ection of the more cautious economic outlook, returns from fi nancial markets were relatively subdued. Equity markets and nongovernment bonds in particular traded back from their highs in 2018 as expectations for growth and future earnings reduced. In contrast, after trading lower in the fi rst half of the year, government bonds rallied into the year end as expectations of future interest rates hikes lessened.
There has continued to be a focus on net investments within illiquid credit instruments. These investments, which include infrastructure loans, loans backed by property and trade receivables, have been targeted to take advantage of the additional yield offered for illiquidity relative to traditional quoted bonds. The total Group commitments to these assets now stand at c.£1.8bn with c.£1.4bn of investments deployed. Investment into these instruments continues to be very carefully managed and has been targeted so that it maintains the strong underlying credit quality of the Group’s investment portfolios. The pace of new investments moderated during 2018 in refl ection of market conditions and further new investments will only be made over the coming year if they meet the Group’s stringent criteria for both quality and projected return.
The Committee continued to also review the investment strategy of the defi ned benefi t pension schemes. While pension investment strategy is ultimately the responsibility of the scheme trustees the Group actively monitors and inputs to the strategy process. During 2018, the Group engaged with the two main UK schemes in the triennial funding valuation and, partly in refl ection of this, focus on investment actions was relatively modest. The Group, however, continues to work with the trustees to consider options for further de-risking of the schemes’ investment strategy over time.
No signifi cant changes to Group strategy are targeted at this time with the Group continuing to retain its core, high-quality, low risk investment structure. Given the highly uncertain nature of the global economic and political environment, however, it is recognised that market conditions may change signifi cantly over the course of the coming year and the Committee will continue to review the risks and opportunities that arise from such movements.
· Review of investments strategy of the Group’s main defi ned benefi t pension schemes
· Continued review of strategy and opportunities to drive optimisation of returns while maintaining the core high quality low risk investment portfolio structure
Martin Scicluna Chairman and Chair of Group Nomination and Governance Committee
· The changes introduced in the new UK Corporate Governance Code
Development themes and activities for possible future candidates to join the Executive Committee are reviewed annually by the Committee, and an assessment of the strength of the succession pipeline has also been introduced to highlight areas where action may be needed.
During the year formal processes were undertaken by the Committee to strengthen the experience and skills on the Board and its committees resulting in the appointment of two new Directors, Charlotte and Sonia, and a change in role for Scott Egan from CFO to Chief Executive of our UK & International division.
Following a recommendation from the Committee, Charlotte Jones was appointed as a non-executive director to the Board and as a member of the Group Audit Committee and of the Board Risk Committee with effect from 1 April 2018. A formal and rigorous process for this appointment was undertaken. Based on a candidate profi le agreed by the Committee, a long list of potential candidates was produced by the executive search fi rm,
Russell Reynolds Associates (formerly The Zygos Partnership). Isabel Hudson and I interviewed a short list of two candidates, and, following positive feedback on both candidates, interviews were conducted with Alastair Barbour and Kath Cates, and Stephen Hester and Scott Egan.
The Committee also made recommendations in relation to executive director appointments. Following the departure of Steve Lewis, Scott Egan was appointed as the new Chief Executive of our UK & International division. Korn Ferry were appointed to conduct a search for the CFO role. A shortlist of candidates was produced against an agreed candidate profi le. Two candidates were interviewed by several Board members and, following a recommendation from the Committee, Charlotte Jones was appointed as Group CFO. Charlotte brings signifi cant
Succession planning has remained an area of focus for the Committee. The Committee discussed the results of a self-assessment questionnaire that the non-executive directors completed on the current experience of the
Isabel Hudson is a member of one of the Group’s defi ned benefi t pension schemes relating to her previous employment with Royal Insurance, which ended in 1993. Taking into account a number of factors, including the size of the pension benefi t and its relative immateriality to her overall retirement planning, it remains the Committee’s view that Isabel’s pension entitlement in no way compromises her independence of character and judgement.
Particular attention is given to any nonexecutive director appointment over six years taking into account the need for progressive refreshing of the Board. The Committee gave detailed consideration to the expertise and contribution that Martin Scicluna and Alastair Barbour bring to the Board and its committees when considering their reappointment. The Committee was satisfi ed that they continue to make a signifi cant contribution to the proceedings of the Board and its committees and that their proposed re-election would provide valuable continuity as work on refreshing the Board progresses.
Following due consideration, the Committee concluded that all directors proposed for re-election continue to be effective, demonstrating commitment and making valuable contributions to the Board and that each non-executive director remains independent. Therefore, the Board is proposing the re-elections as set out in the 2019 Notice of Annual General Meeting, noting that Joseph Streppel would not be seeking re-election.
The Board values the breadth of perspective that such diversity can bring and the benefi cial impact it can have on Board effectiveness and throughout the Group more broadly; and remains committed to maintaining a diverse Board and overseeing the development of a diverse workforce.
Following on from this, the Committee received an in-depth update on employee workforce engagement and culture. The Committee discussed the various ways by which the views of the workforce were canvassed and concluded for recommendation to the Board that the most effective way of understanding the views of the workforce was to enhance management reporting of workforce issues as well as maximising Board interactions with the workforce.
The Committee also has responsibility for the oversight of regulated subsidiaries. Following the implementation of Group-wide regulated subsidiary guidance in 2017, the Committee has received updates from the regional chairs of the Scandinavian and Canadian businesses on matters including board composition, governance and their strategic priorities.
· The Committee considered the new external appointments of Martin Scicluna (as chairman-designate of J Sainsbury plc), Alastair Barbour and Martin Strobel and in each case was satisfi ed that the external appointments could be approved on the basis that they did not give rise to a confl icts of interest and would not impact the director’s time commitment to the Company.
· The Committee reviewed and discussed the results of the Board and committee evaluation prior to the Senior Independent Director presenting the results to the Board. Further information relating to the Board evaluation process and results is included on page 54.
standardising IT risk reporting, enhancing management summaries received by the Committee and developing the Committee’s understanding of key topics (e.g. cyber-related risks, the Internal Solvency Model) through site visits, deep dives, briefi ngs and training.
As part of the Board’s three-day site visit to Toronto, Committee members attended a meeting of the Canadian Audit and Risk Committee to better understand the key risks of our Canadian operations and how they are mitigated. With the same purpose of better understanding the key risks facing our business, I also attended the UK and International Risk and Control Committee. This meeting included a deep dive into the IT cyber exposure of the UK business.
The composition of the Committee was enhanced during the year with the appointment of Charlotte Jones in April 2018 and Enrico Cucchiani in June 2018.
Effective management of insurance risk is key to the Group’s performance and longer-term success. In 2018, the focus was on enhancing underwriting and portfolio management capabilities across the Group and monitoring of the programme to develop these capabilities. At the Committee’s request, a quarterly progress update is received in each meeting alongside regular insurance risk reporting. A deep dive on external delegation of authority was also received. Other insurance risk deep dives covered large losses, cyber risk and ‘high-risk’ policies.
IT and cyber security have been a key area of focus over the last few years and will continue to be, given the pace and nature of technological change, and the cyber threat landscape. These are extremely complex areas and have received signifi cant attention from the Committee during the year. This included a deep dive on UK cyber risk and cyber risk training, which helps inform discussions on the cyber strategy for the Group. Also, the Committee stabilised the format of IT risk appetite reporting through the year making it easier to understand quarteron -quarter changes and the progress of key actions.
The Internal Capital Model (the model) and regulatory capital requirements of the Group are key topics at each meeting, with regular updates on current position, including model sensitivities. The Committee oversaw an external review of the model and signifi cant
Martin Strobel Non-executive director and Chairman of the Board Risk Committee
As for every insurer, the continuing development of the regulatory landscape, market studies and regular engagement means regulatory risk and compliance matters remain a key area of focus. Conduct regulation received more attention this year with the Committee focusing on customer risk, renewal pricing and IDD. Compliance with the Senior Managers and Certifi cation Regime was discussed with consideration of the implications for both the Committee and senior management.
Following discussion of people risk and the impact of change on the control environment, the Committee requested additional updates on this subject. An update was received on actions agreed in 2016 to ensure the control environment is sustained during change. Additionally, an update on major change projects underway across the Group was presented, giving a view of the top change risks and the level of oversight by the risk function. The update included a change risk checklist, informed by lessons learnt from past programmes, that can be used to support the Committee’s oversight activities. Summaries of major change projects will be reported on a regular basis going forward.
· The Committee received quarterly updates from the Group Chief Risk Offi cer on the key risks that potentially impact the Group, including an assessment of whether risks are within appetite and whether any mitigating actions are necessary.
· The Group’s risk strategy and appetite was reviewed as part of the annual refresh with minor changes in relation to capital surplus limits and reputational risk measures recommended to the Board for approval.
· The annual stress and scenario testing process was reviewed by the Committee. In addition to the European Insurance and Occupational Pensions Authority stress test, reverse stress testing was performed on the impact of 1 in 10 and 1 in 20 insurance variances, and stress testing on three other scenarios; increasing medical costs, major regulatory changes and major data errors. As a result of this discussion, the Committee requested further insight on the insurance variations as part of their briefi ng on the internal model design.
· The Group’s risk strategy and appetite was reviewed as part of the annual refresh, with minor changes in relation to capital surplus limits and reputational risk measures recommended to the Board for approval.
· The Committee discussed a draft of the Chief Risk Offi cer’s annual risk and governance review, which is conducted to support the Remuneration Committee’s consideration of risk matters when agreeing executive variable pay awards. This process is a key link between the two committees and helps the Committee consider the effectiveness of the risk framework and the strength of risk culture within the Group.
During 2019, the Board will visit Scandinavia to spend time with the regional fi rst, second and third line management. The Committee will use this visit to gain greater insight into the regional business, its activities, and local risk and governance matters.
Annual Report on Remuneration 70 2. The Group Remuneration Committee 70 3. Executive Director total 4. Components of variable remuneration 71 5. Executive Director Shareholding 76 6. External directorships 77 7. Loss of offi ce and former director payments 77 8. Contextual fi gures 78 9. Implementation of Policy in 2019 80 10. Non-Executive Directors 82 11. Statement of voting at General Meeting 84
Executive Directors 86 4. Approach to recruitment remuneration 88 5. Service contracts and policy for payments on loss of offi ce 89 6. Legacy incentive plans 90 7. Required shareholding 91 8. Policy for Non-Executive Directors 91
The results are refl ected in the incentive outcomes for our Executive Directors.
Following careful consideration of Stephen Hester’s and Scott Egan’s contributions (both what was delivered and how), the external context and incentive outcomes for other RSA employees, the Committee determined that they will receive bonus awards at 32% of the maximum, 48% down on 2017. Half of these awards are deferred into shares for three years. In reaching the bonus determination, the Committee applied an element of downwards discretion to the Scorecard outcome as detailed on page 72.
However, the results over the last three years as a whole refl ect the substantial transformation progress made, and this is seen in the out-turn of the 2016-18 long-term incentive. Here, performance exceeded targeted levels. Therefore, 74% of this award will vest.
The current Directors’ Remuneration Policy was approved at the 2017 AGM. It operated as intended during 2018 and will continue in place for 2019.
The 2019 Annual Bonus Plan and 2019-21 longterm incentive plan will have similar measures to 2018, focusing on shareholder returns and profi t indicators. Targets are set in line with the Group’s operating plan. Other key performance areas of risk and capital management, controllable costs, attritional loss ratios, business improvement, and customer and people, will be assessed in Business and Personal Scorecards. The Executive Director long-term incentive grants have been agreed in principle at the same levels as last year, as noted on page 82.
The Committee will be developing its approach on post-employment shareholding as part of its review of the Policy for approval in 2020. The retention period on long-term incentives granted from 2019 onwards will be aligned with this.
In setting executive pay, the Committee takes account of business performance, risk, shareholder returns and how we reward across the Group overall
∙ Refreshed package of fl exible benefi ts launched in UK with additional choices.
∙ If possible we offer employees the chance to customise their reward package.
∙ We strive to ensure all employees receive a living wage or equivalent.
∙ We recognise what and how everyone contributes to RSA and provide opportunities to share in its success, in line with our long-term strategy and risk management.
a process of pension contribution reduction, with payments from 2019 to reduce by 3% of salary, and by an additional 3% of salary from next year. The Group’s updated policy for new Executive Director appointments will take account of these guidelines from the outset.
In February 2019, we announced that Scott Egan would be changing role from Group CFO to CEO UK & International. Scott will remain an Executive Director. There is no resulting change to his remuneration except that his 2019 Annual Bonus Plan will have a focus on UK & International performance measures.
On leaving her current employer, Charlotte is due to forfeit a number of incentive awards. In line with the principles in the Policy, a compensatory package will be constructed to match the timing and nature of awards forfeited, as described on page 82.
In the year, the Group launched a new People Strategy architecture and took forward a number of enhancements to the reward deal for our wider employee population. For example, UK pension rates will be increasingly harmonised in 2019, with c.40% of UK employees benefi tting from an uplift in contribution levels.
While these comparative fi gures will be kept under close review, the Committee is satisfi ed the remuneration in this report is appropriate as similar factors are used in setting both employee and executive pay, including market positioning, job size and content, and individual experience.
Going forward, the Committee intends to share with employees how executive remuneration is aligned with our overall remuneration policy. This will build on existing workforce engagement in our employee survey, internal social networking site, town halls and other forums.
The Committee welcomes investor feedback on an ongoing basis. We engaged with the Group’s largest shareholders, ISS, the Investment Association and the Pension and Lifetime Savings Association in 2018 and refl ected on the comments made in determining the 2019 incentive measures. These dialogues ultimately contribute to shaping appropriate remuneration outcomes, as the performance measures provide the framework within which the Committee makes its award judgements.
Consider risk factors, workforce remuneration and shareholder experience – adjust if needed
Scorecards. Formulaic award outcomes can be overridden / adjusted for risk. Malus and clawback provisions in place. Half of bonus deferred. Long-term incentive is three years plus a two-year retention period. Signifi cant shareholding requirements.
RSA exists to help protect customers against risk and to serve shareholders. In so doing, we contribute to society at large.
We aim to fulfi l our purpose and strategy by consistently building our core business values: ∙ Strong customer service
∙ Sustain a platform of fi nancial strength that enables our purpose
Target shareholding level. Scott Egan continues to build holding within targeted fi ve-year period.
2 Unvested share awards. The percentages are estimates of the potential additional shareholding that could result from these awards post-vesting
3 Valuation uses the 2018 average RSA share price and each individual’s salary at 31
This Annual Report on Remuneration details how the approved Remuneration Policy has been implemented for Directors in the fi nancial year ended 31 December 2018, and how the Group intends to implement its Policy in 2019.
The Committee operates within an agreed set of terms of reference, which it reviews annually. A copy of these terms can be viewed on the Group’s website at: www.rsagroup. com/termsofreference or alternatively a paper copy can be requested in writing from the Group Company Secretary.
The Committee comprises a number of independent Non-Executive Directors. The Committee’s members in 2018 were: Kath Cates (Chair), Enrico Cucchiani, Isabel Hudson, Hugh Mitchell (to 11 May 2018), Joseph Streppel and Martin Strobel. The number of meetings attended by each Director is shown on page 52.
PricewaterhouseCoopers (PwC) was appointed by the Committee as its independent adviser. It was selected following a market tender exercise. During 2018, PwC also provided advice and consultancy services across the Group globally on matters including data and analytics technologies, regulatory risk and compliance, fi nancial reporting in preparation for IFRS 17, operations strategy, cyber security and privacy, IT risk and governance, internal audit, direct and indirect tax and compliance. PwC is a member of the Remuneration Consultants’ Group and a signatory to its Code of Conduct. In addition, the Committee has satisfi ed itself that the advice it receives is objective and independent as PwC has confi rmed there are no confl icts of interest arising between it, its advisers and RSA. The fee paid for services to the Committee in the year was £80,000 excluding VAT, based on a fi xed fee for a defi ned scope of work.
In 2018, the Committee met on fi ve occasions and the table below summarises the matters it discussed.
· Testing of Annual Bonus Plan 2017 and LTIP cycle 2015-17 performance conditions; and determination of outcomes.
· Approval of the terms of the long-term incentive grant 2018 and executives’ associated conditional share awards.
· Review of the Directors’ Remuneration Report 2017 and Solvency II disclosures.
· Approval for a supplementary grant of conditional long-term incentive awards in September 2018 for non-Board employees.
· Approval to operate all-employee share plans (Sharesave and Sharebuild), in participating countries in 2018.
December · Update on the performance of the Annual Bonus Plan 2018 and long-term incentive cycle 2016-18.
· Update on the supplementary grant of long-term incentive awards in September 2018 for non-Board employees.
The table below sets out the Executive Directors’ total remuneration single fi gures. Non-Executive Director fees are detailed on pages 82 to 83.
Salary Taxable benefi ts1 Bonus2 LTIP Pension related benefi ts Other remuneration Total
Notes: 1 Taxable benefi ts: This includes reimbursement in respect of travel. Stephen Hester received a car allowance and the use of a car and driver service which totalled £40,460 (2017: £43,760), Scott Egan received a car allowance of £15,000 (2017: £15,000), and each of the Executive Directors were provided with medical benefi ts and life cover.
4 LTIP 2017: Actual value of Performance Shares and accrued dividend equivalents under the 2015-17 LTIP cycle that vested on 7 April 2018. The vesting was as disclosed in the 2017 Annual Report and Accounts on page 77. Valuation has been restated using the vesting date share price of £6.524.
5 Pension 2018: Scott Egan and Stephen Hester received taxable cash allowances of 15% and 30% of base salary respectively. Stephen Hester has voluntarily agreed to begin a process of pension contribution reduction and contribution levels will fall to 27% of base salary from April 2019 and 24% from April 2020. The aggregate value paid by the Company into the RSA Pension Scheme (a defi ned contribution plan) for the Executive Directors in 2018 was £0 (2017: £0). No Executive Director has a prospective entitlement to a defi ned benefi t pension in respect of their service with RSA.
7 Stephen Hester was appointed as an Executive Director effective 5 February 2014. In 2018 he received an annual base salary of £993,225 from 1 January to 31 March.
The Executive Directors’ 2018 Annual Bonus Plan consisted of fi nancial and business targets aligned to the Group’s operational plans. These included: Group underlying Return on Tangible Equity (ROTE), Group underlying profi t before tax (PBT), Group combined operating ratio (COR), a Business Scorecard and role-specifi c personal objectives. The maximum bonus opportunity was 160% of salary, of which half of any award is deferred into RSA shares for three years. Bonus awards are subject to malus and clawback provisions, as detailed on page 75. In determining 2018 bonus awards under this Plan, the Committee considered how goals had been met and took account of key risk factors.
As shown in the following table, the achievement was less strong than the threshold targets set for the year and therefore no award is made.
Refl ecting on the Commercial Lines large loss volatility which impacted headline fi nancial performance, the Committee felt that an element of this could have been better underwritten and therefore should impact the underlying assessment, while an element was market driven. Accordingly, discretion was used to adjust downwards the Business Scorecard outcome by 5% from 22/30 to 17/30.
Business Sustainability: Policy / premium retention 81% Broadly in line with 2017 80%
Notes: 1 Defi ned excluding Claims Handling Expenses (which are part of the expense measure) and adjusted for reinsurance changes.
Scott’s objectives included: · Strategy work: centred on effective Group planning and benchmarking, continued upgrading of Finance function and operation of zero based budgeting.
· Stakeholders: effective Investor Relations, investor and analyst interaction, regulator and rating agency relations.
· Financial results were disappointing as set out above, though outperforming moderately on an underlying level.
· Planning process working well, with further enhancements made to Board reporting.
· Has continued to build the bench strength of the Finance team, providing successors across the regions into key roles.
· Customer progress: driving initiatives to improve customer service and resume profi table growth.
· Leadership: sustain strong stakeholder relations, continued team and culture development focused on top 50 leaders to support Best in Class strategies, support for Diversity & Inclusion and environmental/ community policies.
· Effective actions taken to commence portfolio exits and improve commercial underwriting in response to loss challenges.
· Best in Class strategic initiatives progressing well across Company. Initiatives refi ned and developed as appropriate.
· Beat Group cost savings target (>£450m) a year ahead of schedule.
· Risk and regulatory items on track overall with some exceptions.
· Good customer progress especially in satisfaction measures and volumes in personal lines, including winning new partners.
· Has strengthened the leadership of the business with key appointments and targeted executive development.
Business Review Scorecard See narrative See narrative See narrative 33.3% 25.0%
The vesting outcome on this element was determined by the Committee assessing RSA’s progress during the three years in the round, particularly relating to capital, strategy implementation and earnings improvement. The 2016-18 Scorecard targets were strengthened compared to 2015-17, taking account of progress made including enhanced controllable expenses and attritional loss ratio targets. The Scorecard which was devised in 2016 differs from that applied to the 2018 Annual Bonus Plan both in timescale (three years vs one year) and some of the performance measures which were updated for long-term incentive cycles commencing after this one, i.e. the 2017-19 cycle onwards.
The Scorecard’s capital and business performance indicators shown in the following table form the basis of this judgement.
Attritional loss ratio5 Improvement vs 2015 base year of 51.0% 49.4% 49.6% 49.7%
Pensions) has been excluded as well as the impact of capital actions benefi cial to the shareholder.
4 A cumulative measure, adjusted for the timing of business disposals.
5 Defi ned on a Core Group basis, excluding Claims Handling Expenses (which are captured in the expense measure) and adjusted for reinsurance changes.
3 The Committee considered whether any discretionary adjustments in respect of the vesting were appropriate and concluded that none were required.
The Business Scorecard measures a range of indicators on an underlying basis, and includes: regulatory capital ratios, credit rating, capital actions, risk management, attritional loss ratio, total controllable costs/cost ratios, key business improvement projects, customer franchise and other relevant actions related to the Company’s long-term success. Achievement will be evaluated using a performance framework whereby metrics will be reviewed against their targets, together with any other aspects connected to the business performance including material risk items. Judgement in the round will be used by the Committee to determine the level of vesting. The specifi c targets cannot be disclosed prospectively for commercial reasons, including price sensitivity. A performance narrative will be given regarding the level of Scorecard vesting once the performance conditions have been tested.
Notes: 1 Relative TSR index of comparators includes: Admiral, Allianz, Aviva, Chubb, Direct Line, Gjensidige Forsikring, Hiscox, Intact, Mapfre, QBE, Topdanmark, Tryg and Zurich.
A straight-line calculation is applied to determine the portion of awards that vest for performance between the threshold and maximum targets.
2 Group underlying ROTE will be calculated on a three-year average basis. A straight-line calculation is applied to determine the portion of awards that vest for performance between threshold and on-target, and between on-target and maximum. The average required for on-target vesting (62.5% vesting) is positioned requiring demanding increases in underlying performance vs 2017 and is considered commercially sensitive because it is set in line with, and therefore signals, the Group’s forward plan for the period. Disclosure will be provided retrospectively following the end of the performance period.
3 The face value of the award is calculated as the maximum number of shares that would vest if all performance measures and targets are met at maximum, multiplied by the mid-market closing price of an RSA ordinary share averaged over the fi ve business days preceding the date of grant (2 March 2018), of £6.3232.
The Group operates a Malus and Clawback Policy. This is reviewed annually, as set out on page 87. In summary, the Committee has the ability to reduce or forfeit awards that have yet to be paid or vest in the case of shares, to delay the payment or vesting date or to amend another form of award or benefi t which has yet to be received (malus adjustment). The Committee may also recover sums already paid to Executive Committee members if it considers it appropriate to do so (clawback). This can be applied during a two-year period after receipt (in the case of cash bonuses) or vesting (in the case of long-term incentives).
The circumstances in which malus and clawback may apply are outlined in the table below: Malus adjustment Clawback
· Material error or fi nancial misstatement of results which has resulted in an overpayment
The table below shows the interests of Executive Directors in Ordinary Shares of £1.00 each of the Company, including those of closely associated persons. Non-Executive Director holdings are shown on page 83.
2 Full details of all Directors’ shareholdings and options to subscribe for shares are recorded in the Group’s Register of Directors’ Interests which is open to inspection by shareholders at the AGM and at the Company’s registered offi ce during standard business hours. The Directors had no share options that vested and remained unexercised, or were exercised in the year.
Unvested scheme interests provide further exposure to the RSA share price ensuring Executive Directors have signifi cant ‘skin in the game.’ These awards must be retained on vesting (aside from any sold to satisfy statutory deductions) until the required Shareholding level is reached. Any awards which vest and are retained count towards the Shareholding level from that point.
Notes: 1 Shareholding fi gures do not include unvested share awards in the Group’s incentive plans.
3 Calculated using the gross annual base salary as at 31 December 2018.
Notes: 1 The Company granted conditional awards over Ordinary Shares under the PSP during the year at nil cost. The number of shares was calculated based on the mid-market closing price averaged over the fi ve business days preceding the grant date of 2 March 2018, of £6.3232.
2 Deferred Bonus Shares vest three years from the date of grant, and are subject to malus adjustment as detailed on page 87.
4 Performance Shares granted to Stephen Hester in 2015 partially vested during the year and 31,559 accrued dividend equivalent shares were added to the number of vesting awards shown above. A portion of the shares were sold to cover statutory deductions, the rest were retained.
5 Performance Shares granted in 2016 have performance conditions of Group underlying ROTE, Relative TSR and a Business Review Scorecard (one-third weighting each).
Stephen Hester received fees of £92,500 during the year in respect of his non-executive role at Centrica plc, where he is Senior Independent Director. As permitted under the Remuneration Policy, he retained these fees.
RSA Annual Report and Accounts 201878 rsagroup.com 8. Contextual fi gures
The following graph shows the TSR of the Group over the ten years from 31 December 2008 to 31 December 2018, with reference to the FTSE 100 Index and a peer group comprised of those companies included in the LTIP’s Relative TSR component (which are noted on pages 73 and 75). The FTSE 100 Index is included as it comprises the 100 most highly capitalised companies in the UK market, of which RSA was a member in 2018.
The graph refl ects the change in value of Ordinary Shares in a company over time, as represented by a hypothetical £100 holding in the shares. Any distribution of dividends is included.
Single fi gure of total remuneration (£’000) 4,451 4,024 2,488 311 2,164 1,011 21 39 2,118 2,469 4,478 5,077 4,068
Annual bonus award rates (% of maximum) 89% 73% 58% 59% 50% 0% n/a n/a 68% 77% 100% 63% 32%
LTIP vesting rates (% of maximum) 100% 66% 31% 34% 34% 0% n/a n/a n/a n/a 43% 58% 74%
2 Stephen Hester was appointed Group Chief Executive effective 5 February 2014 and did not have any long-term incentive awards in the 2012-14 and 2013-15 cycles.
3 Details of the 2017 and 2018 fi gures are given on pages 71 to 74.
A range of factors are taken into account in setting pay across the organisation, such as market positioning, infl ation, job scale and content, and individual experience. The Group Chief Executive’s remuneration is weighted relatively more towards variable pay due to the responsibility of the role, and therefore the ratio for any given year will shift according to incentive plan outcomes for that year, including multi-year long-term incentive awards. Further, since the majority of profi ts, revenues and employees of RSA lie outside the UK, the Group Chief Executive total remuneration will move in line with the total Group performance which may differ from UK employee averages that will primarily refl ect UK performance. Nevertheless, the Committee is mindful of the importance of monitoring and assessing pay relativities, and ratios will be kept under review.
Year Method 25th percentile pay ratio Median pay ratio 75th percentile pay ratio 20181 Option B2 184:1 124:1 70:1
Notes: 1 The company determined the remuneration fi gures for the employee at each quartile with reference to a date of 31 December of the year shown.
RSA monitors its dilution levels on a regular basis to ensure that they remain within the headroom limits set by the Investment Association (IA). As at 31 December 2018, the dilution levels were as follows: Limit RSA dilution %
RSA Annual Report and Accounts 201880 rsagroup.com 9. Implementation of Policy in 2019
The following charts illustrate how Executive Directors’ remuneration potential changes according to varying levels of performance achievement. The Committee’s aim is that superior levels of remuneration will only be paid in return for delivering superior levels of performance. The variable element is fully fl exible such that no award is guaranteed. Additionally, the charts show the balance between fi xed and variable remuneration. The remuneration structure is intended to promote the long-term interests of the Company and its shareholders. The assumptions used in preparing these charts are noted in the following table.
There are no changes to Scott Egan’s remuneration quantum as a result of his role change, announced in February 2019, from Group CFO to CEO UK & International. Charlotte Jones has been appointed to succeed Scott Egan as Group CFO and details of the remuneration that will apply following commencement of her appointment are given on the following pages.
Scott Egan and Charlotte Jones Minimum remuneration receivable: · Fixed remuneration1
Jones this is based on the annual value of base salary, pension and estimated benefi ts.
2 Assumes 62.5% vesting of the award in the 2019-21 grant, i.e. half-way between the 25% threshold vesting and 100% maximum vesting.
4 There are no assumptions relating to share price growth or dividend equivalents included in the above scenarios. In the event of 50% share price growth during the LTIP
The Policy will implemented consistently with the approach used in 2018. The Committee reviewed the Executive Director salary levels, taking into account the average reviews applied elsewhere in the Group, including those for employees subject to collective bargaining agreements, and UK infl ation fi gures. It referenced a range of information including market data from two benchmarking peer groups of listed international insurers and FTSE companies of a broadly comparable market capitalisation to RSA, excluding banks and heavy industries.
The table below shows how the business strategy, and the key performance indicators which underpin it, are refl ected in the Annual Bonus Plan and long-term incentive performance measures for Executive Directors in 2019: Strategic priorities Annual Bonus Plan 2019 Long-term incentive cycle 2019-21
The Business Scorecard component focuses on key areas of management activity essential to the success of the Company including Underlying Performance, Risk and Resilience and Business Sustainability including Customer franchise. For the CEO UK & International, divisional performance indicators are included. The Personal Scorecard consists of SMART objectives bespoke to each Director, with a focus on both what is achieved and how goals are delivered.
The Committee will assess performance for 2019 once the fi nancial year has ended, taking into account material risk factors. All of the bonus targets are considered to be commercially sensitive because they signal the Group’s forward plan for the year, and therefore they are not provided in this document. Disclosure will be provided in the 2019 Directors’ Remuneration Report, to the extent that the targets do not remain commercially sensitive.
The table below sets out the structure of the Executive Directors’ bonus plan for 2019.
Group underlying Return on Tangible Equity (ROTE) 20% 32% 20% 32%
Group underlying Profi t before Tax (PBT) – – 10% 16%
UK & International COR and Underwriting Result 20% 32% – –
The Business Scorecard measures and assessment will be operated similarly to the 2018-20 LTIP cycle, as described on page 75.
The Committee has approved in principle that Stephen Hester’s Performance Share opportunity in the 2019-21 LTIP grant will be 230% of salary at maximum vesting, which is the usual level of award for the Group Chief Executive; and the opportunity for other Executive Directors will be 200% of salary at maximum vesting.
Relative TSR 1/3 RSA’s TSR is equal to the unweighted index of comparators
Notes: 1 The TSR index of comparators for this cycle includes: Admiral, Allianz, Aviva, Chubb, Direct Line, Gjensidige Forsikring, Hiscox, Intact, Mapfre, QBE, Topdanmark, Tryg and
Zurich. A straight-line calculation is applied to determine the portion of awards that vest for performance between the threshold and maximum targets.
Notes: 1 Taxable benefi ts: This includes reimbursement in respect of travel and accommodation. Alastair Barbour received benefi ts of £16,284 and Enrico Cucchiani £13,376 for taxable travel where relief under HMRC rules is not available. The corresponding 2017 fi gure for Enrico
Executive Director in 2019 at the effective date of her appointment as Group CFO.
3 Hugh Mitchell resigned as a Non-Executive Director effective 11 May 2018.
Under the Company’s Articles of Association, the Non-Executive Directors’ remuneration is determined by the Board (minus the Non-Executive Directors), within limits set by shareholders. The Non-Executive Directors’ fees were reviewed in accordance with the Remuneration Policy as noted on page 91 and the fees effective from 1 April 2019 are shown in the following table. The base fee change is aligned to the average salary increase levels for our UK employees, while other fees are unchanged.
2 Charlotte Jones was appointed as a Non-Executive Director effective 1 April 2018. The table above shows her shareholding as at that date and not 1 January 2018.
Notes: 1 Charlotte Jones will become an Executive Director in 2019 at the effective date of her appointment as Group CFO.
2 Joseph Streppel will retire as a Non-Executive Director with effect from 9 May 2019.
The following voting was recorded at the AGM on 11 May 2018: Resolution Votes for Votes against Total votes cast Votes witheld1
The most recent resolution to approve the Directors’ Remuneration Policy was at the AGM on 5 May 2017, where the following voting was recorded: Resolution Votes for Votes against Total votes cast Votes witheld1
Note: 1 Votes withheld are not included in the calculation as a vote withheld is not a vote in law.
The Directors’ Remuneration Policy was approved by shareholders on 5 May 2017, and was effective from that date. No changes to the Policy are proposed this year.
For ease of reference, elements of the Policy referenced in Committee activity during 2018 are re-presented on the following pages 85 to 91, including the policy tables and information on Directors’ contractual terms. The full Policy Report is contained in the 2016 Annual Report and Accounts (pages 80 to 87), which is available at www.rsagroup.com/fi nancialreporting.
The remuneration philosophy and strategy are directly informed by the business strategy. The remuneration principles that the Group Remuneration Committee (‘the Committee’) follows are: · Remuneration is aligned to the long-term term interests of the Company, its business strategy and performance; · The remuneration framework is designed to promote sound and effective risk management in line with the company’s risk profi le; · Each component of the total remuneration package is simple and transparent, so as to be effective and understood by executives, shareholders and regulators; · Pay is linked to performance, with variable remuneration fully contingent on the achievement of stretching short- and longterm objectives which directly support the achievement of strategic priorities and are aligned to shareholders’ interests; · Executive Directors and other executives are required to hold a signifi cant number of shares in the Company; they are encouraged to act in shareholders’ best interests by having a personal investment in RSA; · Competitive remuneration packages are offered in order to attract, retain and reward the levels of high calibre talent which are essential to RSA’s success in today’s competitive global insurance market; and
RSA Annual Report and Accounts 201886 rsagroup.com 3. Remuneration Policy for Executive Directors
Salaries are reviewed annually considering factors including: market positioning, internal pay relativities, levels of pay for other RSA employees, infl ation, affordability, job scale and content, individual’s experience and expertise.
Other than exceptional circumstances such as a role change, salary increases will not exceed the level of increases applied to other
This element forms part of a market competitive package and supports the executive.
Benefi ts typically cover the areas of: health and well-being, leave of absence, car and business travel, sickness benefi t, insurances, professional subscriptions, external advice and employee discounts on certain insurance products. Home to work travel may be covered where appropriate.
Executive Directors in participating countries can acquire shares in RSA’s all-employee share plans (Sharesave and Sharebuild), and those in the UK can participate in RSA’s fl exible benefi ts programme.
The Committee can amend any benefi t or introduce new ones to ensure the remuneration package remains market competitive or to respond to regulatory, legal or best practice changes.
Benefi ts are valued and determined with reference to the benchmarking peer groups and other surveys reviewed by the Committee.
Benefi ts are fi xed remuneration, however the cost to provide them can vary from year to year in line with market conditions, which therefore determine the maximum value.
Note: 1 This will be updated for the next Policy renewal in 2020.
This element incentivises the achievement of short-term fi nancial and non-fi nancial goals in line with
An additional bonus opportunity of up to a further 40% of salary may be available, at the
Committee’s discretion, to recognise highly exceptional circumstances. Full disclosure will be given if an increased bonus opportunity is applied.
Measures typically cover profi t, underwriting performance, risk management, expenses, capital and balance sheet strength, customer and business sustainability, and objectives personal to the executive.
A majority weighting is given to fi nancial metrics. Measures can be assessed on a Scorecard basis.
The performance measures and targets used to inform the 2018 bonus awards are on pages 71 to 73.
This element supports RSA’s long-term strategy, performance and priority to create shareholder value through sustained earnings and share price growth.
Awards are subject to the Malus and Clawback Policy, which is reviewed annually, and is noted on page 75.
The Committee can act within the parameters of the Plan’s rules as approved by shareholders and its performance conditions, enabling the LTIP to be appropriately administered under both normal and exceptional circumstances.1 The Committee can make such amendments as may be necessary to respond to legal, accounting or regulatory changes. Awards can be reduced or otherwise amended, provided the action is fair and justifi able, for example, to guard against a windfall award or the converse generated by an accounting treatment. Vesting can be adjusted downwards for current or future risk exposure.
Award vesting is linked to achievement against the performance conditions as follows: · Below threshold – 0% vesting
Measures are typically linked to value creation through performance of the Group’s share price, profi t, capital and balance sheet strength and underlying performance.
The Committee ensures a consistent and transparent approach is taken when appointing Executive Directors to the Board, as shown in the following table. When a new Executive Director is recruited, the Committee will provide details of how the Policy has been implemented in respect of their appointment terms in the relevant Directors’ Remuneration Report.
Base salary · Set using the same approach as for existing Directors’ salary reviews. The Committee can exercise discretion on the timing and level of salary reviews for newly appointed Directors refl ecting the individual’s development and performance in the role.
· Same as those offered to current Executive Directors, but the Committee may exercise judgement to fl ex the package to accommodate any specifi c terms bespoke to the individual, e.g. related to health, annual leave, pension or insurance benefi ts.1
· Where the Director is an internal appointee to the Board, or appointed following a corporate transaction, he/she may be permitted to retain any legacy benefi ts or terms at the Committee’s discretion, or a buy-out may be made depending on the benefi t type and circumstance. Continuity of service with the Group will be maintained.
Buy-outs · Where the Director is an external appointment, the Committee may agree to a compensatory package refl ecting the value and terms of incentives or benefi ts forfeited upon resignation.
- Typically, the form of award that is being forfeited (e.g. cash or shares) will be replaced by the same form of award at RSA.
- Performance-linked awards will normally only be compensated with Restricted Shares where a performance condition has been achieved or is nearing testing and there is a reasonable expectation of the vesting level.
Notice period · No Director will be appointed on a notice period exceeding 12 months. The current Executive Directors’ employment can be terminated by the Company or the individual, by the serving of 12 months’ notice.
Garden leave · The Company has the contractual right to place the Executive Directors on garden leave for part, or all, of their notice period.
· A Director may be paid in lieu of an unexpired portion of their notice period, covering base salary, pension and benefi ts, regardless of which party has served notice.
· If a loss of offi ce were to occur giving rise to a redundancy payment under prevailing employment legislation, the payment will be calculated taking account of the Director’s length of service with the Group and his/her annual gross basic salary as at their employment termination date.
· No payment or compensation for loss of offi ce made to any departing Director will be disclosed if it is less than £10,000 gross.
· Executive Directors do not have terms which provide additional rights or payments to them in the event of a change of control, reconstruction or amalgamation of the Company.
· At the Committee’s discretion, and normally including such circumstances as planned retirement, death, disability/ medical severance, transfers outside of the Group and redundancy1
· The Committee has the discretion to make the fi nal bonus award in cash and so waive deferral, subject to any regulatory requirements.
· In cases of death in service and, with Committee discretion, medical severance, performance conditions can be tested early and awards vest sooner than the scheduled date.
The Policy provides for any outstanding awards granted under legacy incentive plans to continue in place, although the current Executive Directors do not hold any such awards.
· The shareholding levels to be reached are - Group Chief Executive: 300% of salary - Other Executive Directors: 200% of salary
· Executives have a targeted fi ve years in which to build up their holding, commencing from the fi rst date an unconditional share award is made to them as a Director. No shares are to be sold until the holding level is reached, except where required to cover statutory deductions.
· The Committee can exercise discretion to temporarily waive or reduce the holding requirement or allow shares to be sold in exceptional business or personal circumstances (e.g. ill health, divorce, fi nancial hardship).
· Non-Executive Directors (aside from the Chairman) receive a base fee, further fees are then paid to refl ect membership of a committee, and for chairing a committee. A separate fee is paid to the Senior Independent Director.
· The Chairman receives a fee for his role and this is set by the Committee.
· Fees are reviewed annually but an annual increase may not always be applied.
· When assessing fee levels, account is taken of the required time commitment and the degree of expertise necessary to fulfi l the particular role (such as chairing a committee).
· Details of the Chairman’s fee and the Non-Executive Directors’ fees earned for 2018 are noted on pages 82 to 83.
· Non-Executive Directors may claim expenses in accordance with RSA’s business and travel policies, including tax thereon where such expenses do not qualify for tax relief.
Non-Executive Directors are expected to disclose any confl icts of interest prior to, and during, the course of their tenure. They will not participate in making a decision if any confl ict is considered to impact their independence or limit their ability to discharge their duties to shareholders. Since Non-Executive Directors and the Chairman receive only fees and expenses, no individual can have a loss of offi ce payment, although payment in lieu of notice can be made.
The Companies Act 2006 also requires the Company to provide a Directors’ Report for the year ended 31 December 2018. The information that fulfi ls this requirement and which is incorporated by reference into, and forms part of, this report is set out on pages 04 to 95 and includes the information on fi nancial risk management objectives and policies contained in Note 5 in the consolidated fi nancial statements.
So far as each director of the Board is aware, there is no relevant audit information (as defi ned in section 418(3) of the Companies Act 2006) of which the Company’s external auditor is unaware, and each director has taken all reasonable steps to make himself/ herself aware of, and to establish that the external auditor is aware of, any relevant audit information.
The Directors are responsible for preparing the Annual Report and Accounts and consider that the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy. Further explanation of the assurances undertaken by the Group Audit Committee on behalf of the Board are set out in the Group Audit Committee Report found on pages 57 to 60. A report from the external auditor can be found on pages 98 to 105.
In accordance with regulatory requirements, in order for the Company’s Ordinary Shares to be counted towards the new Group capital requirements, any dividends declared by the Company must be capable of being cancelled and withheld or deferred at any time prior to payment, if the relevant capital requirements have been breached or payment of the dividend would lead to non-compliance with those requirements. Directors do not expect to exercise this right, other than where they believe that it may be necessary to do so in light of the applicable legal or regulatory requirements.
The Company is seeking shareholder approval to renew its authority to offer a Scrip Dividend Scheme to shareholders at the 2019 AGM. The Company will not be offering a Scrip Dividend alternative in respect of the fi nal 2018 dividend. For dividends where a Scrip alternative is offered, shareholders wishing to receive a Scrip dividend instead of a cash dividend should contact the Company’s Registrar for details or visit the shareholder services area of the Company’s website www.rsagroup.com/investors/shareholders.
As at 31 December 2018, the Ordinary Shares and Preference Shares represented 89% and 11% respectively of the Company’s total issued share capital. Directors are limited as to the number of shares they can allot (save in respect of employee share schemes). Renewal of the directors’ authorities to allot shares will be sought at the 2019 AGM. In addition, directors are restricted by the limits set out by the Investment Association. During 2018, the directors exercised their authorities to allot shares only in respect of employee share schemes.
The directors are not aware of any agreements between the Company’s shareholders that may result in restrictions on the transfer of securities or on voting rights. The Company may purchase any of its own shares (including any redeemable shares). An authority from Ordinary Shareholders for the Company to purchase up to 102,400,167 of its own Ordinary Shares (representing 10% of its issued share capital as at 13 March 2018), was passed at the 2018 AGM. This authority will expire at the conclusion of the 2019 AGM and a new authority will be sought. The authority was not exercised during 2018. Other than the standard compulsory transfer provisions in respect of US shareholders contained in the Company’s Articles of Association, there are no specifi c restrictions on the size of a shareholding nor on the transfer of shares, which are both governed by the general provisions of the Articles of Association and legislation.
The Group recognises and actively promotes the benefi ts of a diverse workforce and is committed to treating all employees with dignity and respect regardless of race, gender, disability, age, religion or belief. We therefore welcome applications from all sections of the community. The Group is committed, wherever possible, to employing and supporting people who are disabled, or become disabled during their career within the Group. Our ‘Equal Opportunities’ and ‘Dignity at Work’ policies support this commitment to employees.
More information on employees can be found on pages 38, 39 and 56.
Article 143 of the Articles of Association provides that, among other things and insofar as permitted by law, the Company may indemnify its directors against any liability and may purchase and maintain insurance against any liability. The Company has granted an indemnity to each of the directors pursuant to the power conferred by Article 143 of the Articles of Association. The indemnities granted constitute qualifying third-party indemnity provisions, as defi ned by section 234 of the Companies Act 2006, and is in addition to appropriate insurance cover. The Company believes that it promotes the success of the Company to provide this indemnity to its directors in order to ensure that the Group attracts and retains high calibre directors through competitive terms of employment in line with market standards.
The directors may exercise all the powers of the Company subject to the Articles of Association, relevant law and any directions that may be given by the Company at general meetings by shareholder resolution. The Articles of Association authorise the Board to manage the business of the Company and give the directors power to appoint and replace directors as required until the next AGM.
The table below shows the holdings of major shareholders as disclosed to the Company in accordance with the Disclosure Guidance and Transparency Rules (DTR) as at 31 December 2018 and at the date of this report.
NOTES: 1. The threshold for notifi cations is 5 percent in accordance with DTR 5.1.5. If the Company has not been informed that interests have fallen below this threshold the last notifi cation is included in this table.
Article 101 of the Articles of Association sets out the restrictions on the borrowings of the Company. The aggregate amount, for the time being, remaining borrowed by the Group must not, without the previous sanction of an ordinary resolution of the Company, be more than one-and-a-half-times the aggregate of: (i) the amount paid up on the issued share capital of the Company; and (ii) the total of the capital and revenue reserves of the Group (subject to certain adjustments).
Our disclosures cover all sources of greenhouse gas emissions as required by the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013, covering everything within the boundary of our operational control. Figures below include emissions from all operations with 50 or more full time equivalent employees, covering the period 1 January 2018 – 31 December 2018.
Where data is not provided by the operating entity, estimates have been provided based on intensities determined from similar sites within the Company. Our reporting has been conducted in accordance with guidance set forth by the GHG protocol’s corporate standard.
1. We have removed the impact of all divested businesses including sale of Oak Underwriting, to allow for fair comparison year on year.
During the year the Group did not make any donations to political parties or independent election candidates. Each year the Company proposes a resolution authorising political expenditure up to £100,000 for each of donations to political parties and independent election candidates, donations to political organisations and incurring political expenditure. This resolution is proposed in the event that the funding of seminars, functions and charitable donations by the Group may be regarded as political in nature.
8 Segmental information 128 9 Net investment return 129 10 Net claims 130 11 Other operating income 130 12 Other operating expenses, reorganisation costs and impairments 130 13 Finance costs 130 14 Employee expenses 131 15 Related party transactions 131 16 Auditor’s remuneration 131 17 Income tax 132 18 Share based payments 133 19 Earnings per share 133 20 Dividends paid and proposed 134 21 Total other comprehensive income 134
1 Signifi cant accounting policies 172 2 Risk and capital management 173 3 Related party transactions 173 4 Share based payments 174 5 Dividends paid and proposed 174 7 Current and deferred tax 175 8 Other debtors and other assets 175 9 Share capital 175 11 Loan capital 175
The Directors are responsible for preparing the Annual Report and the Group and Parent Company fi nancial statements in accordance with applicable law and regulations.
Under company law the Directors must not approve the fi nancial statements unless they are satisfi ed that they give a true and fair view of the state of affairs of the Group and Parent Company and of their profi t or loss for that period. In preparing each of the Group and Parent Company fi nancial statements, the Directors are required to: · Select suitable accounting policies and then apply them consistently; · Make judgements and estimates that are reasonable, relevant and reliable; · State whether they have been prepared in accordance with IFRSs as adopted by the EU; · Assess the Group and Parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and
· Use the going concern basis of accounting unless they either intend to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative but to do so.
We consider the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s position and performance, business model and strategy.
We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities are described below. We believe that the audit evidence we have obtained is a suffi cient and appropriate basis for our opinion. Our audit opinion is consistent with our report to the audit committee.
We were fi rst appointed as auditor by the shareholders of the Company at the Annual General Meeting held on 13 May 2013. The period of total uninterrupted engagement is for the six fi nancial years ended 31 December 2018. We have fulfi lled our ethical responsibilities under, and we remain independent of the Group in accordance with, UK ethical requirements including the FRC Ethical Standard as applied to listed public interest entities. No non-audit services prohibited by that standard were provided.
Event driven New: The impact of uncertainties due to the UK exiting the European Union on our audit
2. Key audit matters: including our assessment of risks of material misstatement
Key audit matters are those matters that, in our professional judgment, were of most signifi cance in the audit of the fi nancial statements and include the most signifi cant assessed risks of material misstatement (whether or not due to fraud) identifi ed by us, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. We summarise below the key audit matters in arriving at our audit opinion above, together with our key audit procedures to address those matters and, as required for public interest entities, our results from those procedures. These matters were addressed, and our results are based on procedures undertaken, in the context of, and solely for the purpose of, our audit of the fi nancial statements as a whole, and in forming our opinion thereon, and consequently are incidental to that opinion, and we do not provide a separate opinion on these matters.
Unprecedented levels of uncertainty All audits assess and challenge the reasonableness of estimates, in particular as described in valuation of insurance liabilities, valuation of pensions and post-retirement obligations and valuation of deferred tax assets below, and related disclosures and the appropriateness of the going concern basis of preparation of the fi nancial statements. All of these depend on assessments of the future economic environment and the Group’s future prospects and performance.
Brexit is one of the most signifi cant economic events for the UK and at the date of this report its effects are subject to unprecedented levels of uncertainty of outcomes, with the full range of possible effects unknown.
· Sensitivity analysis – When addressing valuation of insurance liabilities, valuation of pensions and post-retirement obligations, valuation of deferred tax assets, and other areas that depend on forecasts, we compared the directors’ sensitivity analysis to our assessment of the full range of reasonably possible, known adverse scenarios resulting from Brexit uncertainty and, where forecast cash fl ows are required to be discounted, considered adjustments to discount rates for the level of remaining uncertainty.
Our results As reported under valuation of insurance liabilities, valuation of pensions and post-retirement obligations and valuation of deferred tax assets, we found the resulting estimates and related disclosures of insurance liabilities, pensions and post-retirement obligations and deferred tax assets and disclosures in relation to going concern to be acceptable. However, no audit should be expected to predict the unknowable factors or all possible future implications for a company and this is particularly the case in relation to Brexit.
Subjective valuation Insurance liabilities represent the single largest liability for the Group. Valuation of these liabilities is highly judgmental because it requires a number of assumptions to be made with high estimation uncertainty such as loss ratios, estimates of the frequency and severity of claims and, where appropriate, the discount rates for longer tail classes of business, by territory and line of business. The determination and application of the methodology and performance of the calculations are also complex. In addition, the determination of the valuation of individual large losses can be subjective as it is based on estimated settlement amounts which are inherently uncertain, particularly for recently reported claims.
The effect of these matters is that, as part of our risk assessment, we determined that the valuation of insurance liabilities has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the fi nancial statements as a whole and possibly many times that amount. The fi nancial statements (note 37) disclose the sensitivity estimated by the Group.
Our procedures included: · Controls design and observation: Evaluation of the governance around the overall Group reserving process, including the scrutiny applied by the Local, Regional and Group Reserving committees, as well as Group level actuarial reviews. We assessed qualifi cations and experience of those responsible and examined the output of the reviews to assess the scope and depth of these processes. Our evaluation of the methodologies and key assumptions for the most signifi cant and subjective classes of business enabled us to assess the quality of challenge applied through the Group’s reserving process.
· Sector experience and Benchmarking: Comparison of assumptions, reserving methodologies and estimates of losses to expectations based on the Group’s historical experience, current trends, externally-derived data and benchmarking against industry trends including information relating to forthcoming legislation that may affect claims settlement speed or amount.
· Margin evaluation: Evaluation of the appropriateness of the Reserve Committee’s recommended margin to be applied to the actuarial best estimate. In order to do this we assessed the Directors’ approach to, and analysis performed, in setting the margin with respect to recognised actuarial methods. In particular we considered the allowance for uncertainties inherent in the data and assumptions in developing the actuarial best estimate through inquiry with the Directors and with respect to our understanding of any changes in Group’s risks and our own sector experience of approaches to setting the margin and the level of margin held by the Group’s peers.
Data capture The valuation of insurance liabilities depends on complete and accurate data about the volume, amount and pattern of current and historical claims since they are often used to form expectations about future claims. If the data used in calculating insurance liabilities, or for forming judgements over key assumptions, is not complete and accurate then material impacts on the valuation of insurance liabilities may arise.
· Test of detail: We also compared samples of claims case reserves, including large loss reserves, to appropriate documentation, such as reports from loss adjusters in order to test the valuation of individual claims reserves, particularly where such claims may be subject to recovery under reinsurance arrangements.
Processing errors Many fi nancial reporting controls depend on the correct functioning of operational and fi nancial IT systems. If these systems or controls fail, a signifi cant risk of error in reported fi nancial information can arise from the failure to transfer data appropriately between systems or inappropriate changes being made to fi nancial data or systems.
With the assistance of our own IT audit specialists, our procedures included: · Controls design and observation: Testing general IT controls around system access, change management and computer operations within specifi c applications pertinent to the fi nancial statements by assessing if appropriate policies are in place and adhered to by inspecting supporting evidence. Where general IT controls are not operating effectively, we addressed the increased risk of fi nancial statement misstatement by extending the scope of our work. This included assessing the operation of controls over changes or transactions being recorded in the systems and testing manual compensating controls, such as reconciliations between systems and other information sources, through reperformance or inspection.
Valuation of pensions and post-retirement obligations (2018: £7,974 million, 2017: £8,878 million)
Subjective valuation Small changes in the assumptions and estimates used can have signifi cant effect on the valuation of the Group’s pension obligations and therefore the amount of the pension and post retirement obligations and the Group’s fi nancial position.
With the assistance of our own pension actuarial specialists, our procedures included: · Membership data: Compared the data received from the third party administrator of the pension scheme to the data sent to the third party external expert who valued the pension obligation.
· Assessing transparency: Considering the adequacy of the Group’s disclosures in respect of the sensitivity of the defi ned pension obligation to these assumptions.
Valuation of deferred tax assets (2018: £234 million; 2017: £276 million)
Forecast-based valuation The recoverability of the recognised deferred tax asset is dependent on the future profi tability of the UK business, and RSAI plc as the taxable legal entity, in particular. There is inherent uncertainty involved in developing the operational plan upon which forecast future taxable profi ts are based. These forecasts determine the extent to which deferred tax assets are or are not recognised.
Our procedures included: · Historical comparisons and our sector experience: Comparing the expected growth rates to the Group’s approved operating plan and assessing the accuracy of that forecasting process in the past. We considered whether projected margins are achievable with reference to the business’s recent performance and operating plans, as well as our own industry knowledge.
· Sensitivity analysis: Sensitivity analysis of taxable profi ts to assumptions such as the Combined Operating Ratio.
Our results As a result of our work we found the level of deferred tax assets recognised to be acceptable (2017 result: acceptable).
Our procedures included: · Comparing valuations: We compared the market value of the Group, used as the base for the Company’s valuation, to an independent source of market capitalisation.
· Historical comparisons: In respect of the adjusting items, we compared the expected cash fl ows to the Group’s operating plan, and considered the historical accuracy of previous projections.
· Sector experience: With the support of our own valuation specialists, we independently recalculated the weighted average cost of capital used to discount the cash fl ows to determine the value of the adjusting items.
The materiality for the Group fi nancial statements as a whole was set at £35m (2017: £35m) determined with reference to a benchmark of Net Earned Premiums of £6,537m (2017: £6,605m), of which it represents 0.5% (2017: 0.5%). We continue to believe that the benchmark of net earned premiums is a fair refl ection of revenue from the Group’s operations as it is not subject to the volatility arising from multi-year insurance contracts that net written premium would be. We have not considered profi t before tax to be a suitable benchmark due to historical volatility in this metric.
We agreed to report to the Audit Committee any corrected or uncorrected identifi ed misstatements exceeding £1.7m, in addition to other identifi ed misstatements that warranted reporting on qualitative grounds.
Of the group’s nine (2017: nine) reporting components, we subjected four (2017: four), being those located within the UK, Ireland, Canada and Scandinavia, to full scope audits for group purposes and one (2017: one), being the Group’s central functions, to specifi ed riskfocused audit procedures. The latter was not individually fi nancially signifi cant enough to require a full scope audit for group purposes, but did present specifi c individual risks that needed to be addressed. As such, specifi ed risk-focused procedures were performed on investments, treasury and reinsurance, which included agreeing fi nancial information to supporting documentation. Within the Scandinavia reporting component, audits were performed by local audit teams in Denmark, Sweden and Norway.
The components within the scope of our work accounted for the percentages illustrated opposite. For the remaining components we performed analysis at an aggregated Group level to re-examine our assessment that there were no signifi cant risks of material misstatement within these.
The Group audit team visited four (2017: four) component locations, being those in the UK, Ireland, Canada and Denmark (2017: UK, Ireland, Canada and Denmark) to assess the audit risk and planned audit approach. The work on four of the nine components (2017: four of the nine components) was performed by component auditors and the rest, including the audit of the parent company, was performed by the Group team. Telephone conference meetings were also held with these component auditors and at these visits and meetings, the fi ndings reported to the Group team were discussed in more detail, and any further work required by the Group team was then performed by the component auditor.
£1.7m Misstatements reported to the audit committee (2017: £1.75m)Net Earned Premium
Our responsibility is to read the other information and, in doing so, consider whether, based on our fi nancial statements audit work, the information therein is materially misstated or inconsistent with the fi nancial statements or our audit knowledge. Based solely on that work we have not identifi ed material misstatements in the other information.
Based solely on our work on the other information: · we have not identifi ed material misstatements in the strategic report and the directors’ report; · in our opinion the information given in those reports for the fi nancial year is consistent with the fi nancial statements; and
Based on the knowledge we acquired during our fi nancial statements audit, we have nothing material to add or draw attention to in relation to: · the directors’ confi rmation within the viability statement (page 40) that they have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency and liquidity; · the Principal Risks disclosures describing these risks and explaining how they are being managed and mitigated; and
Our work is limited to assessing these matters in the context of only the knowledge acquired during our fi nancial statements audit. As we cannot predict all future events or conditions and as subsequent events may result in outcomes that are inconsistent with judgments that were reasonable at the time they were made, the absence of anything to report on these statements is not a guarantee as to the Group’s and Company’s longer-term viability.
6. We have nothing to report on the other matters on which we are required to report by exception
Under the Companies Act 2006, we are required to report to you if, in our opinion: · adequate accounting records have not been kept by the parent Company, or returns adequate for our audit have not been received from branches not visited by us; or
· the parent Company fi nancial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns; or
· certain disclosures of directors’ remuneration specifi ed by law are not made; or
As explained more fully in their statement set out on page 97, the directors are responsible for: the preparation of the fi nancial statements including being satisfi ed that they give a true and fair view; such internal control as they determine is necessary to enable the preparation of fi nancial statements that are free from material misstatement, whether due to fraud or error; assessing the Group and parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and using the going concern basis of accounting unless they either intend to liquidate the Group or the parent Company or to cease operations, or have no realistic alternative but to do so.
Our objectives are to obtain reasonable assurance about whether the fi nancial statements as a whole are free from material misstatement, whether due to fraud or other irregularities (see below), or error, and to issue our opinion in an auditor’s report. Reasonable assurance is a high level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud, other irregularities or error and are considered material if, individually or in aggregate, they could reasonably be expected to infl uence the economic decisions of users taken on the basis of the fi nancial statements.
We identifi ed areas of laws and regulations that could reasonably be expected to have a material effect on the fi nancial statements through discussion with the directors and other management (as required by auditing standards), and from inspection of the group’s regulatory and legal correspondence. We communicated identifi ed laws and regulations throughout our team and remained alert to any indications of non-compliance throughout the audit. This included communication from the group to component audit teams of relevant laws and regulations identifi ed at group level.
The potential effect of these laws and regulations on the fi nancial statements varies considerably.
Firstly, the group is subject to laws and regulations that directly affect the fi nancial statements including fi nancial reporting legislation (including related companies legislation) and taxation legislation, we assessed the extent of compliance with these laws and regulations as part of our procedures on the related fi nancial statement items.
Secondly, the group is subject to many other laws and regulations where the consequences of non-compliance could have a material effect on amounts or disclosures in the fi nancial statements, for instance through the imposition of fi nes or litigation or the loss of the group’s licence to operate. We identifi ed the following areas as those most likely to have such an effect: regulatory capital and liquidity and certain aspects of company legislation recognising the fi nancial and regulated nature of the group’s activities. Auditing standards limit the required audit procedures to identify non-compliance with these laws and regulations to enquiry of the directors and other management and inspection of regulatory and legal correspondence, if any. These limited procedures did not identify actual or suspected non-compliance.
Owing to the inherent limitations of an audit, there is an unavoidable risk that we may not have detected some material misstatements in the fi nancial statements, even though we have properly planned and performed our audit in accordance with auditing standards. For example, the further removed non-compliance with laws and regulations (irregularities) is from the events and transactions refl ected in the fi nancial statements, the less likely the inherently limited procedures required by auditing standards would identify it. In addition, as with any audit, there remained a higher risk of non-detection of irregularities, as these may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal controls. We are not responsible for preventing non-compliance and cannot be expected to detect non-compliance with all laws and regulations.
(Loss)/profi t on disposal of business and realised (losses)/gains on held for sale assets 6 (2) 69
Net share of profi t after tax of associates 1 1
The attached notes on pages 111 to 168 form an integral part of these consolidated fi nancial statements.
Profi t for the year – – – – – – – 289 289 – 33 322
Other comprehensive (expense)/income (note 21) – – – – (192) – (24) 44 (172) – (15) (187)
Share based payments (note 18/32) 2 – – – – – – 14 16 – – 16
Issue of Tier 1 notes (note 33) – – – – – – – – – 297 – 297
Other reserve transfer – – – – (7) – – 7 – – – –
Changes in shareholders’ interests in subsidiaries – – – – – – – 1 1 – 12 13
Profi t for the year – – – – – – – 349 349 – 23 372
Assets of operations classifi ed as held for sale 6 639 668
Cash and cash equivalents at the beginning of the year 1,049 1,087
Cash and cash equivalents at the end of the year 31 781 1,049
The remaining balances are of a mixed nature. The current and non-current portions of such balances are in the notes on pages 111 to 168 or in the Risk and Capital Management note (note 5).
Except where otherwise stated, all fi gures included in the consolidated fi nancial statements are presented in millions of pounds sterling (£m).
Accounting policies that are signifi cant to understanding the performance, fi nancial position and cash fl ows of the Group are set out in note 4 with other policies presented in Appendix A. The notes are grouped together by their nature. Estimation techniques and assumptions are presented in the relevant note in order to provide context to the fi gures presented. The most signifi cant estimates are those used in determining insurance contract liabilities (note 37), deferred tax (note 29) and defi ned benefi t pension scheme liabilities (note 38). There are no signifi cant judgements not related to accounting estimates.
IFRS 15 ‘Revenue Recognition’ became effective from 1 January 2018 and does not apply to insurance and fi nancial instrument income. The Group completed its detailed review of the application of IFRS 15 on its income recognised from the performance of other services for customers as set out in note 11. Existing policies for the recognition and measurement of such income are already compliant with the requirements of IFRS 15 and therefore no adjustment was necessary when applying the standard.
There are also a small number of other narrow scope amendments arising from annual improvements to standards that are applicable to the Group for the fi rst time in 2018, none of which have had a signifi cant impact on the consolidated fi nancial statements.
The Group’s programme of implementation activity is progressing in line with plans which include consideration of the impact of the one year deferral. The activities completed in 2018 include making decisions on accounting policy in key areas supported by fi nancial impact analysis, the design of fi nance systems and process change and drafting revised pro-forma fi nancial statements. Detailed build and testing of new systems and processes will take place during 2019 and early 2020 moving into detailed parallel run testing of reporting during the latter part of 2020 and into 2021 to assure reporting compliance by 1 January 2022.
RSA Annual Report and Accounts 2018112 rsagroup.com 3) New accounting standards, interpretations and amendments continued
IFRS 16 introduces a single, on balance sheet lease accounting model for lessees. A lessee recognises an asset representing its right to use the underlying leased asset and a liability representing its obligation to make lease payments. There are recognition exemptions for short-term leases and leases of low-value items, which the Group intends to utilise.
The nature of expenses on these areas changes from 1 January 2019 when the Group will recognise a depreciation charge for right-of-use assets and an interest expense on lease liabilities. Currently, the Group recognises the applicable expenses as they fall due, and assets and liabilities only to the extent that there was a timing difference between the recognition of the expense and its actual payment.
The Group will apply IFRS 16 on 1 January 2019 using the standard’s second modifi ed retrospective approach which means that the lease liability on transition will be matched by an equal and opposite right of use asset resulting in a nil impact on opening equity which will be applied using the exemption not to present the prior reporting period. This means that, based on the information currently available, the Group estimates that it will recognise additional lease liabilities and right-of-use assets on implementation of c£280m. The impact on the Income Statement in future years is expected to be immaterial.
The Group has not made any signifi cant changes to its accounting policies during 2018.
Acquisition costs comprise the direct and indirect costs of obtaining and processing new insurance business. Levies payable are treated as costs of underwriting business. These costs are recognised as deferred acquisition costs (DAC) and are deducted from the provision for unearned premium. DAC is amortised on the same basis as the related unearned premiums are earned.
Written premiums ceded to a reinsurer are recognised in the period in which the reinsurance contract is entered into and include estimates where the amounts are not fi nalised at the end of the reporting period. The ceded written premiums are recognised in the consolidated income statement over the period of the reinsurance contract, based on the expected earning pattern in relation to the underlying insurance contract(s).
Reinsurers’ share of insurance contract liabilities within the consolidated statement of fi nancial position includes the reinsurers’ share of provisions for losses and loss adjustment expenses and unearned premiums. The Group reports third party reinsurance balances on the consolidated balance sheets on a gross basis to present the exposure to credit risk related to third party reinsurance. The amount recoverable is reduced when there is an event arising after the initial recognition that provides objective evidence that the Group may not receive all amounts due under the reinsurance contract.
Annuities purchased by the Group to provide for payments under structured settlement arrangements are accounted for as reinsurance ceded and a corresponding reinsurers’ share of insurance contract liabilities in cases where the Group remains liable for the settlement in the event of default by the annuity provider. Any gain or loss arising on the purchase of an annuity is recognised in the consolidated income statement at the date of purchase.
Classifi cation and measurement of fi nancial assets and fi nancial liabilities
At initial measurement, the Group classifi es its fi nancial assets and fi nancial liabilities in one of the following categories: · Designated at fair value through profi t and loss (FVTPL); · Held for trading; · Available for sale (AFS); · Cash and cash equivalents; · Loans and receivables; · Financial liabilities; or
Designated fair value through profi t and loss (FVTPL) on initial recognition
Where the investment return on equity or debt securities is managed on the basis of the periodic cash fl ows arising from the investment
Loans and receivables Loans, reinsurance deposits, other deposits and fi nancial assets arising from non-investment activities, and loans made for investment purposes
Financial liabilities Other borrowings Financial liabilities with fi xed or determinable payments
Hedge of a net investment in a foreign operation or hedge of future cash fl ows or hedge of fair value of fi xed interest securities
Hedge of a net investment in a foreign operation – effective portion is recognised in other comprehensive income, ineffective portion is immediately recognised in the income statement
Unrealised gains and losses on AFS investments are recognised in other comprehensive income, except for impairment losses and foreign exchange gains and losses on monetary items which are recognised in the consolidated income statement. On derecognition of an investment classifi ed as AFS, the cumulative gain or loss previously recognised in other comprehensive income is recognised in the consolidated income statement. Further information can be found in note 9.
The Group determines, at each reporting date, whether there is evidence that the value of a fi nancial asset or a group of fi nancial assets, other than those measured as FVTPL are impaired. A fi nancial asset is impaired if there is objective evidence that indicates that an event has occurred after the initial recognition of the asset that may have resulted in a loss of value as a result of having a negative effect on the estimated future cash fl ows generated by that asset which can be estimated reliably.
An impairment loss in respect of debt instruments is calculated as the difference between its carrying amount and the present value of the estimated future cash fl ows discounted at the original effective interest rate of the instrument and is recognised in the consolidated income statement. Interest on the impaired asset continues to be recognised using the effective interest rate method.
For equity securities whose fair values are readily determined and where there is objective evidence that such an asset is impaired by a ‘signifi cant’ or ‘prolonged’ decline in the fair value below cost, the net loss previously charged to other comprehensive income is reclassifi ed to the consolidated income statement.
Current taxation is based on profi ts and income for the year as determined in accordance with the relevant tax legislation, together with adjustments for prior years.
A defi ned benefi t scheme refers to any other pension scheme; specifi cally, the Group’s defi ned benefi t schemes defi ne an amount of pension benefi t that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and salary.
RSA Annual Report and Accounts 2018116 rsagroup.com 4) Signifi cant accounting policies continued
The amounts charged (or credited where relevant) in the consolidated income statement relating to post-retirement defi ned benefi t schemes are as follows: · The current service cost: this is the present value of additional benefi ts payable for employees’ services provided during the reporting period; · The past service costs and gains or losses on settlement: these are changes to the obligations already established for past service costs that have arisen from an amendment to the terms of the scheme or a curtailment of the benefi ts payable by the scheme. These are recognised at the earlier of when the terms of the scheme are amended or the curtailment occurs or, where applicable, when the Group recognises related restructuring costs or termination benefi ts; · Net interest on the net defi ned benefi t liability/asset: this is determined by applying the discount rate applied to the defi ned benefi t obligation for the period to the net defi ned benefi t liability/asset, and results in a net interest expense/income; · The administration costs of operating the pension schemes.
The Group capitalises internal and external computer software development costs where the software is separately identifi able; the Group has control over the software; and where it can be demonstrated that they provide future economic benefi ts for the Group through facilitating revenue or improved processes. The costs capitalised includes administrative and other general overhead expenditure when they can be directly attributed to the software development and preparing it for use. The useful economic life of externally acquired and internally generated software is normally estimated to be between three and seven years.
Further information on goodwill and other intangibles can be found in note 22.
Goodwill and intangible assets not yet available to use are subject to an impairment test on an annual basis. Other intangible assets, which includes internally generated software, are reviewed for indications of impairment on an annual basis and are subject to an impairment test only if there is an indication of impairment.
Goodwill, other intangible assets and internally developed computer software are allocated to cash generating units (CGUs) for the purpose of impairment testing. When testing for impairment, the recoverable amount of a CGU is determined based on value in use calculations. Further information on how the value in use is calculated can be found in note 22.
Provisions for onerous contracts are recognised when action is taken by the Group as part of a restructuring programme that reduces any remaining benefi t expected under a contract to below its remaining unavoidable costs.
RSA Annual Report and Accounts 2018118 rsagroup.com 5) Risk and capital management
The Group is exposed to risks arising from insurance contracts as set out below: A) Underwriting risk
The majority of underwriting risk to which the Group is exposed is of a short-term nature, and generally does not exceed 12 months. The Group’s underwriting strategy aims to ensure that the underwritten risks are well diversifi ed in terms of the type, amount of risk, and geography in order to ensure that the Group minimises the volatility of its insurance result.
Underwriting limits are in place to enforce appropriate risk selection criteria and pricing with all of the Group’s underwriters having specifi c licences that set clear parameters for the business they can underwrite, based on their expertise.
· The actuarial indication of ultimate losses together with an assessment of risks and possible favourable or adverse developments that may not have been fully refl ected in calculating these indications. At the end of 2018, 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 historical business; general uncertainty in the claims environment; the emergence of latent exposures; the outcome of litigation on claims received; failure to recover reinsurance and unanticipated changes in claims infl ation; · The views of internal peer reviewers of the reserves and of other parties including actuaries, legal counsel, risk directors, underwriters and claims managers; · The outcome from independent assurance reviews performed by the Group actuarial function to assess the reasonableness of regional actuarial indication estimates; · How previous actuarial indications have developed.
The Group undertakes a number of strategies to manage these risks including the use of derivative fi nancial instruments for the purpose of reducing its exposure to adverse fl uctuations in interest rates, foreign exchange rates and long term infl ation. The Group does not use derivatives to leverage its exposure to markets and does not hold or issue derivative fi nancial instruments for speculative purposes. The policy on use of derivatives is approved by the Board Risk Committee (‘BRC’).
In defi ning its appetite for credit risk the Group looks at exposures at both an aggregate and business unit level, distinguishing between credit risks incurred as a result of offsetting insurance risks or operating in the insurance market (e.g. reinsurance credit risks and risks to receiving premiums due from policyholders and intermediaries) and credit risks incurred for the purposes of generating a return (e.g. invested assets credit risk).
Limits are set at both a portfolio and counterparty level based on likelihood of default, derived from the rating of the counterparty, to ensure that the Group’s overall credit profi le and specifi c concentrations are managed and controlled within risk appetite.
The Group Reinsurance Credit Committee oversees the management of credit risk arising from the reinsurer failing to settle its liability to the Group. Group standards are set such that reinsurers that have a fi nancial strength rating of less than ‘A-’ with Standard & Poor’s, or a comparable rating, are removed from the Group’s authorised list of approved reinsurers unless the Group’s internal review discovers exceptional circumstances in favour of the reinsurer. Collateral is taken, where appropriate, to mitigate exposures to acceptable levels. At 31 December 2018 the extent of collateral held by the Group against reinsurers’ share of insurance contract liabilities was £577m (2017: £585m), which in the event of a default would be called and recognised on the balance sheet.
The Group’s use of reinsurance is suffi ciently diversifi ed that it is not concentrated on a single reinsurer, or any single reinsurance contract. The Group regularly monitors its aggregate exposures by reinsurer group against predetermined reinsurer group limits, in accordance with the methodology agreed by the BRC. The Group’s largest reinsurance exposures to active reinsurance groups, excluding Enstar which is fully collateralised (see note 6), are Berkshire Hathaway, Lloyd’s of London and Talanx. At 31 December 2018 the reinsurance asset recoverable from these groups does not exceed 3.9% (2017: 3.9%) of the Group’s total fi nancial assets. Stress tests are performed by reinsurer counterparty and the limits are set such that in a catastrophic event, the exposure to a single reinsurer is estimated not to exceed 6.5% (2017: 6.4%) of the Group’s total fi nancial assets.
The credit profi le of the Group’s assets exposed to credit risk is shown below. The credit rating bands are provided by independent rating agencies. The table below sets out the Group’s aggregated credit risk exposure for its fi nancial and insurance assets.
Credit rating relating to fi nancial assets that are neither past due nor impaired
Total fi nancial assets that are neither past due nor impaired £m
Of which would qualify for SPPI under IFRS 91 5,358 2,154 2,199 636 95 – 10,442 – 10,442
Reinsurers’ share of insurance contract liabilities 2,266 – – – – 5 2,271 –
Loans and receivables 219 – – – – – 219 (4)
Cash and cash equivalents 1,048 – – – – – 1,048 –
At 31 December 2018 the Group held investments classifi ed as equity securities of £739m (2017: £764m). These include interests in structured entities (as disclosed in note 27) and other investments where the price risk arises from interest rate risk rather than from equity market price risk. The Group considers that within equity securities, investments with a fair value of £203m (2017: £242m) may be more affected by equity index market price risk than by interest rate risk. On this basis a 15% fall in the value of equity index prices would result in the recognition of losses of £30m (2017: £36m) in other comprehensive income.
In addition the Group holds investments in properties and in group occupied properties which are subject to property price risk. A decrease of 15% in property prices would result in the recognition of losses of £47m (2017: £46m) in the income statement and £3m (2017: £5m) in other comprehensive income.
RSA Annual Report and Accounts 2018122 rsagroup.com 5) Risk and capital management continued ii. Interest rate risk
Given the composition of the Group’s investments as at 31 December 2018, the table below illustrates the impact to the income statement and other comprehensive income of a hypothetical 100bps change in interest rates on fi xed income securities and cash that are subject to interest rate risk.
The Group principally manages interest rate risk by holding investment assets (predominantly fi xed income) that generate cash fl ows which broadly match the duration of expected claim settlements and other associated costs.
The Group incurs exposure to currency risk in two ways: · Operational currency risk – by holding investments and other assets and by underwriting and incurring liabilities in currencies other than the currency of the primary environment in which the business units operate, the Group is exposed to fl uctuations in foreign exchange rates that can impact both its profi tability and the reported value of such assets and liabilities; · Structural currency risk – by investing in overseas subsidiaries the Group is exposed to the risk that fl uctuations in foreign exchange rates impact the reported profi tability of foreign operations to the Group, and the value of its net investment in foreign operations.
The table below illustrates the impact of a hypothetical 10% change in Danish Krone/Euro, Canadian Dollar or Swedish Krona exchange rates on shareholders’ equity when retranslating into sterling: in Pounds Sterling against Danish
Movement in shareholders’ equity at 31 December 2018 (36) 45 (60) 73 (21) 25
Changes arising from the retranslation of foreign subsidiaries’ net asset positions from their primary currencies into Sterling are taken through the foreign currency translation reserve and so consequently these movements in exchange rates have no impact on profi t.
Subordinated guaranteed US$ bonds – – – – – – 7 7 6
Provisions for losses and loss adjustment expenses 4,334 1,813 1,158 815 629 1,402 1,605 11,756 9,468
Deposits received from reinsurers 22 – – – – – – 22 22
Interest on perpetual bonds and notes 23 21 21 21 21 40 1 148
Guaranteed subordinated step-up notes due 2039 – 39 – – – – – 39 39
The capital and interest payable on the bonds and notes have been included until the earliest dates on which the Group has the option to call the instruments and the interest rates are reset. For further information on terms of the bonds and notes, see note 35.
The Group is exposed to risks through its obligation to fund a number of schemes. These risks include market risk (assets not performing as well as expected), infl ation risk and mortality risk over the lives of the members. The Group and 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 mortality swaps. Further information on the Group’s management of pension risk is included within note 38.
It is a key regulatory requirement that the Group maintains suffi cient capital to support its exposure to risk. Accordingly, the Group’s capital management strategy is closely linked to its monitoring and management of risk. The Group’s capital objectives consist of striking the right balance between the need to support claims liabilities and ensure the confi dence of policyholders, exposure to other risks, support competitive pricing strategies, meet regulatory capital requirements, and providing adequate returns for its shareholders.
The Group’s Solvency II Internal Model was approved by the PRA in December 2015 and forms the basis of the primary Solvency II solvency capital ratio (SCR) measure.
The impact on the Solvency II coverage ratio of a range of sensitivities is set out below: Solvency II Sensitivities (change in coverage ratio): Unaudited
1 The impact of pensions depends signifi cantly on the opening position of the schemes and market conditions. As such the sensitivities shown are point in time estimates that will vary and should not be extrapolated.
TNAV is one of many capital metrics used by the group and is based on IFRS net assets excluding the value of goodwill and intangible assets.
1 Profi t after tax excludes amortisation and impairment of intangible assets. 2 Dividends includes £9m (2017: £9m) paid in relation to preference shares and £14m (2017: £11m) coupon payment on the Group’s Tier 1 notes.
RSA Annual Report and Accounts 2018126 rsagroup.com 5) Risk and capital management continued
The Group defi nes its ORSA as a series of inter-related activities by which it establishes: · The quantity and quality of the risks which it seeks to assume or to which it is exposed; · The level of capital required to support those risks; · The actions it will take to achieve and maintain the desired levels of risk and capital.
The assessment of risk and solvency needs is in principle carried out continuously. In practice, the assessment consists of a range of specifi c activities and decisions carried out at different times of the year as part of an annual cycle, supplemented as necessary by ad hoc assessments of the impact of external events and developments and of internal business proposals.
The assets and liabilities of the businesses held for sale are shown below.
Assets of operations classifi ed as held for sale 3 636 639 668
Liabilities directly associated with assets classifi ed as held for sale
Liabilities of operations classifi ed as held for sale – 636 636 668
During the period RSA has entered into an agreement to make a contribution of £15m to Enstar Group Limited, which is contingent upon Court approval of the completion of the Part VII legal transfer of the UK Legacy business.
Profi t on disposal of business and realised gains on held for sale assets
Deposits, cash and cash equivalents 10 5 – – – – – – 10 5