OUR PORTFOLIO OF BUSINESSES IS DIVERSE AND PROVIDES EXPOSURE TO MARKETS AT DIFFERENT POINTS IN THE INSURANCE CYCLE.
Visit www.rsagroup.com for more information. This Annual Report and Accounts contains forward looking statements as defined in the US Private Securities Litigation Reform Act of 1995. For a discussion of factors that could affect future results, reference should be made to the ‘Important disclaimer’ on the inside back cover. Pages 1 to 35 constitute the business review of RSA and are incorporated by reference into the directors’ report set out on pages 41 to 43. The directors’ report has been drawn up and presented in accordance with, and in reliance upon applicable English Company Law and the liabilities of the directors in connection with that report shall be subject to the limitations and restrictions provided by such law.
INTRODUCTION 01 Highlights 02 RSA at a glance 04 Chairman’s statement 06 Group CEO’s review
GOVERNANCE 41 Directors’ report 44 Corporate governance 49 Remuneration report 57 Directors’ emoluments and interests
Scandinavia represents 53% of the International portfolio and 25% of the RSA Group. Codan in Denmark and Trygg-Hansa in Sweden are the third largest insurers in their respective markets. We also have a growing presence in Norway and a Marine business in Finland.
In Canada, we are the sixth largest general insurer. Johnson, our direct business, is Canada’s second largest affinity writer and we are well positioned in the Broker channel.
WE ARE THE UK’S LARGEST COMMERCIAL INSURER AND THIRD LARGEST PERSONAL LINES INSURER.
Our Commercial business writes Property, Motor, Liability and Marine insurance. The business has a strong reputation for technical excellence. We are the UK’s largest Property and second largest Liability and Motor insurer and a leading Marine underwriter.
EMERGING MARKETS OPERATES ACROSS 20 DEVELOPING INSURANCE MARKETS AND IS RSA’S FASTEST GROWING REGION.
Latin America is the largest business in Emerging Markets with operations in seven countries. The largest is in Chile, where we are the market leader, and we are also the largest private insurer in Uruguay.
We are the largest general insurer in the Baltics with leading market positions in Latvia and Lithuania.
We operate in four countries across the Middle East, and service the Asian region through commercial hubs in China, Hong Kong and Singapore and through our associate, Royal Sundaram in India.
I am pleased to report on another year of further improvement for our Company despite increasingly difficult market circumstances. In summary: a growth in net written premiums of 11% a 13% increase in pre-tax profits a combined operating ratio of 94.5% a strengthened balance sheet and robust capital position.
In all markets we continue to take the right action on rate and cost and delivered our planned expense savings target of £200m by mid 2008. We announced new targets with our preliminary results for further cost savings of £70m to ensure we can deliver competitively priced products and maintain our profitability in all markets where we choose to operate.
The common theme behind our results has not changed, namely management excellence in strategic, operational and financial performance in all our businesses. We continue to review and improve our control environment in the pricing of risk and underwriting disciplines with sustainable profitable performance linked to prudent reserving and a low risk investment strategy. This approach remains unchanged and will continue.
There have been understandable demands for increased regulation following the issues in the banking sector. This from time to time can give concerns about over generalised, untargeted and disproportionate responses. Our policy remains to seek to cooperate positively with all regulators in an open, joint way and help develop improved industry practice. There remain important external regulatory issues including agreement on Solvency II to ensure that any changes to the financial services arrangements are proportional and risk based as they relate to general insurance.
The main variable moving forward is the likely impact of lower interest rates on predicted investment income. There are other less predictable trends in the rate of fall of economic growth in various economies. Our general response is to continue to seek management
excellence in what we do at all management levels and in all functions. We have an ongoing programme of review and continuous improvement in all our management disciplines. We continue to invest in operational and technical excellence and progress our extensive management development programmes, which are a key contributor to our progress.
In summary therefore we are pleased with our 2008 results and confident of a continuing strong relative performance in 2009 despite expecting some inevitable decline in the investment return. Against that background we are confident in recommending an increase in the final dividend to 7.71p, giving a total increase for 2008 of 10%.
I would like to take this opportunity to thank on behalf of shareholders, all our RSA colleagues, the management team ably led by our Chief Executive Andy Haste and my Board colleagues for their commitment, support and dedication on which all results depend. Finally I look forward to seeing as many of you as possible at the AGM and introducing a new RSA director, Johanna Waterous, who joined us in the year and has become an effective contributor to the RSA Board.
2008 has been another strong year for the Group. In a year of challenging trading conditions and volatile investment markets, we have again delivered a strong and profitable performance.
The combined operating ratio (COR) for the Group was 94.5%. The underwriting result increased by 38% to £384m with the expected strong contribution from International.
Profit after tax was £586m. This compares with £628m last year which benefited from the release of £103m of deferred tax provisions in Codan.
‘WE REMAIN CONFIDENT OF CONTINUING TO DELIVER SUSTAINABLE PROFITABLE PERFORMANCE AND WE ARE WELL POSITIONED TO TAKE ADVANTAGE OF MARKET OPPORTUNITIES.’
In Scandinavia, it has been an outstanding year. The buyout of the minorities was the right thing to do and the business has performed strongly in attractive markets. Premiums were up by 16% to £1.6bn (3% at constant exchange) reflecting good growth in Commercial, particularly in Denmark and Norway.
In Denmark we grew our SME book by around 6%, Marine by 10%, and Renewable Energy by almost 60% (all figures on constant exchange). In Norway we signed a further 10 agents during the year and achieved strong growth with Commercial premiums up by 65% on constant exchange.
The underwriting result was up by 64% to £190m, with a COR of 88.3%, over 3 points better than last year. This was driven primarily by a strong performance from Sweden.
In Canada, premiums increased 26% to around £900m (15% on constant exchange), driven by strong organic growth and the strong performance of CNS which was acquired in December 2007. The integration of CNS is on track. We have consolidated our product range and all new business is on the RSA platform. Broker loyalty remains high and customer retention was very good at 80%.
Johnson, our direct personal business, finished the year strongly with premiums increasing by 24% (14% on constant exchange), reflecting the acquisition of TJV in 2007 and good growth in affinity. We signed 35 new sponsorship groups during the year, giving us access to around 240,000 potential new customers.
The underwriting profit of £57m and COR of 92.9% are good results and were achieved despite the severe winter storms and increased large losses.
In Other Europe, premiums increased by 19% to £0.5bn (2% on constant exchange) and the COR was 97.1%. Italy continued to grow ahead of the market and premiums increased by 3% on constant exchange, driven by growth in Personal Motor. We also continued to build distribution, signing 37 new agents in 2008.
We withdrew capacity in areas such as Motor Fleet and Solicitors’ Professional Indemnity and this was offset by growth in affinity and our recent acquisitions.
We also completed the domestication of our Irish business, establishing it as a separate legal entity. This company started writing Group business in 2009, taking advantage of Ireland’s lower tax regime.
Premiums increased by 1% to £2.7bn reflecting our disciplined approach to growth. The COR was 97.6%, with the benefit of improved weather offset by increased large losses.
The underwriting result was £99m, with the expected lower level of prior year development and increased large losses partially offsetting the benefits of improved weather.
At our year end results, we announced a new £70m expense savings target for the UK to be delivered by mid 2010, primarily through a reduction in headcount of 1,200. There will be a one off cost of £80m to deliver this, which will be treated as a reorganisation cost in 2009 and will not be included in the Operating Result. The savings will be at full run rate by mid 2010 and together with other actions, we are targeting an expense ratio of around 14% by the end of 2012.
and increased by 26% (12% at constant exchange) after excluding Venezuela, which we sold in December 2007. The underwriting result increased by 28% to £23m with a COR of 96.4%, reflecting continued positive contributions from Asia and the Middle East, Latin America and the Baltics.
We also achieved two significant regulatory milestones. In the Kingdom of Saudi Arabia, we were granted our Royal Decree so we can proceed with our IPO and in China we received approval to establish our branch in Beijing.
Intouch has market leading direct operations in Poland, the Czech Republic and Russia, and in February 2009, we announced plans to acquire the remaining 50% of the business.
Across the region, we are successfully implementing our affinity strategy and in 2008 we signed deals with 47 retailers and financial institutions.
The economic environment deteriorated markedly in 2008. Growth decelerated sharply in most economies and unemployment began to rise. The speed and extent of the global slowdown prompted aggressive action from central banks and national governments. Interest rates were cut to historically low levels and substantial capital injections were provided to businesses regarded as essential to national economies. The banking sector, in particular, attracted considerable support. Despite these actions, expectations for global economic activity remain poor in the near term.
Against the backdrop of a weakening economy, RSA has performed strongly, due to the focused and geographically diversified nature of our business model, coupled with firm action taken on rate. Equally, the high quality and transparent nature of our investment portfolio has meant that we have not suffered unduly from market volatility.
Given the extent of the financial crisis and the high degree of government intervention which has resulted, policymakers are engaged in active debate over the appropriate nature of the future regulatory environment. We look forward to working with the European Union institutions on the follow up to the De Larosière high level group discussions on financial supervision which has considered the issues from an EU perspective.
RSA is keen for the EU governments to reach agreement on this legislation as soon as possible in order to end uncertainty and allow time for considered implementation. In the UK we will be monitoring the progress of the Banking Bill to ensure that the impact of changes to the Financial Services Compensation Scheme as regards general insurers is proportionate and risk-based.
We continue to build and expand our technical capabilities. We appointed Peter Jackson as our new Group Sales Director, responsible for building and managing RSA’s relationships with key global brokers. As a global insurer, listening and working with our global broker partners and making it easier for them to do business with us is key to what we do and this appointment will strengthen that.
2 emissions; and Our Canadian home insurance, which provides supplementary coverage to help customers develop more eco-friendly homes.
Our employees also continued to participate actively in our corporate responsibility programme. During 2008, building on the success of the UK National Volunteer Week held in 2007, we launched similar programmes across Canada, Scandinavia and our Asia and Middle East businesses. For the first time employees were actively encouraged to help local communities during work hours with 7,250 volunteers taking part in Community activity across the Group. This approach ensures an engaged workforce, actively involved with our local communities.
In recognition of our progress, we were pleased to be nominated as a ‘Gold’ rated ‘Times Top 100 Company that Counts’, to be included in the ethical investor fund the
We have once again delivered strong results in challenging conditions. With our strong balance sheet, our management actions and diversified portfolio, we are delivering sustainable profitable performance.
OUR STRATEGY OUR STRATEGY IS BASED ON A DISCIPLINED APPROACH TO DELIVERING STRONG,
SUSTAINABLE RETURNS AND OUR STRATEGIC PRIORITIES ARE: OUR STRONG AND DIVERSIFIED PORTFOLIO AND FOCUS ON OPERATIONAL AND FINANCIAL MANAGEMENT ARE KEY TO DELIVERING THESE STRATEGIC PRIORITIES.
We derive real advantage from being a pure P&C insurer. Our focus on doing one thing and doing it well is evident in our attention to detail, rigorous control and our actions.
We have strong market positions in attractive markets and a balanced portfolio of businesses.
The shape of the portfolio is deliberate: Our geographic balance gives us exposure to markets at different points in the cycle and different stages of development It allows us to shift capacity to where we see the best opportunities In each of our markets there are opportunities for profitable growth.
We have strong underwriting controls, from ensuring that every one of our underwriters is licensed, through to quarterly in depth portfolio and reserve reviews. Together with our market leading technical skills, these controls ensure that we are taking the right risks at the right rate.
Our commitment to underwriting discipline and taking the right action on rate is clearly evident in our results.
We have a relentless focus on operational excellence and have a strong track record of delivering on our expense savings targets.
Our investment portfolio is well diversified, high quality and low risk. This is evidenced by the resilience of the portfolio during 2008, where, in spite of volatile financial markets the portfolio performed strongly and increased in value.
Our strong portfolio allows us to shift capacity to where we see the best returns We have a tightly controlled risk appetite and underwriting process, and a conservative reinsurance policy We are committed to underwriting discipline and taking the right action on rate We have a prudent reserving policy, high quality investment portfolio and a strong balance sheet.
OPERATING RESULT £m 94.5% £867m CONTINUE TO DELIVER SUSTAINABLE PROFITABLE PERFORMANCE We expect to deliver a COR of around 95%. We are seeing signs of economic downturn, however alongside our rating and expense actions, we are seeing rates beginning to harden in our key markets. On investments we will benefit from geographic diversification and will continue to take action to mitigate against lower interest rates, and in 2009, expect to deliver investment income in line with 2007 levels.
We target growth in profitable lines of buiness and withdraw capacity from areas of the market where we cannot achieve our target returns We are using our strong customer focus to develop targeted propositions and maximise retention Our focus on customer differentiation for our partners and their customers is driving growth in our affinity business Across the Group, we have benefited from expanding distribution as well as targeted acquisitions.
4% GROWTH IN NET WRITTEN PREMIUMS Net written premiums are up 4% on a constant exchange basis, reflecting 12% growth in Emerging Markets (adjusted for the sale of Venezuela), 6% growth in International, and 1% in the UK, our most competitive market. This growth reflects our positive rating action, organic growth in target segments and the benefits of the acquisitions made in 2007.
ALLOCATE CAPACITY TO TAKE ADVANTAGE OF POSITIVE RATING TRENDS Our overriding focus remains taking the right action on rate and ensuring that we will only grow where it is profitable to do so. We will therefore continue to actively allocate capacity to maximise returns and look to take advantage of market opportunities in terms of positive rating trends and acquisitions.
We maintain relentless focus on operational excellence and deliver on our expense savings targets Our technical skills are market leading and a source of real competitive advantage. We are investing in these skills through our Technical Academy and global development programmes We continue to attract top talent from both inside and outside the insurance industry. We have instilled a strong performance culture and over 90% of our employees have their pay linked to their performance.
Our focus has been to build on CNS’ strong local service delivery and leverage RSA’s technical expertise and capacity to strengthen our broker and customer propositions. As a result, we are well positioned to continue to grow profitably in the important British Columbian market.
The integration is progressing well. We have consolidated our product range and all new business is now processed on the RSA platform. The CNS brand has been updated and has a new, modern look and feel consistent with the RSA brand. Through these and other innovations we have positioned the business to continue delivering profitable growth.
WITH A 19% INCREASE IN NET WRITTEN PREMIUMS AND A 27% INCREASE
Customer focus is central to our propositions and we are optimising customer reach through our multi channel distribution strategy, with strong intermediary, affinity and direct propositions.
We delivered our increased target of £60m of annualised expense savings by mid 2008, and made good progress towards achieving the additional £25m expense savings target set for Scandinavia this year. These savings are to be achieved by mid 2010 and will double Scandinavia’s expense savings to £50m and reduce the expense ratio to around 14%.
‘ WITH OUR STRONG TOP AND BOTTOM LINE PERFORMANCE, WE ARE CONTINUING TO DRIVE THE GROUP FORWARD.’
International continues to drive the Group forward and has again delivered a strong top and bottom line performance. Net written premiums are up 19% to £2,998m (6% on constant exchange). International contributed the majority of the Group’s underwriting result, with a 27% increase in underwriting profit to £262m and a COR of 91.2%.
Commercial performed strongly, delivering a 19% increase in net written premiums to £727m (5% on constant exchange). This reflects good growth in Norway, and in SME, Marine and Renewable Energy in Denmark.
Commercial net written premiums increased by 19% to £217m (9% on constant exchange) reflecting the CNS acquisition in December 2007 and continued strong retention. The integration of CNS is on track and the business is performing well, with 80% of business retained.
In Ireland, the market remains competitive and we are continuing to act on rate. Premiums are in line with last year, with growth in our affinity business and recent acquisitions offsetting the withdrawal of capacity in areas such as Fleet and Solicitors’ Professional Indemnity. We also completed the domestication of our Irish business, establishing it as a separate legal entity. This company started writing Group business in 2009, taking advantage of Ireland’s lower tax regime.
We have been steadily expanding our Marine business with innovative products, such as New Aquaculture for the growing fishfarming industry, as well as bespoke solutions for Port & Terminal operators. We’ve also expanded geographically, establishing specialist insurance teams in Belgium, Brazil, China, Dubai, France, Germany, The Netherlands and Singapore.
Our performance has been recognised through a number of awards, such as the British Insurance Awards ‘Underwriter of the Year’ in 2005 and Lloyd’s List Marine ‘Insurer of the Year’ in 2008.
In Commercial we are focusing on specialist segments, such as Risk Solutions and Marine, and leveraging our technical expertise to develop innovative risk solutions and strengthen our broker proposition to deliver profitable growth and manage retention in our target markets.
We achieved our target of £120m of annualised expense savings by mid 2008 and have committed to delivering a further £70m of savings by mid 2010. With these and other actions, we are targeting an expense ratio of around 14% by the end of 2012.
‘ WITH OUR CONTINUED ACTION ON RATE AND EXPENSES, WE ARE CONFIDENT THAT THE UK BUSINESS WILL CONTINUE TO DELIVER SUSTAINABLE PROFITABLE PERFORMANCE.’
PERSONAL In Personal, premiums are up by 2% at £1.1bn, reflecting a good performance from MORE TH>N® with 2% premium growth, while, as expected, affinity volumes continue to be impacted by lower new car sales and mortgage originations. The COR was 95.0% compared with the 2007 result of 100.6% which was impacted by the summer floods.
We are continuing to build the MORE TH>N® brand with a series of marketing campaigns and new propositions. During the year, MORE TH>N® won Finaccord’s ‘Most Effective Brand’ and was a finalist at the British Insurance Awards for E-business and Customer Care.
In affinity, we signed two new deals and retained four existing partnerships that renewed during the year.
In Commercial, we are increasingly seeing clients and brokers looking at the security and quality of companies where they place business and with our strong balance sheet and reputation for technical excellence, we are well positioned. There are also signs of the market showing a more disciplined approach to rate and greater resistance to high levels of broker commission.
In Chile, Falabella has over 400 outlets including supermarkets, department and home improvement stores and financial services retailers and has around three million active card holders.
In October we launched a number of loyalty campaigns aimed at strengthening retention and, as a result, we’ve seen retention rates increase by 25% over average 2007 levels.
Emerging Markets has operations in 20 countries across Latin America, the Baltics, Asia and the Middle East and Central and Eastern Europe. We are the number one insurer in Chile and in the Baltics, the largest private insurer in Uruguay and Intouch, our business in Central and Eastern Europe, has market leading direct operations in Poland, the Czech Republic and Russia.
We are focused on delivering profitable growth through expanding distribution, disciplined underwriting and improving operational performance. Our strategy is to focus on markets where we can establish a meaningful presence, either in overall market share or in segments where we have a competitive advantage. We are committed to strong governance and control, as well as close co-operation across the region to develop customer solutions which can be replicated in relevant territories cost effectively.
‘ THESE ARE ATTRACTIVE MARKETS, WITH GOOD LONG TERM POTENTIAL AND WE REMAIN ON TRACK TO DELIVER AN INCREASE IN EMERGING MARKETS’ PREMIUMS TO £1BN BY THE END OF 2010.’
For Large & Complex risks, we have implemented a hub and spoke approach, where regional centres of excellence assist our smaller operations underwrite complex risks, combining RSA’s global technical expertise with local knowledge. This has significant cost advantages over employing technical experts in all locations.
SMEs have historically been underserved by brokers due to the high cost to service small individual policies; however in countries such as India, this customer segment represents a significant opportunity. By offering simple, standard products with policies that can be issued after answering a handful of questions, we plan to simplify the broker sales process and access the potential of this market.
Latin America delivered a 22% increase in premiums (10% on constant exchange) after adjusting for the sale of Venezuela, reflecting good double digit growth across Chile, Brazil, Argentina and Colombia.
We are seeing the impact of economic downturn in a number of our markets and, in response, we have taken a number of actions on expenses to protect profitability, including reducing headcount by around 400 across the region, representing around 10% of the total Emerging Markets’ workforce.
2009 will be a challenging year and we expect to see a continued slowdown in growth as a result of economic conditions across a number of our markets. However, we will continue to take action to protect profitability. As insurance penetration is low across our areas of strategic focus, there remain good opportunities for profitable growth. These are attractive markets, with good long term potential and we remain on track to increase Emerging Markets’ premiums to £1bn by the end of 2010.
The operating result is £867m (2007: £814m), reflecting an improved underwriting result partially offset by a lower investment result, due to the expected reduced level of total gains.
UNDERWRITING RESULT The underwriting result is up by 38% to £384m (2007: £278m) and represents another strong performance, with a current year underwriting profit of £93m (2007: underwriting loss £70m) and a prior year profit of £291m (2007: £348m). The improvement in the current year result
‘OUR OBJECTIVE IS TO DELIVER SUSTAINABLE PROFITABLE PERFORMANCE AND THIS IS CLEARLY EVIDENT IN THE GROUP’S CONTINUED DELIVERY OF STRONG RESULTS.’
reflects the continued benefits of management actions, while improved weather (£155m better than 2007) was offset by adverse large loss experience (£110m worse than 2007), primarily in the UK. The strong prior year result reflects continued positive run off from all three regions.
The Group continues to adopt a prudent reserving policy for both current year and overall reserves and at 31 December 2008 reserves remain significantly to the right side of best estimate.
Total gains were £32m (2007: £119m) and comprise gains on the equity hedges of £141m and on equity and bond sales of £68m, offset by mark to market movements on commercial property of £98m, on CDO’s of £12m and on other assets of £10m. Impairments totalled £61m and include £43m on equities and £18m on bonds.
Going forward, investment income will be impacted by lower interest rates. However, with the actions we are taking to lock in higher yields and the geographic diversification of the portfolio we expect to limit this, and in 2009, we expect investment income to be around 2007 levels.
OTHER ACTIVITIES Expenses from other activities for 2008 have increased by £18m to £111m and include £19m (2007: £4m) in respect of our investment in our associates in India and Central and Eastern Europe.
charge represents an effective tax rate of 23% and includes a 3% benefit from the transfer of a portion of the Swedish profits into the Swedish Security Fund.
The directors will recommend at the Annual General Meeting, to be held on 18 May 2009, that a final ordinary dividend of 4.98p (2007: 4.53p) per share be paid. This, together with the interim dividend of 2.73p paid on 28 November 2008, will make the total distribution for the year 7.71p (2007: 7.01p).
Our balance sheet and capital position are strong, and the Group has sufficient capital to meet its strategic objectives and financing commitments. In 2008, the Group’s shareholders’ funds increased by 25% to £3.8bn, primarily reflecting after tax profits, foreign exchange, and the increase in the pension fund surplus.
90% of the total investment portfolio is invested in high quality fixed income and cash assets. The fixed interest portfolio remains concentrated on high quality short dated assets, with 99% of the bond portfolio investment grade, and 83% rated AA or above. The bond holdings are well diversified, with 74% invested in currencies other than Sterling, and 48% invested in non government bonds (2007: 45%). The average duration is 2.7 years for the Group, and 2.0 years in the UK.
The non government bond portfolio of £5.6bn comprises £1.8bn of Scandinavian Mortgage Bonds, £2.2bn of other financials and £1.6bn of non financials. The Scandinavian Mortgage Bond portfolio comprises £1.2bn of Swedish bonds, which are all rated AAA, and £0.6bn of Danish bonds, which are principally rated Aaa. The average duration on the Scandinavian Mortgage Bond portfolio is 2.6 years with an average LTV of 50-60%. Within the £2.2bn of other financial exposure, £0.6bn is in supranational and sovereign backed entities, £0.3bn in other non bank financials and £1.3bn in banks. Of the £1.3bn in banks, just £320m of this is subordinated debt and only £90m is Tier 1, the vast majority of which is in Canadian banks with only £10m in the UK.
At 31 December 2008, unrealised gains were £263m (31 December 2007: £461m).
Our financing and liquidity position is strong. Our committed £455m senior facility remains undrawn and matures in 2013. The next call on external financing is on the €500m subordinated guaranteed bonds in October 2009.
RATING AGENCIES S&P, AM Best and Moody’s Investor Service provide insurance financial strength ratings for the Group and its principal subsidiaries.
The Group is currently rated A, stable outlook by S&P. The Group was upgraded by Moody’s to A2 stable outlook in December 2008, and by AM Best to A (Excellent) in February 2009.
The surplus on the pension scheme as at 31 December 2008 is £363m compared with £116m at the start of the year. The movement is due to the increase in discount rate for the UK schemes from 5.6% to 6.2% (which includes an allowance for current pricing of financial corporate bonds) and the change in the inflation assumption from 3.2% to 2.8%.
The Group uses medium cohort assumptions for mortality, using PFA92 and PMA92 tables. The life expectancy of a male pensioner aged 60 is assumed to be 25.8 years and 27.0 years for a female pensioner.
Our objective is to deliver sustainable profitable performance and this is clearly evident in the Group’s continued delivery of strong results.
Our strong balance sheet and tight management of the business, including our relentless action on rate and expenses and low risk investment strategy ensures that the Group is well positioned to continue to manage the competitive rating environment, challenging economic conditions and volatile investment markets.
Value Foreign Mark to Other Value 31/12/2007 exchange market movements 31/12/2008 £m £m £m £m £m
The Group operates under an enterprise risk management framework that is designed to identify, assess, measure and manage exposure to risk. This process is subject to continuous review and development and further work was undertaken in 2008 to enhance the framework.
Executive management has the responsibility for establishing and implementing appropriate systems and controls in their own areas of remit. The Group Risk Management Framework provides the mechanism through which risk management and control is embedded throughout the Group. Each Group business is required to follow a consistent process to identify, assess, manage and monitor their key risks.
GROUP RISK APPETITE The Group has a process for setting risk appetite at both Group and regional level and for monitoring compliance with this. The Group risk appetite sets business volumes for certain higher risk insurance classes, stipulates loss retention limits, reinsurance protection, targets for credit rating and solvency margins, and other appropriate measures.
There is a formal escalation process for potential or emerging risks that are outside the risk appetite.
Compliance with policy statements is mandatory. Policies are subject to regular review in order to reflect changes in circumstances and the Group risk appetite.
Further work has been undertaken in 2008 to refine and improve the Portfolio Classification process, designed to provide a more effective method of evaluating portfolio performance. We are continuing to improve risk oversight and supporting tools to ensure that we remain in control of our insurance business and the risks within it.
Operational risk exists in every facet of the organisation, including those areas that are not viewed as ‘operating units’. As such, all areas of the Group and its major outsourcing providers, are involved in addressing and controlling operational risk.
The Group uses a suite of risk tools to help manage operational risk using a common categorisation of risk. These tools include Risk and Control Self Assessments, Key Risk Indicators, Scenario Analyses, Incident Management and Loss Reporting.
The Group operates in a number of geographical locations with diverse regulatory requirements. Internationally, the regulatory environment has become more complex and demanding. The Group continues to respond to these developments through its arrangements for regulatory compliance and by ensuring that it maintains open and cooperative relationships with its regulators.
In this section we set out the principal risks and uncertainties to delivering our strategy, together with the actions we are taking to minimise the likelihood that these will occur and any potential impact on the future performance of the business.
We have seen some impact on premiums as a result of lower levels of commercial and personal activity, including lower new car sales and mortgage originations, and have identified a limited number of contracts triggered by economic conditions. This impact is being partially offset by rates beginning to harden in a number of our key markets and an observed decline in claims inflation, for example, in rebuilding costs and replacement motor vehicles. In addition, we continue to take action on rate and expenses. We expect to deliver a combined operating ratio of around 95% in 2009.
Risk framework continued evidenced by the resilience of the portfolio during 2008, where, in spite of increased market turbulence, the portfolio increased in value.
At the year end, only 5% of the portfolio was invested in equities (excluding preference shares and Collective Investment Vehicles backed by fixed income and cash). The equity exposure has been hedged for the past 4 years, and currently, around 75% of this exposure is hedged with a rolling programme of put and call options, providing protection down to a FTSE level of 2825. The commercial property portfolio is only 2% of investment assets and comprises high quality commercial properties and does not include any development properties.
Investment income will be impacted by lower interest rates. In 2008, we took a number of actions to enhance yield on the bond portfolio, including selling low yielding government bonds and reinvesting at longer duration to take advantage of higher yields. In addition, we purchased a net £600m of high quality, well diversified non government securities. The net purchases of non government bonds were at an average credit rating of AA-, well diversified by sector and were spread over more than 100 names. These actions are consistent with our high quality, low risk investment strategy and we have maintained the overall high credit quality of the portfolio.
As noted above, the portfolio benefits from being well diversified geographically, with over 70% of bonds invested in currencies other than Sterling. While most of these markets are also seeing interest rate reductions, this has been offset by foreign exchange gains.
In 2009, we will continue to operate a high quality, low risk investment strategy. The investment result will be impacted by lower interest rates and continued investment market volatility, however, we will continue to take action to mitigate this impact. These actions and the geographic diversification of the portfolio will limit the full impact of falling yields, and in 2009 we expect investment income to be around 2007 levels. Total gains will continue to be impacted by any further negative market movements in commercial property values as well as financial market volatility, and we are not anticipating a positive contribution from total gains in 2009.
3. RATING ENVIRONMENT SOFTENS SIGNIFICANTLY IN KEY MARKETS The Group’s overriding objective is to deliver sustainable profitable performance. Our strong and diverse portfolio provides exposure to markets at different stages of development at different points in the insurance cycle. We actively use the portfolio to shift capacity to where we see the best returns.
We are committed to underwriting discipline, with a relentless focus on profitability over volume and delivering on our expense savings targets.
4. INSURANCE RISKS ARE ACCEPTED OUTSIDE THE GROUP’S RISK APPETITE OR BELOW TECHNICAL PRICE The Group has strict underwriting limits in place to ensure that risk selection is within the
Group’s risk appetite. The Group’s underwriters are licensed to only write risks within specified limits, based on the experience of each individual underwriter.
Behaving responsibly and ethically in the way we manage our business directly affects the environment, people and the communities in which we operate. We are committed to doing the right thing both as individuals and as a company.
The principles by which we operate the business and our brand beliefs underpin our commitments and our CR policies form an essential part of our broader risk and governance framework.
As an insurer, we play a vital role in helping people recover from sometimes catastrophic setback. Helping get their lives back on track is our first priority. Our response during the 2008 snowstorms, flooding and earthquake in China was to help our customers through our rapid claims response. Across RSA both employees and the business assisted others less fortunate through disaster relief.
Our UK Personal Customer Management programme, provides customers with their own dedicated customer services manager, was pioneered in our Canadian business. It has now been rolled out to over 300,000 customers. This demonstrates our focus on the customer experience.
Product innovation is also key to our success and across the business we have created tailored and relevant products for specific customer groups. Social and environmental changes create new demands for insurance and we continue to develop insurance solutions that provide additional social or environmental benefits: In the UK, our Energy Performance Management Proposition won the Insurance Times insurer innovation category. The solution provides Energy Performance Certificates to support Government legislation to reduce CO
We remain committed to clear and open communication with our customers, and to resolving any complaints promptly. This was reflected in our continued upper quartile performance in the Association of British
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We work closely with our business partners and intermediaries to grow a successful business together while reducing our collective environmental and social impact. During 2008, in the UK we asked 96 of our suppliers about their management of these issues and engaged in active dialogue to improve standards.
In 2009, we will look to pilot this approach in Canada and Scandinavia building on our responsible procurement agenda and sector wide collaboration through the Financial Services Procurement Forum.
During 2008, we have focused on integrating our online environmental management system across our business. We achieved over 73% of our environmental targets across the Group for 2008. We will continue to set challenging targets and extend our approach across the Group.
Our Irish business became carbon neutral for the first time, joining our UK business in building on strong programmes of targets and operational energy efficiency improvements. All offsetting of equivalent emissions is made in renewable energy projects certified to the Voluntary Carbon Standard.
We are constantly improving and evolving our technology to assess risk for customers. Our flood risk assessment tool allows us to insure customers who might otherwise be excluded by assessing risk to the individual postcode level. We are partners in Eurotempest which allows a forecast of likely wind damage up to five days in advance of a storm.
We aim to make it more affordable for customers to make environmental choices through products and services such as our discounts for fuel efficient and alternative fuel vehicles and our customised environmental home insurance for the members of the UK charity the National Trust.
During 2008, building on the success of the UK National Volunteer Week held in 2007, we launched similar programmes across Canada, Scandinavia and our Asia & Middle East businesses. For the first time employees were actively encouraged to help local communities during work hours with 7,250 volunteers taking part in Community activity across the Group.
Road safety continues to be a major issue for us as an insurer and we have continued to support road safety programmes around the world, most recently in Lithuania, Chile, Dubai and Sweden. In Denmark, we launched a new programme for children based on our successful programme in Sweden, donating over 2,000 reflective safety vests.
We donated over £2.2 million (2007: £2.3 million) in charitable donations in 2008, with over 13,039 volunteer hours donated. We also provided £1,000,026 in gifts in kind in the form of sports fields for three schools in London. Our focus continues to be helping issues which link to our business objectives and brand beliefs and where we are able to use our knowledge such as safety, environment and social inclusion to do the right thing.
GROUP 1.5 UK 2.5 ENERGY UK (ELEC) 15 IRELAND (ELEC) 5 CANADA (ELEC) 3 TRAVEL DENMARK (AIR) 11
WASTE & RECYCLING CANADA (WASTE DISPOSED) 2 CANADA (RECYCLING) 2 DENMARK (PAPER WASTE) 51
ORLAGH HUNT GROUP HUMAN RESOURCES DIRECTOR Orlagh joined the Group as HR Director for International in September 2003 and was appointed Group Human Resources Director in October 2006. She was previously Head of Human Resources for AXA Sun Life and has previously worked at Walkers and Tesco in a variety of HR management roles.
ANNE JÆGER GROUP CHIEF AUDITOR Anne has been with the RSA Group since 2001. She was appointed Group Chief Auditor in September 2008. Prior to that she was Regional Chief Auditor, International, based in Denmark. She was part of the Codan Group Executive leadership team and the International Central leadership team. Anne was previously CFO at Maersk Data for two years and spent 13 years with KPMG as a State Authorised Public Accountant, where she was involved in work with public listed companies and M&A and restructuring.
ADRIAN BROWN UK CHIEF EXECUTIVE Adrian Brown was appointed UK CEO in September 2008. Adrian is a qualified management accountant and has been with the RSA Group since 1989. Between 2006 and 2008, he was the UK’s Chief Operating Officer with responsibility for Claims, Sales and Service, IT and Change across both Personal and Commercial lines. Prior to this, he was UK Director of Personal Lines, led the launch of MORE TH>N® and held a number of senior customer service and finance roles.
PAUL WHITTAKER CEO OF EMERGING MARKETS Paul was appointed CEO of Emerging Markets in 2006, having been RSA’s Group HR Director since April 2003. He has over 20 years senior management experience in the financial services sector including three years at AXA and 10 years at GE Capital, including work in Asia and Eastern Europe on acquisition integration and business development.
ANDY HASTE Age 47. Director and Group Chief Executive since April 2003. Non-executive Director of ITV plc (media) since August 2008. Former Chief Executive of AXA Sun Life plc and Director of AXA UK plc (life and pensions). Former President and Chief Executive Officer of Global Consumer Finance Europe at GE Capital UK, Western Europe and Eastern Europe (financial services). Former President of National Westminster Bank’s US Consumer Credit Business (retail banking).
GEORGE CULMER Age 46. Chief Financial Officer and Director of the Group since May 2004. Previously Head of Capital Management Zurich Financial Services (insurance).
NOEL HARWERTH Age 61. Director of the Group since March 2004. Director of Logica CMG plc, Impellam Group plc (support services) and Harry Winston Diamond Corporation (mining and retail). Deputy Chairman of Sumitomo Mitsui Banking Corporation Europe Limited (finance). Former Chief Operating Officer of Citibank International plc (finance).
SIMON LEE Age 47. Director of the Group since January 2007 having been Chief Executive of the International business since April 2003. Former Chief Executive, Natwest Offshore and Head of US Retail Banking at National Westminster Group.
MALCOLM LE MAY Age 51. Director of the Group since March 2004 and Chairman of the Investment Committee. Non-executive Director of Pendragon plc (general retailers). Former Deputy Chief Executive of Morley Fund Management (Investment Fund Manager). Former Deputy CEO of ING-Barings (finance).
JOHN MAXWELL Age 64. Director of the Group since July 2003. Chairman of the Remuneration Committee since October 2003. Director of Provident Financial plc (financial services). Director of Homeserve plc (support services). Director of the Royal Automobile Club Limited. Director of London Finance and Investment Group plc. Previously an executive director of Prudential Group plc. Former Chairman of DX Services plc (mail). Previously Director General (Chief Executive Officer) of The Automobile Association Limited.
JOHANNA WATEROUS Age 51. Director of the Group since May 2008. Director of the RBG Kew Foundation and Enterprises Limited. Chairman of Britt Lintner Limited. Director of the English National Opera. Former Chairman of Tate Enterprises and Director of McKinsey & Company.
Executive director Member of the Group Audit Committee Member of the Remuneration Committee Member of the Nomination Committee Member of the Investment Committee
FINANCIAL STATEMENTS 62 Responsibility statement 63 I ndependent auditors’ report to the members of RSA Insurance Group plc 64 Consolidated income statement 65 Consolidated statement of recognised income and expense 66 Consolidated balance sheet 67 Consolidated cashflow statement 68 Significant accounting policies 76 Estimation techniques, risks, uncertainties and contingencies 79 Risk management 89 Notes to the financial statements 124 Independent auditor’s report to the members of RSA Insurance Group plc 125 Parent Company balance sheet 126 Statement of changes in equity of the Parent Company 127 Parent Company cashflow statement 128 Notes to the separate financial statements
The preferential dividend at the rate of 3.6875% for the period from 1 October 2008 to 31 March 2009 will be paid on 1 April 2009 to holders of preference shares on the register at the close of business on 6 March 2009.
The Group is committed to the promotion of equal opportunities for all employees including those with a disability. In order to do this, we shall ensure that any reasonable adjustment is made, where it is appropriate to do so, to provide equal opportunities to all in respect of recruitment, terms and conditions of employment, promotions, transfers, grievances, redundancies and vocational training. The Group is committed wherever possible, to supporting the rehabilitation and return to work of employees who become disabled during their career with us.
The Group is committed to fostering a constructive dialogue with recognised independent trade unions, ensuring a regular and open dialogue on business issues and early consultation on changes affecting the workforce. In the UK, Unite is formally recognised through a partnership agreement which covers collective consultation and bargaining on behalf of non management employees. The Management Association (TMA) represents managerial employees under a separate consultative agreement. The European Consultative Forum (ECF) is a cross European body created to enable information sharing and consultation on transnational issues with the European workforce. Since 2005, an amended constitution has been in place for the European workforce which enables streamlined consultation arrangements.
The directors of RSA Insurance Group plc (RSA) present their report and the audited financial statements of the Company for the year ended 31 December 2008.
The Group uses Key Performance Indicators (KPIs) to provide a well balanced and comprehensive review of the Group’s overall performance. KPIs are monitored in a number of areas including financial, employee, customer, strategic priorities and the environment and community. Financial KPIs include the Group’s combined operating ratio, expense ratio, operating result and net written premium growth. Employee KPIs include the percentage of staff that have performance related pay, the percentage of staff taking part in the employee survey and the increase in overall employee engagement levels as measured by the survey. Customer KPIs include the levels of customer retention and the Group’s position in the annual benchmarking survey on complaints handling by the Association of British Insurers. Environment and community KPIs include targets on energy, travel, waste and levels of CO
In 2008, we have continued to deliver our leadership development programmes, integrating the new Brand Beliefs into each one. We have continued to accelerate the development of our in house executive talent through the Executive Development Programme which enters its fifth year in 2009. We have also introduced robust strategies to build capability and performance in the areas of sales, underwriting, claims and actuarial.
Our policy is to encourage employee share ownership. Employees from a number of our global businesses are encouraged to participate in Sharesave which is an Employee Sharesave Scheme (HM Revenue and Customs approved). This year saw a significant increase in the number of eligible employees participating in both the UK and overseas schemes.
We also encourage employees to participate in our employee discount schemes. Our Staff Saver Scheme in the UK currently has approximately 6,000 Staff Saver policies in force, an increase from approximately 500 policies in 2007.
The Group actively encourages employees to become involved in supporting their local communities. Further details are provided in the corporate responsibility report on pages 33 to 35.
The Company’s outstanding indebtedness to trade creditors on 31 December 2008 amounted to £3.9m corresponding to 19 days’ payment when averaged over the year.
Share capital During the year, 24,707,235 ordinary shares of 27.5p each were issued in satisfaction of the exercise of employee share options for a total consideration of £19,436,726, and 51,770,891 ordinary shares of 27.5p each were issued under the Company’s scrip dividend scheme for a total consideration of £64,803,178.
The Company may purchase any of its own shares (including any redeemable shares). An authority from shareholders for the Company to purchase up to 325,496,475 of its own ordinary shares (representing 10% of its issued share capital as at 20 March 2008) remained in force at 31 December 2008.
Further details on the share capital of the Company are incorporated into this report and are set out in note 18 on pages 103 to 104.
Rights and obligations attaching to shares The rights attaching to the ordinary shares and preference shares are set out in the Articles of Association (the ‘Articles’). Details of the rights and obligations attaching to shares as at 31 December 2008 are incorporated into this report by reference and are set out in note 18 on pages 103 to 104.
Details of directors’ powers are set out in the corporate governance report on page 44 and are incorporated into this report by reference.
None of the directors had any interest in any other contract with the Company or any of its subsidiaries during 2008.
Related party transactions Related party transactions are set out in note 32 on page 121.
Significant relationships and essential contracts The Company does not consider that it, or any of its subsidiaries, has any key dependency or essential contract that is fundamental to the success of the Company that is required to be disclosed pursuant to section 417 of the Companies Act 2006. However, the Group includes a number of regulated entities which rely on various licences to carry out their business. Accordingly, maintaining effective relationships with the Group’s regulators is integral to the success of the Group’s strategies and its long term value.
Charitable and political contributions The Company and its subsidiaries worldwide made charitable donations of £2,245,273 during the year. The largest contribution of £330,852 was made for the Swedish life buoy programme promoting safety around water. There is a formal Group Policy currently in place which prohibits any donations to political parties.
Going concern In considering the appropriateness of the going concern basis, the Board has reviewed the Group’s ongoing financial commitments for the next 12 months and beyond. The Board’s review included consideration of the Group’s underwriting plans, strong regulatory capital surplus, diverse insurance risk profile, considerable undrawn financing facilities and highly liquid investment portfolio. As a result of this review the directors have satisfied themselves that it is appropriate to prepare these financial statements on a going concern basis.
Compliance with the Combined Code Throughout 2008 the Group has complied with the Principles and Provisions of the Combined Code except that the Group has not appointed a senior independent director. The non-executive directors consider each year formally whether a senior independent director is required and continue to have a unanimous view that the appointment of a senior independent director is not appropriate at this time. All non-executive directors are encouraged to communicate directly with executive directors and senior management outside of formal meetings and an active dialogue is maintained by the Board.
The Board The Board is accountable to shareholders for the creation and delivery of strong sustainable performance and the creation of long term shareholder value. The Board meets regularly and is responsible for organising and directing the affairs of the Company and the Group in a manner that will promote the success of the Company and is consistent with good corporate governance practice, and for ensuring that in carrying out its duties the Company and the Group meet legal and regulatory requirements. The Board is also responsible to the Financial Services Authority (FSA) for ensuring compliance with the Group’s UK regulatory obligations. In the first quarter of 2008 the FSA concluded an Advanced Risk Recognition Operating FrameWork review of both the Group and UK operations. During 2008 the FSA also conducted private meetings with several members of the Board and executive management, including Johanna Waterous, prior to her appointment as a director, as a part of their ‘close and continuous’ programme.
The business of the Company is managed by the directors, who may exercise all the power of the Company subject to the Articles, relevant law and any directions as may be given by the Company in general meeting by shareholder resolution. The directors may delegate any of their powers or discretions to committees.
The specific duties of the Board are clearly set out as a formal schedule of matters specifically reserved to it, which can only be amended by the Board itself and which is reviewed annually. Matters reserved to the Board include: Approval of the Group’s long term objectives and commercial strategy Approval of changes to the Group’s senior management structure Approval of the Group’s overall risk appetite Annual review of the effectiveness of internal control arrangements Approval of the annual operating and capital budgets Changes to the Group’s capital structure and Approval of the Group’s financial results and any significant changes to accounting practices or policies.
The Board met 11 times during the year ended 31 December 2008. The attendance of directors at meetings of the Board and at board committees of which they were members during the year is set out below: Board Board Group Audit Nomination Remuneration Investment Board Risk Notes meetings Committee Committee Committee Committee Committee Committee
Total number of meetings in the year 1 11 4 5 3 8 3 4
Edward Lea 11 5* 8 3 Simon Lee 11 Malcolm Le May 8 2 5 3* John Maxwell 11 5 3 8* 3 Bridget McIntyre 2 8 John Napier 11* 2* 3 Johanna Waterous 3 6 2 1 *Chairman of the Board or board committee
years thereafter. Johanna Waterous will therefore be proposed for reappointment at the forthcoming AGM and the directors proposed for re-election are Andy Haste and John Napier. The Company may (by ordinary resolution of which special notice has been given) remove any director before the expiration of his period of office.
Pursuant to his appointment on 9 January 2003, John Napier has completed a six year term as a non-executive director and Chairman and his appointment has been extended for a further three year term which will expire on 31 December 2011. This reappointment was considered in detail by the Board, with particular consideration given to the commitment shown by John Napier to his role during his term of appointment and the requirement for the progressive refreshment of the Board.
Nomination Committee During the year the Nomination Committee was chaired by John Napier. The other members of the Committee were John Maxwell and Malcolm Le May. The attendance record of directors during 2008 is shown in the table above. The Committee met three times during 2008.
Board balance and independence Details of the directors who served during the year can be found on pages 38 and 39.
Remuneration Details of the directors’ remuneration and the Group’s policies on remuneration are set out in the remuneration report on pages 49 to 61.
Financial reporting The directors are required to ensure that adequate accounting records are maintained so as to disclose at any time, and with reasonable accuracy, the financial position of the Group. They are also responsible for taking reasonable steps to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.
The Board reviews annually the effectiveness of the Group’s systems of internal control in order to safeguard the Group’s assets and shareholders’ investment. This system includes governance, financial controls, the risk management framework and the process to deliver regulatory and compliance requirements. The systems are designed to subject to the approval of the Board, taking into account the recommendations of the Nomination Committee.
Performance evaluation In 2008 the Board undertook an annual evaluation of its performance to assess how well the Board, its committees and the directors were performing. The review included the use of a comprehensive questionnaire. Responses from the questionnaire were collated and subsequently discussed by the Board. Some of the outcomes achieved in 2008 following the review included: A continued commitment to site visits and on the non-executive directors meeting emerging talent from the business Continued improvement of agenda management for Board meetings to ensure that adequate time is made for the debate and exchange of ideas and A programme of regular investment updates for the whole Board, in addition to continued comprehensive reviews at the Investment Committee.
The non-executive directors are responsible for the evaluation of the Chairman’s performance and take into account the views of the executive directors in their evaluation. As part of the ongoing performance evaluation process the Chairman has regular one to one meetings with all the non-executive directors.
The GAC has unrestricted access to Company documents and information, as well as to employees of the Company and the external auditors.
It is the GAC’s responsibility to keep the procedures laid out in the Group whistleblowing policy under review. This policy deals with employees who wish to raise serious concerns in good faith, and either do not feel comfortable raising the matter with local management or are not satisfied with the local management response. They can raise their concerns with the Group Chief Auditor, who will either investigate or arrange for an investigation of the matter. Employees are offered such safeguards and support as may be necessary to protect their personal integrity and, where possible, identity.
External auditors During the year, Deloitte LLP were, on a number of occasions, engaged as advisors. In order to maintain their independence, such appointments are only made in accordance with a protocol developed by the GAC. This gives guidance to businesses within the Group on the appropriateness of engaging the Group’s external auditors as advisors and sets down the procedures to be followed to authorise such an engagement. The GAC is satisfied that this protocol has been followed and there are no matters that would compromise the independence of the auditors or affect the performance of their statutory duties.
The Board has accepted the GAC’s recommendation that a resolution be put to the 2009 AGM for the reappointment of Deloitte LLP as external auditors.
The Board considers that the current reporting framework delivers sufficient information to monitor the systems of internal control and to review their effectiveness as required by the Combined Code. The Board therefore considers that an ongoing process for identifying, evaluating and managing the significant risks faced by the Group has been in place during 2008 and up to the date of approval of the Annual Report and Accounts. This process is regularly reviewed by the Board and accords with the Turnbull Guidance on the Combined Code.
The Board Risk Committee The BRC, which meets at least quarterly, is currently chaired by George Culmer, Chief Financial Officer. The BRC also comprises the Group CEO and other members of executive management. It is intended that in 2009 Noel Harwerth will join the Committee and become Chairman and Malcolm Le May will also join the Committee. The Committee is authorised by the Board under its terms of reference to manage all risks faced by the Group. The Committee’s principal duties include: Defining the Group’s risk appetite prior to approval by the Board by reference to policies, control limits and other mechanisms Approval of policy and minimum standards that are consistent with the risk appetite Ensuring that risks that are outside the appetite are identified and mitigated in an appropriate manner and Overseeing and challenging the Group’s risk management processes.
Members of the Committee have no personal financial interest, other than as shareholders, in the Committee’s decisions and they have no conflict of interest arising from cross directorships. Fees for serving as a committee member and chairing committees of the Board are described in the non-executive directors section of this report on page 56.
Advisors to the Remuneration Committee During the first half of 2008, the Committee obtained its principal advice from Hewitt New Bridge Street, who were appointed by the Committee and provided no other services to the Company during the year. In July, the Committee reviewed the appointment of its advisers and, after presentations to the Committee, appointed Towers Perrin LLP as its principal advisers. In addition to providing independent advice to the Committee, Towers Perrin LLP provide broad reward advice to the Company and will continue to do so in 2009.
The Group CEO is invited to attend all meetings of the Committee to provide context and advice to the Committee on Group strategy and performance and senior executive pay strategy. The Group Human Resources Director and the Group Director, Reward and Recognition normally attend meetings to provide information on wider remuneration strategy and practice within the Group. In 2008 the Chairman was invited to attend meetings as appropriate and became a member of the Committee with effect from 1 January 2009. The General Counsel and Group Company Secretary acts as secretary to the Committee. None of the non Committee attendees are present as of right, and do not attend when their own remuneration is discussed.
The Committee is required by its Terms of Reference to meet at least twice each year, but meets as often as necessary throughout the year to ensure that it is able to fully report to the Board and shareholders on all relevant matters. In 2008, the Committee met eight times and discussed, amongst other things, the issues described below.
The following report by the Remuneration Committee has been approved by the Board for submission to the shareholders at the 2009 AGM.
Deloitte LLP have audited the following items stipulated in law for their review: The table of directors’ remuneration and associated footnotes on page 57 and the disclosure of the items comprising benefits in kind The tables of defined benefit and defined contribution pensions on pages 57 to 58 and associated footnotes The table of disclosure of directors’ share options and share awards on pages 58 to 61 and associated footnotes.
The Committee’s principal duties are as follows: The determination of the terms and conditions and remuneration of the Chairman of the Board and the executive directors Overseeing the operation of the Company’s share based long term incentive schemes, including approving the value and timing of awards and overseeing the operation of performance conditions Consideration of, and advice to the Board on, the Group’s broader remuneration policy in relation to senior executives reporting to the Group CEO (the Executive Team).
Remuneration review The Committee wishes to ensure that the structure of remuneration for the senior executives is sufficiently compelling and aligned with practice in the organisations with which we compete for talent. The Committee has reviewed variable remuneration for the executive directors, the Executive Team and senior management and believes that adjusting our variable pay policy is appropriate and timely because: The financial performance of the Group has been sustained and strong for a number of years, and the Group continues to deliver excellent results. The Committee believes that performance linked variable pay should be capable of delivering outstanding reward for consistently outstanding performance Reward opportunities with a strong performance link are critical to retain our top executives in the current challenging business environment and Following a review of the market, it was clear that the variable pay opportunities at the Company were lower than those in comparator companies and the Committee has approved a number of changes to improve the Company’s alignment with those companies.
The Committee has therefore resolved to: Increase the on target and maximum cash bonus opportunity for the executive directors (the first increase in the annual bonus opportunity for over five years) Enhance the element of the bonus paid in the form of deferred shares, from 25% of the total bonus to 33% of the total bonus Increase the maximum value of Performance Shares granted under the LTIP for executive directors, but remaining within the limits approved by shareholders when the LTIP was introduced in 2006 and Improve the robustness of the guidelines for executives’ shareholdings.
Additionally, the performance conditions applying to share awards granted under the LTIP were reviewed and the Committee resolved to adjust the ratio of shares subject to the return on equity (ROE) and total shareholder return (TSR) performance conditions.
Further details on each of the above changes is set out in the relevant section of this report.
Elements of remuneration Remuneration for executive directors in 2009 will consist of the four principal elements described in the table below, of which only base salary is pensionable: Remuneration Purpose Delivery Policy detail
Base salary To reflect the market value of the role and the skills and experience of the individual
To incentivise the delivery of annual goals at Group, business area and individual levels
Maximum opportunity of 180% of base salary One third of the annual bonus received is to be in the form of compulsory Deferred Shares under the LTIP Annual Non pensionable
As an indication of the balance of remuneration, including long term incentives (LTIs), the following charts illustrate the remuneration attributable to the continuing executive directors over the year (excluding allowances and pension provision): 24% SALARY
Deferred shares remain an important element of the total bonus and the proportion of deferred shares is to be increased from 25% of the total bonus payable, to 33% of the total bonus. If the stretching targets required to achieve on target level are achieved, executive directors receive a cash bonus of up to 60% of base salary and Deferred Shares worth up to 30% of base salary. For outstanding performance, a cash bonus of up to 120% of base salary and Deferred Shares worth up to 60% of base salary are achievable. Deferred Shares are described in the section headed share based long term incentive awards below.
Base salary Policy: Base salary is set with reference to equivalent roles in similar companies and the sustained performance of the executive. Base salaries for executive directors and members of the Executive Team are set on appointment with reference to market data.
In 2008, base salaries were primarily reviewed on the basis of market movements. The Committee analysed the remuneration details of a comparator group comprising 14 FTSE 100 financial services companies and awards salary increases with reference to the median position for equivalent roles in that group.
The 2008 salary review process resulted in the following increases, effective from 1 April 2008, for the continuing executive directors (as at 31 December 2008): Position Increase Base salary
Andy Haste Group CEO 6.4% £910,000 George Culmer Chief Financial Officer 10.4% £530,000 Simon Lee International CEO 9.9% £408,000
The following table sets out the base salaries of UK based executives below Board level on a banded basis as at 31 December 2008. No such executive received a base salary in excess of £360,000.
Annual performance bonus Policy: Bonus payments are related to stretching performance targets and are capped at 180% of base salary. For maximum bonuses to be achieved outstanding performance must be demonstrated. As part of the review of total remuneration, the Committee reviewed the on target and maximum bonus opportunities for executive directors. After a detailed review of the market, the Committee considered that
150% of base salary, for outstanding personal performance, as approved by shareholders when the LTIP was introduced in 2006.
Performance conditions The Committee will determine the performance condition for each grant of Performance Shares and Matching Shares, with performance measured over a single period of three years with no provision to retest. In 2009 grants of Performance Shares and Matching Shares related to
Share based long term incentive awards Policy: To provide annual share awards to executives to ensure alignment with shareholder interests solely through the LTIP. Except in exceptional circumstances, no other discretionary share plan will be used to make awards. Prior to the approval of the LTIP, two share incentive plans were operated: The 2004 Share Matching Plan, which was designed to operate for two years. The final awards under this plan were made in 2005 The Executive Share Option Scheme (ESOS). Regular awards under the ESOS were discontinued from 2006. The ESOS plan rules expire in 2009. It is proposed that a renewed Executive Share Option Scheme will be put to shareholders at the 2009 AGM. As with the ESOS, it is intended that the new plan will initially be used only in exceptional circumstances, such as executive recruitment. Performance conditions will attach to all options granted under the new ESOS, and will be determined by the Committee at the appropriate time.
Conditional awards of Performance Shares Participants may receive a conditional award of shares with the grant level and performance condition determined by the Committee prior to each grant. Executive directors, members of the Executive Team and the Top 100 will be eligible for awards of Performance Shares. As part of the review of total remuneration, the Committee considered the value of Performance Shares that are granted annually to executive directors. After a review of the market, the Committee decided to revise its policy of capping Performance Share awards for executive directors at 100% of base salary, and will now permit awards of Performance Shares of up to
non voluntarily Deferred Shares will be subject to a performance condition consisting of a combination of ROE and TSR targets.
While the ROE and TSR performance measures will continue to be used, the weighting of performance measures for long term incentive awards granted in 2009 is to be amended. ROE will be given greater prominence than relative TSR, to underline our commitment to improving the returns that we generate on our balance sheet. The vesting of 70% of the LTIP awards will be based on ROE performance and 30% on relative TSR performance (with the exception of Matching Shares attaching to voluntarily Deferred Shares, the vesting of which will remain dependent solely on the ROE performance condition).
70% of the shares comprising the award will vest according to ROE performance. In 2008, the Remuneration Committee approved an increase in the ROE performance targets for awards made in that year, so that if underlying average annual ROE over three years commencing with the financial year of grant is below 12% (10% for awards made in 2006 and 2007), no part of the award subject to the ROE performance condition will vest. If underlying average annual ROE over three years is 12% (10% for awards made in 2006 and 2007), 25% of the award will vest. If underlying average annual ROE over three years is 18% (16% for awards made in 2006 and 2007), 100% of the award will vest. Vesting will be on a straight line basis in between. Underlying ROE will exclude items of an exceptional nature which in the view of the Committee do not reflect the underlying performance of the business.
of termination and in all cases of termination on performance grounds the Committee’s policy would be to seek and apply mitigation. None of the executive directors have current terms in their service contracts which allow them additional rights or payment in the event of a reconstruction or amalgamation of the Group.
The following table shows the number of shares (including voluntary Deferred Shares held under the LTIP) held by each executive director at 31 December 2008 and the increase in shareholding over the year.
Simon Lee elected not to join a Group pension plan on appointment, and receives a taxable cash allowance of 17.5% of base salary instead.
On 11 August 2008 Andy Haste was appointed to the Board of ITV plc as a non-executive director. During the year he received a fee of £23,878. At the date of this report Simon Lee and Mark Chambers held directorships in not for profit organisations.
Non-executive directors Under the Company’s Articles, the remuneration paid to non-executive directors is determined by the Board, within limits set by shareholders. The fee structure for non-executive directors is shown below: £
Non-executive directors are not entitled to bonus payments or pension arrangements, nor do they participate in the Group’s long term incentive plans.
Edward Lea 10 July 2003 John Maxwell 10 July 2003 Noel Harwerth 30 March 2004 Malcolm Le May 30 March 2004 Johanna Waterous 20 May 2008
All non-executive directors (including the Chairman) are subject to a three year rolling period of appointment in accordance with the Company’s Articles.
Historical TSR performance The graph below is included in the report of the Committee as a requirement of Schedule 7A to the Companies Act 1985.
Directors’ emoluments (audited part) Remuneration for the year ended 31 December was as follows: Base salary Allowances Total Total and fees and benefits Bonuses 2008 2007 Notes £000 £000 £000 £000 £000
The sums payable in respect of base salary, pension and benefits which amount to £555,202 in aggregate are subject to mitigation. They will be paid in 12 monthly instalments during 2009 and are subject to reduction, in whole or in part, by any amount received as remuneration or fees from employment, consultancy or any other arrangement until the final payment is made. The sum payable of £326,325 in respect of bonus for 2008 will be paid in March 2009.
4. The benefits shown above in respect of Andy Haste relate to his membership of a defined benefit pension scheme up to the earnings cap. 5. For Andy Haste the increase in his accrued pension during the year, excluding the effects of inflation, was £1,941 p.a. and the transfer value in respect of this less his contributions was £28,340 at 31 December 2008.
Shareholdings (non audited part) The interests of directors in ordinary shares of 27.5p each of the Company, as declared and recorded in accordance with the FSA Listing Rules, are as follows: Shares held at Shares held at 31 December 1 January Notes 2008 2008
Non-executive directors Noel Harwerth 10,000 10,000 Edward Lea 439,801 416,467 Malcolm Le May 16,515 15,360 John Maxwell 315,057 304,251 John Napier 560,671 314,265 Johanna Waterous – –
Notes: 1. In addition to the interests shown above, the directors indicated, in common with the employees, had a beneficial interest as at 31 December 2008 in 3,919,975 (2007: 4,938,894)
ordinary shares of 27.5p each held in the Royal & SunAlliance ESOP Trust No 2. 2. The directors had a beneficial interest as at 31 December 2008 in the voluntary Deferred Shares of 27.5p each held under the Long Term Incentive Plan which are not included in the above table. 3. On 25 February 2009 the directors’ interests remained unchanged.
Options (audited part) Movements in option holdings during 2008 were as follows: Options Options Options Options Options held at granted exercised lapsed held at 1 January during during during 31 December 2008 the year the year the year 2008
Bridget McIntyre ESOS 301,724 – – – 301,724 SAYE 15,448 – – – 15,448
Long term incentive schemes (audited part) Long term incentive scheme interests held during 2008 in respect of the ordinary shares of the Company are as follows: Share Matching Plan Share awards Share awards Share awards Share awards Share awards Share awards Dates by held at granted vested exercised lapsed held at which qualifying 1 January during during during during 31 December conditions must Notes 2008 the year the year the year the year 2008 be fulfilled
Notes: 1. The market price of ordinary shares on 9 April 2008, the date on which long term incentive scheme interests were granted during the year, was 135.7p. 2. Deferred Shares are inclusive of voluntary Deferred Shares and compulsory Deferred Shares. Voluntary Deferred Shares are purchased by Lloyds TSB Offshore Trust Company
Limited on behalf of each participant using part of the net annual bonus paid to them and are held in trust for three years. These Deferred Shares are not at risk of forfeiture and may be withdrawn from the trust at any time, but the related Matching Share awards would lapse if the voluntary Deferred Shares are withdrawn within three years of acquisition. Compulsory Deferred Shares are awarded as part of the annual bonus. These Deferred Shares will normally vest in three years from the date of grant subject to continuous employment with the Group.
3. Matching Shares are capable of vesting in respect of a maximum of 2.5 times the number of Deferred Shares awarded, subject to the achievement of performance conditions over a three year period. One half of the Matching Shares relating to compulsory Deferred Shares are subject to TSR performance relative to other companies specified by the Remuneration Committee. For awards granted in 2006, 2007 and 2008 TSR will be measured relative to the following comparator group companies: Aegon, Alleanza, Allianz Group, AVIVA, AXA, Baloise, Generali, Legal & General Group, Munich Re, QBE, Swiss Re and Zurich Financial Services. Full vesting will only occur at upper quintile performance; at median performance 25% of the Matching Shares will vest. Vesting will be on a straight line basis in between. The remaining half of the Matching Shares relating to compulsory Deferred Shares (and all of the Matching Shares relating to voluntary Deferred Shares) are subject to a ROE performance condition. If underlying ROE over three years commencing on the year of grant is below 10% (12% for awards granted in 2008), no part of the award subject to ROE performance will vest. If underlying ROE over three years is 10% (12% for awards granted in 2008), 25% of the award will vest. If underlying average annual ROE over three years is 16% or higher (18% for awards granted in 2008), 100% of the awards will vest. Vesting will be on a straight line basis in between. For the purpose of establishing the number of Matching Shares relating to voluntary Deferred Shares that may be awarded, the gross value of that part of the annual bonus payment that a participant elects to voluntarily defer is used.
5. The above table shows the date by which qualifying conditions for awards made on 9 April 2008 must be fulfilled. For awards made on 12 June 2006, the date by which qualifying conditions must be fulfilled is 12 June 2009. For awards made on 16 April 2007, the date by which qualifying conditions must be fulfilled is 16 April 2010.
Andy Haste George Culmer Chief Executive Officer Chief Financial Officer 25 February 2009 25 February 2009
We have audited the consolidated financial statements of RSA Insurance Group plc for the year ended 31 December 2008 which comprise the consolidated income statement, the consolidated statement of recognised income and expense, the consolidated balance sheet, the consolidated cashflow statement, significant accounting policies, estimation techniques, risks, uncertainties and contingencies, risk management and related notes 1 to 34. These consolidated financial statements have been prepared under the accounting policies set out therein. We have also audited the information in the remuneration report that is described as having been audited.
We have reported separately on the Parent Company financial statements of RSA Insurance Group plc for the year ended 31 December 2008.
We report to you our opinion as to whether the consolidated financial statements give a true and fair view, whether the consolidated financial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation and whether the part of the remuneration report described as having been audited has been properly prepared in accordance with the Companies Act 1985. We also report to you whether in our opinion the information given in the directors’ report is consistent with the consolidated financial statements. The information given in the directors’ report includes that specific information presented in the Group CEO’s business review, the regional business reviews and the estimation techniques, risks, uncertainties and contingencies that are cross referred from the business review section of the directors’ report.
We review whether the corporate governance statement reflects the Company’s compliance with the nine provisions of the 2006 Combined Code specified for our review by the Listing Rules of the Financial
We read the other information contained in the Annual Report as described in the contents section and consider whether it is consistent with the audited consolidated financial statements. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the consolidated financial statements. Our responsibilities do not extend to any further information outside the Annual Report.
Deloitte LLP Chartered Accountants and Registered Auditors London, UK 25 February 2009
Discontinued operations Loss for the year from discontinued operations 34 – (13) Profit for the year 586 628
Earnings per share on profit from continuing operations attributable to the ordinary shareholders of the Parent Company Basic 6 17.3p 19.3p
Earnings per share on profit attributable to the ordinary shareholders of the Parent Company Basic 6 17.3p 18.9p
Ordinary dividends paid and proposed for the year Interim dividend paid (per share) 7 2.73p 2.48p Final dividend proposed (per share) 7 4.98p 4.53p
Selection of accounting policies The Group exercises judgement in selecting each Group accounting policy. The accounting policies of the Group are selected by the directors to present financial statements that they consider provide the most relevant information. For certain accounting policies there are different accounting treatments that could be adopted, each of which would be in compliance with IFRS and would have a significant influence upon the basis on which the financial statements are presented. The bases of selection of the accounting policies for the accounting for financial assets and for the recognition of actuarial gains and losses related to pension obligations are set out below: The Group designates financial assets that are held as investments on the basis on which the investment return is managed and the performance is evaluated internally. Where the investment return is managed on the basis of the periodic cashflows arising from the investment, a financial asset is designated as an available for sale financial asset with unrealised gains recognised in the statement of recognised income and expense. Where the investment return is managed on the basis of the total return on the investment (including unrealised investment gains), the financial asset is designated as at fair value through the income statement The Group accounting policy is to recognise actuarial gains and losses arising from the recognition and funding of the Group’s pension obligations in the statement of recognised income and expense during the period in which they arise. This policy has been adopted as it provides the most relevant basis of recognition of such gains and losses.
Consolidation Subsidiaries Subsidiaries are entities over which the Group has the power to govern the financial and operating policies so as to obtain benefits from their activities, generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases.
The Group’s shares of its associates’ post acquisition profits or losses are recognised in the income statement, and its share of post acquisition movements in reserves is recognised in reserves. The cumulative post acquisition movements are adjusted in the carrying amount of the investment. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate.
Goodwill and other intangible assets Goodwill, being the difference between the cost of a business acquisition and the Group’s interest in the net fair value of the identifiable assets and liabilities acquired, is initially capitalised in the balance sheet at cost and is subsequently recognised at cost less accumulated impairment losses. The cost of the acquisition is the amount of cash paid and the fair value of other purchase consideration given together with associated expenses. Goodwill is allocated to cash generating units for the purpose of impairment testing. Each of those cash generating units represents the Group’s investment within each operation. Goodwill is subject to an impairment review at least annually. An impairment review is also carried out whenever there is an indication that goodwill or other intangible assets are impaired. Where the carrying amount is more than the recoverable amount, an impairment is recognised in the income statement.
Increases in the carrying amount arising on the revaluation of Group occupied property are credited to revaluation reserves in equity. Decreases that offset the previous increases of the same asset are charged against revaluation surplus directly in equity; other decreases are charged to the income statement. Each year the difference between depreciation based on the fair value of the asset charged to the income statement and depreciation based on the assets original cost is transferred from revaluation surplus to retained earnings.
The Group designates investments in accordance with its investment strategy on the basis on which the investment return is managed and the performance is evaluated internally. Where the investment return is managed on the basis of the periodic cashflows arising from the investment, a financial asset is designated as an available for sale financial asset. Where the investment return is managed on the basis of the total return on the investment (including unrealised investment gains), the financial asset is designated as at fair value through the income statement.
For other loans and receivables, where there is evidence that the contracted cashflows will not be received in full, an impairment charge is recognised in the income statement to reduce the carrying value of the financial asset to its recoverable amount.
Derivative financial instruments Derivatives are recognised in the balance sheet on a trade date basis and are carried at fair value. Derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument and the nature of the item being
Recognition of income Premiums written are accounted for in the period in which the contract is entered into and include estimates where the amounts are not determined at the balance sheet date. Premiums written exclude taxes and duties levied on premiums and directly related expenses, e.g. commissions. Premiums are earned as revenue over the period of the contract and are calculated principally on a daily pro rata basis.
The provisions for claims outstanding, whether reported or not, comprise the estimated cost of claims incurred but not settled at the balance sheet date. It includes related expenses and a deduction for the expected value of salvage and other recoveries. The provision is determined using the best information available of claims settlement patterns, forecast inflation and settlement of claims. The provisions for claims outstanding relating to long term permanent disability claims in Canada and Scandinavia are also determined using recognised actuarial methods.
Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which these temporary differences can be utilised.
At each balance sheet date an assessment is made of whether the provisions for unearned premiums are adequate. A separate provision is made, based on information available at the balance sheet date, for any estimated future underwriting losses relating to unexpired risks. The provision is calculated after taking into account future investment income that is expected to be earned from the assets backing the provisions for unearned premiums (net of deferred acquisition costs). The unexpired risk provision is assessed in aggregate for business classes which, in the opinion of the directors, are managed together.
A reinsurance asset (reinsurers’ share of insurance liabilities) is recognised to reflect the amount estimated to be recoverable under the reinsurance contracts in respect of the outstanding claims reported under insurance liabilities. The amount recoverable from reinsurers is initially valued on the same basis as the underlying claims provision. 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 contract and the event has a reliably measurable impact on the expected amount that will be recovered from the reinsurer.
The amounts charged (or credited where relevant) in the income statement relating to post retirement benefits in respect of defined benefit schemes are as follows: The current service cost The past service costs for additional benefits granted in the current or earlier periods The interest cost for the period The impact of any curtailments or settlements during the period The expected return on scheme assets (where relevant).
The calculation of the present value of accrued benefits includes an actuarial assumption of future interest rates, which is used to discount the expected ultimate cost of providing the benefits. The discount rate is determined at each balance sheet date by reference to current market yields on high quality corporate bonds identified to match the currency and estimated term of the obligations. The interest cost for the period is calculated by multiplying the discount rate determined at the start of the period by the defined benefit obligations during the period.
The value recognised in the balance sheet for each individual post retirement scheme is calculated as follows: The present value of defined benefit obligation of the scheme at the balance sheet date Minus any past service cost not yet recognised Minus the fair value at the balance sheet date of the scheme assets out of which the obligations are to be settled directly.
For those individual schemes in deficit, the resulting net liabilities are recognised on the consolidated balance sheet in provisions. For those individual schemes in surplus, an asset is recognised on the balance sheet in other debtors and other assets to the extent that the Group can realise an economic benefit, in the form of a refund or a reduction in future contributions, at some point during the life of the scheme or when the scheme liabilities are settled.
Dividends to equity holders The final dividend is recognised as a liability when approved at the Annual General Meeting. The interim dividend is recognised as a liability when paid.
Recently issued accounting pronouncements Pronouncements issued by the International Accounting Standards Board (IASB) but which are not yet mandatory for adoption in the Group financial statements are listed below: a) Published standards and amendments to published standards that are not yet effective but which have been early adopted by the Group
b) Published standards and amendments to published standards that are not yet effective and have not been early adopted by the Group
On 6 September 2007 the IASB issued a revised version of IAS 1 ‘Presentation of Financial Statements’.
The revised standard changes certain aspects of the presentation of financial statements including the mandatory introduction of a statement of comprehensive income. The revised standard gives preparers of financial statements the option of presenting items of income and expense and components of other comprehensive income either in a single statement of comprehensive income with subtotals, or in two separate statements (a separate income statement followed by a statement of comprehensive income). In addition, the revisions include changes in the titles of some of the financial statements to standardise accounting terminology (for example, the balance sheet is renamed a statement of financial position). The new titles will be used in accounting standards, but are not mandatory for use in financial statements.
On 10 January 2008 the IASB issued a revised version of IFRS 3 ‘Business Combinations’ and an amended version of IAS 27 ‘Consolidated and Separate Financial Statements’. The revisions include the following changes to existing accounting practice: An equity interest in a subsidiary entity that is not held by the reporting and controlling entity is now described as a non controlling interest (currently described as a minority interest) Total comprehensive income is attributed to a non controlling interest even if this results in the non controlling interest having a deficit balance A change in a controlling interest arising from a transaction between a controlling interest and a non controlling interest that does not result in a loss of control, is accounted for as an equity transaction
c) Other standards and interpretations to published standards issued that are not relevant for the Group’s operations or not expected to change accounting policies
The uncertainty inherent in insurance is inevitably reflected in the financial statements of insurance companies. The uncertainty in the financial statements principally arises in respect of the insurance liabilities of the company.
The insurance liabilities of an insurance company include the provision for unearned premiums and unexpired risks and the provision for outstanding claims. Unearned premiums and unexpired risks represent the amount of income set aside by the company to cover the cost of claims that may arise during the unexpired period of risk of insurance policies in force at the balance sheet date. Outstanding claims represent the company’s estimate of the cost of settlement of claims that have occurred by the balance sheet date but have not yet been finally settled.
Estimation techniques Claims and unexpired risks provisions are determined based upon previous claims experience, knowledge of events and the terms and conditions of the relevant policies and on interpretation of circumstances. Particularly relevant is experience with similar cases and historical claims payment trends. The approach also includes the consideration of the development of loss payment trends, the potential longer term significance of large events, the levels of unpaid claims, legislative changes, judicial decisions and economic and political conditions.
Where possible, the Group adopts multiple techniques to estimate the required level of provisions. This assists in giving greater understanding of the trends inherent in the data being projected. The Group’s estimates of losses and loss expenses are reached after a review of several commonly accepted actuarial projection methodologies and a number of different bases to determine these provisions. These include methods based upon the following: The development of previously settled claims, where payments to date are extrapolated for each prior year Estimates based upon a projection of claims numbers and average cost
Uncertainties and contingencies The uncertainty arising under insurance contracts may be characterised under a number of specific headings, such as: Uncertainty as to whether an event has occurred which would give rise to a policyholder suffering an insured loss Uncertainty as to the extent of policy coverage and limits applicable Uncertainty as to the amount of insured loss suffered by a policyholder as a result of the event occurring and Uncertainty over the timing of a settlement to a policyholder for a loss suffered.
The Group has exposures to risks in each class of business within each operating segment that may develop and that could have a material impact upon the Group’s financial position. The geographic and insurance risk diversity within the Group’s portfolio of issued insurance policies make it not possible to predict whether material development will occur and, if it does occur, the location and the timing of such an occurrence. The estimation of insurance liabilities involves the use of judgments and assumptions that are specific to the insurance risks within each territory and the particular type of insurance risk covered. The diversity of the insurance risks results in it not being possible to identify individual judgments and assumptions that are more likely than others to have a material impact on the future development of the insurance liabilities.
Asbestos and environmental claims The estimation of the provisions for the ultimate cost of claims for asbestos and environmental pollution is subject to a range of uncertainties that is generally greater than those encountered for other classes of insurance business. As a result it is not possible to determine the future development of asbestos and environmental claims with the same degree of reliability as with other types of claims, particularly in periods when theories of law are in flux. Consequently, traditional techniques for estimating claims provisions cannot wholly be relied upon and the Group employs specialised techniques to determine provisions using the extensive knowledge of both internal asbestos and environmental pollution experts and external legal and professional advisors.
Factors contributing to this higher degree of uncertainty include: The long delay in reporting claims from the date of exposure (for example, cases of mesothelioma can have a latent period of up to 40 years). This makes estimating the ultimate number of claims we will receive particularly difficult Issues of allocation of responsibility among potentially responsible parties and insurers Emerging court decisions and the possibility of retrospective legislative changes increasing or decreasing insurer liability The tendency for social trends and factors to influence court awards Developments pertaining to the Group’s ability to recover reinsurance for claims of this nature and For US liabilities from our London market business, developments in the tactics of US plaintiff lawyers and court decisions and awards.
In particular the Group is continuing to monitor and respond to developments relating to the Solvency II Framework Directive, which is intended, in the medium term, to achieve greater harmonisation of approach across European member states to assessing capital resources and requirements. The directors are confident that the Group will continue to meet all future regulatory capital requirements.
Reinsurance arrangements in place include excess, stop loss and catastrophe coverage. The effect of such reinsurance arrangements is that the Group should not suffer total net insurance losses beyond the Group’s risk appetite in any one year.
The Group has a Group Reserving Committee consisting of the Group Chief Executive Officer, Chief Financial Officer, Group Underwriting and Claims Director and Group Chief Actuary. A similar committee has been established in each of the Group’s major operating segments. The Group Reserving Committee monitors the decisions and judgments made by the business units as to the level of reserves recommended and makes the final decision on the reserves to be included within the consolidated financial statements (‘Management Best Estimate’). In making its judgment, the Group Reserving Committee’s aim is that, over the longer term, reserves should be more likely to run off favourably than adversely. However, there can be no assurance that reserves will not develop adversely and exceed the Management Best Estimate. In making its judgment of the Management Best Estimate of reserves to include in the consolidated financial statements, the Group Reserving Committee adopts the following approach: The Group’s actuaries provide an indication of ultimate losses together with an assessment of risks and possible favourable or adverse developments that may not have been fully considered in calculating these indications. At the end of 2008 these risks and developments include: the possibility of future legislative change having retrospective effect on open claims; changes in claims settlement procedures potentially leading to future claims payment patterns differing from historical experience; the possibility of new types of claim, such as disease claims, emerging from business written several years ago; general uncertainty in the claims environment; the emergence of latent exposures such as asbestos; the outcome of litigation on claims received; failure to recover reinsurance and unanticipated changes in claims inflation Consideration is also made of the views of internal peer reviewers of the reserves and of third parties including actuaries, legal counsel, risk directors, underwriters and claims managers Consideration is made of how previous actuarial indications have developed.
The following table provides information regarding the aggregated credit risk exposure for financial assets of the Group as at 31 December 2008.
Debt securities 6,635 1,528 1,010 201 70 134 9,578 Other financial assets 55 3 8 2 1 82 151 Short term investments 7 26 53 2 1 32 121 Reinsurers’ share of insurance contract liabilities 63 702 714 191 115 74 1,859 Insurance and reinsurance debtors 1 2 75 71 43 8 2,200 2,399 Derivative assets – – 33 – – – 33
With the exception of AAA rated government debt securities, the largest aggregate credit exposure does not exceed 3% of the Group’s total financial assets.
The Group is exposed to concentrations of risk with individual reinsurers, due to the nature of the reinsurance market and the restricted range of reinsurers that have acceptable credit ratings. Reinsurance counterparties are subject to a rigorous internal assessment process on an ongoing basis to ensure that their creditworthiness continues to be satisfactory and the potential impact from reinsurer default is measured regularly and managed accordingly. The Group Reinsurance Credit Committee oversees the management of these risks. Group standards are set such that reinsurers that have a financial strength rating of less than ‘A–’ with Standard & Poor’s, or a comparable rating with AM Best, are removed from the Group’s authorised list unless the Group’s internal review discovers exceptional circumstances in favour of the reinsurer. Collateral is taken to mitigate exposures, where appropriate, to acceptable levels or the size or credit quality of the exposure. At 31 December 2008 the Group held collateral against £64m (2007: £65m) of reinsurers’ share of insurance contract liabilities.
Other financial assets 151 – – – – – 151 – Short term investments 121 – – – – – 121 – Reinsurers’ share of insurance contract liabilities 1,859 – – – – 13 1,872 (3)
Regional operations are responsible for assessing and monitoring the creditworthiness of their counterparties (e.g. brokers and policyholders). Local credit committees are responsible for ensuring these exposures are within the risk appetite of the local operations within the overall financial control framework. Exposure monitoring and reporting is embedded throughout the organisation with aggregate credit positions reported and monitored at Group level.
At 31 December 2008, the Group had pledged £1,049m (2007: £954m) of financial assets as collateral for liabilities or contingent liabilities and had accepted £1,329m (2007: £1,536m) collateral that could be sold or pledged. The nature of the assets pledged as collateral comprises government securities of £893m (2007: £933m), cash and cash equivalents of £93m (2007: £21m) and debt securities of £63m (2007: £nil). The terms and conditions of the collateral pledged are market standard in relation to letter of credit facilities.
Market risk The Group is exposed to the risk of potential losses from adverse movements in market rates and prices as follows: Interest rate risk Equity price risk Property price risk Foreign currency exchange risk Derivatives.
The investment risk policy governs the Group’s exposure to market risks. Exposures are controlled by the setting of investment limits in line with the Group’s risk appetite.
Interest rate risk The fair value of the Group’s portfolio of fixed income securities is inversely correlated to changes in the market interest rates. Thus if interest rates fall, the fair value of the portfolio would tend to rise and vice versa as set out in the sensitivity analysis on page 86.
The Group incurs exposure to foreign currency exchange risk in two ways: Operational foreign currency exchange risk – by underwriting liabilities in currencies other than the currency of the primary environment in which the business units operate (non functional currencies) Structural foreign currency exchange risk – by investing in overseas subsidiaries and operating an international insurance group.
Shareholders’ equity is stated before taking account of the effect of forward foreign exchange contracts. After taking account of the effect of forward foreign exchange contracts, a 10% change in Sterling against Danish Kroner, Canadian Dollar or Swedish Krona would have the following impact on shareholders’ equity: 10% 10% 10% 10% 10% 10% strengthening weakening strengthening weakening strengthening weakening in Sterling in Sterling in Sterling in Sterling in Sterling in Sterling against Danish against Danish against against against against Kroner Kroner Canadian $ Canadian $ Swedish Krona Swedish Krona £m £m £m £m £m £m
Cross currency Asset – – – – 1 – 4 Liability 83 – 2 85 31 1,286 1,247 Equity/index Asset 118 – – 118 32 see below see below Liability 61 – – 61 31 see below see below
Changes in the income statement and equity: Increase/(decrease) in income statement Decrease in equity 2008 2007 2008 2007 £m £m £m £m
3. The impact on the fair value of the loan capital is a decrease of £32m (2007: £124m). 4. The effect of movements in equity and property markets is reflected as a one time decrease of worldwide equity and property markets on 1 January 2009 and 1 January 2008 which results in a 15% decline in the value of the Group’s assets in these investment categories. 5. This analysis has not considered the impact of the above market changes on the valuation of the Group’s insurance liabilities.
The Group evaluates the concentration of exposures to individual and cumulative insurance risk and establishes its reinsurance policy to reduce such exposures to levels acceptable to the Group.
Subordinated guaranteed US$ bonds – – – – – – 16 16 15 Subordinated guaranteed Euro bonds 484 – – – – – – 484 481 Subordinated Sterling perpetual guaranteed bonds – – – – – 375 – 375 310 Subordinated guaranteed perpetual notes – – – – – 450 – 450 505 Provision for unearned premiums 3,361 382 67 7 7 7 4 3,835 3,835 Provision for losses and loss adjustment expenses 4,033 1,933 1,380 962 679 1,615 1,565 12,167 11,220 Direct insurance creditors 222 1 – – – 1 – 224 224 Reinsurance creditors 320 1 – – – – – 321 321 Borrowings 298 1 1 – – – – 300 300 Deposits received from reinsurers 73 3 – – – – – 76 76 Derivative trading liabilities 144 – – – – 2 – 146 146 Total 8,935 2,321 1,448 969 686 2,450 1,585 18,394 17,433
As at 31 December 2007 Balance Greater sheet Less than One to Two to Three to Four to Five to than carrying one year two years three years four years five years ten years ten years Total value* £m £m £m £m £m £m £m £m £m
Subordinated guaranteed US$ bonds – – – – – – 12 12 11 Subordinated guaranteed Euro bonds – 367 – – – – – 367 365 Subordinated Sterling perpetual guaranteed bonds – – – – – 375 – 375 305 Subordinated guaranteed perpetual notes – – – – – 450 – 450 513 Provision for unearned premiums 3,134 152 59 8 5 9 16 3,383 3,383 Provision for losses and loss adjustment expenses 3,418 1,880 1,357 957 678 1,541 1,337 11,168 10,344 Direct insurance creditors 165 1 – – – – – 166 166 Reinsurance creditors 250 10 – – – – – 260 260 Borrowings 302 1 – – – – – 303 303 Deposits received from reinsurers 47 16 1 – – – – 64 64 Derivative trading liabilities 60 – – – – – 2 62 62 Total 7,376 2,427 1,417 965 683 2,375 1,367 16,610 15,776
Interest on perpetual bonds and notes 88 88 64 64 64 208 13 589
As at 31 December 2008 the Group had an IGD surplus of approximately £1.7bn (2007: £1.5bn). The improvement in IGD surplus is mainly attributable to the profits for the year and positive foreign exchange movements, offset by the dividend paid, unrealised investment losses and an increase in the capital requirement in line with business growth. The coverage ratio stood at 2.5 times at 31 December 2008 (2007: 2.5 times).
Notes to the financial statements 1. Operating segments The Group is organised into three operating segments – International, Emerging Markets and the UK. The UK is the Group’s country of domicile and principal market (based on value of premium written in a single country). International comprises operations in Scandinavia, Canada, Ireland and Italy and Emerging Markets comprises the Group’s operations in Latin America, Asia and the Middle East, the Baltics and the Group’s joint ventures in Central and Eastern Europe, which are accounted for as associates. All operations are engaged in providing personal and commercial general insurance services. Central functions include the Group’s internal reinsurance function and Group Corporate Centre.
Net written premiums is the key measure of revenue used in internal reporting. Underwriting result and COR are the key internal measures of profitability of the operating segments. The COR reflects the ratio of claims costs and expenses (including commission) to premiums, expressed as a percentage.
Management basis The management basis reflects the way management monitor the business. Operating result on a management basis comprises the underwriting result, the investment result and other activities.
The investment result, excluding unwind of discount and foreign exchange, is disclosed as net investment return on the statutory basis. Investment income on the statutory basis includes an adjustment for depreciation on Group occupied properties.
Other activities primarily comprise administration and other expenses of £67m (2007: £72m), the Group share in the loss after tax of its associates of £18m (2007: £nil) and investment expenses and charges of £26m (2007: £21m).
Net written premiums 2,711 2,998 738 15 6,462 Underwriting result 99 262 23 – 384 Investment result 317 237 40 – 594 Insurance result 416 499 63 – 978 Other activities 1 (6) (29) (77) (111) Operating result (management basis) 417 493 34 (77) 867 Amortisation (18) Add: net share of losses after tax of associates 18 Results of operating activities (per income statement) 867
Operating result (management basis) 436 410 54 (86) 814 Amortisation (18) Results of operating activities (per income statement) 796
Other segment items included in the income statement: Investment income 328 198 35 30 591 Interest expense – (6) (6) (9) (21) Depreciation and amortisation (38) (39) (6) (5) (88)
Year ended 31 December 2007 Emerging Central Total UK International Markets functions Group £m £m £m £m £m
Net written premiums and non current assets from major geographical regions Net written premiums Non current assets
During 2008 the accrued interest income on impaired financial assets was £nil (2007: £nil).
Direct operating expenses (including repairs and maintenance) arising from investment properties were not material in 2008 and 2007.
Gross claims paid 4,747 4,145 Gross changes in insurance contract liabilities for claims (542) (101) Reinsurance recoveries on losses and loss expenses paid (484) (519) Reinsurers’ share of change in insurance contract liabilities for claims 421 132 Net claims and benefits 4,142 3,657 4. Profit before tax The following items have been included in arriving at the profit before tax on continuing operations: Other operating income 2008 2007 £m £m
Administration and other expenses 76 83 Investment expenses and charges 26 21 Amortisation of intangible assets 18 18 Foreign exchange gains (3) (3) Other operating expenses 117 119
Other lease payments The operating lease payments recognised as an expense during the year were £53m (2007: £48m). The Group has no significant lease agreements that include contingent rents.
Fees payable to the Company’s auditors for audit of the Company’s annual accounts 0.9 0.9 – – 0.9 0.9 Fees payable to the Company’s auditors and its associates for other services: The audit of the Company’s subsidiaries, pursuant to legislation 3.1 2.6 – 0.3 3.1 2.9 Other services pursuant to legislation 0.3 0.1 – 0.1 0.3 0.2 Tax services 0.1 0.1 – 0.8 0.1 0.9 Services relating to corporate finance activities 0.6 1.1 – 0.3 0.6 1.4 Other 3.3 0.4 – 0.2 3.3 0.6 Fees in respect to pension scheme: Audit – – – 0.1 – 0.1 8.3 5.2 – 1.8 8.3 7.0
Other includes fees payable to the Company’s auditors in respect of consultancy services relating to business transformation processes and regulatory development projects.
Directors’ emoluments The aggregate emoluments of the directors, including amounts received from subsidiaries, were as follows: Emoluments of executive directors 4,838 4,479 Fees and other payments to non-executive directors 584 556
5. Income tax expense The tax amounts charged in the income statement are as follows: Current tax 240 168 Deferred tax (67) (139) Taxation attributable to the Group 173 29
UK corporation tax is calculated at 28.5% (2007: 30%) of the estimated assessable profit for the year. Since the Group operates around the world, it is subject to income taxes in many different jurisdictions. Taxation for jurisdictions other than the UK is calculated at the rates prevailing in those jurisdictions. Of the above taxation attributable to the Group £38m (2007: £37m) relates to UK corporation tax and £135m (2007: £(8)m) to overseas taxation.
Basic Basic earnings per share is calculated by dividing the profit attributable to the ordinary shareholders of the Parent Company by the weighted average number of ordinary shares in issue during the period, excluding ordinary shares purchased by the ESOP Trusts and held as treasury shares.
Profit attributable to the ordinary shareholders of the Parent Company 574 609 574 596 Less: cumulative preference dividends (9) (9) (9) (9) Profit for the calculation of earnings per share 565 600 565 587 Weighted average number of ordinary shares in issue (thousands) 3,273,492 3,106,017 3,273,492 3,106,017 Basic earnings per share (p) 17.3 19.3 17.3 18.9
Profit for the calculation of earnings per share 565 600 565 587 Weighted average number of ordinary shares in issue (thousands) 3,273,492 3,106,017 3,273,492 3,106,017 Adjustments for share options (thousands) 53,034 43,869 53,034 43,869 Weighted average number of ordinary shares for diluted earnings per share (thousands) 3,326,526 3,149,886 3,326,526 3,149,886 Diluted earnings per share (p) 17.0 19.0 17.0 18.6
The trustees of the Royal & SunAlliance ESOP Trust and the Royal & SunAlliance ESOP Trust No 2 waived their entitlement to dividends which reduced the total dividend paid by £1m (2007: £1m).
8. Goodwill and other intangible assets Intangible asset arising from acquired claims Software Goodwill provisions development Other Total £m £m £m £m £m
Cost At 1 January 2008 263 102 448 150 963 Additions and transfers 25 – 70 2 97 Disposals and transfers – – (4) (2) (6)
No goodwill and other intangible assets as at 31 December 2008 have been impaired.
Intangible asset arising from acquired claims Software Goodwill provisions development Other Total £m £m £m £m £m
Impairment tests for goodwill Goodwill is allocated to the Group’s cash generating units (CGUs) as follows: Emerging Markets 50 45
A number of other assumptions and estimates are involved in the application of a cashflow model to forecast operating cashflows, premium volumes, expenses and working capital requirements. Forecasts of future cashflows are based on the best estimates of future premiums, operating expenses using historical trends, general geographical market conditions, industry trends and forecasts and other available information. These assumptions are subject to review by management and the Group Audit Committee. The cashflow forecasts are adjusted by appropriate discount rates. Discount rates used are within a range of 8% to 16% (2007: 10% to 15%), are pre tax and reflect specific risks relating to the relevant segments at the date of evaluation. The weighted average growth rates used in 2008 are within a range of 0.9% to 3.5% (2007: 0.9% to 3%).
The Group occupied property was revalued on 31 December 2008 by independent valuers.
Depreciation expenses of £35m (2007: £32m) have been charged to underwriting and policy acquisition costs.
10. Investment property Investment property consists of the following: Land and buildings: Freehold and long leasehold 363 426 Short leasehold 2 3 Total land and buildings 365 429
Movement in the carrying value of investment property is detailed below: Investment property at 1 January 429 454 Additions from subsequent expenditure 10 9 Transfer from property and equipment – 10 Sales and purchases (3) 1 Fair value losses (98) (50) Exchange adjustment 27 5 Investment property at 31 December 365 429
On 14 March 2008 Global Direct Insurance Investments BV changed its name to Intouch Insurance Group BV.
On 5 February, the Group announced that it had reached an agreement to acquire the remaining share capital of Intouch Insurance Group BV for a consideration of €70m. The transaction requires regulatory approval prior to the Group obtaining control of the business. It is expected this approval will be granted by the third quarter of 2009.
Summarised below are the assets, liabilities, revenue and profit and loss of the companies above. The comparatives below have not been restated for associates acquired during 2008.
Total assets 400 251 Total liabilities 292 173 Total revenue 237 116 Goodwill on acquisition 88 56 (Loss)/profit for the year after tax (26) 2
The Group’s share of net assets and profit and loss are accounted for under the equity method.
The Group’s portfolio of equity securities comprises ordinary shares and unit trusts of £780m (2007: £1,132m) and other equity instruments of £160m (2007: £355m). Other equity instruments include preference shares of £97m (2007: £125m) and collective investment vehicles primarily invested in cash and bond assets of £63m (2007: £230m). The performance of these assets is typically not expected to correlate strongly to the performance of ordinary shareholdings.
Reinsurers’ share of provision for unearned premiums 259 215 Reinsurers’ share of provisions for losses and loss adjustment expenses 1,500 1,657 Total reinsurers’ share of insurance contract liabilities 1,759 1,872
The following changes have occurred in the reinsurers’ share of the provision for unearned premiums during the year: Reinsurers’ share of provision for unearned premiums at 1 January 215 189 Premiums ceded to reinsurers 811 759 Reinsurers’ share of premiums earned (803) (754) Changes in reinsurance asset 8 5 Reinsurers’ share of portfolio transfers and (disposals)/acquisitions of subsidiaries (1) 12 Exchange adjustment 37 9 Reinsurers’ share of provision for unearned premiums at 31 December 259 215
The following changes have occurred in the reinsurers’ share of the provision for losses and loss adjustment expenses during the year: Reinsurers’ share of provisions for losses and loss adjustment expenses at 1 January 1,657 1,738 Reinsurers’ share of total claims incurred 63 387 Total reinsurance recoveries received (484) (519) Reinsurers’ share of portfolio transfers and acquisitions of subsidiaries 2 50 Exchange adjustment 256 57 Other movements 6 2 Transfer to non current and disposal group assets held for sale – (58) Reinsurers’ share of provisions for losses and loss adjustment expenses at 31 December 1,500 1,657
Derivative assets 118 33 Other debtors 387 355 Pension scheme surplus 602 263 Accrued interest and rent 193 150
To be settled within 12 months 806 643 To be settled after 12 months 671 320 17. Cash and cash equivalents
Cash and cash equivalents and bank overdrafts (as reported within the cashflow statement) 1,614 1,538 Add: bank overdrafts – 3 Less: transfer to non current and disposal group assets held for sale – (32) Total cash and cash equivalents 1,614 1,509
The interest bearing financial assets and financial liabilities included in cash and cash equivalents and bank overdrafts had an effective interest rate of 2.64% (2007: 4.85%) and had an average maturity of 15 days (2007: 23 days).
Notes to the financial statements continued 18. Equity and reserves Changes in equity Changes in equity for the year ended 31 December 2008
Total recognised (expense)/ income for the year – – – – (43) – 136 577 670 15 685
The above amounts are presented net of deferred tax. The deferred tax charged or credited directly to equity is set out in note 23.
During 2007, Codan A/S purchased £24m of its own shares on the market. In addition, the Group launched a voluntary conditional public tender offer for the acquisition of all the outstanding issued shares and voting rights in Codan A/S. As a result the Group acquired sufficient shareholding to effect a compulsory acquisition of the remaining shares and, as the transaction is not reversible, to account for 100% of the subsidiary. The total consideration was £590m. The two transactions reduced minority interests by £246m and shareholders’ funds by £368m.
Ordinary and preference shares During the year 24,707,235 (2007: 12,448,823) ordinary shares were issued on the exercise of employee share options for a cash consideration of £19m (2007: £9m). The Parent Company also issued 51,770,891 (2007: 66,632,200) ordinary shares during the year under the scrip scheme as approved by shareholders.
During 2007, to fund the acquisition of Codan A/S the Parent Company issued 186,350,000 ordinary shares in a placing raising gross proceeds of approximately £300m. The placing was made through a company established specifically for the placing. The placing was structured in such a way as to enable the Parent Company to obtain merger relief on the issue of the placing shares in accordance with section 131 of the Companies Act 1985. The effect of this is to relieve the Parent Company of a requirement to credit any amount paid up on the shares in excess of their nominal value to a share premium account. This excess was therefore recognised in retained earnings.
Authorised 4,250,000,000 ordinary shares of 27.5p each (2007: 3,923,636,364 ordinary shares of 27.5p each) 1,169 1,079 300,000,000 preference shares of £1 each (2007: 300,000,000 preference shares of £1 each) 300 300 Issued and fully paid 3,329,435,791 ordinary shares of 27.5p each (2007: 3,252,957,665 ordinary shares of 27.5p each) 915 895 125,000,000 preference shares of £1 each (2007: 125,000,000 preference shares of £1 each) 125 125
Notes to the financial statements continued 18. Equity and reserves continued The directors may deduct from any dividend or other monies payable to any shareholder all sums of money presently payable by him to the Parent Company on account of calls or otherwise in relation to his shares in the Parent Company.
On a return of capital on a winding up (liquidation), preference shareholders are entitled, in priority to holders of ordinary shares of the Parent Company, to receive out of the surplus assets of the Parent Company any arrears and accruals of the dividend together with the greater of the price at which the gross yield on each preference share is equal to the mean gross yield on 3.5% War Loan or such Government Stock as may be agreed (but not exceeding twice the nominal amount of the preference share) and the nominal amount of the share together with any premium paid on issue.
Save with the consent of preference shareholders, the directors shall not increase the amount of any shares of any class (or any securities convertible into any shares of any class), ranking as regards participation in the profits or assets of the Parent Company (otherwise than on a redemption or purchase by the Parent Company of any such share) in priority to the preference shares.
The directors may also refuse to register any transfer of any certificated share unless: A duly stamped instrument of transfer is delivered to the Parent Company’s registered office together with the certificates of the shares to which it relates and any other evidence that the directors may reasonably require to show the right of the transferor to make the transfer and The instrument of transfer is in respect of only one class of share.
Subordinated guaranteed US$ bonds 15 11 Subordinated guaranteed Euro bonds 481 365 Total dated loan capital 496 376 Subordinated Sterling perpetual guaranteed bonds 310 305 Subordinated guaranteed perpetual notes 505 513 Total loan capital 1,311 1,194
The subordinated guaranteed US Dollar bonds (‘Yankee Bonds’) have a nominal value of $23,679,000 and a redemption date of 15 October 2029. The rate of interest payable on the Yankee Bonds is 8.95%.
The subordinated guaranteed Euro bonds (€500m) have a redemption date of 15 October 2019. €200m of the Euro bonds bear interest at a fixed rate of 6.875% until 15 October 2009 and a floating rate thereafter. €300m of the Euro bonds bear interest at a floating rate from the date of issue of EURIBOR plus 1.25%. The Parent Company has the option to repay the Euro bonds on specific dates from 15 October 2009. If the bonds are not repaid on that date, the rate of interest payable would be EURIBOR plus 2.25%.
The subordinated Sterling perpetual guaranteed bonds have a nominal value of £375m and the rate of interest payable is 6.701% of the nominal value. The Group has the option to repay the bonds on specific dates starting 12 July 2017. If the bonds are not repaid, from that date, the interest rate payable would be LIBOR plus 2.51%.
Provision for unearned premiums The following changes have occurred in the provision for unearned premiums during the year: Provision for unearned premiums at 1 January 3,383 2,969 Premiums written 7,273 6,596 Less: premiums earned (7,161) (6,361) Changes in provision for unearned premiums 112 235 Gross portfolio transfers, acquisitions and disposals (3) 37 Exchange adjustment 343 142 Provision for unearned premiums at 31 December 3,835 3,383
The loss development tables above are presented on an undiscounted basis. Prior year development in 2008 showed favourable experience across all accident years and regions and totalled £369m, net of reinsurance. The total discounting at the end of 2008 was £671m representing an increase of £70m in the year, due to the impact of foreign exchange. In Scandinavia certain long tail liabilities are settled by an annuity and the discounted value of these annuities is shown separately. At the year end the annuity reserves were £437m (2007: £327m) with the increase in the year driven primarily by foreign exchange and growth in the business.
Direct insurance creditors 224 166 Reinsurance creditors 321 260 Total insurance and reinsurance liabilities 545 426
At 31 December 2008 and 2007 the Group had in place a one billion US Dollar Euro commercial paper program. There were no amounts outstanding at 31 December 2008 (2007: £nil).
The Articles of Association of the Group defines a cap on borrowing limits. This cap is not being amended at the 2009 AGM. At 31 December 2008 the cap on borrowing limits was £5,243m (2007: £4,221m) of which £1,625m (2007: £1,507m) had been utilised.
Deferred tax assets 142 87 Deferred tax liabilities (238) (224) Net deferred tax position at 31 December (96) (137)
The following are the major deferred tax liabilities and assets recognised by the Group and their movements during the year: Net Retirement insurance Other Reclassification benefit contract Revaluation Security Fund/ temporary of debt obligations liabilities of investments Safety Reserve differences Total £m £m £m £m £m £m £m
International Financial Reporting Standards require the Danish Security Fund and Swedish Safety Reserve in Codan A/S to be recognised within shareholders’ equity rather than as liabilities. During 2007, the Group acquired the minority interest in its Scandinavian subsidiaries and as a result of the change in circumstances concluded that no tax base and associated temporary tax difference existed in respect of these reserves and the associated deferred tax liability was released.
Notes to the financial statements continued 23. Current and deferred tax continued The deferred income tax credited/(charged) to equity is as follows: Fair value reserves in shareholders’ equity Available for sale financial assets 37 30 Group occupied property 10 (4) Retirement benefit obligations (83) 13 Share options 1 (3) Reclassification of debt (2) (4) Total (charged)/credited to equity for the year (37) 32
At the balance sheet date, the Group had unused tax losses of £1,582m (2007: £1,244m) and unused tax credits of £14m (2007: £33m) available for offset against future profits. A deferred tax asset of £16m (2007: £2m) has been recognised in respect of losses included within other temporary differences at 31 December 2008. No deferred tax asset has been recognised in respect of £1,523m (2007: £1,237m) tax losses and unused tax credits of £14m (2007: £33m) due to the unpredictability of future profit streams. Included in unrecognised tax losses are losses of £68m (2007: £51m) which will expire between 2009 and 2028. Other tax losses and unused credits may be carried forward indefinitely.
The Group does not recognise deferred tax on the unremitted earnings of overseas subsidiaries, as the Group is able to control the remittance of earnings to the UK and there is no intention to remit any such earnings to the UK in the foreseeable future if the remittance would trigger a material incremental UK tax liability. The temporary differences in respect of the retained earnings of overseas subsidiaries is £1,410m (2007: £959m).
Pensions and post retirement obligations 96 105 Reorganisation provisions 14 37 Other provisions 130 189 Total provisions at 31 December 240 331
Of the above, £155m is due to be settled outside of 12 months (2007: £139m).
To be settled within 12 months 866 1,016 To be settled after 12 months 177 71
In 2003 a subsidiary of the Group wrote an Adverse Development Cover (ADC) contract with its former US subsidiary. The liabilities arising under the ADC contract comprise an insurance component and a deposit component. The liability arising under the insurance component of £0.1bn represents the timing risk on the settlement of those liabilities. The financial liability arising under the deposit component is offset by the value of funds held in a trust fund whose trust deed only permits the trust fund assets to be used to settle amounts due under the ADC. The value of the funds held in trust at 31 December 2008 is £0.6bn and the value of the liability of the deposit component is £0.6bn.
26. Retirement benefit obligations The Group operates defined contribution pension schemes, funded and unfunded defined benefit pension schemes, and has other post retirement obligations.
Defined contribution pension schemes Costs of £39m (2007: £34m) were recognised in respect of defined contribution schemes by the Group. The Group’s Swedish subsidiaries are part of a multi employer defined benefit scheme along with other financial institutions in Sweden. As it is not possible to determine the assets and liabilities in respect of any one employer under this scheme, it is included in these accounts as a defined contribution scheme. Contributions of £9m (2007: £23m) were paid to this scheme during 2008 and are included in the costs shown above. The latest information regarding the funding of this scheme is taken from the interim report for the first half of 2008, when the scheme funding rate was 119% (2007: 132%). The Group’s Swedish subsidiaries’ share of the total multi employer scheme was less than 15% (2007: less than 15%).
Notes to the financial statements continued 26. Retirement benefit obligations continued The Group also provides post retirement healthcare benefits to certain current and retired Canadian employees. The benefits are not prefunded. Life insurance benefits, which provide varying levels of coverage, are provided at no cost to retirees. Healthcare benefits, which also provide varying levels of coverage, require retiree contributions in certain instances. Benefits are generally payable for life. The estimated discounted present values of the unfunded accumulated obligations are calculated in accordance with the advice of independent, qualified actuaries.
The actuarial gains/(losses) recognised in equity are as follows: UK Other Total Total £m £m £m £m
Actual return on scheme assets (63) (51) (114) 383 Less: expected return on scheme assets (281) (18) (299) (294) Actual return on assets (below)/in excess of expectations (344) (69) (413) 89 Experience losses on liabilities (97) (4) (101) (78) Change in actuarial assumptions 734 67 801 (39)
The accumulated actuarial gains since 1 January 2004 are £349m (2007: £62m).
Continuing operations analysed: Defined benefit pension schemes 572 (42) 530 184 Other post retirement benefits – (24) (24) (26)
Notes to the financial statements continued 26. Retirement benefit obligations continued Additional information for the current annual period and previous four annual periods: At 31 December Present value of defined benefit obligation 4,536 5,086 4,838 5,439 4,939 Fair value of plan assets 5,042 5,244 4,870 4,967 4,226
Experience adjustments on schemes liabilities (101) (78) 42 (50) 87 Experience adjustments on schemes assets (413) 89 (14) 434 145
Assumptions used in calculation of retirement benefit obligation: Discount rate 6.2 5.6 6.5 5.4 Annual rate of general inflation 2.8 3.2 2.0 2.5 Annual rate of increase in salaries 4.3 4.7 3.9 4.4 Annual rate of increase in pensions 2.8 3.2 2.0 2.5 Assumptions used in calculation of income statement credit/charge in year: Discount rate 5.6 5.1 5.4 4.9 Expected return on: Equities 7.5 7.5 8.3 8.3
The total employment cost recorded in the income statement for all plans was £25m in 2008 (2007: £19m). These costs include the costs associated with plans which are settled in the form of ordinary shares for awards that have been granted after 7 November 2002. The value of equity settled awards granted prior to this date has been excluded in accordance with the transitional provisions contained in IFRS 2 ‘Share Based Payment’.
The performance conditions in respect of awards under the Executive Share Option Scheme are described on page 59. The exercise price of all options is the fair value of the ordinary shares on the date of grant. All options expire 10 years after the date of the grant.
Additional information with respect to the Executive Share Option Scheme at 31 December is as follows: Weighted average Weighted average Number of shares exercise price* Number of shares exercise price*
Weighted average Weighted average remaining Weighted remaining Weighted contractual life average contractual life average Range of exercise prices Number of shares (years) exercise price* Number of shares (years) exercise price*
Under the scheme, there were no awards during 2007 or 2008. The value of the awards is charged in the income statement over the vesting period. The weighted average share price on the dates the options were exercised in 2008 was 147.57p (2007: 152.06p).
Weighted average Weighted average Number of shares exercise price* Number of shares exercise price*
Under the Sharesave Plan, the weighted average estimated fair value per option granted by the Parent Company during 2008 was 42.31p (2007: 45.84p). The fair value of share options granted under the Sharesave Plan during 2008 was £6m (2007: £8m). The value of the awards is charged in the income statement over the vesting period. The weighted average share price on the dates the options were exercised in 2008 was 147.21p (2007: 150.57p).
Fair values for the options granted under the Sharesave Plan were estimated as of the date of grant using the Black Scholes pricing model with the following weighted average assumptions: dividend yields of 5.7% (2007: 4.0%); expected volatilities of 30% (2007: 30%); ordinary share price of 158.10p (2007: 142.90p) risk free interest rates of 4.3% (2007: 5.0%); and expected terms equal to the vesting terms of 3.2 or 5.2 years. An estimate based on past experience is made of the number of forfeitures during the vesting period due to employees leaving the Group. The actual share price at 31 December 2008 was 138.10p (2007: 148.20p). The expected volatility is determined by reference to the actual volatility of the share price over the appropriate term ending on the grant date.
Share Matching Plan The Group’s Share Matching Plan for executive directors and other selected executives was adopted following approval obtained at the 2004 AGM. Awards were made during 2004 and 2005.
Further information on the Share Matching Plan may be found in the footnote to the long term incentive scheme table (audited part) on page 60.
Additional information with respect to Deferred and Matching Share awards at 31 December is as follows: 2008 2007 Number of shares Number of shares
Under the Share Matching Plan there were no awards granted in 2007 or 2008.
Long Term Incentive Plan The Long Term Incentive Plan for executive directors and other selected executives was adopted following approval obtained at the 2006 AGM. Awards have been made each year since 2006 following shareholder approval.
Fair values of the awards granted under the Long Term Incentive Plan scheme during 2008 are taken to be the share price on the day preceding the grant date, except for the Restricted Shares where the share price is reduced by an estimate of the value of dividends that will not be received. A dividend yield of 5.7% (2007: 4.0%) was assumed. Market related performance criteria were based on an arithmetic mean estimate of performance against a specified group of 13 competitors and it is assumed that all non market related performance criteria would be met such that all awards would be exercisable. An estimate based on past experience is made of the number of forfeitures during the vesting period due to employees leaving the Group.
Other share based payments Certain employees of the Group’s former US operation held entitlements under the Equity Incentive Scheme for US Employees prior to the disposal of the operation. On disposal of the US operation the options under the scheme became cash settled and the majority of the options vested. There are also other plans under which awards have been granted to certain employees in the form of cash settled share based awards. Under these plans, if the vesting conditions are satisfied, cash awards are made based upon the underlying performance of the Parent Company’s ordinary shares. Awards were made in 1999 and 2001 under old schemes and during 2004 and 2005 on terms that provide the same potential benefits as the Share Matching Plan. The liability in respect of these plans at 31 December 2008 was £1m (2007: £4m). The intrinsic value of awards that had vested at 31 December 2008 was £1m (2007: £4m).
Notes to the financial statements continued 30. Business combinations Acquisition of subsidiaries On 11 February 2008 the Group acquired 100% of the share capital of Fyfe Group Limited. On 31 March 2008 the Group acquired 100% of the share capital of Sertus Underwriting Limited. The total consideration was £28m and goodwill of £25m arose on acquisitions.
Goodwill is individually assessed on each acquisition. The goodwill shown above arose from the premium paid for strengthening the Group’s market position in targeted business segments and acquiring the skilled workforce to drive future profitability in those segments. Goodwill also represents the future cost saving from expected synergies and economies of scale.
Disposal of subsidiaries During the year disposals of subsidiary undertakings and books of business were made for total proceeds of £125m, giving rise to a pre tax profit of £18m. Group disposals during the year comprise: The disposal of Guildhall Insurance Company Limited on 29 February 2008. Following the writedown in 2007 the transaction generated proceeds, net of costs, of £33m and generated a pre tax profit of £1m. In 2007 the loss recognised as a result of remeasurement to fair value less costs to sell was £6m. The disposal of Ejendomsselskabet Gammel Longevej 60 ApS on 1 October 2008. The transaction generated proceeds, net of costs, of £85m and generated a pre tax loss of £1m. The dissolution of Royal & Sun Alliance SA on 18 May 2008. The transaction generated a pre tax profit of £17m. This represents foreign exchange, which is recycled from shareholders’ funds and does not impact total equity. Other disposals in the year generated proceeds, net of costs, of £7m and generated a pre tax profit of £1m.
Property and equipment 92 Reinsurers’ share of insurance contract liabilities 27 Other assets 6 Cash and cash equivalents 57 Insurance contract liabilities (49) Other liabilities (7) Net assets 126 Cumulative translation differences (19) Profit on disposal 18 Proceeds deferred in respect of assets leased back 10 Total cash consideration 135
Net profit for the year before tax on continuing operations 759 670 Adjustments for: Depreciation 35 32
Fair value losses/(gains) (including loss/(gain) on disposal) on property and equipment 1 (4) Fair value gains (including gain on disposal) on investments (187) (159) Fair value losses (including loss on disposal) on investment property 95 30 Impairment charge on available for sale financial assets 61 3 Share of loss from associates 18 – (Profit)/loss on disposal of subsidiaries (18) 22 Foreign exchange gain (152) (53) Amortisation of available for sale investments (2) 7 Other non cash movements 368 312 Changes in operating assets/liabilities: Movement in technical provisions Unearned premiums 104 230 Losses and loss adjustment expenses (47) 94 Movement in working capital (360) (624) Movement in deferred acquisition costs (65) (61) Reclassification of interest received (547) (489) Cash generated from continuing operations 137 66 32. Related party transactions The ultimate Parent Company of the Group is RSA Insurance Group plc which is incorporated in Great Britain and registered in England and Wales.
A number of the directors, other key managers, their close families and entities under their control have general insurance policies with subsidiary companies of the Group. Such policies are on normal commercial terms except that executive directors and key managers are entitled to special rates which are also available to other members of staff.
Operating lease commitments The Group leases various outlets and offices under non cancellable operating lease agreements. The leases have varying terms, escalation clauses and renewal rights.
One year or less 27 25 Between one and five years 85 83 After five years 109 125
In 2006, the Group recognised the losses arising on the writedown of the carrying value of the US operation to fair value. The loss recognised in 2007 includes the cumulative amount of the exchange gains and losses deferred in equity relating to the disposal of the US operation and to the cumulative exchange gains and losses recorded on a US dollar denominated loan made by a UK subsidiary company to the US operation.
Non current and disposal group assets and liabilities held for sale The Group has classified office property within the UK operating segment as a non current asset held for sale. The Group is actively marketing the property. No gain or loss has been recognised in the income statement since the reclassification.
In 2007, a UK subsidiary was classified as a disposal group and UK office property was classified as a non current asset held for sale. The sale of these assets has been completed during 2008. No impairment losses have been recognised in respect of these assets during 2008.
The analysis of the non current and disposal group assets and liabilities held for sale is as follows: Assets Property and equipment 3 13 Reinsurers’ share of insurance contract liabilities – 58 Insurance and reinsurance debtors – 5 Cash and cash equivalents – 32 Total assets 3 108
Liabilities Insurance contract liabilities – 58 Insurance and reinsurance liabilities – 5 Other liabilities – 2 Total liabilities – 65
Independent auditors’ report to the members of RSA Insurance Group plc
We have reported separately on the Group financial statements of RSA Insurance Group plc for the year ended 31 December 2008 and on the information in the remuneration report that is described as having been audited.
Current tax liabilities 5 – Accruals and other liabilities 71 70 Total liabilities 1,823 1,496 Total equity, reserves and liabilities 6,824 6,914
The separate financial statements were approved on 25 February 2009 by the Board of Directors and are signed on its behalf by: George Culmer Chief Financial Officer
Statement of changes in equity of the Parent Company for the year ended 31 December 2008
Balance at 1 January 895 943 125 3,025 8 422 5,418 Profit for the year – – – – – 483 483 Dividends – paid (note 7) – – – – – (246) (246) Issued by scrip 14 51 – – – – 65 Issued for cash 6 13 – – – – 19 Share options – – – – – 25 25 Fair value losses net of tax – – – (763) – – (763)
Share options – – – – – 19 19 Fair value gains net of tax – – – (200) – – (200)
Cash generated from operations 8 (87) 70 Purchase of fixtures and fittings (2) – Net movement in amounts owed to/by subsidiaries 254 (239) Net cashflows from investing activities 252 (239) Proceeds from issue of share capital 19 304 Dividends paid (181) (111) Repayment of long term borrowings – (25) Net cashflows from financing activities (162) 168 Net increase/(decrease) in cash and cash equivalents 3 (1) Cash and cash equivalents at beginning of the year 1 2 Cash and cash equivalents at end of the year 4 1
Notes to the separate financial statements 1. Significant accounting policies RSA Insurance Group plc, domiciled in the United Kingdom is the ultimate Parent Company (‘the Company’) of the RSA group of companies. The principal activity of the Company is to hold investments in its subsidiaries and the receipt and payment of dividends.
Investment in subsidiaries The Company accounts for its investments in directly owned subsidiaries as available for sale financial assets, which are included in the accounts at fair value.
Investments at 1 January – at valuation 5,587 5,811 Disposals during the year – (24) Fair value adjustments (763) (200) Investments at 31 December – at valuation 4,824 5,587
Other prepayments and accrued income 1 2 Other debtors 1 2 Total other debtors and other assets 2 4 4. Share capital Full details of the share capital of the Company are set out in note 18 to the consolidated financial statements.
Deferred tax assets at 1 January 2007 5 22 1 28 Change of rate in deferred tax – (2) – (2) Charge to equity for the year – (2) – (2) Charge to income for the year (3) – – (3) Deferred tax assets at 31 December 2007 2 18 1 21 Charge to equity for the year – (2) – (2) Credit to income for the year 5 – 1 6 Deferred tax assets at 31 December 2008 7 16 2 25
7. Dividends Full details of the dividends paid and proposed by the Company are set out in note 7 to the consolidated financial statements.
Company website The Annual Report and Accounts, Interim Management Statements, Half Year Report and other useful information about the Company, such as the current share price, is available on the website www.rsagroup.com. Frequently asked questions and answers in respect of shareholding matters are detailed on the Company’s website.
Electronic communications Following the adoption of electronic communication provisions into the Company’s Articles of Association in May 2008, RSA now provides the majority of information to shareholders via the Company’s website. Receiving the Company’s communications electronically allows the Company to communicate with its shareholders in a more environmentally friendly, cost effective and timely manner. Shareholders are encouraged to elect to receive notifications of shareholder communications by registering with Shareview (www.shareview.co.uk).
Scrip Dividend Scheme RSA offers shareholders the opportunity to use their dividends to buy more ordinary shares in the Company by participating in the Company’s Scrip Dividend Scheme. The Scheme applies to both interim and final dividends and enables shareholders to increase their holding in the Company without incurring dealing costs or stamp duty. If you wish to receive a scrip dividend instead of a cash dividend for future dividends on which a scrip alternative is offered, please contact Equiniti.
Managing your shareholding Share register fraud: protecting your investment It is required by law that our shareholder register is available for public inspection and we are unable to control the use of information obtained by persons inspecting the register. Please treat any approaches purporting to originate from RSA with caution. RSA will never contact its shareholders directly to provide recommendation or advice regarding your shareholding and neither does it appoint third parties to do so.
Low cost share dealing facilities A telephone and internet dealing service is available through Equiniti which provides a simple way of buying and selling RSA shares. Commission is 1.5% with a minimum charge of £25 for telephone dealing and 1% with a minimum charge of £20 for internet dealing. For telephone sales call +44 (0)845 6037 037 between 8.30am and 4.30pm, Monday to Friday, and for internet sales log on to www.shareview.co.uk/ dealing. You will need your shareholder reference number as shown on your share certificate. Share dealing services are also widely provided by other organisations.
Record date for the ordinary final dividend for 2008 and the first preference dividend for 2009
Announcement of the scrip dividend price for the ordinary final dividend for 2008
Payment date for the ordinary final dividend for 2008 (subject to shareholder approval at the AGM)
Important disclaimer This document contains ‘forward looking statements’ (as defined in the US Private Securities Litigation Reform Act of 1995) with respect to certain of the Company’s plans and its current goals and expectations relating to its future financial condition, performance and results. These statements are often, but not always, made through use of words or phrases such as ‘will likely result’, ‘are expected to’, ‘will continue’, ‘believe’, ‘is anticipated’, ‘intends’, ‘plans’, ‘seeks’, ‘protection’, ‘outlook’, and ‘aims’. By their nature, all forward looking statements involve risk and uncertainty because they relate to future events and circumstances which are beyond the Company’s control, including amongst other things, UK domestic and global economic business conditions, market related risks such as fluctuations in interest rates and exchange rates, the policies and actions of regulatory authorities (including changes related to capital and solvency requirements), the impact of competition, inflation, deflation, the timing impact and other uncertainties of future acquisitions or combinations within relevant industries, as well as the impact of tax and other legislation and other regulations in the jurisdictions in which the Company and its affiliates operate. As a result, the Company’s actual future financial condition, performance and results may differ materially from the plans, goals and expectations set forth in the Company’s forward looking statements. The Company undertakes no obligation to update any forward looking statements save in respect of any requirement under applicable law or regulation.
Director’s photography by Homer Sykes and Liam Bailey Executive Team by Liam Bailey Photography for front cover and pages 22 and 23 supplied by Getty Images