As one of the world’s oldest insurance companies we know that we can only continue to win for customers and shareholders if we adapt, and anticipate their needs.
a b £2.9bn 2015 Net written premiums 2015 Net written premiums 2015 Net written premiums
- Aiming to compete only where we can win. And to win where we compete.
a b c f g d e a. Direct 27% b. Broker 55% c. Agent/affinity 18% a b c
At RSA we operate across society, providing award-winning Personal, Commercial and Specialty insurance products and services. Whether it’s direct-to-customer, via our broker relationships or partner organisations, we use our experience to anticipate and exceed customer expectations and improve outcomes across our value chain.
However, our ambition does not end there. We must get better. Whilst our 2015 performance represents significant progress from 2013 and 2014, we target deeper performance improvements over the next few years to take our business towards best-inclass performance. We must do this against the backdrop of continued challenging global economic and financial market conditions. Your Board and RSA’s management team are
We have delivered substantial improvements to our financial results, marking a turning point on our path to significantly improved business performance. This further increases our ambition and gives us greater confidence in our ability to deliver our stated financial and operational targets.
The strategy that we laid out in early 2014 is clear and simple. We wanted to achieve three things: a more focused business; improved capital strength; and sharply improved performance levels. We have now materially completed the re-focusing of our geographic footprint, of which the most significant achievement during 2015 was the agreed sale of our businesses in Latin America. Importantly, the focus of our management team is now solely on our core businesses in the UK & Ireland, Scandinavia, and Canada.
committed to the actions needed to achieve this ambition. You can find more detail on our strategy and performance improvement ambition from page 12.
RSA has seen significant change over the past two years and will continue to see further changes in the coming years. Throughout this our employees have reacted with commitment, maturity and sheer hard work, and on behalf of the Board I would like to thank them for this. The Board is responsible for leading RSA’s governance agenda, and on pages 46 to 54 of this report you can find details of how the performance of the Board is evaluated and how it remained effective during the year.
Your Board is confident that RSA has a bright future as a successful and high performing company. Zurich’s unsolicited approach to RSA last summer was further evidence that our Company has a collection of strong and attractive franchises. I would encourage you to use this Annual Report to find out more about the progress we are making. Finally, I would like to thank all of our shareholders for their continued support, and I look forward to seeing many of you at our AGM in May.
What: Today, 50% of the world’s population live in cities. In our core markets, urbanisation is above 80%. The UN predicts that population growth and urbanisation will add a further 2.5bn to the world’s population by 2050.
Impact: The increased demand on infrastructure, such as road networks, housing and natural resources will lead to greater risks to safety and security.
Response: RSA continues to proactively educate on the risks presented by urban living, for example through road safety campaigns launched across the Group. We also innovate, creating products that reflect new ways of living, such as telematics, our data-driven car insurance product.
What: Inequality based on age, gender, ethnicity or background remains a significant social issue in the workplace and more broadly.
Response: We are focusing in areas where we have strong customer franchises and on building a balanced business across select distribution channels and customer segments, where we can maintain competitive advantage. We are working hard to operate more efficiently to achieve more from our business activities.
What: In response to low economic growth, interest rates have been cut to record lows to encourage spending and investment in the economy.
Impact: For investors, lower rates mean an increased focus on sustainable and growing yields on equity investments. For the company, it means less investment income, a significant element of RSA’s revenues.
Response: We are simplifying our business and we are focusing on operational excellence in underwriting to maintain and increase profitability in our chosen markets.
Technology has also re-wired customer expectations of service levels. Customers now expect a more bespoke approach to products and services and more direct engagement from insurers.
Response: RSA is harnessing the power of digital innovation where we can best improve the customer experience: Through this we are delivering e-enabled distribution processes, increased operational efficiency in policy and claims administration and enhanced data analytics and pricing capability.
Good business simply starts with our customers, and we strive to keep customers at the heart of what we do.
Our business relies on energy and resources provided by the natural environment. It’s our duty to ensure that we operate in a way that preserves the sustainability of our business, our communities and the natural environment.
If you would like to read more about how we are responding to social and environmental trends then please access our Corporate Responsibility report via the corporate website: rsagroup.com/corporateresponsibility
RSA Annual Report and Accounts 2015 5Strategic report – RSA insights
Brand quality With over 300 years of experience we have developed trusted and recognisable brands in our markets, supporting our strong customer franchises.
Balance of scale and focus Our unique mix of scale and focus across three core regions enables us to operate in market-leading positions and benefit from diversification in capital and returns.
Natural We have three core regions in our business and operate across c.200 offices.
Technology RSA is harnessing the power of technology through e-enabled distribution, increased operational efficiency in policy and claims administration and enhanced data and pricing analytics.
Our business model provides the framework for us to win for each of our stakeholders.
OUR IMPACT OUR IMPACTFinancial value Social value Environmental value £6.8bn Net written premiums of the Group £1.6m Value of community contributions1 20k tonnes CO2e Carbon credits supporting environmental projects globally £523m Operating profits generated 7,158 Volunteer hours in our local communities 90% RSA involvement in coverage of offshore wind production2 10.5p Total dividend per share for the year 10 Number of countries in which we ran road safety campaigns 79% RSA’s waste recycling rate, versus 60% benchmark rate
THRIVING COMMUNITIES Giving back to our communities through education, employability, enterprise and entrepreneurship
SUSTAINABLE FUTURE Mitigating the risks posed by climate change through sustainable business practices
RSA Annual Report and Accounts 2015 7Strategic report – Business model
2015 was a year of major achievement for RSA. As a result, the turnaround phase of our Action Plan is nearly complete and we have good prospects of substantial further performance improvement.
Industry Conditions RSA operates in a relatively mature, stable and consolidated industry. Our markets show that attractive performance is possible, despite economic and competitive challenges. To achieve this requires intense operational focus, within a disciplined strategic envelope set to concentrate on natural strengths. Customer needs will continue to evolve. Slow market
Strategy and Focus With our strategic restructuring largely complete, RSA is a strong and focused international insurer. We have leadership positions in the major general insurance markets of the UK, Scandinavia and Canada. We have valuable franchise strength and balance – across regions, between Commercial and Personal customers, and across product lines.
The history, dynamics and structure of our markets show that focused regional market leaders can successfully sustain both customer appeal (market position) and excellent shareholder performance. The benefits of relative simplicity and focus, applied to regional leadership, are visible in the performance and valuation of certain key competitors which can trump those of the largest global companies in our industry. RSA has now built the foundations to follow this course and to credibly set best-in-class as our future performance ambition. Our plans over the next three years show RSA advancing on that goal.
We set out on the ‘turnaround’ of RSA in 2014 with three central priorities: to serve customers well; to operate with strong finances; and to build strong sustainable performance, making RSA the best investment proposition we can achieve. These priorities are unchanged.
growth and competition puts special focus on underwriting skills and discipline, and on cost reduction. Technology is a key enabler of both.
Financial markets are important for all insurers. At the year end, bond yields in our major markets were slightly higher on average than a year ago. However, the start of the year has seen troubling market volatility with weak equity markets, bond yield declines and credit spread widening. While these moves have not as yet led us to materially change our outlook, and indeed our capital position has strengthened further since year end, we remain alert to the risks. Exchange rates are also important to RSA with around two thirds of premiums from non-UK business.
RSA Annual Report and Accounts 2015 9Strategic report – Group Chief Executive’s statement
performance fundamentally – from below our competitors’ to ‘in the pack’, and then towards our best-in-class ambitions. We are well on the way.
Our customer actions have maintained retention rates and improved satisfaction measures on average across the Group. The partnership with Nationwide Building Society announced before Christmas is a major new business win, a marquee endorsement of our customer proposition and gives us market leadership in UK Home insurance, the most attractive of the UK Personal Lines segments.
Critical to performance improvement are better underlying underwriting results. Business wide initiatives are paying off, covering portfolio re-underwriting, data and model sophistication, staff training and market discipline. Attritional loss ratios for the core business are 1.9% better than 2014 on an underlying basis, and are on track to improve again in 2016.
Financial strength: RSA’s financial strength and resilience continue to improve. In addition to disposal proceeds, our stronger business results and prospects are important supplements. RSA’s credit ratings are now at the level we target. A key December milestone was receiving Solvency II internal model approval. The year end 2015 capital ratio at 143% of ‘SCR’ falls within our newly established 130-160% target zone, prior to receiving Latin American disposal proceeds. Additionally we were pleased to successfully conclude the triennial UK pension scheme reviews. This allows us to implement a major de-risking from 25% to 15% equity content in the schemes with no change in annual top-up contributions (£65m p.a.). At year end we show an IFRS reported pension surplus of £64m and (at the March 2015 valuation date) a funding basis deficit below 2012’s level and equivalent to 95% funding adequacy.
Core business improvement: We start with strong business franchises in our three core regions – the product of over 300 years of history. The goal is to renew these, to step up customer service and to improve operating
Our financial results have many moving parts, reflecting the nature of our industry, as well as the ongoing restructuring programme.
Total underwriting profit was £220m, over five times higher than last year. The combined operating ratio (COR) was 96.0% for core businesses (96.9% total Group), improving from 98.8% in 2014. Reserve margins are unchanged on the year at 5%.
Looking Forward Our medium-term performance target of 12-15% underlying return on net tangible assets remains sensible for RSA. It translates to 15-20% ROTE pre-pension/legacy capital charges. Our latest plans, if achieved, show ROTE in the upper half of our target range in 2017, with further gains thereafter. Our focus on moving COR towards best-in-class levels for our markets set an ambition that is better than our ‘target’ range.
Thanks The support and efforts of all our stakeholders are integral to the improvements at RSA. We are grateful to customers, brokers and shareholders alike. We are appreciative of regulatory engagement, not least over Solvency II. But especially I should recognise the efforts of our people, my colleagues. It’s tough work, uncertainties abound and there are hard decisions being made. RSA’s people are stepping up and we are grateful for it. So too do we welcome the talented newcomers to our management and thank those who have left us.
Reflecting RSA’s progress, a final dividend of 7.0p/share is proposed making a 10.5p/share total for the year (up 425%), or 47% pay-out of headline and 38% of underlying EPS. Our dividend policy is unchanged; medium-term pay-outs of 40-50%, plus other capital return if surpluses so allow. Once restructuring is complete and bond pull-to-par has unwound, we expect capital generation, net of organic growth needs, to be strong.
RSA Annual Report and Accounts 2015 11Strategic report – Group Chief Executive’s statement
Demonstrating how we’re: Focused By the end of 2015, our Group’s strategic refocus was nearly complete. After agreeing the sales of our Latin American and Russian businesses, we can now concentrate on improving performance in our three core regions. Strategic refocus: Latin America
It was determined that the Group would benefit from the greater capital and operational flexibility offered by a sale, which enables management to focus attention on the three largest markets of UK & Ireland, Scandinavia and Canada.
£0.5bn Total disposal gains to date £1.2bn Total proceeds to date
Solvency II A key priority for 2015 was completing preparations for Solvency II: Solvency II is a fundamental review of the capital adequacy regime for the European insurance industry. It has established a revised set of EU-wide capital requirements and risk management standards that came into force on 1 January 2016.
RSA Annual Report and Accounts 201512 Strategic report – Our strategic priorities
Better Our business made excellent progress in 2015. We further strengthened our customer franchises and invested in our future. We look forward to 2016 and beyond with increased ambition and prospects for further improvement.
Better value for employees For employees we are simplifying processes and upgrading tools to make it easier to get things done. We are maintaining our focus on developing people across our businesses and we are committed to rewarding and recognising people appropriately for the work they do.
Better value for shareholders Our strategy is designed to maximise value for shareholders. We have simplified the business. We are also investing in the future and streamlining the cost base to build the foundations for attractive shareholder returns.
RSA Annual Report and Accounts 201514 Strategic report – Our strategic priorities
Great customer service is consistently making RSA a partner of choice and a market-leading home insurer During 2015 we proudly announced an exclusive, five-year contract with Nationwide, the UK’s largest building society, to underwrite their home insurance portfolio. Throughout the process RSA’s customer obsession and commitment to affinity partnerships proved to be the differentiating factors. We are pleased that this significant win makes RSA a market leader in UK home insurance, a firm endorsement of our customer proposition.
RSA has a strong track-record as a trusted affinity partner to leading retail brands, including John Lewis’ Home Insurance, which was the focus of the heart-warming ‘Tiny Dancer’ ad campaign during the year.
“ This will be the first place I turn to make changes to my policies.” Retired teacher Johnson customer and app tester
The rapid-digitisation programme will continue to build momentum during 2016. This will include using sophisticated analytics to improve our customer offering, enhancing our customer support capabilities and upgrading digital marketing capabilities for our Johnson affinity partners to improve customer insight.
Telematics – using technology to develop innovative insurance products RSA is proud to be one of the UK’s leading insurers for young and inexperienced drivers. Back in early 2012 we didn’t write insurance for young drivers in the UK. However, we believed that, by combining motor insurance with monitoring devices in cars – sometimes called ‘black box’ insurance or ‘Telematics’ – there was an opportunity for us to offer great innovative products to young drivers and to be commercially successful. With the success of our own MORE TH>N
SM>RT WHEELS telematics product, we now insure around 30,000 young drivers.
Our Telematics products reward drivers for driving safely, providing easy to understand driver feedback scores via a web-based dashboard or mobile app, which can lead to discounts on their insurance premium.
“ Having joined RSA on the Global Graduate Scheme, career development has been encouraged from the start. The Fastrack Scheme has been a great example of this and has enabled me to develop negotiation and influencing skills, enhance my network internally and help deliver change to the School for Social Entrepreneurs charity.”
Nick Brown (UK) Portfolio Lead – Construction, Engineering and Renewable Energy
Senior Talent Acceleration (STA) STA is designed for high potential leaders with the capability to step up to more senior leadership roles.
“ The STA programme provided valuable insight into what is required to lead with impact at a senior level and has armed me with the knowledge required to meet this challenge. The programme illustrated the importance of adapting my strategic thinking and approach to innovation, in the face of evolving competitive threats and increased organisational complexity, to continue to add value to our organisation.“ Kellie Haslam (Canada) Director, SME – Central Region
“ The programme provided me with the opportunity to step away from my role and spend time developing my style, leadership and strategic thinking with a group of talented people. We were encouraged to challenge the way we view our business, challenge each other and of course, to build a strong network of contacts across the company. I believe the programme has helped me to develop greater perspective and succeed.” Gavin Wilkinson (Group head office) Director of Capital, FP&A and Performance Management
Upgrading technology During 2015 RSA embedded its largestever global technology programme. The ‘Big Upgrade’ enabled colleagues to work faster and more efficiently, while providing them with greater flexibility.
RSA Annual Report and Accounts 2015 17Strategic report – Our strategic priorities
RSA Annual Report and Accounts 201518 Strategic report – Our strategic priorities
Safe, Secure World – Promoting road safety across our regions This year, we focused on making young people more visible on our roads and helping young drivers be safer drivers.
In the UK we launched a film warning young people of the devastating consequences of driving when not in control. MORE TH>N also released the ‘Safe In Sound’ campaign to identify the safest song to drive to, helping raise awareness about the impact of music on our driving styles.
Thriving Communities – Supporting the growth of social enterprise in the UK Our award winning partnership with the School for Social Entrepreneurs (SSE) delivers both community and commercial benefits. It aligns with our strategy to support the SME sector and provides opportunities for our people to share and develop their skills by supporting social entrepreneurs to succeed.
“ By supporting social entrepreneurs, we are having a real impact in the communities where we operate.” Mark Edgar Human Resources (Canada)
Sustainable Future – ‘Insuring’ a low carbon future We play a role in tackling climate change by helping our customers adapt to changing environmental risks and opportunities and by reducing the emissions from our own operations.
Renewable energy has an important part to play in the transition to a low carbon future. We have been insuring renewable energy projects since the 1970s and are now one of the leading insurers of renewable energy globally, having been involved in the insurance of 90% of off-shore wind energy. We provide insurance across the full lifecycle, working with developers from the start to provide effective risk management advice to reduce energy costs.
We have set ourselves an ambitious new carbon reduction target to reduce our Group carbon footprint by 12% per full time employee (FTE) by 2018.
Acting responsibly Responsible business is at the core of what we do. We engage openly with customers, employees and suppliers remaining transparent in how we manage our operations and deliver our products and services, helping us to build and sustain trust.
RSA Annual Report and Accounts 201520 Strategic report – Our strategic priorities
Investing in your business Our ambition for RSA is to create a business capable of supporting best-in-class performance levels in each of our key regions.
“ In a world where investment returns are low and markets resilient to price increases, we are investing in cost reduction and improvements to customer experience to secure growth and profitability.” Paul Whittaker Group Chief Operating Officer
Case Study: Canadian operational excellence The Canadian transformation effort is focused on consolidating our office footprint, implementing ‘lean’ end-toend processes and rapid deployment of customer-centric digital technology.
We are also implementing ‘lean’ management principles to drive staff engagement, customer service and process efficiency. Since adopting lean techniques in our policy servicing teams call-handling times have reduced by 26% while also improving service for customers and brokers.
During 2015 we successfully completed stage one of the transformation, which involved restructuring the businesses into country-based organisations, resetting the strategy and streamlining the operating model.
The change has increased local management’s ownership and accountability leading to increased operational agility. For example, in Sweden the change enabled the business to identify an opportunity to consolidate the small business call centre into one for Personal Lines, which has led to increased sales and improved customer satisfaction scores as well as cost savings.
“ We achieved a lot in 2015; we started with high ambitions, which we raised significantly and still we over-delivered.” Sara Lemke Head of Strategy/PMO lead (Scandinavia)
RSA Annual Report and Accounts 2015 21Strategic report – Our strategic priorities
Definition Operating profit attributable to ordinary shareholders less interest costs and underlying tax, expressed in relation to opening tangible shareholders’ funds i.e. excluding goodwill and intangible assets.
Commentary The Solvency II SCR is a measure of the capital adequacy of insurance companies. Our SCR is calculated on our risk profile using the Group’s internal capital model.
This icon indicates those KPIs directly linked to executive remuneration. To read more about executive variable remuneration, including the set of financial and non-financial performance measures on which it is based, please turn to page 68.
RSA Annual Report and Accounts 201522 Strategic report – Key performance indicators
Outlook We target >£350m reduction in gross controllable expenses by 2018 and improving expense ratios in the medium-term, in line with our ambition of best-in-class performance.
Outlook We expect TNAV to increase through retained earnings and completion of remaining disposals.
Definition This is the underlying loss ratio (net incurred claims and claims handling expense as a proportion of net earned premiums) of our business prior to volatile impacts from weather, large losses and prior year reserve developments.
Outlook We aim to reduce our emissions by 12% per FTE by 2018 (2015 baseline).
Commentary This metric can be used to assess companies across the sector for relative capital strength, when judged in the context of product and geographical diversification. It is used as a high-level guide along other capital metrics used in the Group.
RSA Annual Report and Accounts 2015 23Strategic report – Key performance indicators
Underwriting result The Group underwriting profit of £220m has improved significantly year-on-year (2014: £41m) and comprised £237m from core operations, and a £17m loss from non-core operations.
RSA Annual Report and Accounts 2015 25Strategic report – Financial review £150m (two events at a net retention of £75m each). In addition, the Group booked recoveries of £74m from the Group aggregate reinsurance cover, bringing the overall net cost to the Group down to £76m.
Prior year profit of £91m provided a 1.4 point benefit to the combined ratio overall and reflected positive prior year development from Canada and the UK, partly offset by reserve strengthening in Scandinavia relating to legacy long-tail Swedish Personal Accident products; and prior year loss of £6m in Ireland (2014: £45m loss).
Our future guidance is for prior year profit to be around 1% of premiums, but there remains the potential for volatility given our commitment to transparent reserve margins, held stable at 5% of booked claims reserves.
Underwriting operating expenses The overall Group underwriting expense ratio was down 0.3pts to 15.7% in 2015 and at a Core Group level was down marginally to 15.3%. There were improvements of 0.5pts and 0.4pts in Scandinavia and the UK respectively, offset by a higher ratio in Canada (the product of flat expenses and lower premiums). In 2016 we expect the Core Group expense ratio to fall again, and we target further reductions thereafter.
Against our target of greater than £250m annual gross cost reduction by 2017 we have delivered £180m at the end of 2015 and now expect to achieve in the region of £250m by 2016. We have therefore raised our future savings targets for a second time to in excess of £350m by 2018. We expect ‘costs to achieve’ to be less than 1.5 times the annual cost savings. These costs will be booked over the years 2014-17, falling sharply in 2017.
Our 2015 results show strong progress from a year ago and set the path for substantial further performance improvements.
Note: Pro forma for aggregate reinsurance 2015 net recovery of £28m (£74m recovery net of £46m earned premium cost) shown separately in Group Re.
RSA Annual Report and Accounts 201526 Strategic report – Financial review
Total Group controllable costs were down 8% year-on-year at constant exchange to £1,808m. Core business controllable costs were down 3% in the same period at constant exchange to £1,505m (comprising 4% cost reductions, offset by 1% inflation).
The majority of the year-on-year core business cost reduction has come from our Scandinavian business (8% down) and our UK business (4% down).
Group FTE is down 26% since the start of 2014 to 16,713 at the end of 2015, and will be down 36% post the completion of the Latin America disposal. Over the same period core business headcount has fallen by 13% to 13,637.
Non-operating items Tangible net gains of £204m (2014: £476m) comprise £184m of disposal gains (2014: £342m) including Hong Kong and Singapore £103m, China £28m, Italy £29m and India £21m; and £20m of investment gains mainly comprising realised equity gains and unrealised gains on property assets.
Non-cash non-operating charges of £35m (2014: £42m) comprise £27m of amortisation of customer related intangible assets and £8m of pension net interest costs. We expect the amortisation of customer related intangible assets to fall in 2016 to around half the amount booked in 2015.
Non-recurring charges of £212m (2014: £306m) include reorganisation costs of £183m (2014: £110m) in respect of redundancy (£59m) and restructuring (£124m). Restructuring costs in 2015 related to amounts incurred across the Group for activities such as process re-engineering, office footprint consolidation, reducing spans of control, and renegotiation of supplier contracts. Solvency II implementation costs were £26m in 2015 (2014: £25m). In 2016 we expect a significantly reduced Solvency II cost, falling to zero thereafter.
In 2016, we expect an optically higher ETR due to the accounting impact of the Latin American disposal, higher taxed foreign profits, and UK reorganisation costs that do not give an immediate tax benefit. Thereafter, we anticipate an ETR more in line with the statutory rates in our Core territories.
Tangible net assets Tangible net assets have reduced by 2% to £2.8bn during 2015. Profits in the year (including disposal gains) and positive IAS 19 pension fund movements were offset by adverse foreign exchange, fair value mark-to-market reductions due to higher bond yields, the payment of dividends and intangible asset additions.
Capital The Group now reports its capital position under Solvency II, a new EU-wide insurance regulatory regime. Further information on Solvency II and our response can be found on page 38.
RSA uses a fully consolidated Internal Model tailored to the Group’s risk profile for which regulatory approval was received in December 2015. The SCR represents the Value-at-Risk of basic own funds subject to a confidence level of 99.5 % over a one-year period and covers existing business and all new business expected to be written over the next 12 months.
Notes: 1. SCR allocation based on undiversified capital requirement. 2. Legacy includes asbestos, disease and abuse.
However, the pension scheme provides a degree of volatility under Solvency II. During 2016, as Solvency II beds in across the industry, we will assess target coverage ratios. But based on current knowledge, we consider a target operating range of 130%-160% to be appropriate for the Group’s risk profile.
The level of diversification within our Solvency II model approximately ranges between 35%-45%.
Reserving We believe that the culture, methodologies and governance around the Group’s reserving process drive a prudent reserving policy with booked reserves significantly above actuarial best estimate. Our assessment of the margin in reserves for the Group (the difference between our actuarial indication and the booked reserves in the financial statements) is unchanged at 5% of booked claims reserves.
As at 31 March 2015, the main UK schemes, Royal Insurance Group Pension Scheme (“RIGPS”) and the SAL Pension Scheme (“SALPS”) were in aggregate c.95% funded on the prudent measure that the Trustees are required to use, with a combined deficit of £392m. This compares to c.92% funded and a combined deficit of £477m at 31 March 2012.
The improvement was driven by deficit funding contributions of £65m (pre-tax) paid in the first quarter and experience gains on liabilities due to lower actual pension increases and heavier mortality experience than expected, partly offset by adverse asset performance.
2016 should see the last major year of restructuring charges associated with capability improvement and our increased cost savings targets. The totality of management actions across 2014-16 is expected to produce further strong performance gains in 2017/18 consistent with the Group’s ambition and financial targets.
Importantly, RSA is the only international insurer operating with scale in Scandinavia.
Premiums Scandinavian net written premiums of £1,606m were up 4% at constant exchange (2014: £1,759m as reported), with volumes up 1% across the region and rate increases contributing 3%.
RSA Annual Report and Accounts 201528 Strategic report – Regional review £1.6bn Net written premiums
Overall, the prior year effect on the loss ratio was adverse at 2.0% (2014: 1.5% positive). The final combined ratio was 94.0% (2014: 90.4%)
Progress on controllable expenses was pleasing given the focus by the business: Down 8% year-on-year (comprising 9% cost reduction, partly offset by 1% inflation). FTE was down 5% in 2015 and 9% since the start of 2014.
Event Teams constantly monitor weather patterns, predictions and flood levels to ensure we’re prepared.
When the storms arrived in Sweden the team knew it would be a major event and met quickly to prepare the response.
A dedicated flood-line was opened, with additional staff helping to cope with call volumes. All customers suffering from large losses were contacted by specialists to assess damages within two days and our suppliers were also contacted to ensure that they were ready to support repairs.
Proactive and agile response in a crisis is crucial to serving our customers well and something we constantly improve.
Our strategy Our focused strategy has three core elements. The first is upgrading the business by fixing the basics, the second is creating and fostering a customer culture by ‘living our expectations’ and the third is to develop our business and bring out the best in each country. Significant improvements have been made during 2015, especially in fixing the basics; this has included introducing the countrybased organisation discussed on page 21. During 2016 and beyond we will focus on future-proofing RSA Scandinavia by driving a digitisation agenda, strengthening claims and underwriting functions, increasing process efficiency and securing technology uplifts
RSA Annual Report and Accounts 201530 Strategic report – Regional review
Our portfolio is balanced at 70% Personal and 30% Commercial. We have leading market positions in affinity distribution via our Johnson brand and leading positions in Travel and Marine underwriting.
Canada market context The Canadian market remains challenging but navigable with low single-digit economic growth translating into tough insurance market conditions and continuing consolidation trends. Legislative intervention in the Ontario Auto market will continue to see prices decline in this segment (although with corresponding reductions in claims costs), while prices are expected to increase in Personal Household and Commercial due to the low interest environment and recent elevated loss trends, particularly in 2013. In Canada we continue to prioritise underwriting profitability over top-line growth.
Canada had its strongest ever underwriting result in 2015. In 2016 we expect to see continued underlying improvements.
RSA Annual Report and Accounts 2015 31Strategic report – Regional review premiums were down 3%, driven by reduction in Motor, partially offset by growth in Household.
Operating result Underwriting profit for the year was £116m (2014: £21m) which is our strongest ever performance in Canada. Current year profits of £35m, up £52m on 2014, were supported by prior year profits of £81m. The combined ratio was 91.7% (2014: 98.6%).
A foundation year for RSA Canada One which focused on ensuring we have the tools, people and practices in place to set us up for future success.
We consolidated functions, such as Personal Insurance and Commercial Insurance underwriting, from regional offices to our operating hub in Sheridan, we strengthened our organic growth potential, taking steps in 2015 to enhance sales capabilities, which have shown immediate benefits.
Outlook In Canada we are beginning to deliver better underlying performance, which we expect to continue, subject to volatile items. Our focus is on operational improvement, particularly; underwriting and claims improvements; process simplification; and modernisation of technology and infrastructure. n 2016 we expect premiums to stabilise, current year profitability to continue improving and costs to continue to fall.
Our strategy In Canada we are well-balanced by province, customer, channel and product. We offer a broad and diversified offering to customers from personal through to corporate and specialty risk.
Types of business a. Personal Motor 10% b. Household 23% c. Personal Other 11% d. Com. Property 24% e. Com. Motor 10% f. Liability 11% g. Marine & Other 11%
UK market context The UK market remains very challenging. Despite the early signs of wider economic recovery, insurance markets remain tough. In personal lines we experience high levels of competition with a strong focus on price, driven in part by the increasing role of price comparison websites. Regulatory changes including the increase in insurance premium tax and the introduction of Flood Re will increase price pressure with the potential to further squeeze margins. In commercial lines we are experiencing a prolonged soft pricing market.
The UK continued to deliver against its strategic priorities during the year, bringing greater strategic focus on core performance improvement.
Notes: 1. Pro forma for aggregate reinsurance 2015 net recovery of £28m (£74m recovery net of £46m earned premium cost) shown separately in Group Re. 2. At constant exchange.
Performance improvement The UK continued to deliver on its performance improvement programme during the year. Greater focus was achieved through completion of the sale of our UK Engineering Inspection business, and withdrawal from the Specialty Property market in Germany. Current Year attritional loss ratios improved to 48.1%, (2014: 49.0%) with Commercial improving by two percentage points.
Controllable expenses are down 4% year-on-year (comprising 5% cost reduction, partly offset by 1% inflation) with opportunity to improve further as we continue to deploy our transformation programme.
A focused insurer with Global appeal Whilst RSA now has a focused geographic footprint it remains committed to supporting Global clients via our Global Specialty Lines business based in London but writing business globally. One such client, acquired during the year, is Severn Trent, the 2nd largest water utility company in the UK and with properties around the world, including in the U.S.
Outlook The competitive landscape will continue to be challenging. However, the ambitious strategy we have put in place will improve our ability to compete and challenge for best-in-class in the UK market.
Premiums Net written premiums of £261m were down 4% on 2014 on a constant exchange rate basis, as we continue to remediate the portfolio. A reduction in the Personal portfolio drove the decline, offset by growth in Commercial
Underwriting losses of £35m are significantly reduced from prior year levels (2014: £108m loss) as remediation continues to make strong progress. Within the underwriting result volatile items from weather and large losses were broadly in line with five-year averages.
Performance improvement The performance improvement plan in Ireland is progressing with total controllable expenses down 5% year-on-year.
RSA Annual Report and Accounts 201534 Strategic report – Regional review
Group Disposal programme In 2014 we commenced a major disposal programme with the intention of focusing RSA on its strongest businesses and stabilising the Group’s capital position.
At the end of 2015 that disposal programme is largely complete, with completion of the sale of our Latin American operations (expected during the first half of 2016) the last major piece.
Performance The UK Legacy underwriting result for 2015 was a loss of £39m (2014: £48m loss) and was primarily driven by strengthening for abuse and deafness claims, together with operating expenses incurred.
Total proceeds to date have been c.£1.2bn and have significantly strengthened the capital position, delivering c£0.5bn of disposal gains.
With the agreed sale of Latin America during 2015, RSA has now largely completed the strategic refocus of the Group.
RSA Annual Report and Accounts 2015 35Strategic report – Regional review
Our risk management approach Our risk strategy supports the execution of the wider business strategy. Risk appetite and tolerances establish the principles through which we operate, enabling us to retain only risks residing within our core areas of expertise. We use a risk and control framework to ensure that risks are appropriately managed, mitigated or avoided in-line with our risk appetite.
The Group’s risk appetite sets the overarching approach to risk, as well as more granular tolerances within our insurance portfolios. This supports our goals of providing customers with products that protect them from risk and uncertainty, with those risks collectively managed to maximise risk-adjusted returns to our shareholders.
Our risk appetite continues to evolve in line with changing risk, regulatory and economic environments, with a recent focus on preparations for the Solvency II regime, which launched on 1 January 2016.
The Board retains ultimate responsibility for the risk appetite and for maintaining a robust risk management system via the Board Risk Committee, supported by the Chief Risk Officer.
Proactive response – Putting the customer first Whilst we design our policies and processes to avoid security breaches, with the evolving cyber risk landscape it is important that we remain alert and prepared to respond if incidents do occur.
The first line of defence represents the business as a whole, operating within a robust control environment, designed to be effective in managing risks independent of the second and third lines. This first line is a key element and includes control testing performed by objective business experts.
Governance structure: The Board is ultimately responsible for ensuring that RSA operates an effective system of risk management, which is monitored via the Board Risk Committee, (further detail on pages 57-58) in turn supported by regional risk and control committees attended by senior leaders and risk management professionals in each of our core regions.
4. Monitor against risk appetite Risks are monitored and controlled by the business in line with risk policies, with oversight provided by the second and third lines of defence. Risks identified outside of appetite are raised at regional risk and control committees and action plans agreed. Further escalation of risks to local Boards, Executive management and the Group Board will follow, as required.
RSA Annual Report and Accounts 2015 37Strategic report – Risk management
Catastrophe Risk This is the risk presented by large natural disasters. The largest catastrophe risks that we are exposed to are Northern European windstorms and Canadian and Chilean earthquakes.
12% • Reinsurance is used to mitigate the net impact of catastrophe risks to RSA and our programme is designed to cover at least 1 in 200 year events
• The disposal of our Latin American operations will remove our exposure to Chilean earthquakes post completion
• Additionally the Group has implemented a comprehensive reserve assurance programme to provide independent verification of >80% of gross reserves by value
• Claims case reserves are prudently set in line with policy requirements
• Extensive control validation activities performed with additional assurance by the second line
• As part of the Group’s Focused, Stronger, Better strategy stricter underwriting requirements have been applied to a number of underwriting portfolios aimed at increasingly profitability
Market, Credit and Currency Risk The risks to our Insurance Investments Fund presented by movements in macro-economic variables, such as widening credit spreads, declining Bond yields or currency fluctuations
• Market Risk Policy and associated Control Framework ensure Group operates within risk appetite
Pension Risk These are risks associated with our Defined Benefit Pension Scheme – also market related. The largest exposures are to equity prices and credit spreads, however, this is partly offset by movements in the Insurance Investment Fund 23% • Funding Assets well matched to liabilities in the pension programme, including use of swap arrangements
• During 2015 RSA has completed a triennial valuation with the pension trustees
Operational Risk These risks relate to customer and/or reputational damage arising from operational failures, such as IT system failure 7% • Comprehensive policies for IT, financial crime, regulatory compliance etc
• Operational change, such as Group transformation programme monitored by additional governance and assurance activities
Quantifying risks The table on the left details the proportion each risk type contributes to our total Solvency II Capital Requirement (SCR) (please read Solvency II and solvency capital requirement for more information on the new regime). Consistent with our strategy of focusing on risks within our core area of expertise, our SCR is primarily comprised of insurance related risks. These include higher than expected underwriting losses, large retained catastrophe losses, such as flooding or earthquake, and deterioration in our stock of reserves for future claims.
Our investment strategy is intentionally conservative relative to the industry to minimise market risks to both customers and shareholders. However, we still look for opportunities to capture additional return from less liquid investment-grade assets, where the cashflow profile can be matched with that of our liabilities, this is especially relevant for our longer tail liabilities. For more information on our market risks please refer to the financial statements and supporting notes on page 116.
Future and emerging risks In addition to those risks that inform our capital requirements the Group constantly considers the broader risk landscape, including new and emerging risks and how they may impact the business, our customers and shareholders. One such area, that we have been focusing on recently is the threat posed by cyber attacks. During 2015 we performed a deep-dive assessment of the impact a cyberattack would have on the UK power distribution network and shared the results with the PRA. The exercise involved interviews with various industry specialists both internally and externally and led to an assessment of the impact for the UK power network and RSA as a company. The assessment included: • Identifying sources of both primary (such as damage) and secondary (such as business interruption) losses which could arise from an incident
• A detailed review of policies and assessment of RSA’s potential exposure
• Assessment of the mitigating actions the Group has in place, including reinsurance covers.
Outlook for 2016 During 2016 the risk team will continue to work with the business to streamline control processes and increase efficiency. They will also focus on monitoring market risks (including the impact of inflation shocks) and IT risks and controls. The external environment and ongoing IT transformation has made this a priority focus for 2016.
The Directive has three pillars that have impacted how RSA manages risk and how it reports to regulators, policyholders and shareholders: Pillar I relates to the quantitative requirements and introduces a riskbased methodology to calculating the Group’s Solvency Capital Requirement (SCR). Insurers are required to calculate the level of capital required based on their unique risk profile. For RSA this is calculated using our own Internal Model that was approved by the regulator in December 2015.
Pillar II incorporates qualitative governance requirements, including the way the risk management function operates within the business and how key systems and controls are documented and reviewed.
There have also been some changes to the Executive Committee during the year with the promotion of Ralph Daals as Group Chief Auditor, following Caroline Ramsay’s retirement and the departure of Vanessa Evans, the Group Human Resources Director. Paul Whittaker, Group Chief Operating Officer, has taken on responsibility for HR, given his previous experience in this role. Derek Walsh, the Group General Counsel and Company Secretary is due to leave the Group on 29 February 2016 after five and a half years, and will be succeeded by Charlotte Heiss who currently heads the Group Legal Team. The Board was pleased to be able to appoint internal candidates to these roles, in line with internal succession plans.
Leadership We are pleased to welcome Scott Egan who joined the Board as an Executive Director and Group Chief Financial Officer on 1 October 2015, replacing Richard Houghton. Scott has substantial experience in senior finance roles and at Board level in a number of companies in the insurance industry and is a welcome addition to the Board.
Whilst this means that we currently only have 22% female representation on the Board, we are actively recruiting two additional Non-Executive Directors, at least one of whom we would prefer to be female. We remain committed to achieving Lord Davies recommendation on female Board representation, although all appointments are made
The Group’s systems of internal control have been strengthened during the year which, together with the remediation of the Group being almost complete, will allow the Board to focus on long-term strategy during 2016.
Executive Directors; spending greater time engaging with the business; re-focusing on the Group’s long-term strategy to drive the business forward; and to increase focus on our customers, people, brand and culture. Further information on the evaluation can be found on pages 51 to 52.
The Company has complied with the UK Corporate Governance Code throughout the year as detailed throughout the Directors’ and Corporate Governance Report.
Engagement Non-Executive Directors are actively encouraged to engage with stakeholders including shareholders, customers, employees and regulators, and we also look forward to answering shareholder queries at the Annual General Meeting (AGM) on 6 May 2016. During the year, over 360 meetings were held with institutional investors to discuss areas such as the Group’s future ambitions, Solvency II implementation, and capital.
The Zurich approach was naturally an unsettling time for employees, and the Board and executive management showed strong leadership during this time. The efforts made by all employees to ensure continuity of service for our customers during this period is greatly appreciated.
The Board visited the Group’s office in Copenhagen in October where we held a Board meeting and met with the Danish regulator and local employees to deepen our understanding of our Scandinavian businesses. Individually, Non-Executive Directors’ also attended local board and committee meetings or made site visits across the Group.
Board Committees The Board cannot cover all areas in detail and focuses on strategy, performance and approval of material transactions. It therefore delegates authority and oversight to its Committees in certain areas. During the year, a key focus for the Board Risk Committee has been the implementation of Solvency II and the submission of the Group’s ‘internal model’ for calculating our capital requirements under Solvency II to the Prudential Regulatory Authority.
The Group Audit Committee reviewed each financial results announcement and the Annual Report and Accounts prior to Board approval as well as considering areas from the new ‘viability statement’ to the Group’s anti-bribery, anti-money laundering and whistleblowing processes.
The Group Remuneration Committee agreed a remuneration package for Scott, in line with our current remuneration policy, tested performance conditions on outstanding awards under executive share schemes, and reviewed incentive principles for 2016.
Conclusion The Group’s systems of internal control have been strengthened during the year which, together with the remediation of the Group being almost complete, will allow the Board to focus on long-term strategy during 2016. I would like to thank the Board and our employees for their contribution and commitment throughout 2015 and to date in 2016 for the progress achieved.
External appointments: Member of the Board of the Association of British Insurers.
Martin has considerable Board experience and knowledge and understanding of the financial services sector. Previous roles include NonExecutive Director and Chairman of the Audit Committee at Lloyds Banking Group plc, 34 years at Deloitte LLP, 26 years of which as Partner, Chairman of Deloitte LLP from 1995 to 2007, Director, Deloitte Touche Tohmatsu from 1999 to 2007 and a member of the Financial Services Trade and Investment Board from 2013 to 2015.
Before RSA, Scott was Interim Chief Executive Officer at Towergate Insurance having previously held the post of Chief Financial Officer. Scott also held the post of Chief Financial Officer at Brit Insurance, after four years at Zurich Financial Services, as Chief Financial Officer UK, and latterly as Group Financial Controller. He has also held various senior finance roles at Norwich Union Insurance (now Aviva). Scott is a qualified accountant (ACMA) and has an MBA from Cranfield University.
Role: Group Chief Financial Officer Appointment date: October 2015 Nationality: British
Alastair retired from KPMG in March 2011. In the last 20 years of his 36 year career with the firm, in the UK and overseas, he led their financial services team in Scotland with a primary focus on insurance and investment management. Alastair has extensive experience in advising on accounting and financial reporting, corporate governance and management issues in the financial sector and is a Fellow of the Institute of Chartered Accountants in England and Wales.
External appointments: Non-Executive Director and Senior Independent Director of Rexam PLC, Director of RBG Kew Enterprises Limited, and Chairman of Sandpiper CI.
Role: Senior Independent NonExecutive Director Appointment date: May 2008 Nationality: Canadian
Until December 2015, Hugh was Chief Human Resources and Corporate Officer of Royal Dutch Shell plc and a member of its Executive Committee. He was a Director of Shell International Ltd, Shell Aircraft Ltd and the Shell Foundation.
Hugh has previously held advisory roles at The Centre for Advanced Human Resources at Cornell University Advisory Board, IMD Business School Advisory Board, Honorary Vice- President for the CIPD and Advisory Board Member of the National College for School Leadership.
External appointments: Fellow of the National Academy of Human Resources (USA), Director of Edinburgh Business School.
Joseph has a comprehensive understanding of the insurance market globally, extensive financial services expertise and a good knowledge of international and emerging markets. Previous roles include Chief Financial Officer of Aegon until 2009. Chairman of the Monitoring Committee of the Dutch Corporate Governance Code, Advisor to the Tilburg Centre of Finance and Chairman of KPN.
External appointments: Vice-Chairman of Van Lanschot, a Dutch private banking and asset management firm, Director of Arq Foundation, Chairman of Duisenberg School of Finance, Chairman of the Advisory Board of the Royal Dutch Society of Actuaries and Vice-Counsel (Raad) Enterprise Chamber of the High Court of Amsterdam.
RSA Annual Report and Accounts 201544 Directors’ and Corporate Governance Report – Executive Committee
Ralph was appointed Group Chief Auditor in June 2015 with responsibility for leading the Group Internal Audit function. Previously, he held the post of Chief Auditor for the UK and Western Europe. Before joining RSA in 2014, Ralph headed up Deloitte UK’s Internal Audit services to the insurance industry. Prior to that he held senior audit positions at Aviva. Through advisory roles at Arthur Andersen and Deloitte, Ralph has extensive experience in providing internal audit, risk management and governance services to leading financial institutions. Ralph holds a Masters in Finance from London Business School.
He is responsible for the Global Legal, Company Secretarial and Compliance teams and since 2014 took an additional executive responsibility of Global Broker Relationship Director. From 2002 he served as Group General Counsel at Benfield Group Limited, where he was also responsible for the global legal, company secretarial and compliance teams. Prior to that, Derek held positions in law firms Pinsent Curtis (now Pinsent Masons), McKenna & Co (now CMS Cameron McKenna) and Norton Rose.
Rowan is Chief Executive Officer of the Group’s Canadian business. Since joining the Group in 1987, he has held progressive leadership positions in the areas of underwriting, marketing, sales and finance. He is a member of the Board of Directors of the Insurance Bureau of Canada (IBC) and was the IBC’s past Chair. Rowan is currently a Non-Executive Director at Equitable Group Inc., a publicly traded company on the Toronto Stock Exchange.
Corporate Governance Framework Sets out how the business is managed, the role of the Board and its Committees, and the management structure.
Regulatory Risk and Compliance Function, Group Internal Audit Function and External Auditor in the Group Audit Committee Report on pages 61 to 65.
The diagram below shows the elements of our System of Governance and how it is operated and overseen through the three lines of defence model.
Directors The names of the directors together with their biographical and Committee membership details are set out on pages 42 and 43. In addition, Richard Houghton served as Director until his resignation as an Executive Director on 7 May 2015 and as Group Chief Financial Officer on 10 July 2015. Scott Egan was appointed with effect from 1 October 2015 as Executive Director and Group Chief Financial Officer.
Details of the directors’ service contracts and terms of appointment, together with their interests in the Company’s shares, are shown in the Directors’ Remuneration Report on pages 66 to 90.
Corporate Governance Framework The Corporate Governance Framework supports the realisation of the Group’s business strategy, supports its long-term success and safeguards compliance with applicable laws and regulations. It sets out clear responsibilities for how the Group is directed and managed, to ensure that both directors and employees act under a chain of authority and powers that link back to the shareholders as ultimate owners of the Group.
The directors may exercise all the powers of the Company subject to the Articles of Association, relevant law and any directions that may be given by the Company at general meetings by shareholder resolution. The directors may delegate any of their powers or discretion to Committees.
Board Committees The Board delegates certain duties to its Committees so that matters receive detailed consideration. Terms of reference for each Committee set out the authority delegated from the Board, and these have been reviewed and approved by the Board during the year.
Further details on the role and responsibilities of each Committee can be found in each Committee report and the full terms of reference are available at www.rsagroup.com/ termsofreference.
Solvency II came into force on 1 January 2016 and the Group’s Internal Model which calculates its regulatory capital requirements was approved by the PRA in December 2015. During the year, the Board received regular updates on the progress of the Group’s Internal Model development and application to the PRA for its approval from management and the Board Risk Committee.
Whilst oversight of the Group’s System of Governance is mainly carried out by the Group Audit Committee and Board Risk Committee, the Board retains overall responsibility for ensuring that the Group operates within a sound governance framework. The Board has therefore received regular updates on the status of the Group’s Internal Control system and actions taken following the 2014 project to enhance this system. Following an assessment by, and recommendation from, the Group Audit Committee in February 2016, the Board concluded that it was satisfied with the effectiveness of the Group’s Risk Management and Internal Control systems.
The approach by Zurich to possibly acquire the Group was considered carefully by the Board over a number of meetings in 2015. The Board examined each course of action it could take and what would be in the best interests of shareholders, the Group’s customers and employees. The Company’s key shareholders were contacted to ensure that their views on the approach were taken into consideration. The Board concluded that it would have been willing to recommend the revised proposal received from Zurich to shareholders subject to certain terms and conditions.
Board attendance The Board held nine scheduled meetings during the year and seven ad-hoc meetings. In addition, Non-Executive Directors met privately on three occasions during the year without Executive Directors or senior management being present.
When considering matters such as the approval of financial statements and large operational contracts, the Board may delegate authority to a Committee to finalise and approve as required.
Service agreements and letters of appointment, for both the Executive and Non-Executive Directors, are available for inspection at the Company’s registered office and at the AGM.
Induction, training and development of directors Upon appointment to the Board, directors undertake an induction programme, receiving a broad range of information about the Company that is tailored to their existing knowledge and experience. The induction programme includes: information on the operational performance and business of the Group, details of Board procedures, corporate governance and directors’ responsibilities. In addition, each new director attends a series of meetings with senior management covering all aspects of the business including: Risk, Regulatory Risk and Compliance, Claims, Capital, Reserving, Underwriting, Internal Audit, IT and E-Business and HR. They are also invited to attend meetings of each of the Board Committees at least once during their induction.
The Group General Counsel and Company Secretary is responsible for assisting the Chairman in arranging the induction programme, training schedules and professional development of the directors and for bringing all governance matters to the attention of the Board.
The directors have access to the services and advice of the Group General Counsel and Company Secretary and may take independent professional advice at the expense of the Company in the furtherance of their duties.
Directors of the Company have attended training sessions and seminars during the year to enhance their knowledge. Topics covered in 2015 include: • Solvency II
• The Group’s control environment, the three lines of defence and the importance of policies, procedures and behaviour
Kath Cates, Board Risk Committee Chairman, attended a global risk leadership team forum during the year that covered the key risks, risk profile, risk appetite and actions being taken in each region at a more detailed level than would usually be reported to the Board Risk Committee. It also gave her a detailed view of the Risk function’s plans for 2016 and an opportunity to discuss these areas in detail with internal experts, challenge the planning process and get to know the senior Risk leaders. The Risk function found Kath’s presence was beneficial as it assisted the function in seeing matters from the perspective of a Non-Executive Director and helped promote openness and led to a frank discussion of issues.
nt er na l o nlin e interviews with all Board members
The Group Nomination and Governance Committee agreed the following actions to further improve the Board and Committees’ effectiveness during the course of 2016 as follows: • Continue the recruitment of two additional Non-Executive Directors
• To re-focus on trends shaping the Group’s long-term strategy post turnaround
• More time to be spent on broader stakeholder views including customers and employees and developing the Group’s brand and culture as the long-term strategy develops.
Throughout the year, the Board has regularly received reports to enable it to monitor the actions that arose from the evaluation carried out in 2014 and the following table highlights the progress made.
Increased scrutiny of the near-term performance, including achievement of key milestones in line with the three-year strategic turnaround plan.
The Board received and reviewed regular updates from management and is satisfied with progress to date.
During the year CEOs from Canada, Scandinavia and the UK each presented their business reviews to the Board. These reviews included regional updates on operating landscape, performance relative to peers, market trends and the status of turnaround plans.
The Chairman and some of the Non-Executive Directors attended the Global Leaders Conference and Executive, Senior and FastTrack Executive Development programmes to engage with different levels of management and gain a deeper understanding of the business. Succession plans for the Board and Group Executive have been reviewed by the Group Nomination and Governance Committee and further information is disclosed in that Committee’s report on pages 55 to 56.
The Board reviewed the results of an assessment developed during 2014 to identify early signs of cultural risk. The results of these assessments is also used by Internal Audit to support their audits of risk culture which are reported to the Group Audit Committee regularly.
The Board to spend more time in the business, with increased interaction with senior management, customers, brokers, key shareholders and regulators, to strengthen the Board’s direct insights into the business and its capabilities.
The Board visited Copenhagen in October 2015 and met with the local board, employees and the Danish Regulator. In addition Non-Executive Directors have attended regional board and committee meetings in Canada and Scandinavia as well as attending meetings with regional senior management. For 2016 the Board are scheduled to spend time in the UK business and have scheduled a visit to the Canadian business.
RSA Annual Report and Accounts 201552 Directors’ and Corporate Governance Report – Corporate governance
Employees The performance and expertise of the Group’s employees are key to the successful delivery of the Group’s strategy.
For the second year running, employees shared their views on the Group via YOURSAY, the global employee opinion survey. Over 75,000 comments, ideas and suggestions were received and these results have been shared across the organisation. From these results teams create action plans to implement positive changes.
The Group is committed to diversity and the promotion of equal opportunities. Following the launch in 2013 of a new diversity and inclusion programme, the Group has continued to invest in strengthening its pipeline of female employees in senior leadership positions. The Group is committed, wherever possible, to employing and developing people who are disabled, or become disabled during their career with the Group.
Rating agencies The Group is rated on an interactive basis by Standard & Poor’s and Moody’s. The insurance financial strength ratings are currently A (stable outlook) and A2 (stable outlook) respectively. These ratings were affirmed following the 2015 half-year results and the positive progress on the strategic restructuring programme announced by the Company. In addition, both agencies spent one day with senior management discussing Group strategy, financial plans, capital and risk management.
The Group remains committed to increasing levels of transparency and disclosure to investors to aid understanding of the Company’s investment case. During 2015 the Group has conducted a thorough review of financial disclosures and has redrafted the Group Financial Statements and supporting notes to increase both clarity and usability. The views of other providers of capital are taken into account as appropriate.
Corporate responsibility The Group’s Corporate Responsibility Strategy 2013-2018 addresses the Group’s most relevant environmental and social issues. The Corporate Responsibility approach is based on the Board’s commitment to run the business in a way that all stakeholders can be proud of at the same time as making a positive impact on society and the environment. More detail can be found in the Strategic Report on pages 18 to 19 and on the Group’s website at www.rsagroup.com/ corporate-responsibility.
Each year the Company proposes a resolution authorising political expenditure up to £100,000 for each of donations to political parties and independent election candidates, donations to political organisations and incurring political expenditure. This resolution is proposed in the event that the funding of seminars, functions and charitable donations by the Group may be regarded as political in nature. During the year the Group has not made any donations to political parties or independent election candidates.
RSA Annual Report and Accounts 201554 Directors’ and Corporate Governance Report – Corporate governance
During the year, the Committee considered candidates for the role of Group Chief Financial Officer, following Richard Houghton’s resignation, and was pleased to recommend Scott Egan’s appointment to the Board.
We announced at the 2015 AGM that the Board would benefit from two additional independent Non-Executive Directors with a proven track record in insurance, particularly in the Group’s core markets and in transformation. A search is ongoing and any appointments will be announced in due course.
The Committee has also reviewed succession plans for Executive Committee members, noting that the simplification of the Group and spans of control could lead to greater gaps in succession planning. To address this, we are ensuring that tailored development plans are created for those individuals that we believe could join the Executive Committee in the future.
• Ensuring appropriate succession plans are in place for members of the Board and certain senior executive roles
• Monitoring the Group’s compliance with the UK Corporate Governance Code
The graph above shows the percentage of the Board with each of the skill categories listed.
Hugh Mitchell and I concluded our first three-year terms of appointment during the year. The Committee considered each of our contributions to the Board and how our skills, knowledge and experience complemented those of the other directors. The Committee concluded that both Hugh and I continued to add value to the Board and that Hugh remained independent and therefore recommended that we both be re-appointed for a further three-year term commencing September 2015 and January 2016 respectively. Hugh absented himself during discussions on his appointment and Johanna Waterous chaired the Committee and Board in my absence during discussions on my re-appointment.
The Committee considers that each Non-Executive Director devotes sufficient time to discharging their duties and remains independent of mind and judgement, and therefore recommended each Non-Executive Director’s re-election to the Board. The recommendation to re-elect Johanna Waterous was subject to particularly rigorous review as she has served on the Board for over six years. The Committee further recommended the Chairman and Executive Directors for election or re-election to the Board at the 2016 AGM. We have also considered new external appointments to ensure that they did not give rise to conflicts of interests and did not impact the director’s time commitment to the Company. In each case the Committee was satisfied that external appointments could be authorised.
Breakdown of topics discussed at Committee meetings held during 2015 a. Governance 20% b. Succession Planning 30% c. Recruitment 40% d. Other 10% a b d c
Compliance with the UK Corporate Governance Code The Committee reviews the Group’s compliance with the Code through an assessment carried out by the Company Secretary twice a year. Any non-compliance is discussed and it is agreed whether action is required to remedy the non-compliance, or if there are circumstances which justify the non-compliance. The Company has complied with the principles and provisions of the 2014 version of the Code throughout the year, or implemented the new requirements during the year.
RSA Annual Report and Accounts 201556 Directors’ and Corporate Governance Report – Committee reports
Committee composition I am supported on the Committee by Alastair Barbour, Enrico Cucchiani, Hugh Mitchell and Martin Scicluna, and attendance at Committee meetings is shown below. The Group Chief Executive, Group Chief Risk Officer, Group Chief Financial Officer, Group Chief Auditor, Group Underwriting Director and the Group and UK Regulatory Compliance Director are regular attendees at Committee meetings by invitation with other members of management and external advisers also being periodically invited. In addition, private meetings are held ahead of each Committee meeting to discuss issues on which to concentrate with management and advisers. The Committee has held four private meetings without management being present as well as a private meeting with the Group Chief Risk Officer.
Note: 1. Hugh Mitchell was unable to attend one meeting due to a pre-existing commitment.
The Committee has been assisted in carrying out its duties by a Control and Governance Advisory Committee which meets quarterly, and is responsible for considering and approving all revised policies in addition to monitoring any gaps in compliance.
The Committee has also considered the success of the Global Programme set up to enhance the effectiveness of the Internal Control System and activities carried out as part of the Own Risk and Solvency Assessment (ORSA), including close monitoring of the risks associated with the Group’s turnaround and change programme.
• Considering and approving the Group framework of risk appetite and risk limits for recommendation to the Board
An ad-hoc meeting was held in April 2015 to approve the Internal Model application for recommendation to the Board and submission to the PRA.
Risk Management System The Risk Management System is designed to identify, measure, manage, monitor and report risk and is underpinned by the three lines of defence model. The Committee oversees the Group’s Risk Management System to ensure it is robust and operating effectively throughout the year. The Risk function is part of the second line of defence and plays a key role in providing assurance to management and the Committee on the effectiveness of the Risk Management System as well as advising on emerging risks.
The overarching Risk Management Policy, approved annually by the Board on the Committee’s recommendation, establishes a framework of standard risk management processes which are embedded throughout the Group. It also defines the dependencies and interactions with the Group’s ORSA and the Group’s approach to stress and scenario testing. There are further policies setting out risk assessment standards and risk appetite and detailed procedures which set minimum requirements, internal controls and details of controls testing. Senior Group executives own each policy and are responsible for ensuring they are embedded through regional, local and functional owners who are responsible for identifying and reporting any non-compliance through rigorous assessments. The results of these assessments are reviewed and challenged by local and Group risk teams, the responsible senior Group executives, regional risk committees and the Committee.
Business Risk review The Group Chief Risk Officer provides a quarterly update to the Committee on the key risks and risk themes impacting the Group including an assessment of whether risks are within appetite and any actions deemed necessary to bring risks within appetite. This review is supplemented by subject matter expert assessments of the risks impacting the business including insurance risk, financial risk, operational risk and reinsurance risk and strategy. As an example with respect to insurance risk, the Committee discussed specific themes, such as catastrophe risk and pricing capabilities, whilst focussing on remediation progress on specific risk portfolios and considering the reinsurance options available, which in 2015 included the purchase of group volatility reinsurance cover. The monitoring of IT risk and controls will remain an area of key focus, particularly given the increasing level of external threat and the extensive level of transformational change being rolled out across the Group,
Breakdown of topics discussed at Committee meetings held during 2015 a. Investment Strategy 85% b. Governance 15%
Investment portfolio The combination of sales of businesses and a further strengthening of sterling against the currencies used by the Group’s subsidiary operations saw the total size of the Group’s investment portfolios decline by £1,219m over 2015. Despite the relatively significant change in size, the core structure of the Group’s investment portfolios remained broadly unchanged with the portfolios continuing to be heavily concentrated in fixed interest and cash assets with a limited exposure to equity and property.
Introduction The Group Investment Committee is authorised by the Board to manage all aspects of investment policy and strategy for the Group and provide oversight of the operation of the Group’s investment portfolios within established strategy and risk frameworks.
Role and responsibilities The Committee is responsible for: • Managing all aspects of investment policy and strategy for the Group.
Notes: 1. Richard Houghton ceased to be a member of the Committee with effect from 10 July 2015. 2. Scott Egan became a member of the Committee on 1 October 2015.
Total assets as at 31 December 2015: £13.0bn a. Cash 6% b. Fixed Income 86% c. Property Investment 3% d. Equities 1% e. Alternatives and other 4%
Details of the Group’s investments are contained in note 10 on page 131.
Joseph Streppel Non-Executive Director and Chairman of the Group Investment Committee
RSA Annual Report and Accounts 201560 Directors’ and Corporate Governance Report – Committee reports
Committee composition, skills and experience The Committee comprises four independent Non-Executive Directors and the Board is satisfied that the Committee has recent and relevant financial experience as required by the Code. The members bring diverse experience, knowledge and skills to the Committee, which enables the members collectively to act as an effective Committee. In particular, Joseph brings financial, governance and industry experience through his former role as CFO of Aegon and as Chairman of the Dutch Corporate Governance Monitoring Committee. Kath has in-depth knowledge of controls, governance and risk management through roles including Chief Operating Officer, Wholesale Banking at Standard Chartered. Johanna brings expertise in sales and marketing as well as her experience as a chairman and non-executive director. I bring audit experience and knowledge of financial reporting requirements through my former career at KPMG. In addition, Kath and I are members of the Board Risk Committee, ensuring that risk is taken into account in the Committee’s decisions and that information flows appropriately between the two Committees.
The Group Chief Executive, the Group Chief Financial Officer, the Group Chief Auditor, the Group & UK Regulatory Compliance Director, the Group Chief Risk Officer and representatives of the external auditor, KPMG, are regular attendees at Committee meetings. Other members of management and external advisers may attend at the invitation of the Committee. A management level Disclosure Committee regularly considers any matters that may require disclosure in financial results announcements and makes recommendations to the Committee.
Notes: 1. Joseph Streppel was unable to attend one meeting due to a family bereavement.
The Committee has continued to monitor the effectiveness of the Group’s Systems of Internal Control, particularly to ensure that the enhancements to risk policies and control processes made through a Group-wide project in 2014 have been implemented, embedded, and are operating effectively.
Ralph Daals’ appointment as Group Chief Auditor was approved by the Committee during the year. This was an internal appointment based on the succession plan for senior executive roles.
During the year the Committee was internally evaluated as part of the wider review of the Board and its Committees, the outcome of which can be found on page 51.
Role and responsibilities The purpose of the Committee is to: • Coordinate and oversee the integrity of the financial reporting process
• Monitor compliance with relevant regulations, industry codes and legal requirements
• Oversee the effectiveness and objectivity of the internal and external auditors
The Committee has unrestricted access to management, information and external advisers as required in order to fulfil its duties, and is satisfied that it has received sufficient, reliable and timely information during 2015 in order to discharge those duties.
RSA Annual Report and Accounts 2015 61Directors’ and Corporate Governance Report – Committee Reports
• The capital position and strength of reserves in the Group’s Irish business was monitored particularly closely, including management’s interaction with the Central Bank of Ireland which regulates insurance entities in Ireland; • Monitored compliance with the Group’s reserving policy by each business to ensure that the Group’s reserve margin remained adequate and that the uncertainty considerations were appropriate; • Reviewed the Group’s interim Solvency II returns to the European Insurance and Occupational Pensions Authority; • Monitored the proposals to implement the Senior Insurance Manager Regime in the UK; • Monitored the Group’s compliance with anti-money laundering requirements and anti-bribery and corruption laws, including the progress in implementing new screening software across the Group and approving new Anti-Money Laundering and Sanctions; and Fraud Policies; • Monitored the sustainability of control improvements, including the number of risk acceptances in place and their cumulative impact on the Group’s risk appetite, and the Group’s risk and control culture; • Reviewed management proposals to revise the presentation of the financial disclosures in the 2015 Annual Report and Accounts to make it clearer and more concise.
Breakdown of topics discussed at Committee meetings held during 2015 a. Financial Reporting 15% b. Financial results 15% c. Reserving 10% d. External Audit 15% e. Governance, controls, compliance 18% f. Internal Audit 10% g. IT Matters 5% h. Solvency II 7% i. Other 5%
Financial reporting and significant financial issues The Committee attaches considerable importance to the work, opinions and findings of the external auditor, KPMG who participate in all Committee meetings and who met with the Committee in private on two occasions during the year. The principle interactions with KPMG during the year were: • Consideration of the strategy and plan for the audit of the financial statements including discussion and challenge in relation to materiality levels set; the scope of the proposed coverage by business unit; determination and approach to the audit of key areas of risk; understanding the oversight by the group audit team of subsidiary business unit audit teams and visits by the group team to business units
The Committee received and reviewed actuarial reserving reports which described the basis for judgement in valuing insurance liabilities. Particular areas of focus for the Committee were the reserving and reinsurance recoveries arising from the UK winter storms and large claims impacting the Group aggregate reinsurance cover and reserve strengthening for adverse development on prior year claims
of IT testing processes and improvements in documentation and standards together with regular reporting from Group Internal Audit on the results of their review and testing. With respect to financial reporting controls the Committee received detailed updates from KPMG on their assessment of general IT controls including information on areas where additional controls or substantive testing was required, the reasons behind them and the conclusions reached in support of the audit. After consideration and discussion with management and KPMG the Committee concluded that the financial results as prepared from the IT systems was appropriate and reliable.
During the year the Committee received quarterly updates on the assessment and testing of controls including breaches and the action taken as a result. The Committee considered and discussed with management rectification of any deficiencies in controls and further action to be taken as appropriate.
Internal control The Board has overall responsibility for the effectiveness of Internal Control Systems, with the implementation and maintenance being delegated to the Executive Directors and senior management.
The Committee reviews the performance of internal control systems quarterly, with an annual review undertaken by the Board. This system includes governance, financial controls, the risk management framework and processes to deliver in connection with Swedish personal accident claims. The Committee satisfied itself that management reflected available and reliable information when setting the reserves and that an appropriate margin was maintained.
The Committee considered the results of an external review of the Group’s reserving practices and governance in respect of setting and monitoring reserves together with reports from the Group-wide project undertaken to review and enhance control processes and concluded that the processes in place are appropriate.
Valuation of deferred tax assets The Committee reviewed the key assumptions and financial projections supporting the UK deferred tax asset. The Committee assessed the forecasts presented by management and in particular, the longer-term projections of profitability in light of the changes to business plans as a result of the strategic review, revisions to restructuring activities and other management actions in progress or contemplated. After discussion and challenge, the Committee concluded that management’s proposed assessment as to the recoverable deferred tax was reasonable.
RSA Annual Report and Accounts 2015 63Directors’ and Corporate Governance Report – Committee Reports
The function’s annual Compliance Plan sets out the compliance work to be undertaken in the upcoming year to ensure compliance, maintain an open, constructive and cooperative relationships with the Group’s regulators, ensures the Board and employees understand their regulatory responsibilities and provides assurance, advice and guidance to the Board and the business. The Committee approved the 2016 Compliance Plan in late 2015.
Group Internal Audit Group Internal Audit’s (GIA) primary role is to help the Board and management to protect the assets, reputation and sustainability of the Group. GIA does this by evaluating the effectiveness of the Group’s risk management, control and governance processes.
GIA is an independent and objective function reporting to the Board. The Group Chief Auditor is a member of the Executive Committee and has a primary reporting line to the Chairman of the Group Audit Committee, with a secondary line to the Group’s Chief Executive. Regional Chief Auditors report directly to the Group Chief Auditor, while recognising local regulation.
GIA’s scope is unrestricted and includes first line of defence control validation and second line of defence assurance activities, as well as the risk and control culture of the Group.
During 2015, the Committee received updates from the Group Chief Risk Officer on the assurance process improvements identified in 2014 and implemented during the year, including the progress in updating all Group-wide policies in line with the revised Internal Controls System.
The reporting framework, including reports to the Committee from management on the Financial Control Framework; the external auditor; Group Internal Audit; and Group Regulatory Risk and Compliance, delivers information to enable the effectiveness of the Group’s systems of internal control to be evaluated. The Board considers that an effective and appropriate ongoing process for identifying, evaluating and managing the significant risks faced by the Group has been in place during 2015 and up to the date of approval of the Annual Report and Accounts. For more information about the Group’s Risk Management Framework, see pages 36 to 39.
Compliance of audits with the professional standards is monitored within GIA through an independent quality assurance process, outsourced to Deloitte and operated on a continuous basis. The function is governed by an Internal Audit Charter which sets out the function’s role, mandate and authority, and includes independence and objectivity criteria.
Appointment, tenure, independence and objectivity KPMG were appointed as the Group’s external auditor in 2013 following a formal competitive tender process and have been reappointed at each subsequent AGM. The external auditor forms part of the third line of defence. The current audit partner is Stuart Crisp who has been the Group’s audit engagement partner since KPMG’s appointment. In line with Financial Reporting Council’s standards, KPMG will rotate the audit engagement partner at least once every five years. There are no contractual obligations restricting the Company’s choice of external auditor and there is no limitation of liability in the terms of the appointments of KPMG LLP as auditor to the Company.
The Committee has provided clear guidance to KPMG on the Committee’s expectations of them as part of their role as auditor; that the Committee, not management, is their client; that they are expected to challenge appropriately; that they are expected to raise issues and concerns with the Committee as soon as is appropriate; and on material matters they are expected to indicate their agreement to the position taken by management, or to explain why they do not, and the implications. The Committee has met with the external auditor twice during the year without management present to ensure that the external auditor has an opportunity to raise any concerns they may have and to ensure they remain independent and objective.
Fees and non-audit services The audit fee for the 2015 Annual Report and Accounts was discussed between the Committee and the external auditor and approved by the Committee on behalf of the Board. The fee for the statutory audit and audit-related services for 2015 was £5.1m (2014 £5.7m).
The Group operates a non-audit services policy to assist with maintaining the independence of the external auditor and its personnel. The policy only permits certain services considered to be audit related to be performed by the auditor. All permitted activity must be authorised in advance by the Committee Chairman and subsequently ratified by the Committee. In addition, the total value of non-audit fees incurred by the external auditor is capped at 25% of total audit fees for the relevant financial year. In exceptional circumstances the auditor will be considered for additional services where there is an overwhelming business rationale, but only with full Board approval. A summary of the policy is available on the Company’s website at www.rsagroup.com/ termsofreference.
Accordingly the Committee has recommended to the Board that a resolution be put to the 2016 AGM for the reappointment of KPMG LLP as external auditor, and the Board has accepted this recommendation.
Alastair WS Barbour FCA Non-Executive Director and Chairman of Group Audit Committee
RSA Annual Report and Accounts 2015 65Directors’ and Corporate Governance Report – Committee Reports
The Committee determines executive remuneration on the basis of a considered assessment of business performance, in line with the Remuneration Policy which was approved by shareholders at the AGM on 9 May 2014.
Linking remuneration with performance in 2015 The Committee is focused on maintaining a close linkage between remuneration and the Company’s underlying financial performance, shareholder value creation, and achievement of individual and business review performance targets. A review of material risk factors and controls was conducted for 2015, and as a result, no adjustments were considered necessary to incentive plan outcomes.
RSA Annual Report and Accounts 2015 67Directors’ and Corporate Governance Report – Directors’ Remuneration Report
During the year, the Committee continued to monitor corporate governance best practice, and reviewed the Group’s remuneration arrangements in conjunction with the risk alignment provisions of Solvency II. This follows the introduction of clawback provisions on cash bonuses awarded for 2015 performance, and performance shares granted from 2015, as detailed on page 75.
Aligning remuneration and strategy in 2016 The Directors’ Remuneration Policy will continue unchanged for the year ahead. In the view of the Committee, it remains aligned to the long-term interests of the Company and its shareholders. We will review the Policy during 2016, and will submit it for shareholder approval at the 2017 AGM.
In 2016, the Policy will be implemented in the following ways, as detailed on pages 79 to 81: • The Executive Directors’ remuneration will continue to be based around delivery of the business strategy and the creation of sustained shareholder value within the Group’s risk appetite, with incentive plans measuring performance against profit, shareholder returns, balance sheet strength, capital strength, expense goals and transformation actions.
• The Annual Bonus Plan for 2016 will include Group financial measures, business review goals and personal targets in the areas of Strategy, Financials, Customer, People and Risk. In line with our focus on deeper performance improvements at this stage of the business transformation, reduction in attritional loss ratio will additionally be targeted, and the Group’s Solvency II coverage ratio will be included as a measure of capital strength to reflect the new Solvency II regime implemented from 1 January 2016. An assessment of current and future risk exposure will be conducted prior to making incentive awards.
• The set of long-term incentive performance conditions for awards granted in the 2016-18 cycle have been reviewed to reflect the progress of the turnaround: – The three-year average Group underlying ROTE required for on-target vesting will be set higher up the 11-16% target range compared to the 2015-17 incentive cycle. It continues to incorporate an appropriate degree of stretch. The precise target will be disclosed retrospectively, as it is currently considered by the directors to be commercially sensitive.
• The Group Chief Executive’s salary will rise by 2% in April 2016 having remained unchanged since his appointment two years ago – the level of increase is consistent with those for the Group’s UK-based employees this year,
Richard Houghton stepped down from the Board effective 7 May 2015 and left the Company on 10 July 2015. As referenced on page 77, his departure terms were detailed in last year’s report.
Hugh S Mitchell Non-Executive Director and Chairman of Group Remuneration Committee
How is RSA implementing its approved Remuneration Policy for Executive Directors?
Long-term Incentive Plan • Performance shares granted annually which vest subject to performance conditions measured over three years.
• Subject to RSA’s Clawback Policy as detailed on page 75.
• For recruitment purposes, or in highly exceptional circumstances, such as for retention, an award may be made up to an additional 170% of salary.
Executive (300% of salary at maximum vesting, in view of his criticality to business turnaround).
Awards granted (2016-18 cycle) • Group Chief Executive’s conditional grant reduces to 230% of salary. CFO grant at 200%.
Business Review Scorecard 30% 27% Personal Scorecard 30% 30% Total (% of maximum) 100% 76.5%
Long-term incentive cycle 2013-15 Performance measures Actual performance Vesting (% of maximum)
What remuneration did the Executive Directors receive in 2015? (details on page 71)
Salary Taxable benefits Bonus LTIP Pension related benefits Other remuneration Total
The Committee’s members in 2015 are detailed in the following table. The number of meetings each Director attended is shown as a proportion of the total number of meetings held during the year.
The Committee determines the remuneration and contractual terms for the Executive Directors and the Executive Committee (whose profiles are contained on pages 42 to 45). It also approves the fee and contractual terms of the Chairman (whose profile is on page 42).
The decisions the Committee makes are intended to promote the ongoing success of the Group, whilst upholding the interests of shareholders, regulators, customers and other stakeholders. Consequently, it pays close attention to the Group’s risk management policies, ensuring that these are considered alongside other relevant information so that its actions are balanced, appropriate and support the Group’s strategy.
• Testing of the performance conditions underpinning the Annual Bonus Plan 2014 and the LTIP cycle 2012-14; approval of the level of directors’ awards
December • Update on the Annual Bonus Plan 2015 and long-term incentive cycles 2013, 2014 and 2015
• Update on the supplementary grant of conditional long-term incentive awards in November 2015 for non-Board employees
Note: 1. Following its February meeting, the Committee additionally agreed the treatment of Richard Houghton’s remuneration and terms related to his departure, as announced on 26 February 2015.
RSA Annual Report and Accounts 2015 71 3. Total remuneration 2015: ‘single figure’ tables (audited) The tables below set out the directors’ total remuneration single figure for the financial year ended 31 December 2015. For comparative purposes, 2014 figures are also provided. The components of the Executive Directors’ remuneration are detailed on pages 72 to 75. The fee structure applicable to Non-Executive Directors is detailed on page 81. Non-Executive Directors do not participate in any of the Group’s incentive plans.
3. LTIP 2015: Performance-based awards granted under the 2013-15 LTIP cycle will lapse in full on 3 April 2016. 4. LTIP 2014: Performance-based awards granted under the 2012-14 LTIP cycle lapsed in full on 11 May 2015. By exception, Richard Houghton’s award, which was awarded following his appointment as a director effective 12 June 2012, lapsed in full on 15 June 2015.
5. Pension-related benefits: These benefits are detailed on page 72. 6. Other remuneration: The 2015 figure for Scott Egan includes compensatory cash and share-based awards made as part of his appointment to replace cash awards forfeited on leaving his previous employer. These awards, detailed on page 73, are subject to repayment terms in the event of resignation or termination for gross misconduct within two years of appointment. The 2014 figure for Adrian Brown represents gains made from RSA’s HMRCapproved all-employee share plans.
8. Scott Egan was appointed as a director effective 1 October 2015 on an annual salary of £525,000. The salary value shown in the table for 2015 is the pro-rated amount based on his appointment date.
9. Stephen Hester was appointed as a director effective 5 February 2014 on an annual salary of £950,000. The salary value shown in the table for 2014 is the pro-rated amount based on his appointment date.
13. Malcolm Le May resigned as a Non-Executive Director with effect from 8 May 2014. 14. Martin Scicluna was appointed to the role of Executive Chairman from 13 December 2013 to 4 February 2014. At his request, there was no increase in fee for this period. A £38,533 portion of the above 2014 fees relate to the period when he was Executive Chairman.
4. Components of Executive Directors’ remuneration Base salary The Committee reviewed the Executive Director salary levels during 2015, and did so referencing a range of information including market data from two benchmarking peer groups of listed international insurers and FTSE companies of a broadly comparable market capitalisation to RSA, excluding banks and heavy industries. It took into account the average reviews applied elsewhere in the Group, including those for employees subject to collective bargaining agreements, and UK inflation figures.
No changes were made as a result of this review, as shown below.
Notes: 1. Scott Egan was appointed as a director effective 1 October 2015 on an annual salary of £525,000, which will first be reviewed in 2017. 2. Richard Houghton’s salary effective 1 April 2015 remained unchanged at £494,400.
Employment benefits The Executive Directors received a range of employment benefits during 2015, including car, medical benefits and life cover, and the value of these is noted in the table on page 71.
Pension provision (audited) The Executive Directors’ pension benefits for the year were as follows: • Scott Egan joined the RSA Pension Scheme following his appointment in October 2015, and is eligible to receive an employer pension contribution of 15% of base salary.
• Stephen Hester received a taxable cash allowance of 30% of base salary. • Richard Houghton received a taxable cash allowance of 13.18% of base salary for the period he was employed during 2015.
The aggregate value paid by the Company into the RSA Pension Scheme (a defined contribution plan) for the Executive Directors in 2015 was £13,125 (2014: £11,124).
Performance under the Business Review Scorecard was assessed to have been at or above that targeted across all of these areas. Outperformance was noted in much of the transformation. Divestments were planned and implemented well with execution risks managed, and the Group benefitting from the resulting focus. Capital ratios were above target and expense reduction exceeded Plan. Outcomes on the Solvency II internal model approval and UK pension scheme agreements were also positive. Current year underwriting profits increased to record levels and new reinsurance protection worked well.
The Company as a whole met its underlying profitability targets for the year, as reflected in the financial element of the bonus, and performance was much improved on recent years. The Chief Executive’s leadership was central to the level of outperformance seen in the business across the full agenda targeted. It included driving the evolution and implementation of the strategy and action plans, strengthening customer franchises with a range of product and service initiatives and internally building the performance culture. The unsolicited takeover approach by Zurich was also testing and the Group Chief Executive played an important role in its handling and keeping disruption from destabilising Company momentum.
Overview of bonus outcome The table below summarises the 2015 annual bonus outcome for Stephen Hester.
5. The Committee is mindful of guidance published by investor representative bodies around enhancing transparency, and aligned to this, further information on the targets will be published in the 2016 report. This content provides information on the Group’s planning process, and is therefore particularly commercially sensitive during the business transformation.
• Mr Egan also forfeited a cash bonus from his previous employer in respect of 2015, which has been replaced by a compensatory award payable in early 2016, in line with the payment schedule of the original forfeited award. The payment will be 50% in cash (£250,000) and 50% in restricted shares (valued at £250,000). In line with the Policy, the forfeited cash bonus was bought out partially with shares in order to give Mr Egan an early stake in RSA.
These awards are subject to repayment terms in the event of resignation or termination for gross misconduct within two years of appointment. Mr Egan must meet his RSA shareholding requirement of 150% of salary prior to the sale of any shares, excluding those sold to cover statutory deductions. Mr Egan will not receive an RSA Annual Bonus award in respect of the period worked in 2015.
Performance and Matching Shares will lapse in full in 2016, as the Relative TSR and Group underlying ROE conditions attached to these awards were not achieved. The Company’s TSR was less than the unweighted index of comparators, and the threeyear average Group underlying ROE over the performance period was 7.3% (compared to a 9-14% target range).1
The targets for the performance measures are shown in the following table. Achievement against the Business Review Scorecard will be evaluated using a performance framework whereby each metric will be reviewed against its target, and judgement in the round used to determine the level of vesting, taking into account underlying business performance indicators and any material risk items. The specific targets cannot be disclosed prospectively for commercial reasons, including price sensitivity. A performance narrative will be given to summarise the level of vesting on the Business Review Scorecard once the performance conditions have been tested.
LTIP performance measures 2015–17 Weighting Threshold target: 25% vesting Maximum target: 100% vesting
Notes: 1. Relative TSR index of comparators includes: ACE, Admiral, Allianz, Aviva, Direct Line, Gjensidige Forsikring, Hiscox, Intact, Mapfre, QBE, Topdanmark,
2. Group underlying ROTE will be calculated on a three-year average basis. A straight-line calculation is applied to determine the portion of awards that vest for performance between threshold and on-target, and between on-target and maximum. The average required for on-target vesting (62.5% vesting) is less than the mid-point of the 11-16% range and is considered commercially sensitive because it is set in line with, and therefore signals, the Group’s forward plan for the period. Disclosure will be provided retrospectively following the end of the performance period.
As disclosed in the last year’s Directors’ Remuneration Report, Stephen Hester’s award in the 2015–17 cycle was for 300% of salary at maximum vesting, in view of his criticality to the turnaround. The awards granted are set out in the table below: Director
Notes: 1. The performance measures are Group underlying ROTE, relative TSR and a Business Review Scorecard ( weighting each). 2. The performance period is three years and ends on 31 December 2017. 3. If threshold performance is achieved, 25% of the number of shares shown will vest. 4. The face value of the award is calculated as the maximum number of shares that would vest if all performance measures and targets are met, multiplied by the mid-market closing price of an RSA ordinary share averaged over the five business days preceding the date of grant (7 April 2015), of £4.2588.
Clawback Policy A Clawback Policy was introduced in 2013 regarding variable remuneration and is reviewed annually, as set out in the Remuneration Policy on pages 84 and 86.
For cash bonuses awarded for 2015 performance onwards, and long-term incentive awards granted from 2015 onwards, the Committee may also recover sums already paid to Executive Committee members if it considers it appropriate to do so (clawback). This can be applied during a two-year period after receipt (in the case of cash bonuses) or vesting (in the case of long-term incentives).
• Material financial loss of a business unit as a result of circumstances that should reasonably have been risk-managed by the individual
5. Directors’ shareholding (audited) Executive Directors’ shareholding RSA believes it is in shareholders’ interests for its executives to hold shares in the Company. Under the guidelines applicable during 2015, executives are expected to retain vested shares arising from the Company’s share plans, and so build up a minimum shareholding over a five-year period and maintain it thereafter. No shares are to be sold until the holding level is reached, except where required to cover statutory deductions. Unvested share awards and those otherwise subject to forfeiture are excluded when calculating an executive’s current shareholding level.
Performance Share Plan 2014, detailed on page 77. 3. Includes Voluntarily Invested Deferred Shares and Compulsory Deferred Shares held under the legacy Long-term Incentive Plan 2006, and Deferred
Bonus Shares held under the Performance Share Plan 2014, detailed on page 77. 4. Includes shares owned outright, and additionally in the case of Richard Houghton, his beneficial interest as at 7 May 2015 in 9,442 Voluntarily Invested
Deferred Shares held under the legacy Long-term Incentive Plan 2006. 5. The valuation is against the mid-market closing price of an RSA ordinary share as at 31 December 2015 of £4.265 per share. 6. The gross annual base salary as at 31 December 2015. 7. Scott Egan was appointed as a director effective 1 October 2015. The table shows shares held at the date of his appointment and not 1 January 2015. 8. Richard Houghton resigned from the Board effective 7 May 2015. Shares and scheme interests held are shown as at that date, and not 31 December 2015. The shareholding valuation is based on his gross annual base salary and the mid-market closing price of an RSA ordinary share at 7 May 2015 of £4.273.
Scheme interests held Details of Executive Directors’ existing awards in the Company’s share plans for the financial year are set out in the following tables.
Performance Share Plan 2014 (PSP) The directors’ interests in the new long-term incentive plan, the PSP, were as follows: Share awards held at 1 January 2015
A maximum of 88,761 of the 233,581 Performance Shares shown above can vest, as time-proration was subsequently applied to these awards based on the date his employment ended, in accordance with the Remuneration Policy and his good leaver status agreed by the Committee. Further prorating will apply if the performance conditions attached to these awards are not met in full.
4. Deferred Bonus Shares vest three years from the date of grant, and are subject to malus adjustment under the Group’s Clawback Policy as detailed on page 75. 5. The date by which performance conditions for PSP awards granted in 2014 must be met is 31 December 2016 (except the relative TSR condition, the performance period for which began four weeks prior to the grant date and will end on 31 March 2017). The date by which performance conditions for PSP awards granted in 2015 must be met is 31 December 2017.
Long-term Incentive Plan 2006 (LTIP) The directors’ interests in the LTIP were as follows: Share awards held at
6. Payments to directors for loss of office (audited) There were no payments to directors for loss of office in 2015, other than those already disclosed on page 93 of last year’s report in respect of Richard Houghton. These included: Mr Houghton’s contractual salary and benefits (which he continued to receive after stepping down from the Board on 7 May 2015 until his employment ended effective 10 July 2015), and pay in lieu of notice (at £48,319 per month covering salary and benefits, which he received from the date his employment ended to 31 December 2015, and he continued to receive until 25 February 2016). In accordance with the Remuneration Policy and as disclosed last year, good leaver status was agreed by the Committee. Time pro-ration has been applied to his performance-linked share awards based on his employment end date. Unvested share awards will vest in line with the normal vesting timetable, with further pro-rating being applied to performance-linked awards if their performance conditions are not met in full.
8. Historical TSR performance and executive remuneration The graph shows the TSR of the Group with reference to the FTSE 100 Index and the relative TSR peer group used as an LTIP performance measure for the 2015–17 cycle, the constituents of which are noted on page 74.
The table below shows the total remuneration for the incumbents appointed as the most senior Executive Director over the past seven years. The percentages show the proportion of bonuses and LTIPs that were received. Bonuses include both cash and deferred shares components.
4. Simon Lee resigned as Group Chief Executive and his employment ended on 12 December 2013. He did not receive a bonus in respect of the 2013 financial year, and his awards in the 2011–13 LTIP cycle lapsed on that date.
6. Andy Haste resigned as Group Chief Executive effective 31 October 2011 and his employment ended 31 December 2011. The single figure of total remuneration above is pro-rated for his time in the position.
9. Percentage change in remuneration The table below sets out the percentage change in salary, benefits and bonus for the individual undertaking the most senior Executive Director role in the Company compared with UK employees on average between 2014 and 2015. The UK population was selected for this comparison because pay changes within RSA vary significantly, according to local market factors. The Group Chief Executive’s role has a Group-wide remit, but is located in the UK.
10. Relative importance of spend on pay The table below shows the all-employee pay spend and returns to shareholders by way of dividends for 2015. Figures from 2014 are provided for comparison. The employee pay data covers the Group’s employees globally, and therefore includes the impact of exchange rate changes. Levels of inflation vary across the different countries in which the Group operates and, therefore, salary changes will be reflective of local market conditions.
Notes: 1. Includes salaries, social security costs, pension costs and share-based payments as shown in the notes to the Financial Statements on page 133. 2. Includes the figures as shown in the notes to the Financial Statements on page 137.
RSA has a pay-for-performance culture, whereby remuneration is closely linked to the performance of both the business and the individual. Executive Directors’ reward opportunity contains a balance of fixed and variable elements. The Committee’s aim is that superior levels of remuneration will only be paid in return for delivering superior levels of performance. The variable element is fully flexible such that no award is guaranteed. The charts below show how much the Executive Directors could earn for the 2016 financial year based on the application of the Remuneration Policy (detailed on pages 83 to 90). Their remuneration potential changes according to varying levels of performance achievement.
The remuneration structure is intended to promote the long-term interests of the Company and its shareholders. The table below shows when each component of the Executive Directors’ remuneration package, as set out in the charts above, would be delivered to them once any performance conditions or other restrictions have ended (as noted by the shading). These each relate to the 2016 financial year and, in the case of long-term incentive performance share awards, for awards vesting in 2019.
Base salary, benefits and pension The Committee reviewed the Group Chief Executive’s salary and has determined that a 2% increase will apply from 1 April 2016. This level of increase is in line with those for other UK-based employees this year. In respect of benefits and pension, the Policy will continue to be implemented the same way as it was at the end of 2015.
How will incentives be aligned to the business strategy in 2016? The table below shows how the business strategy, and the key performance indicators which underpin it, are reflected in the Annual Bonus Plan and long-term incentive performance measures for Executive Directors in 2016: Strategic priorities Key performance indicators Annual Bonus Plan 2016 Long-term incentive cycle 2016-18
Business Review: • Strategic focus, • Capital and balance sheet strength, • Performance improvement
and Solvency II coverage ratio; Management actions including controllable expenses, disposals, risk items, attritional loss ratio and strategic plan initiatives
Annual Bonus Plan 2016 As noted in the Committee Chairman’s letter on pages 66 to 67, the Annual Bonus Plan will follow a similar design to 2015. Its performance measures are aligned with the core priorities for focus in 2016. The Executive Directors will be expected to deliver against stretching targets, which are geared towards making continued performance improvement. They are targeted against the performance of the entire Group, taking into account their contribution thereto.
The Business Review Scorecard component includes capital strength metrics and strategic management actions required to deliver this stage of the turnaround. The Personal Scorecard consists of ‘SMART’ objectives, which are aligned to the areas of: financials, strategy, risk management, customer and people.
LTIP performance measures 2016–18 Weighting Threshold target: 25% vesting Maximum target: 100% vesting
Topdanmark, Tryg and Zurich. A straight-line calculation is applied to determine the portion of awards that vest for performance between the threshold and maximum targets.
Executive shareholding requirement The Group Chief Executive’s target shareholding requirement is maintained at 300% of salary. The requirement for other Executive Directors remains at 150%.
5% over 10 years for discretionary schemes, including long-term incentives 2.76%
Non-Executive Directors are issued with an appointment letter. The table below shows when the Non-Executive Directors’ appointments became effective and when their terms will expire: Non-Executive Director Date of initial appointment Expiry date of current term
Introduction The Remuneration Policy was approved by shareholders on 9 May 2014, and was effective from this date. No changes to the Policy are proposed this year.
The Policy covers how decisions on directors’ remuneration will be made at RSA, and the remuneration philosophy and strategy which underpin these decisions.
The remuneration principles the Committee follows are: • Competitive remuneration packages are offered in order to attract, retain and reward the levels of high calibre talent which are essential to RSA’s success in today’s competitive global insurance market
• Reviewed annually with consideration of factors including: market positioning, internal pay relativities, levels of pay for other RSA employees, inflation, affordability, job scale and content, individual’s experience and expertise. Only annual base salary is pensionable. An existing Executive Director’s salary may be increased outside of the normal review cycle for material role changes.
• Pension cash allowances are paid monthly and are subject to statutory deductions.
• Normal bonus opportunity is 16% of salary at threshold, rising to 80% of salary for on-target performance and 160% of salary at maximum. Additional bonus headroom of up to a further 40% of salary may be available, at the Committee’s discretion, to recognise highly exceptional circumstances. Full disclosure will be given if an increased bonus opportunity is applied.
Note to table: Policy is consistent for other UK-based managers and most other UK-based employees.
• Performance is measured over one financial year, according to a range of metrics, some of which can be assessed on a scorecard basis, typically including: growth in earnings and profitability, underwriting performance, risk management, expense ratio and cost savings, capital strength, balance sheet strength, customer and employee engagement, and objectives which are personal to the executive. All measures operate independently. Around 70% of the Annual Bonus Plan is weighted according to financial metrics. The performance conditions and targets which were used to inform the 2015 bonus awards are detailed on pages 72 to 73.
• LTIP grants are made annually to a range of senior employees across the Group. For Executive Directors, awards are made in the form of performance shares which vest subject to performance conditions. The LTIP is also used as a vehicle for granting restricted shares which, for an Executive Director would only be used to satisfy a buy-out upon appointment and shares awarded through compulsory bonus deferral.
• The Executive Directors’ maximum award opportunity is set having regard to the market median grant within the benchmark peer groups.
• Executive Directors must acquire shares in RSA and hold them according to specified levels, expressed as a salary multiple.
• The Executive Directors will continue to retain any awards granted under RSA’s 2006 Long-term Incentive Plan including deferred share awards. No further grants will be made under the 2006 Plan. The Committee can exercise the same discretion as noted in the LTIP section above, as appropriate.
Required shareholding Ensures alignment with shareholders’ interests and enables the Director to build a stake in the business.
• Executives have five years in which to build up their holding, commencing from the first date an unconditional share award is made to them as a Director. No shares are to be sold until the holding level is reached, except where required to cover statutory deductions.
The Executive Directors’ shareholding levels as at 31 December 2015 are noted on page 76.
• Any compensatory award using cash or restricted shares will always carry a service condition and an appropriate repayment schedule to protect shareholders’ interests.
• There are no pre-determined special provisions for Directors with regard to compensation for loss of office. Compensation is based on what would be earned by way of salary and other contractual benefits including pension, over the notice period. In the normal course of events, reasonable professional fees may be paid in relation to a Director’s employment termination.
• Where the Director is an internal promotion within the Group, he/she may be permitted to retain any legacy benefits or terms at the Committee’s discretion. Continuity of service with the Group will be maintained.
• Under normal circumstances, a new Executive Director will be eligible for incentive awards in line with the usual policy which provides for a maximum bonus of 160% of salary and LTIP award of 230% of salary. However, in exceptional circumstances, a higher bonus opportunity of up to 200% of salary may be agreed and a performance-related LTIP award may be approved by the Committee in the Director’s first year of service up to the limit of 400% of salary.
• Good leavers, at the Committee’s discretion, and normally including such circumstances as planned retirement, death, disability/medical severance, transfers outside of the Group and redundancy, would be eligible for an annual bonus for the proportion of the bonus year served. Deferred bonus shares will normally vest in line with the normal timetable, and LTIPs vest subject to performance and time-prorating. The Committee will make reasonable judgement on determining whether a Director qualifies for good leaver status by reason of retirement, by understanding the individual’s intentions post employment termination and taking account of the context of his/her departure from the Group. The Committee has the discretion to make the final bonus award in cash and therefore waive compulsory deferral.
• Where good leavers receive pro-rated bonus or LTIP awards, performance is tested in line with the normal performance timetable. The Committee can, however, arrange for the performance conditions to be tested early and for awards to vest sooner than the scheduled date in cases of death in service, medical severance (with discretion) or under a change of control.
RSA’s Remuneration Policy for Non-Executive Directors Purpose and Strategic Link Policy for 2014 onwards Opportunity and performance conditions
• When assessing fee levels, account is taken of the required time commitment and the degree of expertise necessary to fulfil the particular role (such as chairing a committee).
• The Chairman is provided with secretarial support and the use of an office.
The following table shows the holdings of major shareholders as disclosed to the Company in accordance with the Disclosure and Transparency Rules as at 31 December 2015 and at the date of this Report.
Franklin Mutual Advisers, LLC2 184,256,341 5.01% Indirect 184,256,341 5.01% Indirect Notes: 1. Where the Company has been informed that the threshold for notifications is 5% in accordance with DTR 5.1.5, interests below this threshold are not included in this table.
Analysis of Registered Holders a. Unit Trust/Mutual funds 55.8% b. Private/Retail 4.0% c. Pension funds 9.2% d. Insurance 13.9% e. Other 17.1%
Number of Holdings Number of Shares % of Holdings % of Shares
As at 31 December 2015, the Ordinary Shares and Preference Shares represented 89% and 11% respectively of the total issued share capital. Directors are limited as to the number of shares they can allot (save in respect of share schemes). Renewal of the directors’ authorities to allot shares will be sought at the 2016 AGM. In addition, directors are restricted by the limits set out by the Investment Association. During 2015, the directors exercised their authorities to allot shares only in respect of employee share schemes.
There are no specific restrictions on the size of a shareholding nor on the transfer of shares, which are both governed by the general provisions of the Articles of Association and legislation. The directors are not aware of any agreements between the Company’s shareholders that may result in restrictions on the transfer of securities or on voting rights.
During the year, the Company operated two employee benefit trusts to hold Ordinary Shares in the Company which are used to satisfy grants under the Group’s share incentive schemes and Share Incentive Plan (Sharebuild). Capita Trustees Limited and Capita IRG Trustees, respectively are the Trustees. The Trustees may vote in respect of any shares held in the trusts but have no obligation to do so, and Trustees may have regard to the financial interests of the beneficiaries in exercising their voting rights over the Company’s shares. Standard dividend waiver agreements are in place for the employee share trusts to receive dividends of 0.01 pence per share excluding the Voluntary Invested Deferred Shares under the Royal & Sun Alliance 2006 Long-Term Incentive Plan.
AGM The AGM will be held at 200 Aldersgate, St Paul’s, London EC1A 4HD on Friday, 6 May 2016 at 11.00am. A letter from the Chairman and the notice convening the AGM (Notice) is made available to all Ordinary Shareholders at least 20 working days before the meeting and can be found on the Company’s website at www.rsagroup.com/AGM2016.
Presentations are given on the Company’s performance and activities during 2015 and the financial results of the Company prior to the formal business of the meeting. All directors attend the AGM if they are able to do so, with the Chairman and each Board Committee Chairman making themselves available to take questions from Ordinary Shareholders.
RSA Annual Report and Accounts 201592 Directors’ and Corporate Governance Report – Other Statutory Information
Selected data for 2015 as indicated by the symbol has been independently assured by PwC in accordance with ISAE 3000 (Revised) and ISAE 3410. For further information, please refer to our reporting criteria and PwC’s assurance opinion which can be found on our Corporate Responsibility pages at www. rsagroup.com/corporate-responsibility.
Scope 1: Emissions from the Group’s sources that are controlled by us, including the combustion of fuel, company owned vehicles and the operation of our facilities.
Scope 2: Emissions from the consumption of purchased electricity, heat or steam.
In assessing the viability of the Group, using the Group’s Own Risk and Solvency Assessment (ORSA), the Directors have assessed the Group’s principal risks and uncertainties, and how these are managed and mitigated, as detailed in the Strategic Report on pages 36 to 39. This includes, but is not limited to, the Group’s reinsurance programme which is structured to mitigate the impact of catastrophe and large loss events on earnings and capital, and the Group’s underwriting strategy and portfolio management which is used to mitigate the impact of underwriting and claims risk.
Where data is not provided by the operating entity, estimates have been provided based on relative calculations against other businesses within the Company.
Our reporting has been carried out with consideration to the World Business Council for Sustainable Development and World Resources Institute’s (WBCSD/WRI) Greenhouse Gas Protocol, a Corporate Accounting and Reporting Standard, together with the latest emissions factors from recognised public sources including, but not limited to Department of Environment and Rural Affairs, the International Energy Agency, the US Energy Information Association, the US Environmental Protection Agency and the Intergovernmental Panel on Climate Change.
So far as each director of the Board is aware, there is no relevant audit information (as defined in section 418(3) of the Companies Act 2006) of which the Company’s external auditor is unaware, and each director has taken reasonable steps to make himself/herself aware of, and to establish that the external auditor is aware of, any relevant audit information.
A balanced and understandable assessment of the Group’s position and prospects, and an explanation of its strategy for delivering the objectives of the Company are contained in the Strategic Report on pages 1 to 39 which includes: • use of financial instruments by the company, details of financial risk management objectives and policies of the Company, including the policy for hedging each major type of forecasted transaction for which hedge accounting is used
Essential contracts and change of control The Company does not consider that it, or any of its subsidiaries, has any significant agreements to which the Company is a party that take effect, alter or terminate upon a change of control of the Company following a takeover bid that are required to be disclosed pursuant to paragraph 13(2) (j) of Schedule 7 of the Large and Medium Sized Companies and Groups (Accounts and Reports) Regulations 2008 (as amended), other than as disclosed below: Under the Company’s £500m five year senior committed debt facility, if a change of control occurs, if the majority of lenders require, the facility can be cancelled with immediate effect and all outstanding loans, together with accrued interest, become due and payable.
Based on this review no material uncertainties that would require disclosure have been identified in relation to the ability of the Group to remain a going concern for at least the next twelve months, from both the date of the balance sheet and the approval of the consolidated financial statements.
It is therefore concluded that the going concern basis is appropriate for the preparation of the 2015 full year consolidated financial statements.
Conflicts of interest and related party transactions In accordance with section 175 of the Companies Act 2006, each director has a duty to avoid conflicts of interest. Under Articles 91 and 92 of the Company’s Articles of Association, conflicts of interest may be authorised by the Board or a Board Committee. Directors are required to notify the Group General Counsel and Company Secretary when a potential conflict of interest arises. Each director’s conflicts of interest are reviewed on an annual basis. Any director who has declared a conflict of interest shall not count towards the quorum or vote on any resolution to authorise the conflict of interest and, at the Board’s discretion, may be excluded from any meeting at which the conflict of interest is under consideration. Where a conflict of interest is authorised, restrictions may be imposed on the conflicted director, such as excluding the director from the discussion or receiving any information in connection with the conflict of interest.
Borrowing powers Article 98 of the Articles of Association sets out the restrictions of the borrowings of the Company. The aggregate amount, for the time being, remaining borrowed by the Group must not, without the previous sanction of an ordinary resolution of the Company, be more than one and a half times the aggregate of: (i) The amount paid up on the issued share capital of the Company; and
Directors’ responsibility statement The Directors’ Responsibility Statement appears on page 98 as is incorporated by reference into this Report.
RSA Annual Report and Accounts 201596 Directors’ and Corporate Governance Report – Other Statutory Information
Basis of preparation and significant accounting policies 1 Basis of preparation 108 2 Adoption of new and revised standards 108 3 Recently issued accounting pronouncements 108 4 Re-presentation of financial statements and disclosures 5 Significant accounting policies 109
Notes to the Income Statement and Other Comprehensive Income 9 Segmental information 128 10 Net investment return 131 11 Net claims 132 12 Other operating income 132 13 Other operating expenses 132 14 Finance costs 133 15 Employee expenses 133 16 Related party transactions 134 17 Auditor’s remuneration 134 18 Income tax 134 19 Share based payments 135 20 Earnings per share 136 21 Distributions paid and proposed 137 22 Total other comprehensive income 137
The Directors are responsible for preparing the Annual Report and Accounts and the Group and Parent Company financial statements in accordance with applicable laws and regulations. Company law requires the Directors to prepare Group and Parent Company financial statements for each financial year. Under that law they are required to prepare Group financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU) and applicable law and have also chosen to prepare the Parent Company financial statements on the same basis. Under company law the Directors must not approve the accounts unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Parent Company and of their profit or loss for that period. In preparing each of the Group and Parent Company financial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and estimates that are reasonable and prudent; • state whether they have been prepared in accordance with IFRSs as adopted by the EU; and
• prepare the financial statements on a going concern basis unless it is inappropriate to presume that the Group and Parent Company will continue in business.
Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors’ and Corporate Governance Report, Directors’ Remuneration Report and Corporate Governance Statement that complies with that law and those regulations.
Responsibility statement We confirm to the best of our knowledge: • the financial statements on pages 103 to 107, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group and Parent Company; and
2. Our assessment of risks of material misstatement In arriving at our audit opinion above on the financial statements the risks of material misstatement that had the greatest effect on our audit (in decreasing order of audit significance) were as follows.
Small changes in the assumptions used to value the liabilities, particularly those relating to the amount and timing of future claims, can lead to material impacts on the valuation of insurance liabilities. The key assumptions that drive the reserving calculations include loss ratios, estimates of the frequency and severity of claims and, where appropriate, the discount rates for longer tail classes of business by territory and line of business.
The valuation of insurance liabilities depends on accurate data about the volume, amount and pattern of current and historical claims since they are often used to form expectations about future claims. If the data used in calculating insurance liabilities, or for forming judgements over key assumptions, is not complete and accurate then material impacts on the valuation of insurance liabilities may arise.
Finally, a margin is added to the actuarial best estimate of insurance liabilities, to provide for the risk of adverse development in the claims recognised. The appropriate margin to recognise is a judgement taken by management, based on the perceived uncertainty and potential for volatility in the underlying claims. As such, it is a subjective estimate.
Our audit procedures included: • The evaluation and testing of key controls around the claims handling and case reserve setting processes of the Group. We examined evidence of the operation of controls over the valuation of individual claims reserves, such as large loss review controls and internal peer reviews (whereby second reviewers examine documentation supporting claims case reserves and consider if the amount recorded in the financial statements is valued appropriately).
• Checking samples of claims case reserves through comparing the estimated amount of the case reserve to appropriate documentation, such as reports from loss adjusters.
• The evaluation and testing of key controls designed to ensure the integrity of the data used in the actuarial reserving process (including both current and prior year case reserve data).
Group’s historical experience, current trends and our own industry knowledge, including information relating to forthcoming legislation that may impact claims settlement speed or amount; – evaluated the level of prudence applied and compared this to prior periods; – used our industry knowledge to benchmark the Group’s reserving methodologies assumptions, and estimates of losses; and
• Independently re-projected the reserve balances for certain classes of business.
Independent Auditor’s Report to the Members of RSA Insurance Group plc only – continued Deferred tax assets £163 million (2014: £180 million) Refer to page 61 (Group Audit Committee Report), page 113 (accounting policy) and page 177 (financial disclosures).
We considered the sensitivity of the forecast taxable profits to assumptions such as the Combined Operating Ratio. With the support of our own tax specialists, we also assessed the extent to which projected profits were taxable, in particular the Group’s assumptions about how accumulated tax losses and other associated tax attributes can be utilised against UK taxable profits.
In this area our audit procedures included, among others, testing general IT controls around system access and change management and testing controls over computer operations within specific applications which are required to be operating correctly to mitigate the risk of misstatement in the financial statements. With the support of our own IT specialists, we tested these controls through examining the process for approving changes to the systems, and assessing the restrictions placed on access to core systems through testing the permissions and responsibilities of those given that access.
3. Our application of materiality and an overview of the scope of our audit The materiality for the Group financial statements as a whole was set at £35m, determined with reference to a benchmark of net earned premiums (of which it represents 0.6%). In 2014 materiality was £40m, with reference to a benchmark of net written premiums (of which it represented 0.5%). The change aligns our assessment of materiality to a measure that is a better reflection of revenue from the Group’s operations and that, unlike net written premium, is not subject to the volatility arising from multi-year insurance contracts, but is still a key financial statement metric used in assessing the performance of the Group. Materiality has also reduced in absolute terms because disposals of businesses across the Group has reduced the size of the continuing operations, and hence the benchmarks we use to determine it.
We reported to the Audit Committee any corrected or uncorrected misstatements exceeding £1.75m, in addition to other identified misstatements that warranted reporting on qualitative grounds.
Group net earned premium Materiality £35m Materiality for the Group financial statements £26m Range of materiality applied to component audits (£10-26m)
The different components accounted for the following percentages of the Group’s results: Group net earned premium
Audit for Group reporting Specified audit procedures Analysis at Group level
RSA Annual Report and Accounts 2015 101Financial statements – Group consolidated financial statements
The Group audit team instructed component auditors as to the significant areas to be covered, including the relevant risks detailed above and the information to be reported back. The Group audit team approved the component’s materiality thresholds, which ranged from £15m to £24m, having regard to the size and risk profile to the Group of these components.
The Group audit team visited five component locations, being those in the UK, Ireland, Canada, Scandinavia and Brazil, in order to assess the audit risk and planned audit approach. Telephone conference meetings were also held with these component auditors and others that were not physically visited. At these visits and meetings, the findings reported to the Group audit team were discussed in more detail and the Group audit team reviewed key elements of the component’s audit evidence and work papers. Any further work required by the Group audit team was then performed by the component auditor.
4. Our opinion on other matters prescribed by the Companies Act 2006 is unmodified In our opinion: • the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and
• the information given in the Strategic Report and Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements.
• the disclosures on page 108 of the financial statements concerning the use of the going concern basis of accounting.
• the Group Audit Committee Report does not appropriately address matters communicated by us to the audit committee.
Under the Listing Rules we are required to review: • the Directors’ statement, set out on pages 40 to 96, in relation to going concern and longer-term viability; and
Independent Auditor’s Report to the Members of RSA Insurance Group plc only – continued
Note: 1. Further information about the re-presented comparative figures in these financial statements can be found in the re-presentation section of the
RSA Annual Report and Accounts 2015 103Financial statements – Group consolidated financial statements
Items from continuing operations that may be reclassified to the income statement: Exchange losses net of tax on translation of foreign operations (120) (112)
Total comprehensive income for the year from discontinued operations 7 50 165
Attributable to: Equity holders of the Parent Company from continuing operations (189) 8 from discontinued operations 51 170
RSA Annual Report and Accounts 2015104 Financial statements – Group consolidated financial statements
Total comprehensive income Profit for the year – – – – – – – 69 69 7 76 Other comprehensive income/(expense) (note 22) – – – – 229 – (112) (8) 109 – 109
Total comprehensive income (note 22) Profit for the year – – – – – – – 235 235 9 244 Other comprehensive (expense)/income (note 22) – – – – (234) – (204) 65 (373) 4 (369)
Shares issued for cash (note 33) 1 2 – – – – – – 3 – 3
Net profit for the year before tax from continuing operations 106 53
Cashflows from financing activities Proceeds from issue of share capital 33 3 753
Effect of changes in foreign exchange on cash and cash equivalents (73) (61)
RSA Annual Report and Accounts 2015 107Financial statements – Group consolidated financial statements
The structure of the financial statements has been amended from prior years to make them more understandable for the shareholders.
Accounting policies that are significant to understanding the performance, financial position and cashflows of the Group are set out in note 5 with other policies presented in Appendix B. The notes are grouped together by their nature. Estimation techniques and assumptions are now presented in the relevant note in order to provide context to the figures presented. The most significant estimates and judgements are those used in determining Insurance contract liabilities (note 37), Deferred tax (note 30) and Defined benefit pension scheme liabilities (note 38). All of the information previously disclosed continues to be presented, where material, within the financial statements.
2) Adoption of new and revised standards There are a small number of narrow scope amendments arising from annual improvements to standards that are applicable to the Group for the first time in 2015, none of which have had a material impact on the consolidated financial statements.
The Group will decide on appropriate clarification of its investments under IFRS 9 closer to the time of adopting the revised IFRS 4 and so is not able at the present time to fully quantify the impact of adopting IFRS 9 on its financial statements. It is not anticipated however that it will significantly change the Group’s total equity.
IFRS 15 ‘Revenue Recognition’ The date that IFRS 15 ‘Revenue Recognition’ (which has not yet been endorsed by the European Union) becomes effective has been delayed until 1 January 2018. Revenue arising from insurance contacts and financial instruments is outside the scope of IFRS 15. The impact of recognising the revenue from other Group services when these services are delivered to customers is not expected to be material to the Group.
IFRS 16 ‘Leases’ In January 2016, the IASB issued IFRS 16 ‘Leases’ to replace the existing standard IAS 17 which, subject to endorsement by the European Union, will be effective from 1 January 2019 but with earlier adoption permitted.
The main change under IFRS 16 is to the accounting by lessees. For operating leases, IFRS 16 will require the recognition of the present value of a lessee’s full payment obligations in the statement of financial position together with an asset representing the right to the use of the leased asset during the term of the lease. Under IAS 17, for leases qualifying as operating leases, the lease obligations are not recognised in the statement of financial position.
RSA Annual Report and Accounts 2015108 Financial statements – Basis of preparation and significant accounting policies
4) Re-presentation of financial statements and disclosures During 2015, the Group sold a number of its businesses and classified a number of other businesses as held for sale where it has become highly probable that their value to the business will be recovered principally through their sale, rather than through continuing operations. Where these businesses represented a separate geographical area of operations, the business has been classified as a discontinued operation (see note 7 for further details). This has resulted in the re-presentation of the comparatives for the allocation of the loss after tax from continuing operations, the other comprehensive income, the earnings per share (EPS) and diluted EPS between the amounts from continuing and discontinued operations.
In 2014, and further refined in 2015, additional changes have been made to the management basis used to determine the underwriting, investment results and central expenses. The Segmental information set out in note 9 has been re-presented on the revised basis. The table below sets out the changes when compared to year-end 2014 as reported, the net effect is nil: Underwriting Result £m
The Group has not made any significant changes to its accounting policies during 2015.
Gross claims incurred and insurance contract liabilities Gross claims incurred represent the cost of investigating and settling insurance claims on insurance contracts underwritten by the Group. Provisions for losses and loss adjustment expenses are recorded at the estimated ultimate cost, net of expected salvage and subrogation recoveries when a claim is incurred.
Acquisition costs comprise the direct and indirect costs of obtaining and processing new insurance business. These costs are recognised as deferred acquisition costs and are deducted from the provision for unearned premium. Deferred acquisition costs (‘DAC’) are amortised on the same basis as the related unearned premiums are earned.
At the end of each reporting period tests are performed to ensure the adequacy of the Group’s insurance contract liabilities by considering the cashflows associated with the provision for unearned premium net of related deferred acquisition costs. In performing these tests, best estimates of future contractual cashflows, including claims handling and administrative expenses as well as investment income on assets backing such liabilities are used. Any deficiency is charged to the consolidated income statement immediately by establishing a provision for liability adequacy known as the unexpired risk provision. The unexpired risk provision is assessed in aggregate for business classes which are managed together and where there are no restraints on the ability to use assets held in relation to such business to meet any of the associated liabilities.
Further information on net claims can be found in note 11, and insurance contract liabilities in note 37.
Financial Instruments Classification and measurement of financial assets and financial liabilities The Group initially recognises financial instruments at their fair value on the date at which they are purchased.
Further information can be found in note 26, note 27 and note 28.
RSA Annual Report and Accounts 2015110 Financial statements – Basis of preparation and significant accounting policies
The table below summarises the classification and treatment of the Group’s financial assets and financial liabilities.
Category Financial Instrument Description Subsequent Measurement Recognition of change in fair value
Designated Fair Value Through Profit & Loss (FVTPL) on initial recognition
Income Statement – Net investment gains/ (losses) when realised or impaired.
Financial assets with fixed or determinable payments not quoted in an active market.
RSA Annual Report and Accounts 2015 111Financial statements – Basis of preparation and significant accounting policies
Hedge of a net investment in foreign operations – effective portion is recognised in other comprehensive income, ineffective portion is immediately recognised in the income statement.
Hedge of fair value – recognised in the income statement. The change in fair value of the hedged investments attributable to the hedged risk is transferred from the revaluation reserve to the income statement.
Unrealised gains and losses on AFS investments are recognised in other comprehensive income, except for impairment losses and foreign exchange gains and losses on monetary items which are recognised in the consolidated income statement. On derecognition of an investment classified as available for sale, the cumulative gain or loss previously recognised in other comprehensive income is recognised in the consolidated income statement. Further information can be found in note 10.
Impairment of financial instruments The Group determines, at each reporting date, whether there is evidence that the value of a financial asset or a group of financial assets, other than those measured as FVTPL, are impaired. A financial asset is impaired if there is objective evidence that indicates that an event has occurred after the initial recognition of the asset that may have resulted in a loss of value as a result of having a negative effect on the estimated future cashflows generated by that asset which can be estimated reliably.
RSA Annual Report and Accounts 2015112 Financial statements – Basis of preparation and significant accounting policies
Taxation and deferred tax Taxation and deferred tax is recognised in the consolidated income statement, except to the extent that the tax arises from a transaction or event recognised either in other comprehensive income or directly in equity.
For those schemes in a net liability (deficit) position, the net liability is recognised in the consolidated statement of financial position in provisions. For those schemes in a net asset (surplus) position, the asset is recognised in the consolidated statement of financial position in other debtors and other assets only 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.
Remeasurements of the net defined benefit liability/(asset) recognised in other comprehensive income comprises actuarial gains and losses as a result of changes in assumptions and experience adjustments in the calculation of the defined benefit obligation, and return on scheme assets excluding interest. The most significant of these is the selection of the discount rate used to calculate the defined benefit obligation, details of which are set out in note 38.
Internally developed computer software The Group capitalises internal and external computer software development costs where the software is separately identifiable; the Group has control over the software; and where it can be demonstrated that they provide future economic benefits for the Group through facilitating revenue or improved processes. The costs capitalised includes administrative and other general overhead expenditure when they can be directly attributed to the software development and preparing it for use. The useful economic life of externally acquired and internally generated software is normally estimated to be between three and seven years.
Further information on goodwill and other intangibles can be found in note 23.
Impairment of goodwill, other intangible assets and internally developed computer software Goodwill is subject to an impairment test on an annual basis. Other intangible assets which includes internally generated software are reviewed for indications of impairment on an annual basis and are subject to an impairment test only if there is an indication of impairment.
Goodwill, other intangible assets and internally developed computer software is allocated to cash generating units (CGUs) for the purpose of impairment testing. When testing for impairment, the recoverable amount of a CGU is determined based on value in use calculations. Further information on how the value in use is calculated can be found in note 23.
Where the carrying amount is more than the recoverable amount, impairment of goodwill or intangible assets is recognised in the consolidated income statement. Impairment losses previously recognised on intangible assets may be reversed in subsequent periods provided that the revised carrying amount does not exceed the value that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised. An impairment loss recognised for goodwill is not reversed in a subsequent period.
Assets and liabilities held for sale Assets and liabilities are classified as held for sale if it is considered highly probable that the carrying amount of the assets and directly associated liabilities will be recovered principally through a sale, rather than through continuing operations. This includes the expectation that the sale will be completed within 12 months of the classification date as held for sale. Assets and liabilities held for sale are each presented as a single line in the statement of financial position, at the lower of the carrying amount and fair value less costs to sell.
RSA Annual Report and Accounts 2015114 Financial statements – Basis of preparation and significant accounting policies
Provisions for onerous contracts are recognised when action is taken by the Group as part of a restructuring programme that reduces any remaining benefit expected under a contract to below its remaining unavoidable costs.
RSA Annual Report and Accounts 2015 115Financial statements – Basis of preparation and significant accounting policies
The majority of underwriting risk to which the Group is exposed, is of a short-term nature, and generally does not exceed 12 months. The Group’s underwriting strategy aims to ensure that the underwritten risks are well diversified in terms of the type, amount of risk, and geography in order to ensure that the Group is not exposed to a concentration of risk which would result in a volatile insurance result.
The Group has developed enhanced methods of recording exposures and concentrations of risk and has a centrally managed forum looking at Group underwriting issues, reviewing and agreeing underwriting direction and setting policy and directives where appropriate. The Group has a quarterly portfolio management process across all its business units where key risk indicators are tracked to monitor emerging trends, opportunities and risks. This provides greater control of exposures in high risk areas as well as enabling a prompt response to claims from policyholders should there be a catastrophic event such as an earthquake.
Decisions on how much insurance risk to pass on to other insurers through the use of reinsurance is another key strategy employed in managing the Group’s exposure to insurance risk. The Group Corporate Centre determines a minimum level of risk to be retained by the Group as a whole and, therefore, the amount of central reinsurance cover purchased. This is then distributed across the Group in accordance with deemed risk appetite. Local operations may also purchase additional reinsurance within agreed local reinsurance appetite parameters.
Reinsurance arrangements in place include proportional, excess of loss, stop loss, catastrophe and adverse development coverage. These arrangements ensure that the Group should not suffer total net insurance losses beyond the Group’s risk appetite in any one year.
C) Reserving risk Reserving risk refers to the risk that the Group’s estimates of future claims will be insufficient.
RSA Annual Report and Accounts 2015116 Financial statements – Risk and capital management
• The views of internal peer reviewers of the reserves and of other parties including actuaries, legal counsel, risk directors, underwriters and claims managers.
• The outcome from independent assurance reviews performed by the Group actuarial function to assess the reasonableness of regional Actuarial Indication estimates.
Financial risk Financial risk refers to the risk of financial loss predominantly arising from investment transactions entered into by the Group, and also to a lesser extent arising from insurance contracts, and includes the following risks: • Credit risk
• Market risk including price, interest rate and currency rate risks
Credit risk is managed at both a Group level and at a local level. Local 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. Exposure monitoring and reporting is embedded throughout the organisation with aggregate credit positions reported and monitored at Group level.
Limits are set at both a portfolio and counterparty level based on likelihood of default, derived from the rating of the counterparty, to ensure that the Group’s overall credit profile and specific concentrations are managed and controlled within risk appetite.
RSA Annual Report and Accounts 2015 117Financial statements – Risk and capital management
The Group Reinsurance Credit Committee oversees the management of credit risk arising from the reinsurer failing to settle its liability to the Group. Group standards are set such that reinsurers that have a financial strength rating of less than ‘A-’ with Standard & Poor’s, or a comparable rating, are removed from the Group’s authorised list of approved reinsurers unless the Group’s internal review discovers exceptional circumstances in favour of the reinsurer. Collateral is taken, where appropriate, to mitigate exposures to acceptable levels. At 31 December 2015, the extent of collateral held by the Group against reinsurers’ share of insurance contract liabilities was £69m (2014: £90m).
Credit rating relating to financial assets that are neither past due nor impaired
Total of financial assets that are neither past due nor impaired £m
Reinsurers’ share of insurance contract liabilities – 368 1,626 91 23 113 2,221 237 1,984
Note: 1. The insurance and reinsurance debtors classified as not rated comprise personal policyholders and small corporate customers that do not have individual credit ratings. The overall credit risk to the Group is deemed to be low as the cover could be cancelled if payment were not received on a timely basis.
RSA Annual Report and Accounts 2015118 Financial statements – Risk and capital management
Loans and receivables 100 – – – – – 100 2
Cash and cash equivalents 816 – – – – – 816 –
Reinsurers’ share of insurance contract liabilities 1,892 - - - - 5 1,897 3
Market risk can be further broken down into three key components: i. Price risk Price risk arises as a result of fluctuations in the market prices of investments held, primarily equity. The price of debt investments is primarily driven by interest rate fluctuations, which is addressed below. The Group is also subject to property price risk due to the potential changes in fair market value of the property portfolio held as part of the Group’s investment strategy.
The table below illustrates the impact to the income statement of a hypothetical 15% change in equity prices or a 15% change in property prices.
RSA Annual Report and Accounts 2015 119Financial statements – Risk and capital management
Decrease of equity markets: Direct impact on equities of a 15% fall in equity markets (6) (3) (82) (21)
Property markets: Decrease of property markets of 15% (55) (52) (6) (8)
The equity price risk sensitivity analysis is indicative and is based on the Groups equity portfolio as at 31 December 2015.
Given the composition of our investments as at 31 December, the table below illustrates the impact to the income statement and other comprehensive income of hypothetical 100bps change in interest rates on long-term debt and fixed income securities that are subject to interest rate risk.
Interest rate markets: Impact on fixed interest securities in interest rates of 100bps increase 25 24 (435) (481)
• Structural currency risk – by investing in overseas subsidiaries the Group is exposed to the risk that fluctuations in foreign exchange rates impact the reported profitability of foreign operations to the Group, and the value of its net investment in foreign operations.
Structural currency risk is managed at a Group level through currency forward contracts and foreign exchange options within predetermined limits set by the Group Investment Committee. In managing structural currency risk the needs of the Group’s subsidiaries to maintain net assets in local currencies to satisfy local regulatory solvency and internal risk based capital requirements are taken into account. These assets should prove adequate to support local insurance activities irrespective of exchange rate movements but may affect the value of the consolidated shareholders’ equity expressed in sterling.
At 31 December 2015, the Group’s total shareholders’ equity analysed by currency is: Pounds Sterling £m
Interest on perpetual bonds and notes 93 81 68 39 21 101 2 405
Guaranteed subordinated step-up notes due 2039 - - - - 500 - - 500 495
Interest on perpetual bonds and notes 93 93 82 68 39 105 18 498
The maturity analysis above is presented on an undiscounted basis. The carrying values in the statement of financial position are discounted where appropriate in accordance with Group accounting policy.
Capital Management It is a key regulatory requirement that the Group maintains sufficient capital to support its exposure to risk. Accordingly, the Group’s capital management strategy is closely linked to its monitoring and management of risk. The Group’s capital objectives consist of striking the right balance between the need to support claims liabilities and ensure the confidence of policyholders, exposure to other risks, support competitive pricing strategies, meet regulatory capital requirements, and providing adequate returns for its shareholders.
The Group’s overall capital position is primarily comprised of shareholders’ equity and subordinated loan capital and aims to maximise shareholder value, while maintaining financial strength and maintaining adequate regulatory capital. In addition the Group also aims to hold sufficient capital so as to maintain its single ‘A’ credit rating.
For the Group’s senior regulated insurance company, Royal & Sun Alliance Insurance plc, the capital position will be reported under Solvency I at 31 December 2015 for the last time before it is replaced by Solvency II.
RSA Annual Report and Accounts 2015122 Financial statements – Risk and capital management
At 31 December 2015, the estimated SCR and corresponding eligible own funds were as follows: Unaudited 2015 £bn
The internal model is used to support, inform and improve the Group’s decision making across the Group. It is used to determine the Group’s optimum capital structure, its investment strategy, its reinsurance programme and to determine the pricing and target returns for each portfolio. The internal model is also used for the ORSA process.
• the actions it will take to achieve and maintain the desired levels of risk and capital.
The assessments of how much risk to assume and how much capital to hold are inextricably linked. In some situations, it may be desirable to increase the amount of risk assumed or retained in order to make the most efficient use of capital available or else to return excess capital to capital providers. In other situations, where the risks assumed give rise to a capital requirement that is greater than the capital immediately available to support those risks, it will be necessary either to reduce the risk assumed or to obtain additional capital.
Papers are presented to the Board throughout the year dealing with individual elements that make up the ORSA. The information contained in those papers and the associated decisions taken are summarised in an annual ORSA report, which is submitted to the Group’s regulators as part of the normal supervisory process.
RSA Annual Report and Accounts 2015 123Financial statements – Risk and capital management
Thailand 19 December 2014 LeapFrog Thailand Holdings Ltd and Mindo Asia Investments
RSA Annual Report and Accounts 2015124 Financial statements – Significant transactions and events
Assets classified as held for sale: Goodwill and intangibles 63 – 63
Liabilities directly associated with assets classified as held for sale: Insurance contract liabilities 699 12 711
Assets classified as held for sale: Property and equipment – 1 – – 1
Reinsurers’ share of insurance contract liabilities 29 60 15 25 129
Liabilities directly associated with assets classified as held for sale: Provisions and other liabilities – 10 2 8 20
Total net assets of disposal groups (18) 37 47 12 78
Discontinued operations disposed of during the year Year ended 31 December 2015
Carrying value of net assets disposed of (35) (47) (18) - (100)
Gains on sale before recycling of items from other comprehensive income 75 20 28 13 136
Recycle of items from other comprehensive income on disposals: Unrealised gains on available for sale investments 1 - (3) 10 8
Profits on sales of discontinued operations before tax 103 28 21 29 181
Profits on sales of discontinued operations after tax 23 77 22 122 29 21 172
Gain on disposal of business £3m of gains on disposal during the year of businesses not classified as discontinued include £2m relating to the disposal of the Engineering Inspection & Consultancy division in both UK & Ireland to Infexion Private Equity Partners on 1 November 2015.
Included within £203m of gains on disposal during 2014, £164m relates to the disposal of Noraxis Capital Corporation in Canada and the majority of the remainder relates to assets previously held for sale within the Scandinavian region.
9) Segmental information Following a strategic review of its operations in 2014, the Group has disposed of or is in the process of disposing of a number of its businesses. Further information on the Group’s disposal activity is disclosed in note 7. As a result of the review, the Group’s operating segments of Scandinavia, Canada, UK & Ireland, Central Functions and non-core are split between core and non-core businesses, which is consistent with how the Group is managed.
These operating segments are based on geography and all are engaged in providing personal and commercial general insurance services. Central functions include the Group’s internal reinsurance function and Group Corporate Centre.
Non-Core businesses The Group’s non-core businesses in the table below comprises of the Group’s UK legacy business and Middle East operation.
The Middle East is a separate operating segment, and the Group’s UK legacy business is part of the UK operations.
Net written premiums is the key measure of revenue used in internal reporting.
Notes to the Income Statement and Other Comprehensive Income – continued Year ended 31 December 2014 – re-presented
RSA Annual Report and Accounts 2015130 Financial statements – Notes to the Income Statement and Other Comprehensive Income
10) Net investment return A summary of the gross investment income, net realised and net unrealised gains/(losses) included in the income statement is given below.
Deposits, cash and cash equivalents 5 9 – (2) 1 – – – 6 7
Direct operating expenses (including repairs and maintenance) arising from investment properties were not material in 2015 or 2014.
Notes to the Income Statement and Other Comprehensive Income – continued 11) Net claims £m
Impairment of goodwill and other intangible assets (see note 23) 9 88
In 2015, the £3m non-recurring charges represent costs incurred in relation to the potential Zurich Insurance Group bid. The 2014 non-recurring charge of £67m (of which £58m was attributable to continuing operations and £9m to discontinued operations) related to the revisions of estimates including the re-estimation of deferred acquisition costs and dilapidation provisions in respect of leasehold properties resulting in charges of £17m and £5m respectively and a review of the Group’s reinsurance accounting resulted in a charge of £22m. Finally, as a result of a remediation process, better information became available which resulted in certain revisions to accounting estimates and a charge of £23m which predominantly related to the Irish business.
RSA Annual Report and Accounts 2015132 Financial statements – Notes to the Income Statement and Other Comprehensive Income
Finance costs relating to discontinued operations – 1 15) Employee expenses Staff costs for all employees comprise: £m
Average number of employees during the year relating to continuing operations 15,433 16,785
Included in salaries and other short-term employee benefits and bonus awards is £5,378,000 (2014: £3,899,000) paid in respect of Directors. These amounts exclude the value of share options granted to Directors and gains made on the exercise of such options, Group contributions paid in respect of pension schemes and cash or other assets received or receivable under long-term incentive schemes. The total value of the Directors’ remuneration (including values for these excluded items) and other details are disclosed in the Directors’ Remuneration Report.
A number of the Directors, other key managers, their close families and entities under their control have general insurance policies with subsidiary companies of the Group. Such policies are available at discounted rates to all employees including Executive Directors 17) Auditor’s remuneration
18) Income tax The tax amounts charged/(credited) in the income statement are as follows: £m
Increase/(release) of tax provided in respect of prior periods (4) 4
The current tax and deferred income tax credited/(charged) to each component of other comprehensive income is as follows: Current tax Deferred tax Total £m £m £m £m £m £m
The aggregate current tax and deferred tax relating to items that are charged directly to equity is £nil (2014: £(1)m).
Additionally, the Remuneration Committee may defer a portion of an individual’s gross bonus (limited to 50% of that bonus) into an award over shares referred to for the purpose of the plan as Deferred Bonus Shares, which are also not subject to performance conditions.
If an employee resigns from the Group, then Performance Shares and Restricted Shares lapse at date of leaving the Group. Deferred Bonus Shares awards are generally retained by the employee to whom the share was granted if they leave the Group, unless the employee is dismissed for cause.
Long-Term Incentive Plan The Long-Term Incentive Plan was replaced by the Performance Share Plan at the end of 2013. No awards have been granted under this plan since 2013 year end.
Further information on the PSP and the LTIP can be found in the Directors’ Remuneration Report within the Corporate Governance section.
Information on the ESOS, SAYE and Sharebuild schemes are included in Appendix B of the Notes to the Annual Report and Accounts.
20) Earnings per share The earnings per ordinary share are calculated by reference to the profit attributable to the ordinary shareholders and the weighted average number of shares in issue during the year. These were 1,015,489,000 for basic EPS and 1,019,280,000 for diluted EPS (excluding those held in Employee Stock Ownership Plan (ESOP) and Share Incentive Plan (SIP) trusts). The number of shares in issue at 31 December 2015 was 1,016,318,206 (excluding those held in ESOP and SIP trusts).
Profit/(loss) attributable to the shareholders of the Parent Company (£m) 79 156 (115) 184
Notes to the Income Statement and Other Comprehensive Income – continued
Adjustments for share options and contingently issuable shares (thousands) 3,791 -
Total weighted average number of ordinary shares for diluted earnings per share (thousands) 1,019,280 961,658
Diluted earnings/(loss) per share (p) relating to continuing operations 6.9 (12.9)
Note 33 includes further information of the outstanding share options and unvested share awards to Group employees that could potentially dilute basic earnings per share in the future, including those awards omitted from the calculation of diluted earnings per share because they were antidilutive in 2015 and 2014.
21) Distributions paid and proposed The final dividend to equity holders is recognised as a liability when approved at the Annual General Meeting. The Company and its subsidiaries may be subject to restrictions on the amount of dividends they can pay to shareholders as a result of regulatory requirements. However, based on the information currently available, the Group does not believe that such restrictions materially impact the ability to meet obligations or pay dividends. At the Annual General Meeting (AGM) on 6 May 2016, a final dividend in respect of the year ended 31 December 2015 of 7p per ordinary share amounting to a total dividend of £71m is to be proposed. The proposed dividend will be paid and accounted for in shareholders’ equity as an appropriation of retained earnings in the year ending 31 December 2016.
Ordinary dividend: Final paid in respect of prior year 2.0 – 20 –
Interim paid in respect of current year 3.5 – 36 –
Pension – remeasurement of net defined benefit liability net of tax – – – – – 65 65 – 65
Total other comprehensive income/(expense) for the year (237) 6 (3) (234) (204) 65 (373) 4 (369)
RSA Annual Report and Accounts 2015 137Financial statements – Notes to the Income Statement and Other Comprehensive Income
Fair value (losses) net of tax 250 - 2 252 - (1) 251 (2) 249
Less: Assets classified as held for sale 45 – 1 7 10 63
Less: Assets classified as held for sale – – – – –
Impairments Due to software replacement, a software impairment charge of £1m (2014: £44m) has been recognised within other operating expenses. In 2015, £2m (2014: £4m) impairment was charged to underwriting and policy acquisition costs.
Goodwill impairment charges of £18m (2014: £55m) have been recognised within other operating expenses, split between discontinued operations £12m (2014: £11m) and Scandinavia £6m (2014: UK & Ireland £44m) for the Argentinian and Scandinavian Marine subsidiaries respectively.
RSA Annual Report and Accounts 2015 139Financial statements – Notes to the Statement of Financial Position
The value in use and key assumptions used in determining the value in use for the Scandinavian Marine CGU are as follows: Scandinavia Marine
The impairment of £6m in Scandinavia is related to the Marine business due to the value in use exceeding the carrying value. This impairment on the Marine business is due to the use of prudent assumptions around the future profitability of the business. The carrying value of the goodwill of £6m has been fully impaired.
Impairment Sensitivity Following completion of the Group impairment testing, it was identified that an additional Scandinavian CGU was sensitive to changes in key assumptions. This is the Norway CGU and the sensitivities are listed below.
At half year 2014, the Irish operation was impaired to its carrying value. The impairment test for this operation at full year 2015 indicates that there is sufficient headroom in the operation to support the goodwill.
The range of pre-tax discount rates, which reflect specific risks relating to the CGU at the date of evaluation and weighted average growth rates used in 2015 for the CGUs within each operating segment are shown below. The growth rates include improvements in trade performance, where these are forecast in the three-year operational plan for the CGU.
Revaluation adjustments credited/ (charged) to Other Comprehensive Income 7 – 7 4 – 4
The carrying amount of Group occupied property that would have been recognised had the assets been carried under the cost model including assets held for sale at 31 December 2015 is £38m (2014: £42m).
The movement in the Group occupied property reserve is shown below: £m £m
RSA Annual Report and Accounts 2015 141Financial statements – Notes to the Statement of Financial Position
Investment property at 31 December net of assets held for sale 365 346
Total assets classified as held for sale – 376 – 376
Total financial assets net of held for sale 62 12,681 97 12,840
Total assets classified as held for sale 384 - (8) 376 401
Total financial assets net of held for sale 11,462 495 (160) 11,797 12,840
The Group continued to recognise the debt securities in the statement of financial position as the Group remains exposed to the risks and rewards of ownership.
At 31 December 2015, the Group has accepted £554m (2014: £429m) in collateral. The Group is permitted to sell or repledge collateral held in the event of default by the owner. The fair value of the collateral accepted is £554m (2014: £429m). The terms and conditions of the collateral held are market standard. The assets held as collateral are readily convertible into cash.
Currency risk (net investment in foreign operation) 7 (8) 1,076 - - 1,076
Currency risk (net investment in foreign operation) 15 (3) 1,040 - - 1,040
Cross currency interest swaps (fair value/ cashflow) - (19) - 158 117 275
The Group also applies hedge accounting to specified fixed interest assets in its investment portfolio. During 2014, the Group invested in a portfolio of high investment grade corporate bonds denominated in US dollars to allow it to invest in a more diversified range of issuers. These investments are used to cover the insurance liabilities in the UK business. In order to remove exchange risk from this portfolio of investments the Group also acquired cross currency interest rate swaps to swap the cashflows from the portfolio into cashflows denominated in pounds Sterling. The Group applies fair value hedge accounting when using ‘fixed to floating’ interest rate swaps and cashflow hedge accounting when using ‘fixed to fixed’ interest rate swaps. The interest rate swaps exactly offset the timing and amounts expected to be received on the underlying investments. The investments have a remaining term of between two and eight years. There have been no default and no defaults are expected on the hedged investments.
The total losses on cashflow hedge instruments during 2015 was a £4m loss (2014: profit of £4m) in the consolidated statement of other comprehensive income, and the amount reclassified to the income statement was £nil (2014: £nil). The ineffectiveness recognised in the income statement was £nil (2014: £nil).
Group occupied property and investment property Group occupied properties are valued on a vacant possession basis using third-party valuers. Investment properties are valued, at least annually, at their highest and best use.
• Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities
RSA Annual Report and Accounts 2015 145Financial statements – Notes to the statement of financial position
The following table provides an analysis of financial instruments and other items that are measured subsequent to initial recognition at fair value as well as financial liabilities not measured at fair value, grouped into Levels 1 to 3. The table does not include financial assets and liabilities not measured at fair value if the carrying value is a reasonable approximation of fair value.
Group occupied property – land and buildings – – 38 – 38
Available for sale financial assets: Financial assets at FVTPL: Equity securities – – 38 – 38
During 2015, the Group has re-evaluated the basis of valuation of certain investments. As a consequence during 2015 the Group has transferred £3,369m from a classification of Level 1 to a classification of Level 2.
Available for sale financial assets: Financial assets at FVTPL: Debt securities – – 18 – 18
Total assets measured at fair value 12,748 250 594 401 13,191
There were no transfers between Level 1, Level 2 and Level 3 during 2014.
The movement in the fair value measurements of Level 3 financial assets is shown in the table below. There were no financial liabilities measured at fair value in Level 3 in 2014 or 2015.
Level 3 financial assets at 31 December 2015 net of held for sale 269 154 38 15 476
The Group investments in financial assets classified at Level 3 in the hierarchy are primarily investments in various private fund structures investing in debt instruments where the valuation includes estimates of the credit spreads on the underlying holdings. The estimates of the credit spread are based upon market observable credit spreads for what are considered to be assets with similar credit risk. The aggregate value of these holdings included in the table above at 31 December 2015 is £404m. An increase in the estimate of the credit spread of the underlying holdings of 100bps would result in a reduction in the fair value of these investments of £19m.
The Group does not securitise any of its investments in financial instruments and does not create, promote or administer structured entities on behalf of third-party investors. The Group therefore considers that it does not act as a sponsor for any structured entity.
The Group is exposed to the risks of the underlying investments of the investment vehicles. The investment return from the structured entities is expected to reflect the returns from the underlying investments of the underlying vehicles.
In addition, the Group has commitments for future undrawn subscriptions limited to the amounts set out in the subscription agreements. The Group has no obligations to provide any additional funding or other financial support to these entities. The Group has determined that its maximum exposure to structured entities is the sum of the carrying value and the undrawn commitments. These exposures at 31 December 2015 are summarised in the table below: Class of investments Nature of the underlying investments of the vehicle
Other Mainly consist of property funds 262 143 405 122 204 326
Cash and cash equivalents 296 365 29) Reinsurers’ share of insurance contract liabilities £m £m
Reinsurers’ share of provision for unearned premiums at 1 January 709 366
Reinsurers’ share of portfolio transfers and disposals of subsidiaries (2) (8)
Reinsurers’ share of provision for unearned premiums at 31 December 961 709
Total Reinsurers’ share of provision for unearned premiums at 31 December net of held for sale 837 671
RSA Annual Report and Accounts 2015 149Financial statements – Notes to the statement of financial position
The following changes have occurred in the reinsurers’ share of provision for losses and loss adjustment expenses during the year: £m £m
Reinsurers’ share of provisions for losses and loss adjustment expenses at 1 January 1,317 1,660
Reinsurers’ share of portfolio transfers and (disposals)/acquisitions of subsidiaries (57) (14)
Reinsurers’ share of provisions for losses and loss adjustment expenses at 31 December 1,264 1,317
Net deferred tax position at 31 December net of held for sale 163 180 40 62
Net deferred tax asset at 31 December net of held for sale 123 118
The movement in the net deferred tax assets recognised by the Group was as follows: £m £m
Effect of change in tax rates – income statement (12) –
At the end of the reporting period, the Group’s continuing operations have unused tax losses of £1,840m (2014: £2,000m) for which no deferred tax asset is being recognised. This includes £4m (2014: £32m) which will expire between 2016 and 2024 and £1,210m (2014: £1,330m) capital losses for which it is unlikely that a deferred tax asset would be recognised mainly due to UK exemptions. In addition, the Group has unused tax credits of £nil (2014: £16m) and deductible temporary differences of £486m (2014: £456m) for which no deferred tax has been recognised.
The Group has temporary differences in respect of the retained earnings of overseas subsidiaries and associates not held for sale of £1,053m (2014: £1,093m) on which overseas taxes, including withholding taxes, might be incurred on the remittance of these earnings to the UK. This amount relates predominantly to the Group’s subsidiaries in Canada. The Group is able to control the remittance of earnings to the UK and there is no intention to remit the retained earnings in the foreseeable future if the remittance would trigger a material incremental tax liability. As such the Group has not recognised any deferred tax in respect of the potential taxes on the temporary differences arising on unremitted earnings of continuing overseas subsidiaries and associates.
Total insurance and reinsurance debtors net of held for sale 2,653 3,174
To be settled after 12 months 251 152 32) Cash and cash equivalents The interest bearing financial assets included in cash and cash equivalents had an effective interest rate of 1.65% (2014: 2.51%) and had an average maturity of 32 days (2014: 30 days).
Issued and fully paid 1,017,059,842 ordinary shares of £1 each (2014: 1,015,486,873 ordinary shares of £1 each) 1,017 1,015 125,000,000 preference shares of £1 each (2014: 125,000,000 preference shares of £1 each) 125 125
During 2015, the Company issued a total of 1,572,969 new Ordinary Shares of £1 each ranking pari passu with Ordinary Shares in issue (2014: 6,150,197 new Ordinary Shares of 27.5p each and 1,701,662 Ordinary Shares of £1 each), on the exercise of employee share options and in respect of employee share awards. The number of Ordinary Shares in issue, their nominal value and the associated share premiums are as follows: Number of shares Nominal value £m
Issued in respect of employee share options and employee share awards
Ordinary Shares of £1 each Each member holding an Ordinary Share shall be entitled to vote on all matters at a general meeting of the Company, be entitled to receive dividend payments declared in accordance with the Articles of Association, and have the right to participate in any distribution of capital of the Company including on a winding-up of the Company.
Provided a resolution of the Board exists, holders of Preference Shares are entitled to a cumulative preferential dividend of 7.375% per annum, payable out of the profits available for distribution, to be distributed in half-yearly instalments. Preference shareholders have no further right to participate in the profits of the Company.
Employee share schemes 741,636 Ordinary Shares (2014: 1,202,271 Ordinary Shares) are held by various employee share trusts which may subsequently be transferred to employees (including Executive Directors) to satisfy options exercised under the Group employee share option plans and shares awards vesting to Group employees under the long-term incentive plans and under the Sharebuild. These shares are presented as own shares. Own shares are deducted from equity. No gain or loss is recognised on the purchase, sale, issue or cancellation of the own shares. Any consideration paid or received is recognised directly in equity.
At 31 December 2015, the total number of options over Ordinary Shares outstanding under the Group employee share option plans is 6,784,365 (2014: 7,866,932) and the total number of potential shares outstanding under the long-term incentive plan and under the Sharebuild is 13,941,035 Ordinary Shares (2014: 14,299,045 Ordinary Shares). Further information on the employee share schemes is provided in note 19 and in the Directors’ Remuneration Report within the Corporate Governance section.
RSA Annual Report and Accounts 2015 153Financial statements – Notes to the statement of financial position
The subordinated guaranteed US$ bonds were issued in 1999 and have a nominal value of $9m and a redemption date of 15 October 2029. The rate of interest payable on the bonds is 8.95%.
The dated guaranteed subordinated notes were issued on 10 October 2014 at a fixed rate of 5.125%. The nominal £400m bonds have a redemption date of 10 October 2045. The Group has the right to repay the notes on specific dates from 10 October 2025. If the bonds are not repaid on that date, the applicable rate of interest would be reset at a rate of 3.852% plus the appropriate benchmark gilt for a further five-year period.
The perpetual guaranteed subordinated capital securities issued on 12 May 2006 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 payable would be LIBOR plus 2.51%.
The bonds and the notes are contractually subordinated to all other creditors of the Group, such that in the event of a winding-up or of bankruptcy, they are able to be repaid only after the claims of all other creditors have been met.
At 31 December 2015 total unsecured loans from credit institutions under committed credit facilities of £500m (2014: £500m) are available to the Group. There are no amounts outstanding at 31 December 2015 (2014: £nil). The facility expires in 2017.
At 31 December 2015 the Group has in place a US$1bn (2014: US$1bn) Euro commercial paper programme. There are no amounts outstanding at 31 December 2015 (2014: £nil).
Estimation techniques and uncertainties Provisions for losses and loss adjustment expenses are subject to a robust reserving process by each of the Group’s business units and at Group Corporate Centre, as detailed in the Risk Management note. The Group also engage external independent advisors to perform detailed reviews of major classes of specialist business where there is greatest inherent risk of uncertainty, for example the Group’s exposure to asbestos related losses, to help inform the amount of the provision recognised.
The provisions for losses and loss adjustment expenses are estimated using previous claims experience with similar cases, historical payment trends, the volume and nature of the insurance underwritten by the Group and current specific case reserves. Also considered are developing loss payment trends, the potential longer-term significance of large events, and the levels of unpaid claims, legislative changes, judicial decisions and economic, political and regulatory conditions.
The Group uses a number of commonly accepted actuarial projection methodologies to determine the appropriate provision to recognise. These include methods based upon the following: • The development of previously settled claims, where payments to date are extrapolated for each prior year
• Bornhuetter – Ferguson method, which combines features of the above methods
Individually large and significant claims are generally assessed separately, being measured either at the face value of the loss adjusters’ estimates or projected separately in order to allow for the future development of large claims.
Gross insurance contract liabilities and the reinsurers’ share of insurance contract liabilities The Group accounting policies in respect of insurance contract liabilities are described in note 5.
Less: Held for sale provision for unearned premiums 338 (124) 214
Less: Held for sale provisions for losses and loss adjustment expenses 373 (113) 260
Provision for unearned premiums at 31 December net of held for sale 3,107 (837) 2,270
Less: Held for sale provisions for losses and loss adjustment expenses 508 (91) 417
Total insurance contract liabilities excluding held for sale 13,266 (1,897) 11,369
Provision for unearned premiums (gross of acquisition costs) at 31 December 4,200 4,388
Provision for unearned premiums at 31 December net of held for sale 3,738 4,225
The following changes have occurred in the provisions for losses and loss adjustment expenses during the year: £m £m
Provisions for losses and loss adjustment expenses at 1 January 10,336 11,148
Total claims payments made in the year net of salvage and other recoveries (5,250) (6,150)
Provisions for losses and loss adjustment expenses at 31 December 9,457 10,336
Current year provision before discounting 1,901 86 125 138 188 274 477 643 992 1,417 2,593 8,834
Current year provision before discounting 1,624 86 107 149 178 252 411 621 925 1,226 2,151 7,730
Present value recognised in the Consolidated Statement of Financial Position 7,933
Defined benefit pension schemes and other post-retirement benefits Independent actuaries calculate the value of the defined benefit obligations by applying the Projected Unit Credit Method. The future expected cash outflows (calculated based on assumptions that include inflation and mortality) are discounted to present value, using a discount rate determined at the end of each reporting period by reference to current market yields on high quality corporate bonds (‘AA’ rated) identified to match the currency and estimated term of the obligations.
The actuarial valuation involves making assumptions about discount rates, future salary increases, future inflation, the employees’ age upon termination and retirement, mortality rates, future pension increases, disability incidence and health and dental care cost trends.
If actuarial experience differs from the assumptions used, the expected obligation could increase or decrease in future years. Due to the complexity of the valuation and its long-term nature, the defined benefit obligation is highly sensitive to changes in the assumptions. Assumptions are reviewed at each reporting date. As such, the valuation of the liability is highly sensitive to changes in bond rates and will also be impacted by changes in equity markets.
UK Schemes The major defined benefit pension schemes are located in the UK. The assets of these schemes are mainly held in separate trustee administered funds. The UK defined benefit schemes were effectively closed to new entrants in 2002.
Active members – members in employment with the Group and accruing benefits 2,216
Active members of the schemes accrue additional benefits in each year based on salaries (subject to a salary cap) in that year. Employees are entitled to join a stakeholder pension scheme for earnings above the cap.
Accrued benefits are revalued up to retirement in accordance with Government indices for inflation. A cap of 2.5% per annum applies to the revaluation of accrued benefits. A cap of 5% per annum applies for benefits which accrued prior to March 2010.
The Group is exposed to risks through its obligation to fund the schemes. These risks include market risk (assets not performing as well as expected), inflation risk and mortality risk over the lives of the members. The Group and the trustees of the schemes work together to reduce these risks through agreement of investment policy including the use of interest rate, inflation rate and mortality swaps.
During 2009, the Group entered into arrangements that provide coverage against mortality risk for 55% of the retirement obligations relating to pensions in payment of the two largest UK schemes at that time. The arrangement provides for reimbursement of the covered pension obligations in return for the contractual return receivable on portfolios of assets (including some interest rate swaps) held by the pension funds at the inception of the arrangement. The arrangement is accounted for as a longevity swap. The pension schemes continue to hold the original assets used to fund the arrangements.
The weighted average duration of the defined benefit obligation of the two main UK schemes at the end of the reporting period is 17 years (2014: 17 years).
Deferred tax in respect of net pension and post-retirement surplus/(deficit) (3) 26
The following is a reconciliation of the Group’s retirement benefit obligations: £m £m
RSA Annual Report and Accounts 2015 163Financial statements – Notes to the statement of financial position
Return on schemes’ assets included in pension net interest cost 274 301
Sensitivities Sensitivities for the defined benefit obligations of the two main UK schemes are shown below (net of tax): Changes in assumption 2015 2014