Reinsurers’ share of insurance contract liabilities – 670 1,495 78 60 23 2,326 1. The debt securities meeting SPPI criteria under IFRS 9 which are below investment grade are stated under IAS 39 at fair value. 2. Loans and receivables are measured using amortised cost and their carrying amounts are considered to be as approximate fair values. 3. The insurance and reinsurance debtors classified as not rated comprise personal policyholders and small corporate customers that do not have individual credit ratings.
Credit risk of this balance is managed through close monitoring of ageing profiles and cover can be cancelled if payment isn’t received in accordance with agreed credit terms.
With the exception of government debt securities, the largest single aggregate credit exposure does not exceed 2% (2019: 3%) of the Group’s total financial assets.
1. Debtors with similar credit risk characteristics are collectively assessed for impairment with provisions being made based on past experience. 2. Included within impairment losses charged in the period is a £10m write off in relation to aged debtors in Sweden. Refer to note 30 insurance and reinsurance debtors for further details.
Impairment losses charged/ (reversed) to the income statement during the year £m
Reinsurers’ share of insurance contract liabilities 29 2,326 – – – – – 2,326 –
Cash and cash equivalents 33 909 – – – – – 909 –
1. Financial assets that have been impaired have been restated from £nil to £20m to reflect amounts that were impaired in 2019 but disclosed within financial assets that are past due but not impaired.
2. Debtors with similar credit risk characteristics are collectively assessed for impairment with provisions being made based on past experience.
Market risk can be broken down into three key components: i. Equity and property risk At 31 December 2020 the Group held investments classified as AFS equity securities of £673m (2019: £673m). These include interests in structured entities (as disclosed in note 28) and other investments where the price risk arises from interest rate risk rather than from equity market price risk. The Group considers that within AFS equity securities, investments with a fair value of £190m (2019: £218m) may be more affected by equity index market price risk than by interest rate risk. On this basis a 15% fall in the value of equity index prices would result in the recognition of losses of £29m (2019: £33m) in other comprehensive income.
Risk and capital management continued 6) Risk and capital management continued In addition the Group holds investments in properties and in group occupied properties which are subject to property price risk. A decrease of 15% in property prices would result in the recognition of losses of £43m (2019: £45m) in the income statement and £3m (2019: £3m) in other comprehensive income.
Given the composition of the Group’s investments as at 31 December 2020, the table below illustrates the impact to the income statement and other comprehensive income of a hypothetical 100bps change in interest rates on fixed income securities and cash that are subject to interest rate risk.
· 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, swaps and foreign exchange options within predetermined limits set by the Group Board. 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.
Equity attributable to owners of the Parent Company at 31 December 2020 2,579 782 822 142 239 4,564
Equity attributable to owners of the Parent Company at 31 December 2019 2,496 531 645 114 383 4,169
Movement in equity attributable to owners of the Parent Company at 31 December 2019 (48) 59 (59) 72 (10) 13
The Group maintains additional liquidity facilities for contingency purposes. These facilities included uncommitted overdraft arrangements in each of the key operating entities, as well as the ability to enter repurchase agreements to cover short-term fluctuations in cash and liquidity requirements. In addition to these uncommitted arrangements the Group’s Scandinavian subsidiary maintains a small committed revolving credit facility. As at December 2020 there had been no drawdowns under this facility (2019: £nil).
Provisions for losses and loss adjustment expenses 39 3,106 1,885 1,108 721 492 1,088 979 9,379 9,379
Deposits received from reinsurers 43 8 – – – – – – 8 8
Risk and capital management continued 6) Risk and capital management continued As at 31 December 2019
Subordinated guaranteed US$ bonds1 37 – – – – – 7 – 7 6
Provisions for losses and loss adjustment expenses 39 2,878 1,761 1,160 713 514 1,149 966 9,141 9,141
The above maturity analysis is presented on a discounted basis, with the exception of issued debt and lease liabilities, for consistency with the consolidated statement of financial position and supporting notes.
Pension risk The Group is exposed to risks through its obligation to fund a number of schemes. These risks include market risk (assets not performing as well as expected), inflation risk and longevity risk over the lives of the members. The Group and trustees of the schemes work together to reduce these risks through agreement of investment policy including the use of interest rate, inflation rate and mortality swaps. Further information on the Group’s management of pension risk is included within note 41.
© 2020 Friend Studio Ltd File name: Notes_01_to_29_v26 Modification Date: 9 March 2021 11:26 am 6) Risk and capital management continued Regulatory solvency position during 2020 The Group has a Prudential Regulation Authority (PRA) approved Solvency II Internal Model which forms the basis of the primary Solvency II solvency capital ratio (SCR) measure. RSA operates a programme of continuous development in relation to the internal model and a Group-level regulatory approval was received in 2020 for the latest set of enhancements.
The Internal Model is used to support, inform and improve the Group’s decision making across the Group. It is used to inform the Group’s optimum capital structure, its investment and hedging strategy, its reinsurance programme, and pricing and target returns for each portfolio.
1. 2019 eligible own funds included an accrual for the 2019 proposed final dividend, which was subsequently suspended and has not been paid. 2020 figures do not include a dividend accrual as no final dividend is being proposed. The 2019 eligible own funds excluding the dividend accrual is £3.1bn and the coverage ratio would have been 178%.
The impact on the Solvency II coverage ratio of a range of sensitivities is set out below: Solvency II Sensitivities (change in coverage ratio)1: Including pensions2
1. Sensitivities have been calibrated to a coverage ratio at 31 December 2020 that includes a dividend accrual, further adjusted for the UK pension contributions paid in January 2021.
2. The impact of pensions depends significantly on the opening position of the schemes and market conditions and as such should not be extrapolated. 3. The interest rate sensitivities assume a non-parallel shift in the yield curve to reflect that the long end of the yield curve is typically more stable than the short end. 4. The asymmetry in credit spread sensitivities reflects the fact that upside pension sensitivities are restricted to the surplus cap. Sensitivities reflect an assumed offset between the impact on assets held and the IFRS value of pension scheme obligations which could differ in practice.
Movement in tangible net asset value (TNAV) TNAV is one of many capital metrics used by the Group and is based on IFRS net assets excluding the value of goodwill and intangible assets. It is an alternative performance measure (APM) as defined in the APM Appendix on page 183.
As at 31 December 3,274 2,910 1. Profit after tax excludes amortisation and impairment of intangible assets. 2. Dividends includes £9m (2019: £9m) paid in relation to preference shares and £16m (2019: £14m) coupon payment on the Group’s Tier 1 notes.
© 2020 Friend Studio Ltd File name: Notes_01_to_29_v26 Modification Date: 9 March 2021 11:26 am 6) Risk and capital management continued Own risk and solvency assessment (ORSA) The Solvency II directive introduced a requirement for undertakings to conduct an ORSA.
In 2019, the net loss of £14m comprised of a £19m loss relating to the disposal of the UK Legacy business offset by a £4m gain on the sale of Caunce O’Hara & Company Limited. The £19m loss included a £15m additional contribution to Enstar Group Limited and £4m costs of disposal. The legal transfer of the UK Legacy liabilities was completed on 1 July 2019 after the transaction initially took the form of a reinsurance arrangement, effective from 31 December 2016.
8) Reorganisation costs The UK restructuring programme initiated in 2019 has continued in 2020 with further changes to the organisational design through process improvements and other cost saving initiatives. The £78m incurred in 2020 (2019: £27m) (note 9/13) includes £29m in respect of redundancy (2019: £15m), £17m information systems outsourcing rationalisation (2019: £5m), £16m reduction in premises footprint (2019: £2m) and £16m other restructuring activity (2019: £5m).
Underwriting result, COR and business operating result are Alternative Performance Measures (APMs) and the key internal measures of profitability of the operating segments. The COR reflects the ratio of claims costs and expenses (including commission) to earned premiums, expressed as a percentage. Further information on APMs can be found on pages 181 to 190.
Profit after tax 364 1. Included within Scandinavia is a reduction of £22m to gross written and gross earned premium which reflects premium recognised over a number of years in respect of cancelled insurance policies and an increase of £10m to expenses in relation to write-off of aged debtors, following completion of a balance sheet remediation programme in Sweden. This adjustment is also reflected in note 30 insurance and reinsurance debtors.
© 2020 Friend Studio Ltd File name: Notes_01_to_29_v26 Modification Date: 9 March 2021 11:26 am 9) Segmental information continued Year ended 31 December 2019
Profit after tax 383 1. UK & International management underwriting result, as reported in the Strategic Report, includes an £8m reclassification of claims recoveries from Central Functions. This reclassification is not made in the Group consolidated financial statements.
Loans secured by mortgages 1 2 – – – – – – 1 2
Deposits, cash and cash equivalents 3 9 – – – – – – 3 9
Direct operating expenses (including repairs and maintenance) arising from investment properties were not material in 2020 or 2019.
© 2020 Friend Studio Ltd File name: Notes_01_to_29_v26 Modification Date: 9 March 2021 11:26 am
Notes to the consolidated income statement, consolidated statement of comprehensive income and dividends continued 10) Net investment return continued Unrealised gains and losses recognised in other comprehensive income for available for sale assets are as follows: Net unrealised (losses)/gains
Net movement recognised in other comprehensive income 2020 £m 2019 £m 2020 £m 2019 £m 2020 £m 2019 £m 2020 £m 2019 £m 11) Net claims £m £m
Total other operating income 130 140 13) Other operating expenses £m £m
© 2020 Friend Studio Ltd File name: Notes_01_to_29_v26 Modification Date: 9 March 2021 11:26 am 14) Finance costs £m £m
Total finance costs 33 32 15) Employee expenses Staff costs for all employees comprise: 2020 £m 2019 £m
16) Related party transactions Key management personnel comprise members of the Group Executive Committee, executive directors, and non-executive directors.
Included in salaries and other short term employee benefits and bonus awards is £6,760,000 (2019: £6,719,000) 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.
Included in the Audit related assurance services for 2020 is £0.9m (2019: £0.9m) of assurance work in respect of Solvency II reporting. The remainder of £0.7m (2019: £0.4m), together with Other services of £nil (2019: £0.1m), represents in aggregate 11% (2019: 11%) of the Group IFRS audit fee of £6.9m (2019: £5.5m).
Tax at the UK rate of 19.0% (2019: 19.0%) 92 93
Tax effect of: Income/gains not taxable (or taxed at lower rate) (7) (15)
The Group effective tax rate of 25% (2019: 22%) is higher than the UK statutory rate of 19%. This is predominately due to higher statutory tax rates in the Group’s core overseas jurisdictions, non-creditable withholding tax, non-deductible expenses, as well as the de-recognition of deferred tax assets in the UK and Norway. These items are offset, to some extent, by non-taxable income/gains and the impact of the change in future UK tax rate to 19%. Further detail is set out below on specific items.
The net current tax and deferred tax charged directly to equity is £nil (2019: £nil).
The Group applies judgment in identifying uncertainties over income tax treatments under IAS 12 and IFRIC 23. Provisions for uncertain tax treatments are based on our assessment of probable outcomes which take into consideration many factors, including interpretations of tax law and prior experience. At the end of the reporting period, provisions recognised in respect of uncertain tax positions for the Group totalled less than £10m (2019: less than £10m).
Tax assets and liabilities are recognised based on tax rates that have been enacted or substantively enacted at the balance sheet date.
A change to the UK corporation tax rate was substantively enacted during the year. The UK tax rate now remains at 19%, rather than the previously enacted reduction to 17% from 1 April 2020. This change impacts the UK deferred tax rate.
Performance Share Plan This plan is the Group’s current Long-Term Incentive Plan. Awards of Performance Shares to executive directors and other selected executives and senior managers are subject to performance conditions. These consist of the Group’s underlying return on tangible equity; relative total shareholder return; and business scorecard targets over a three year performance period. Typically awards vest on the third anniversary of the date of grant to the extent that the performance conditions have been met, with a two-year retention period in the case of Executive Directors’ Performance Shares.
© 2020 Friend Studio Ltd File name: Notes_01_to_29_v26 Modification Date: 9 March 2021 11:26 am 20) Earnings per share (EPS) 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 1,034,036,503 (2019: 1,030,648,190) for basic EPS and 1,038,199,977 (2019: 1,033,077,874) 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 2020 was 1,035,142,945 (2019: 1,031,523,544) (excluding those held in ESOP and SIP trusts).
Profit attributable to the owners of the Parent Company (£m) 345 359
Adjustments for share options and contingently issuable shares (thousands) 4,163 2,430
Total weighted average number of ordinary shares for diluted earnings per share (thousands) 1,038,200 1,033,078
Note 34 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.
Interim paid in respect of current year 8.0 7.5 83 78
Due to the takeover bid for RSA, a final dividend for 2020 is not being proposed, though were the transaction not to complete, the directors would intend to declare catchup payments thereafter. This also applies to the suspended final dividend for 2019.
© 2020 Friend Studio Ltd File name: Notes_01_to_29_v26 Modification Date: 9 March 2021 11:26 am 22) Total other comprehensive income Year ended 31 December 2020
Exchange gains/(losses) net of tax 15 – – 15 46 – 61 (6) 55
Total other comprehensive income/(expense) for the year 117 – (5) 112 46 (25) 133 (5) 128
Pension – remeasurement of net defined benefit asset/liability net of tax – – – – – (86) (86) – (86)
Notes to the consolidated income statement, consolidated statement of comprehensive income and dividends continued
Impairments During 2020 the software impairment charge was £1m (2019: £1m), recognised in underwriting and policy acquisition costs, relating to obsolete assets that have been fully written off.
The value in use calculation uses cash flow projections based on operational plans approved by management covering a three year period. The operational plans use best estimates of future premiums, operating expenses and taxes using historical trends, general geographical market conditions, industry trends and forecasts and other available information, as discussed in more detail in the Strategic Report. These plans reflect the Group’s assessment of the impact of the current challenging economic environment and assumes that Group continues to operate on a standalone basis.
Goodwill is allocated to the Group’s CGUs, which are contained within the following operating segments: 2020 £m 2019 £m
Sensitivity There is increased uncertainty within the operational plans due to the impact of Covid-19 and the offer to buy RSA therefore a range of downside scenarios to the plan have been considered, none of which would result in an impairment of goodwill.
Property and equipment owned Group occupied propertyland and £m £m £m
Group occupied property was revalued on 31 December 2020 by independent valuers using the basis of valuation as set out in note 27.
© 2020 Friend Studio Ltd File name: Notes_01_to_29_v26 Modification Date: 9 March 2021 11:26 am 24) Property and equipment continued The movement in the Group occupied property reserve is shown below: 2020 £m 2019 £m
Group occupied property reserve at 31 December 21 21 25) Investment property Investment property of £285m (2019: £300m), relating to freehold and leasehold land and buildings, is held for long term rental yields and is not occupied by the Group.
The movement in the carrying value of investment property is detailed below: 2020 £m 2019 £m
26) Financial assets The following tables analyse the Group’s financial assets by classification as at 31 December 2020 and 31 December 2019.
© 2020 Friend Studio Ltd File name: Notes_01_to_29_v26 Modification Date: 9 March 2021 11:26 am 26) Financial assets continued The following table analyses the cost/amortised cost, gross unrealised gains and losses, and fair value of financial assets.
Financial assets measured at fair value 11,014 574 (191) 11,397 11,084
Collateral At 31 December 2020, the Group had pledged £530m (2019: £557m) of financial assets as collateral for liabilities or contingent liabilities, consisting of government debt securities of £287m (2019: £533m), non-government debt securities of £192m (2019: £nil), and cash and cash equivalents of £51m (2019: £24m). The debt securities of £479m (2019: £533m) are included in the balance sheet as available for sale debt securities and the Group’s right to recover the cash pledged of £51m (2019: £24m) is included in other assets. The terms and conditions of the collateral pledged are market standard in relation to letter of credit facilities, derivative transactions and repurchase agreements.
Derivative financial instruments The following table presents the fair value and notional amount of derivatives by term to maturity and nature of risk.
Cross currency interest swaps (fair value/cash flow) 38 54 291 383 28 31
© 2020 Friend Studio Ltd File name: Notes_01_to_29_v26 Modification Date: 9 March 2021 11:26 am 26) Financial assets continued
The use of derivatives can result in accounting mismatches when gains and losses arising on the derivatives are presented in the income statement and corresponding losses and gains on the risks being mitigated are not included in the income statement. In such circumstances the Group may apply hedge accounting in accordance with IAS 39 and the Group accounting policy on hedging.
The Group applies hedge accounting to derivatives acquired to reduce foreign exchange risk in its net investment in certain major overseas subsidiaries. There was no ineffectiveness recognised in the income statement in respect of these hedges during 2020 or 2019.
The total losses on cash flow hedge instruments during 2020 were £26m (2019: £2m losses) in the consolidated statement of other comprehensive income, and the amount reclassified to the income statement was a gain of £19m (2019: £1m gain), recognised within foreign exchange losses in other operating expenses (see note 13) (2019: recognised within foreign exchange gains in other operating income (see note 12)). There was no ineffectiveness recognised in the income statement in respect of these hedges during 2020 or 2019.
The total losses on the fair value hedge instruments recognised in the income statement were £62m (2019: £52m losses) and the offsetting gains related to the hedged risk were £51m (2019: £45m gains).
The ISDA agreements do not meet the criteria for offsetting in the statement of financial position. This is because the Group does not have any current legally enforceable right to offset recognised amounts, because the right to offset is enforceable only on the occurrence of future events. The tables below provide information on the impact of the netting arrangements.
As at 31 December 2020 Amounts subject to enforceable netting arrangements
Cash received under repurchase arrangements 121 – 121 (121) – –
As at 31 December 2019 Amounts subject to enforceable netting arrangements
Effect of offsetting in statement of financial position Related items not offset
Cash received under repurchase arrangements 146 – 146 (146) – –
Information on credit ratings relating to SPPI debt securities and loans and receivables can be found in note 6.
When IFRS 9 is adopted by the Group (currently expected to be 2023) an expected credit loss provision will be recognised replacing the incurred credit loss provision under IAS 39, the impact of which will be determined by the financial instruments held at that time.
27) Fair value measurement Fair value is used to value a number of assets within the statement of financial position and represents their market value at the reporting date.
Fair value hierarchy Fair value for all assets and liabilities which are either measured or disclosed is determined based on available information and categorised according to a three-level fair value hierarchy as detailed below: · Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities; · Level 2 fair value measurements are those derived from data other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); · Level 3 fair value measurements are those derived from valuation techniques that include significant inputs for the asset or liability valuation that are not based on observable market data (unobservable inputs).
Available for sale financial assets: Financial assets at FVTPL: Debt securities – – 15 15
Unrealised losses of £3m (2019: £6m losses) attributable to FVTPL debt securities recognised in the consolidated income statement relate to those still held at the end of the year.
© 2020 Friend Studio Ltd File name: Notes_01_to_29_v26 Modification Date: 9 March 2021 11:26 am 28) Interests in structured entities A structured entity is an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements.
However, the Group invests in entities created by and managed by external specialist investment managers where investments are pooled within an investment vehicle to provide a diversified exposure to particular classes of underlying investments. The use of these products allows the Group to broaden the diversification of its investment portfolio in a cost-efficient manner.
Mortgage backed securities Mainly consists of domestic mortgage backed securities 2,380 – 2,380 2,257 – 2,257
Collateralised debt obligations Structured debt security backed by bonds 286 16 302 212 50 262
Other Mainly consists of property funds 443 57 500 425 100 525
© 2020 Friend Studio Ltd File name: Notes_01_to_29_v26 Modification Date: 9 March 2021 11:26 am 29) Reinsurers’ share of insurance contract liabilities £m £m
The following changes have occurred in the reinsurers’ share of provision for losses and loss adjustment expenses during the year: 2020 £m 2019 £m
Reinsurers’ share of provisions for losses and loss adjustment expenses at 1 January 1,580 2,136
Reinsurers’ share of provisions for losses and loss adjustment expenses at 31 December 1,624 1,580
© 2020 Friend Studio Ltd File name: Notes_30_to_end_NEW_v21 Modification Date: 9 March 2021 12:19 pm 30) Insurance and reinsurance debtors £m £m
Insurance debtors due from policyholders increased by £15m in 2020, this includes an adjustment of £32m to reduce this balance following completion of a balance sheet remediation programme in Sweden. Of this amount, £22m relates to cancelled insurance policies and £10m relates to write-off of aged debtor balances. The adjustment relates to balances that had increased incrementally over a number of years and although the adjustment is not a transaction relating to 2020, it has been recognised in the current year. Judgement has been applied in recognising the adjustment in this way as its impact is not material either to the current or prior years. This adjustment is also reflected in note 9 segmental information.
Deferred tax assets have been recognised on the basis that management consider it probable that future taxable profits will be available against which these deferred tax assets can be utilised. Key assumptions in the forecast are subject to sensitivity testing which, together with additional modelling and analysis, support management’s judgment that the carrying value of deferred tax assets continues to be supportable.
The majority of the deferred tax asset recognised based on future profits is that in respect of the UK. The evidence for the future taxable profits is a seven-year forecast based on the three year operational plans prepared by the relevant businesses and a further four years of extrapolation, which are subject to internal review and challenge, including by the Board. The four years of extrapolation assumes UK premium growth of 5% per annum and overseas premium growth of 3% to 5% where relevant to UK profit projections. The forecasts include the impact of Covid-19 on future taxable profits and a contingency allowance of £25m per annum.
The value of the deferred tax asset is sensitive to assumptions in respect of forecast profits. The impact of downward movements in key assumptions on the value of the UK deferred tax asset is summarised below. The relationship between the UK deferred tax asset and the sensitivities below is not always linear. Therefore, the cumulative impact on the deferred tax asset of combined sensitivities or longer extrapolations based on the table below will be indicative only.
In addition to the impact on the UK deferred tax asset of downwards movements in the key assumptions set out above, further specific downside scenarios have been modelled at 31 December 2020: · Mild and severe UK downside scenarios each reflecting a reduction in premiums for each business due to wider economic uncertainty; an earlier implementation of the FCA thematic review on pricing than the current assumption; an increase in bad debts following the removal of government financial support; some worsening of other key assumptions such as weather and large losses; lower prior year development and higher claims inflation due to Brexit. These downside scenarios also include a proportion of the Canada, Ireland and Europe downside scenario outcomes (due to intra-group reinsurance transactions).
· The impact of a significant single catastrophe event in the UK on forecast future profits (after the impact of existing reinsurance arrangements).
· The impact of using a five year forecast period for modelling future UK profits rather than seven.
· A downside scenario for “uncommitted savings” which excludes the benefit of cost savings in the operational plan where they are not fully committed, including any costs of achieving those savings.
The proposed takeover of the RSA Group poses a material risk to the UK deferred tax asset as there is increased uncertainty in the profit forecasts, particularly in relation to certain intra-group transactions which form a material part of the UK forecast profits. It is not appropriate to take the transaction into account for DTA purposes at 31 December 2020 as there is no certainty over what actions or decisions the purchaser may take if the acquisition completes. Any impact of the acquisition on the UK deferred tax asset will be reflected once the transaction is complete and more detailed information is available.
Net deferred tax asset at 31 December 94 125 1. In 2019, an £8m deferred tax liability for Scandinavian insurance receivables has been moved from “Provisions and other temporary differences” to “Net insurance contract liabilities”.
The movement in the net deferred tax assets recognised by the Group is as follows: 2020 £m 2019 £m
Effect of change in tax rates – income statement 21 1
The Group’s unrecognised trading losses are predominantly located in the UK and Ireland and represent losses which are not expected to be utilised within the forecast profit period. Unrecognised capital losses mainly relate to the UK and have not been recognised as it is not considered probable that they will be utilised in the future as most UK capital gains are exempt from tax. £2m (2019: £1m) of the gross trading tax losses are attributable to Luxembourg and will expire in 2036.
34) Share capital The issued share capital of the Parent Company is fully paid and consists of two classes: Ordinary Shares with a nominal value of £1 each and Preference Shares with a nominal value of £1 each. The issued share capital at 31 December 2020 is: 2020 £m 2019 £m
Issued and fully paid 1,035,267,610 Ordinary Shares of £1 each (2019: 1,031,645,294 Ordinary Shares of £1 each) 1,035 1,032 125,000,000 Preference Shares of £1 each (2019: 125,000,000 Preference Shares of £1 each) 125 125
Issued in respect of employee share options and employee share awards 3,622,316 3 5
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 The Share Incentive Plan Trust is used to hold shares purchased or issued under the Company’s all-employee Sharebuild plan. This includes unvested matching shares and unallocated shares which may subsequently be transferred to employees including Executive Directors to satisfy Sharebuild Matching Share awards. As at 31 December 2020, 124,665 Ordinary Shares (2019: 121,750 Ordinary Shares) are held by the Trust. 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.
The Royal and Sun Alliance ESOP Trust No. 2, an employee benefit trust, is used as a vehicle to satisfy vested awards under the long-term incentive plan (Performance Share Plan (PSP)). New issue shares are allotted to the trust immediately prior to vesting, and distributed to PSP participants at vesting. There was no balance of shares in this Trust as at 1 January 2020 or 31 December 2020.
· Danish Krone 650m at 3 month Cibor +485bps (equivalent to c.4.6% coupon on issue)
Royal & Sun Alliance Insurance (Middle East) BSC (c) 50 164 50 163
The Group has the option to defer interest payments on the bonds and notes, but has to date not exercised this right.
Notes to the consolidated statement of financial position continued 39) Insurance contract liabilities 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 (note 6).
The provisions for losses and loss adjustment expenses are estimated using relevant previous claims experience, 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, the levels of unpaid claims, and relevant external information such as legislative changes, judicial decisions and economic, political and regulatory conditions.
· The Bornhuetter-Ferguson method, which combines features of the above methods
Insurance contract liability estimates are currently subject to heightened uncertainty relative to normal circumstances due to the impact of the Covid-19 pandemic. Materially different outcomes to those we assume are possible. The main areas of heightened uncertainty include: · The impact which Covid-19 has had on claims experience will take time to develop. Some areas such as business interruption, travel and wedding have observed direct claims, whereas many other lines have seen material indirect changes in policyholder behaviour such as reduced motor frequency during lockdown. Changes in experience such as reduced claims frequency can result in a different mix or magnitude of claims and, therefore, different claims and runoff characteristics compared to historic experience. There have been material changes in the external claims environment in areas such as legal and medical activities which impact the speed of claims development. The distortions in our data caused by the various issues means identification of trends is more difficult than normal. Furthermore, it is possible that future economic conditions may give rise to different claims experience than expected. The following assumptions have been made in key areas in order to estimate the ultimate cost of claims: · Frequency, based on different levels of reported claim counts observed during the year
· Claims development patterns, taking into account both internal operations and external impacts
· Legal interpretations and regulatory expectations of the criteria for eligible claims
· Reinsurance recoveries on both the catastrophe and group volatility covers (GVC) are dependent on the identification and timing of events which trigger a reinsurance recovery claim, and for the GVC, the aggregation of all relevant claims against the retention level. The assessment of impact will develop over time as claims notifications are fully understood. Key reinsurance assumptions made include how reinsurance contracts respond to Covid-19 losses, the date of loss that will apply to Covid-19 claims, how losses are attributed by date, and how aggregation applies across different businesses and territories which share common reinsurance treaties. Failure to recover reinsurance in line with our expectations could lead to a material increase in our reported net liability.
© 2020 Friend Studio Ltd File name: Notes_30_to_end_NEW_v21 Modification Date: 9 March 2021 12:19 pm 39) Insurance contract liabilities continued Sensitivities Sensitivities in the table below show the impact on the net claims reserves of changes to key assumptions in relation to reserving risk and underwriting and claims risk. Whilst the range on the sensitivities was wider in the 2019 Annual Report and Accounts, the new set of metrics shown below are more tailored to the increased uncertainties and more aligned to the key risks as described in note 6.
Current year large loss ratios frequency or severity assumptions +5% 25–35 25–35
Inflation being 1% higher than expected for the next 2 years (excluding annuities) 100–120 100–120
Net claims reserves for BI losses are not expected to be sensitive to changes in assumptions to the estimates underlying the gross claims reserves, including the number of eligible claimants and legal interpretations of eligibility, provided reinsurance contracts respond as expected.
Average number of years to settlement from reporting date 2020 Years 2019 Years
As at 31 December 2020, the value of the discount on net claims liability reserves is £75m (2019: £69m) excluding annuities and periodic payment orders. All other factors remaining constant, a decrease of 0.5% in the discount rates would reduce the value of the discount by approximately £30m (2019: £20m).
As at 31 December 2020, the value of the discount on UK and Scandinavia annuities is £472m (2019: £451m). A decrease of 0.5% in the real discount rate would reduce the value of the discount by approximately £50m (2019: £50m). The sensitivity calculation has taken into consideration the undiscounted provisions for each class of business and the respective average settlement period.
Provision for unearned premiums (gross of acquisition costs) at 1 January 3,812 3,919
The provision for unearned premiums is shown net of deferred acquisition costs of £625m (2019: £646m). Movements in deferred acquisition costs during the year are as follows: 2020 £m 2019 £m
Provisions for losses and loss adjustment expenses The following changes have occurred in the provisions for losses and loss adjustment expenses during the year: 2020 £m 2019 £m
Provisions for losses and loss adjustment expenses at 31 December 9,379 9,141
Present value recognised in the consolidated statement of financial position 9,379
Notes to the consolidated statement of financial position continued 39) Insurance contract liabilities continued Consolidated claims development table net of reinsurance prior £m 2011 £m 2012 £m 2013 £m 2014 £m 2015 £m 2016 £m 2017 £m 2018 £m 2019 £m 2020 £m
Present value recognised in the consolidated statement of financial position 7,755
Present value of funded obligations (8,844) (452) (9,296) (8,147) (435) (8,582)
Notes to the consolidated statement of financial position continued 41) Post-employment benefits and obligations continued 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 and subsequently closed to future accruals with effect from 31 March 2017. UK schemes in surplus have been reduced for the 35% tax cost of an authorised return of surplus, classified as ‘Other net surplus remeasurements’. Our opinion is that the authorised refund tax charge is not an income tax within the meaning of IAS 12 and so the surplus is recognised net of this tax charge rather than the tax charge being included within deferred taxation.
In November 2020 the High Court issued a follow-up ruling to the Lloyds Banking Group 2018 case in respect of the equalisation of benefits due to unequal Guaranteed Minimum Pensions (GMPs) for male and female scheme members. The update states that where pension schemes have paid out lump sum transfers in respect of individual members leaving the scheme, these payments should also have been adjusted to allow for GMP equalisation and must therefore be revisited retrospectively. The impact of this on RSA’s UK defined benefit schemes has been estimated with an expected cost of c£1m recognised in 2020 (c£8m recognised in 2018 in respect of the original judgement).
© 2020 Friend Studio Ltd File name: Notes_30_to_end_NEW_v21 Modification Date: 9 March 2021 12:19 pm 41) Post-employment benefits and obligations continued The maturity profile of the undiscounted cash flows of the two main UK schemes is shown below: Cash flow – total liability £m
The weighted average duration of the defined benefit obligation of the two main UK schemes at the end of the reporting period is 17.5 years (2019: 17 years).
© 2020 Friend Studio Ltd File name: Notes_30_to_end_NEW_v21 Modification Date: 9 March 2021 12:19 pm 41) Post-employment benefits and obligations continued The values of scheme assets are as follows: UK £m
Other (including annuity contracts, infrastructure and growth alternatives) – 390 390 – 479 479
Value of asset and longevity swaps – (3,447) (3,447) – (2,791) (2,791)
Total assets in the schemes 9,544 311 9,855 8,152 864 9,016
Where assets are classified as unquoted the valuations are: · Taken from the underlying managers in the case of non-developed market equity, non-UK sovereign debt, pooled non-government debt and other pooled funds – these funds themselves will be subject to annual (or more frequent) audit
During the year a change was made to our actuarial provider of IAS 19 discount rate. The underlying principles of this assumption remain unchanged and, while the impact will vary slightly at different dates, it is expected to remain broadly neutral (1bp at 31 December 2019, which is equivalent to less than a £5m decrease in net IAS 19 surplus).
Mortality rate The mortality assumptions are set following investigations of the main schemes’ recent experience carried out by independent actuaries as part of the most recent funding valuations. The core mortality rates assumed for the main UK schemes follow industry-standard tables with percentage adjustments to reflect the schemes’ recent experience compared with that expected under these tables.
See note 41 for further information regarding the pensions and post-employment benefit obligations.
Movements during the year on reorganisation and other provisions Reorganisation £m
Other creditors of £418m (2019: £387m) mainly includes payroll and other indirect taxes £170m (2019: £167m), outstanding settlements for investment purchases £100m (2019: £63m) and other creditors £148m (2019: £157m).
Amounts recognised at transition on 1 January 2019 190 49 239
Additions to right-of-use assets 9 3 12 1. Other mainly includes foreign exchange. 2. Other includes £6m transfer from Other debtors, £(3)m transfer to Investment property in respect of subleases and foreign exchange.
The key judgements and assumptions considered in the impairment reviews were as follows: · Office space was distinguished between: · Office space that is temporarily underutilised and has not been impaired on the basis that the space will be utilised again in the future when office working resumes
· Office space that will remain vacant and no longer be utilised as a result of the reduced need for working space for the reasons mentioned above
· The recoverable amount of the right-of-use assets relating to permanently vacant office space was based on their value in use and include several key assumptions. These include: · The ability to sublet and the timing of agreements, if considered possible
· The discount rate which is assumed to be the Group weighted average cost of capital (WACC)
Lease liabilities Lease liabilities of £204m (2019: £258m) are included within other liabilities in the consolidated statement of financial position (see note 43). The maturity analysis of this balance can be found in note 6 on page 119.
Three leases relating to property and computer mainframes that incept in 2021 were signed for before the balance sheet date. Therefore future cash flows of £31m were committed at the balance sheet data but are not reflected in the lease liabilities (or right of use assets).
Leases as a lessor The Group leases out its investment property consisting of freehold and leasehold land and buildings, as disclosed in note 25. All leases are classified as operating leases from a lessor perspective with the exception of sub-leases, which the Group has classified as finance sub-leases.
During 2020, the Group recognised interest income on lease receivables of £1m (2019: £1m).
Impairment charge on available for sale financial assets 10 32 –
Total changes from financing cash flows – (27) (50) (33) (110)
The effect of changes in foreign exchange rates – – 4 8 12
Proceeds from issue of loan capital 348 – – – 348
Funding commitments to structured entities and invested assets The future commitments to structured entities are disclosed in note 28 of these financial statements. In addition, the Group has committed to invest £319m (2019: £185m) in other classes of investments.
48) Other contingent liabilities In Canada the Group has purchased annuities from regulated Canadian life insurers in order to pay fixed and recurring payments to certain claimants. This arrangement exposes the Group to a credit risk that the life insurers are unable to make these payments, which is mitigated by an industry compensation scheme which in that event would assume a significant majority of the remaining outstanding obligations. The likelihood of both a Canadian regulated life insurer and the industry compensation scheme being unable to pay their obligations is considered very remote and so no provision has been recognised in respect of this risk. There are no such industry compensation schemes in other regions.
A small number of litigation claims for unpaid BI claims have been filed outside of the UK FCA test case in other regions. RSA conducts a thorough claims assessment process for all BI claims received. Most BI coverages are not expected to be eligible under their terms for Covid-19 claims. In areas of litigation, the claims assessment is supported with legal advice and consequently claims reserves are not held in respect of adverse outcomes beyond the cost of litigation.
49) Events after the reporting period On 18 January 2021 the Group’s shareholders voted to approve a takeover proposal received from a consortium of two companies, Intact Financial Corporation and Tryg. Further steps are required to complete the transaction and RSA continues to operate as an independent company until the sale is complete.
Appendix A: Other accounting policies Subsidiaries Subsidiaries are entities over which the Group has control. The Group controls a subsidiary if the Group has all of the following: · Power over the subsidiary
· Exposure, or rights, to variable returns from its involvement with the subsidiary
Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recognised as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the consolidated income statement.
Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated on consolidation. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of subsidiaries are aligned to ensure consistency with the policies adopted by the Group.
Translation of foreign operations The results and financial position of subsidiaries and associates whose functional currency is not Sterling are translated into Sterling as follows: · Assets and liabilities for each statement of financial position presented are translated at closing exchange rates at the end of the period
· Income and expenses for each income statement are translated at average exchange rates during each period
Hedge accounting Transactions are classified as hedging transactions when the following conditions for hedge accounting are met: · There is a formal designation and documentation of the hedging relationship and the Group’s risk management objective and strategy for undertaking the hedge
Group occupied property is stated at fair value, less subsequent depreciation for buildings. The fair value methodology is set out in note 27. Increases in the carrying amount arising on revaluation are recognised in other comprehensive income and credited to a separate revaluation reserve within equity. Decreases in the carrying amount arising on revaluation are recognised in other comprehensive income and reduce the revaluation reserve, to the extent they offset previous revaluation increases; further decreases are charged to the consolidated income statement. Buildings are depreciated to their residual value on a straight line basis over the useful economic life of the building; depreciation is charged to the consolidated income statement except where a building has been revalued upwards, in which case the amount of the depreciation relating to the difference between the buildings revalued amount and the original cost is transferred from revaluation reserve to retained earnings. Land is not depreciated.
Investment property and rental income Investment property is stated at fair value. The fair value methodology is set out in more detail in note 27. Unrealised gains and unrealised losses are recognised in net investment return in the consolidated income statement. Rental income from operating leases on investment property is recognised in the consolidated income statement on a straight line basis over the length of the lease.
Issued debt Issued debt comprises subordinated bonds and senior notes which are initially measured at the consideration received less transaction costs. Subsequently, issued debt is measured at amortised cost using the effective interest rate method.
Termination benefits Termination benefits are payable when either employment is terminated by the Group before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. Termination benefit expenses are recognised in the income statement at the earlier of the date when the Group can no longer withdraw the offer and the date when any related restructuring costs are recognised. Benefits falling due more than 12 months after the end of the reporting period are discounted to present value.
· Premium policy instalment fee income: is received from policyholders as a finance charge on premiums paid in instalments and is recognised over the period that the instalments are made on a straight line basis.
Share-based payments The fair value of the employee share options and other equity settled share-based payments is calculated at the grant date and recognised as an expense over the vesting period. The vesting/maturity of share awards can be dependent on service and performance conditions, as well as market conditions. The assumption of the number of shares expected to vest is revised at the end of each reporting period, with the corresponding credit or charge recognised immediately in the income statement. Where an option is cancelled by an employee, the full value of the option (less any value previously recognised) is recognised at the cancellation date. The proceeds received by RSA upon exercise of share options are credited to share capital (nominal value) and share premium, with a corresponding increase in equity.
Further information on the share schemes the Group operates can be found in note 19 and in the Directors’ Remuneration Report.
Leases The Group as lessee A lease liability and right-of-use asset is recognised for all lease obligations the Group has as a lessee, except for the following recognition exemptions that the Group has elected to use: lease contracts that at the commencement date have a lease term of 12 months or less and that do not contain a purchase option and lease contracts for which the underlying asset is of low value.
The right-of-use asset is initially measured as the value of the lease liability, adjusted for any initial direct costs incurred to obtain the lease restoration provisions and any lease payments made before the commencement of the lease.
The right-of-use asset is subsequently measured at cost less accumulated depreciation and impairment losses. It is depreciated over the shorter of the useful life or the period of the contract on a straight line basis. The Group applies IAS 36 to determine whether a right-of-use asset is impaired and accounts for any identified impairment loss as described in the ‘Property and equipment’ policy.
The Group as lessor Where the Group act as a lessor the lease will be classified as a finance lease if it transfers substantially all the risk and rewards incidental to ownership of the underlying asset, or otherwise as an operating lease (refer to ‘Investment property and rental income’ policy).
When the Group is an intermediate lessor, it accounts for the head lease and the sub-lease as two separate contracts. The sub-lease is classified as a finance or operating lease by reference to the right-of-use asset arising from the head lease.
Finance lease income is calculated with reference to the gross carrying amount of the lease receivables.
MRM Solutions Limited 208-4940 No. 3 Road, Richmond BC V6X 3A5, Canada
Fort William Building, 10 Factory Lane, St. John’s Newfoundland A1C 6H5, Canada
Class B Common 2029974 Ontario Inc.4 95 Mural Street, Suite 400, Richmond Hill ON L4B 3G2, Canada
Class C Special 2029974 Ontario Inc.4 95 Mural Street, Suite 400, Richmond Hill ON L4B 3G2, Canada
Class N Special 2029974 Ontario Inc.4 95 Mural Street, Suite 400, Richmond Hill ON L4B 3G2, Canada
First Floor, Building 10 C, Cyber City Complex, DLF Phase II, Gurgaon, Haryana, 122002, India
RSA Overseas Holdings B.V.8 20 Fenchurch Street, London, EC3M 3AU, United Kingdom
Eurotempest Limited3 c/o UCL Business Plc, The Network Building 97, Tottenham Court Road, London, W1T 4TP, United Kingdom 33.33
Hempton Court Manco Limited3, 5 7 Seymour Street, London, W1H 7JW 66.66
Items that may be reclassified to the income statement: Fair value gains/(losses) on debt securities net of tax 11 (2)
Items that will not be reclassified to the income statement: Fair value gains on investment in subsidiaries 1,290 510
The loss for the year net of tax includes a tax credit of £5m (2019: £4m tax credit). Fair value gains/(losses) on debt securities includes a tax charge of £2m (2019: £nil).
Fair value gains net of tax – – – – 1,301 – – – 1,301
Share-based payments (note 7) 2 – – – – – 17 – 19
Parent Company statement of comprehensive income For the year ended 31 December 2020
Parent Company statement of changes in equity For the year ended 31 December 2020
The loss for the year net of tax was £19m (2019: £351m profit).
Cash and cash equivalents at the beginning of the year 5 3
The attached notes form an integral part of these Parent Company financial statements.
Notes to the Parent Company financial statements 1) Basis of preparation RSA Insurance Group plc (the Company) is incorporated in England and Wales and is the ultimate Parent Company of the RSA Group of companies. The principal activity of the Company is to hold investments in its subsidiaries and the receipt and payment of dividends.
Except where otherwise stated, all figures included in these Parent Company financial statements are presented in millions of pounds sterling (£m).
3) Adoption of new and revised accounting standards There are no new and revised accounting standards that have or are expected to have an impact on the Company.
4) Significant accounting policies The accounting policies that are used in the preparation of these Parent Company financial statements are consistent with the accounting policies used in the preparation of the consolidated financial statements of the Group as set out in the consolidated financial statements, with the exception of financial instruments where the Company is not permitted to defer the application of IFRS 9 ‘Financial Instruments’.
The accounting policies that are specific to the Parent Company financial statements are set out below.
Investments in subsidiaries The Company designates its investments in directly owned subsidiaries at fair value through other comprehensive income (FVOCI). The fair value is determined having regard to the Company’s market capitalisation at the reporting date.
Changes in the fair value of the investments in subsidiaries are recognised directly in equity through the statement of comprehensive income and are not reclassified through profit or loss on derecognition.
It has been concluded that the value of the ECL would be insignificant and so no ECL is recognised.
An allowance for ECL is based on those default events that are possible within 12 months after the reporting date, or where the credit risk has increased significantly since initial recognition on the basis of all possible default events over the life of debt. Specifically the probability of default is considered over the appropriate period of time together with the expected subsequent loss. For investment grade debt securities, rated BBB or above, the ‘low credit risk exemption’ available within IFRS 9 has been applied. For these assets, it is assumed that credit risk has not increased significantly since initial recognition. As at the balance sheet date, all of the Company’s debt securities are investment grade and expected credit losses are not significant and so no ECL is recognised.
On disposal of debt securities any related balance within the FVOCI reserve will be reclassified to the income statement.
Interest income Interest income is recognised using the effective interest rate method.
The amounts charged in respect of these services to the Company’s subsidiaries totalled £60m (2019: £55m).
Interest income from subsidiaries is £26m (2019: £35m), and interest charged to subsidiaries is £1m (2019: £2m).
Receivable from related parties: Receivable from subsidiaries, interest bearing loans 1,857 1,857
Total payable to related parties 366 209 7) Share-based payments Full details of share-based compensation plans are provided in note 19 to the consolidated financial statements.
8) Dividends paid and proposed Full details of the dividends paid and proposed by the Company are set out in note 21 to the consolidated financial statements.
© 2020 Friend Studio Ltd File name: Notes_30_to_end_NEW_v21 Modification Date: 9 March 2021 12:19 pm 9) Investments Debt securities £m
Investments in subsidiaries The investments in subsidiaries are recognised in the statement of financial position at fair value measured in accordance with the Company’s accounting policies. The Company’s investments in subsidiaries are classified as level 2 financial assets. Fair value of the Company’s significant subsidiary, Royal Insurance Holdings Limited, is determined by reference to the market value (derived from relevant indices) of the Company’s ordinary shares and issued debt instruments at the end of the reporting period, being the most transparent independent available indicator. The market value is adjusted for the fair value of the Company’s preference shares, assets and liabilities, excluding directly owned subsidiaries. The adjusting items have been fair valued by determining the present value of future cash flow projections including projected central costs, using an appropriate arm’s length discount rate. The remaining subsidiaries are held at fair value which has been determined to be net asset value.
Investments in debt securities The investments in debt securities, all of which are listed, are classified at fair value through other comprehensive income (FVOCI) and at 31 December were neither past due nor impaired and comprise of securities with the following investment grades.
Details about the methods and assumptions used to fair value debt securities are provided in note 27 to the consolidated financial statements. Under the fair value hierarchy, £3m of the investments in debt securities are classified as level 1 financial assets (2019: £3m) and £357m are classified as level 2 (2019: £338m).
Loss allowance The loss allowance for debt securities at FVOCI is recognised in the income statement and reduces the fair value otherwise recognised in other comprehensive income. The loss allowance at 31 December 2020 is £nil (2019: £nil).
No deferred tax has been recognised in respect of £18m (2019: £21m) of deferred tax reliefs due to the unpredictability of future profit streams.
13) Tier 1 notes Full details of the Tier 1 notes are set out in note 35 to the consolidated financial statements.
© 2020 Friend Studio Ltd File name: Jargon_Buster_v14 Modification Date: 9 March 2021 12:16 pm
APMs are identifiable within Group tables by the symbol ◊ and are defined in the below jargon buster. Further definition, commentary, and outlook of those APMs considered important in measuring the delivery of the Group’s strategic priorities can be found on pages 16 and 17. Detailed reconciliations of APMs to their nearest IFRS Income Statement equivalents and adjusted APMs can be found after the jargon buster. APMs used to determine management and executive remuneration are identified below with ◊*.
Claims Ratio (Loss Ratio) Percentage of net earned premiums that is paid out in claims and claims handling expenses. ◊ 1 V Claims Reserve (Provision for Losses and Loss Adjustment Expenses)
A measure of underwriting performance being the ratio of underwriting costs (claims, commissions and expenses) expressed in relation to earned premiums: COR = loss ratio + commission ratio + expense ratio, where
Commission An amount paid to an intermediary such as a broker for introducing business to the Group. Constant FX (CFX) Prior period comparative retranslated at current period exchange rates. ◊ 4 Controllable Costs/ Expenses
Customer Retention A measure of the amount of business that is renewed with us each year. Ex. Exits Excluding exits refers to financial results adjusted for the impact of UK&I portfolio exits and business lapses targeted as part of the UK&I strategic review that concluded in 2019.
Group Volatility Cover (GVC) This is an aggregate reinsurance cover purchased by the Group to protect against the accumulation of “smaller/medium” single or event type losses. In 2020, individual large losses and catastrophe events are covered in full if they exceed the £10m franchise level. In 2021, the qualifying criteria for catastrophe losses remains unchanged but individual large losses now qualify based on a £5m excess (the £10m in / out trigger no longer applies for large losses). GVC reinsurers get the inuring benefit of our main excess of loss programmes. Cover attaches once the aggregate deductible is breached. This reinsurance provides protection world-wide for all short tail classes of business other than marine large losses.
Interest Costs Interest costs represent the cost of Group debt. Investment Result Investment result is the money we make from our investments on a management basis.
It comprises the major component of net investment return, investment income, in addition to unwind of discount and investment expenses.
Large Losses Single claim or all claims arising from a single loss event with a net cost of £0.5m or higher. Large Loss Ratio The large loss ratio is an expression of claims incurred in the period with a net cost of £0.5m or higher as a percentage of current year net earned premium over the same period. ◊ 1 T
A specialised type of insurance agent or broker that has been granted underwriting authority by an insurer and can negotiate contracts on behalf of the insurer.
Net asset value per share is calculated as closing ordinary shareholders’ funds (equity attributable to owners of the Parent Company less tier 1 notes and preference share capital) divided by the number of shares in issue at the end of the period.
Net Earned Premium (NEP) The proportion of premium written, net of the cost of associated reinsurance, which represents the consideration charged to policyholders for providing insurance cover during the reporting period.
Net Incurred Claims (NIC) The total claims cost incurred in the period less any share that is borne by reinsurers. It includes both claims payments and movements in claims reserves and claims handling expenses in the period.
Payout Ratio Ordinary dividends expressed as a percentage of underlying profit after tax attributable to ordinary shareholders. This has also been expressed excluding the impact of UK&I exits.
Updates to premium, claims, commission and expense estimates relating to prior years. ◊ 1 P
Property insurance covers loss or damage through fire, theft, floods, storms and other specified risks.
Casualty insurance primarily covers losses arising from accidents that cause injury to other people or damage to the property of others.
The regulatory authority with responsibility for the prudential regulation and supervision of the UK financial services industry.
Reported FX (RFX) Prior period comparative translated at exchange rates applicable at that time. Return on Equity Profit attributable to ordinary shareholders (profit after tax excluding non-controlling interests, coupon on tier 1 notes and preference dividend) expressed in relation to opening ordinary shareholders’ funds (equity attributable to owners of the Parent Company less tier 1 notes and preference share capital).
Tangible net asset value comprises equity attributable to owners of the Parent Company, less tier 1 notes, preference share capital and goodwill and intangible assets.
Underwriting Result Net earned premium less net claims and underwriting and policy acquisition costs. ◊ 1 Z Underlying Profit before Tax Profit before tax adjusted for the add back of all other charges except finance costs. ◊ 6 B Underlying Tax Rate The Group underlying tax rate mainly comprising the local statutory tax rates in the Group’s territories applied to underlying regional profits (business operating profits less finance costs). ◊ 6 A
Volatility Adjustment A measure calculated by the PRA that adjusts the risk-free discount rate used to value Solvency II Technical Provisions, in order to mitigate the effect of short-term credit spread volatility on insurers’ solvency positions. It is calibrated as 65% of the risk-adjusted spread of assets in a representative portfolio.
Weather Loss Ratio The weather loss ratio is an expression of weather losses in the period as a percentage of earned premium.
Income Gross written premiums 7,282 7,282 Less: reinsurance premiums (1,059) (1,059) Net written premiums 6,223 6,223 Change in the gross provision for unearned premiums 6 6 Change in provision for unearned reinsurance premiums (30) (30) Change in provision for unearned premiums (24) (24) Net earned premiums, analysed as 6,199 A 6,199
Earned CY commission (803) K (803) Earned PY commission (5) L (5) Earned CY operating expenses (1,116) M (1,116) Earned PY operating expenses (12) N (12) Underwriting and policy acquisition costs (1,936) (1,936) Unwind of discount and change in economic assumptions (39) (31) (8) Investment expenses (14) (14) Central expenses (13) (13) Amortisation of intangible assets (11) (11) Impairment of goodwill (14) (14) Foreign exchange losses (16) (16) Reorganisation costs (78) (78) Transaction costs (14) (14) Other operating expenses (160)
Interest costs (27) (27) Interest on lease liabilities (6) (6) Finance costs (33) O (33) Acquisitions and disposals (6) (6) Net share of profit after tax of associates 1 1
Attritional loss ratio G/B R 50.6% Weather loss ratio H/B S 2.3% Large loss ratio I/B T 10.1% Prior year effect on loss ratio V-R-S-T U (0.2%) Loss ratio F/A V 62.8% Commission ratio (K+L)/A W 13.0% Expense ratio (E+M+N)/A X 16.1% Combined operating ratio V+W+X Y 91.9%
Income Gross written premiums 7,461 7,461 Less: reinsurance premiums (1,044) (1,044) Net written premiums 6,417 6,417 Change in the gross provision for unearned premiums 34 34 Change in provision for unearned reinsurance premiums 11 11 Change in provision for unearned premiums 45 45 Net earned premiums, analysed as 6,462 A 6,462
Investment income 306 D 306 Realised gains on investments 15 15 Gains on exchange derivatives 1 1 Unrealised losses on investments (26) (26) Net investment return 296 Other insurance income 135 E 135 Pension net interest and administration costs 4 4 Foreign exchange gain 1 1 Other operating income 140 Total income 6,898 Expenses Gross claims incurred (5,059) (5,059) Less: claims recoveries from reinsurers 727 727 Net claims, analysed as (4,332) F (4,332)
Earned CY commission (830) K (830) Earned PY commission (1) L (1) Earned CY operating expenses (1,081) M (1,081) Earned PY operating expenses (7) N (7) Underwriting and policy acquisition costs (1,919) (1,919) Unwind of discount and change in economic assumptions (46) (31) (15) Investment expenses (12) (12) Central expenses (13) (13) Amortisation of intangible assets (12) (12) Reorganisation costs (27) (27) Other operating expenses (64)
B Underlying profit after tax attributable to ordinary shareholders 486 406
E Weighted average no. shares during the period (un-diluted) 1,034 1,031
APM Rec 7 M Underlying earnings per share ex exits 51.2p 44.5p
Alternative performance measures reconciliations continued 3. Balance sheet reconciliations 2020 £m 2019 £m
Closing equity attributable to owners of the Parent Company 4,564 4,169
Alternative performance measures reconciliations continued 5. Controllable expenses 2020 £m 2019 £m
1. Includes add back of £10m expenses (within ‘other’) and £21m net written and net earned premium reductions recognised in 2020 in respect of aged debtor remediation in Sweden.
Alternative performance measures reconciliations continued 7. Adjusted APMs Management report adjusted APMs when circumstance requires to further enhance understanding of reported results and of future performance potential.
Alternative performance measures reconciliations continued £m (unless stated) UK UK &
K GVC recoveries in relation to UK exit portfolio 8 8 (8) –
Amalgamation of accounts Shareholders who receive duplicate sets of Company mailings owing to multiple accounts in their name may contact Equiniti to request that their accounts be amalgamated.
Financial calendar 4 March 2021 Ex-dividend date for the first preference dividend for 2021 5 March 2021 Record date for the first preference dividend for 2021 1 April 2021 Payment date for the first preference dividend for 2021 29 June 2021* Annual General Meeting 29 July 2021* Announcement of the half-year results for the six months ended 30 June 2021 12 August 2021* Ex-dividend date for the second preference dividend for 2021 13 August 2021* Record date for the second preference dividend for 2021 1 October 2021* Payment date for the second preference dividend for 2021 * Provisional date
Annual General Meeting The 2021 AGM will be held in London on Tuesday 29 June 2021 at 11.00am.
Ordinary Share performance The opening market price of an ordinary share on 2 January 2020 was 568.6 pence and the closing market price on 31 December 2020 was 677.4 pence. The highest daily closing price of an Ordinary Share during 2020 was 679.2 pence on 23 December 2020 and the lowest daily closing price was 326.9 pence on 23 March 2020.
Always be wary if you’re contacted out of the blue (by telephone, email, post or in person) and pressured to invest quickly or promised returns that sound too good to be true. Shareholders are advised to be wary of any unsolicited advice, offers to buy shares at a discount, or offers of free reports about the Company. If you receive any unsolicited advice, make sure you get the correct name of the person and organisation and check that they are appropriately authorised by the FCA by visiting www.fca.org.uk/scamsmart. It is advisable to check the URL on websites and check the contact details of a firm in case it’s a ‘clone firm’ pretending to be a real firm, such as your bank or a genuine investment firm.
For other information or help, please contact: · JPMorgan Chase Bank, NA, Shareowner Services, PO Box 64504, St. Paul, MN 55164-0504
· Telephone: Toll-free number: Phone: 1 800 990 1135 Outside the U.S.: Phone: +1 651 453 2128