2013 was a very disappointing year for the Group. The underwriting profit of £57m and loss after tax of £338m reflected the impact of the issues we faced in Ireland, adverse weather across Scandinavia, Canada and the UK, as well as write downs of software intangible assets and goodwill.
Our underlying business continues to perform. On a normalised basis, adjusting for non-recurring items, underwriting profits were £309m, and profit after tax was £304m.
We have completed a thorough review of the Group. We intend to tighten strategic focus so we can concentrate more effectively on performing sustainably well in core businesses; reset the quantity and quality of capital the Group works with and improve business performance and the Group’s ability to sustain it.
PERSONAL Our Personal insurance products provide peace of mind to our customers, and if the worst should happen, we respond quickly to deal with their claim, allowing them to continue living their lives.
A Risk Managed D Property B Marine E Group Reinsurance C Construction and
WHERE ARE OUR CUSTOMERS? A STRONG DIVERSIFIED PORTFOLIO IN DEVELOPED AND EMERGING MARKETS
3. In Sweden, more than 600,000 people have their house insured with Trygg-Hansa and we helped around 400 families with temporary housing in 2013.
SHIFTING BUYING PATTERNS RESPONSE Consumers are increasingly wanting to buy a more diverse range of products and services from large high street retailers and banks. Insurance is no exception and we have secured new affinity relationships with some of the world’s best known brands. This enables us to be closer to our customers, making our products easy to get to.
Corporate governance 44 Chairman’s Governance Letter 46 Board of Directors 48 Executive Committee 50 Directors’ and corporate governance report 64 Group Audit Committee report 69 Directors’ Remuneration report
Financial statements 94 Directors’ responsibilities 95 Independent auditor’s report to the members of RSA Insurance Group plc 99 Financial statements 116 Risk management 127 Notes to the financial statements
EXPLORE ONLINE Visit us online to see summary information and listen to our Group Chief Executive’s statement at: rsagroup.com
OUR PRODUCTS AND SERVICES ARE BUILT AROUND OUR CUSTOMERS, ADAPTING TO DIFFERENT MARKETS AROUND THE WORLD. BY ANTICIPATING THEIR NEEDS AND USING OUR EXPERTISE TO INNOVATE, WE ENSURE THE MANAGEMENT OF RISK MAKES A DIFFERENCE TO THE LIVES OF PEOPLE ALL OVER THE WORLD.
37 YEARS We started offering sickness and accident insurance in 1977, giving us nearly forty years of experience.
200 PEOPLE Attended our ‘Baby Buoy’ training events and we’ve distributed more than 2,500 ‘Baby Buoy’ kits across Sweden.
MARKET LEADERS No. 1 provider of child sickness and accident insurance in Sweden.
Trygg-Hansa, our core brand in Sweden, has been the market leader since the late 1990s and has led the development of the Child S&A customer proposition. During the last few years we’ve noticed some changes in customer behaviour and preferences regarding the product and distribution. Some of these insights are: • Parents want to buy a premium S&A product for their children.
• Younger generations are starting to buy insurance online and gather information via social media.
It’s insights like these that allow us to improve our product offering and deliver a premium service to our customers, year after year.
CLOSER COLLABORATION Face-to-face access to our specialists means we can address brokers’ immediate needs, and offer decisions on the spot. LOCATION, LOCATION
In 2013, we launched new broker-dedicated trading sites in Redhill, Leicester and Edinburgh – and we’re planning more for the future.
BETTER SYSTEMS We will continue to invest in systems, processes and locations to fit the needs of our top brokers.
UK BROKER TRADING SITES AND A NEW CULTURE OF OPENNESS We exist to look after our customers and we respect the trust they place in their broker when they advise them on their choice of insurer. We are doing everything we can to help our top brokers feel confident about recommending RSA to their customers.
As part of our offering we have been reconfiguring our trading sites to create a new way of working which is designed around the needs of our top brokers. Whether they need a meeting space, a hot desk with wi-fi or just a place to think, our top brokers can drop in and use our trading sites as a place to work.
OUR ABILITY TO TRANSFER KNOWLEDGE FROM ARCTIC WILDLIFE TO ARCTIC SHIPPING – AND A LITTLE HELP FROM THIS MAN – HELPED OUR CUSTOMER CHART A NEW COURSE THROUGH THE ARCTIC’S NORTHWEST PASSAGE.
HOW AN OPEN-MINDED APPROACH HELPED ACHIEVE AN INDUSTRY FIRST The bulk carrier Nordic Orion arrived in Vancouver in September to take on cargo, with plans to then sail through the Panama Canal to its destination in Finland.
As our marine surveyor, Andrew Teasdale said, “Imagine you’re in my shoes and someone comes to you and says, ‘Hey, we’re going to put a ship through the Northwest Passage.’
ICE MAN Retired Canadian Coast Guard Tony O’Connell, pictured, was recruited as Ice Navigator through the passage, which carried a cargo of 73,500 tonnes to Finland. With a whole Coast Guard career behind him, Tony advised the captain of the Nordic Orion how to get through the ice, accompanied by a Canadian Coast Guard icebreaker at various points along the route.
MORE IS MORE 25% more cargo was carried than would have been possible had it travelled through the shallower Panama Canal.
SAVING TIME, SAVING MONEY Fuel costs of $80,000 saved by taking the 1,000 nautical mile shorter route, versus the Panama Canal.
CONSIDERING THE ENVIRONMENT Since 2009, RSA Canada has funded critical marine conservation projects. RSA applies information about Arctic wildlife and ice patterns to inform underwriting decisions for vessels and operations in Arctic waters.
We are in the business of risk management. We strive hard to understand the risks our customers want us to insure and make sure that we price our products appropriately.
As a global business we are seeking to maximise the benefits of our reach without losing touch with the differing needs of the many markets we operate in.
ADDITIONAL INCOME WITHOUT PUTTING CAPITAL AT UNDUE RISK Shareholders benefit from the returns on our assets, safe in the knowledge that our prudent approach is unlikely to jeopardise their capital.
ACCESS TO ANCILLARY SERVICES Increasingly our customers are looking for more than just claims payment. For instance, access to our supply chain to enable lower costs of ancillary services allied to the core insurance product or risk management to prevent claims occurring.
ENABLING SOCIETY TO GROW AND DEVELOP By effectively enabling risk transfer across society, we encourage entrepreneurship and innovation in the societies we work in whilst ensuring that society is protected from extreme events.
PLAYING OUR PART IN THE DIGITAL WORLD As more business is transacted online, we are investing to improve our customers’ online experience and encouraging customers to embrace digital distribution.
ENABLING GROWTH AND PROVIDING CAPITAL We invest in all the countries we operate in, providing capital to governments and corporates to enable economic growth.
WE MAKE A DIFFERENCE BY PROTECTING PEOPLE AND BUSINESSES AGAINST THE RISKS THEY FACE IN THEIR DAILY LIVES. WE PROVIDE UNRIVALLED EXPERTISE THROUGH OUR GLOBAL NETWORK OF PROVIDERS TO COVER EVERYTHING FROM HOUSES AND PETS, TO SKYSCRAPERS AND TANKERS, IN OVER 140 COUNTRIES WORLDWIDE.
Our customers expectations are increasing. We aim to constantly improve the service we offer, and pay claims quickly and efficiently.
ENSURES THAT SHAREHOLDERS ARE ADEQUATELY REWARDED FOR THE CAPITAL THEY PROVIDE We aim to achieve acceptable returns through making sure that underwriters understand the target price required to deliver target returns on capital.
THE MOST EFFECTIVE WAY TO GROW PREMIUM INCOME We strive to find the lowest cost route to the largest number of customers, tailoring our offering to meet the needs of specific markets.
LOWER VOLATILITY OF EARNINGS AND LOWER CAPITAL REQUIREMENTS The diversity of our business enables us to hold capital efficiently. Our global footprint diversifies our exposure to catastrophe events leading to lower volatility of earnings.
ACCESS INSURANCE PRODUCTS IN THE WAY YOU WANT The way in which customers want to buy insurance is changing. We are at the forefront of these changes, anticipating customers changing needs to provide easy access to our products.
ACCESS TO BEST PRACTICE INNOVATION AND GLOBAL RISK COVERAGE We are always looking to share ideas and best practice across countries giving customers access to innovative products and services. We can provide multinational customers with global product coverage.
HELPING SOCIETY RECOVER FROM DISASTERS When catastrophes strike, we help society get back on track quickly, through settling claims fairly and efficiently.
Technology is also driving change in our underwriting and claims functions. As the volume and availability of data around the world continues to grow, we are increasingly looking to integrate new data into our processes. For example, we are working with Ingenie, a telematics provider, in the UK to explore how data on driving style can inform our underwriting decisions.
THE DIVIDE BETWEEN MATURE MARKETS... In many of our mature markets, insurance has been a part of most customers’ lives for many years. They understand the benefits that insurance can offer and are increasingly looking for low prices, tailored products and high levels of customer service from brands they trust.
...whilst respecting local differences. But each of the markets we operate in are different – different cultures, legal and regulatory structures, distribution models and product demands. Our business needs to be flexible to ensure that we tailor our model to reflect the demands of local communities.
ensure that risks are effectively priced and claims can be managed quickly. The need to develop a lower carbon economy is driving demand in our renewable energy business.
Finally, we are seeing an increasing burden of regulation in many of the markets we operate in as regulators respond to a post crisis world. This creates pressure on cost and capital but also means we increasingly need to look at our businesses as stand-alone entities as well as part of the overall Group.
…AND EMERGING MARKETS In our emerging markets, insurance is less mature. As customers’ assets and liabilities increase they are looking to buy protection, often for the first time. For these customers education, ease of access and simple products are key to continuing to drive growth.
CANADA As the world’s 11th largest economy, Canada has been an attractive and stable economic environment for some time now. It has outperformed the G7 in terms of GDP growth over the past decade, and prospects for future growth are good.
As the world’s second largest country, Canada has a wide geographic spread of risk. It broadly divides into four regions, with the spread of insurance impacted by varying geographic, socioeconomic and regulatory dynamics.
OUR MARKET UNITS We operate in 32 countries which we organise into four regions.
Denmark, Norway and Sweden are generally perceived as financially safe economies, and all three countries have been top-rated among the leading major credit rating agencies. All countries have small open economies very dependent on export. They all recovered well after the 2009 downturn, and have already reached the pre-crisis level when measuring export per capita. This is expected to improve even further into 2014.
In Commercial lines, around 60–70% of business is written directly, with a majority of the customers using Agents. Brokers are an important distribution channel but only represent around 30–35% of business.
EMERGING MARKETS Whilst growth prospects in Emerging Markets are cooling they remain relatively strong.
Across the Middle East, growth of around 5–7% continues to be strong and is supported by high oil prices and Government action in response to the Arab Spring.
FOLLOWING AN EXTREMELY TOUGH 2013, WE ARE TAKING SWIFT AND DECISIVE ACTION TO IMPROVE THE CAPITAL STRENGTH OF THE GROUP AND OPTIMISE THE GROUP’S PORTFOLIO.
There is no doubt that 2013 was a difficult year for RSA. Extreme weather across Scandinavia, Canada, and the UK and Ireland coupled with the problems we identified in Ireland in the final quarter led to a very disappointing performance for the Group. This, together with our decision to write down certain goodwill and intangible assets, led to a loss after tax of £338m.
In Canada we experienced heavy flooding in Alberta in June and Toronto in July, as well as a significant ice storm in Toronto in December. Northern Europe was badly affected by three storms which swept across the continent in November and December. These events created one of the worst years for weather claims at RSA for some time with weather losses £112m worse than our initial expectations for 2013. However, extreme weather is something we are used to, albeit not at the levels we experienced in 2013.
What we didn’t plan for was a £200m loss in Ireland which was caused by a combination of management irregularities and the need for significant reserve strengthening. The issues which emerged in Ireland are totally unacceptable and have led to a thorough review of our risk and control processes which have included the involvement of external independent firms. As we expected, these reviews confirmed 14 CHAIRMAN’S STATEMENT
extensive global financial services expertise. He has an outstanding track record of transforming the performance of businesses, bringing new energy and focus, and implementing a challenging agenda to ensure significant value is delivered for customers and shareholders. Stephen started by immediately picking up the reins on the business review, and I reverted back to my role as Non-Executive Chairman.
In addition to these issues, the Group continued to face headwinds from the prolonged low interest rate environment which continues to depress investment income. Moderation of anticipated economic growth across our emerging markets has, in part, been offset by an improving outlook in our developed markets of the UK, Canada and Scandinavia.
Despite these very challenging events, I remain firmly of the view that RSA is a high quality business with much to offer shareholders. Our market positions in the territories we operate in are very strong and we have excellent people who are committed to delivering for our customers and, in turn, delivering for our shareholders. This commitment was very much in evidence in helping our customers through the impacts of the extreme weather they experienced in 2013.
At the end of 2013, the Board reconsidered the capital position of the Group in light of recent events, and agreed to conduct a thorough review of the business with the objectives of improving the capital strength of the Group, optimising the Group’s portfolio and delivering a sustainable dividend into the future.
THE ISSUES: During the second half of 2013 we announced two significant issues in our Irish business.
TIMELINE: October 2013 – conclusion of internal audit work in Ireland on reserving for notified claims.
8 November 2013 – announced the suspension of RSA Ireland’s CEO, CFO and Claims Director, pending the outcome of an investigation into issues in the Irish claims and finance functions. Announced capital injection into RSA Insurance Ireland.
9 January 2014 – announced the findings of PwC’s review which describes the RSA Group Control Framework as appropriate in terms of structure and design, and that inappropriate collaboration amongst a small number of senior executives in Ireland undermined control effectiveness over claims. Also announced that additional assurance testing from newly appointed external auditor KPMG and RSA Group Internal Audit confirmed that the irregularities were isolated to Ireland.
2013 was a very disappointing year for the Group. We uncovered irregularities and the need for significant reserve strengthening in our Irish business, and also faced challenging weather conditions across our operations in Canada, Scandinavia and the UK.
EUROPEAN WIND STORM ST JUDE On 27 and 28 October, a severe windstorm affected Northern Europe, including the UK, Scandinavia and the Baltics. The majority of the UK was affected by peak wind speeds of up to 60mph. Scandinavia experienced very strong winds in several heavily populated areas. The storm increased in strength over the North Sea and over Denmark, with wind speeds hitting more than 110mph, the highest ever measured in Denmark. This was reflected in the level of building damage with an exceptionally high level of roof damage. In addition, the storm tracked directly over the heavily insured areas of Aarhus and Copenhagen in Denmark, and Malmo and Gothenburg in Sweden. The average wind speed was 88mph and the damage was primarily caused by wind damage with minimal impact from rainfall. The total net cost to RSA across Scandinavia and the UK was £36m
EUROPEAN WIND STORM XAVER Impacted Denmark and Sweden on 5 December. We also saw exposure in our UK business. Wind speeds peaked at nearly 100mph close to the border between Denmark and Germany. The total net cost to RSA was £33m.
During 2013, RSA was affected by extreme weather conditions across some of its major markets. This has had a significant impact on profitability for the year, with adverse weather accounting for 3.5 points of the combined ratio. Our priority at these difficult times is on providing care and support to our customers, brokers and affected local employees. In response to the increasing impact that adverse weather is having on the insurance industry, we have increased our planning assumption for weather to 3.0 points of the combined ratio.
ALBERTA AND GREATER TORONTO AREA FLOODS In June, Calgary and the surrounding areas of Southern Alberta experienced major flooding following heavy rainfall and resulting river overflow. The floods were the costliest natural disaster in Canadian history with an estimated insurance industry loss of around CAD$1.7bn. Over 1,000 claims were reported to RSA, with the majority of losses coming from Commercial customers. The net cost to RSA was £44m.
In July, record rainfall in the Greater Toronto Area resulted in flash flooding, blackouts and public transit disruptions. The 126mm of rain surpassed the previous single-day rainfall record which had stood since 1954. Around 2,500 claims were reported to us and, with an estimated insurance industry loss of around CAD$0.9bn, this event was the third costliest natural disaster in Canadian history. The net cost to RSA was £38m.
WE BELIEVE RSA CAN BE A STRONGLY PERFORMING COMPANY WITHIN ITS INDUSTRY AND WE HAVE PUT IN PLACE DETERMINED ACTION PLANS TO ACHIEVE THAT GOAL.
There is no shrinking away from hard truths or the action that must be taken. Good work has been done in setting up the strategic review we report on. There is strong backing from the Board and within the company for the path ahead.
We believe RSA’s core businesses to be competitively strong and capable of good performance. They are managed by skilled and dedicated staff whose services will be essential in the years ahead. I have found nothing since joining that leads me away from the view that, with the right focus and strategy, RSA can achieve its potential.
So our mission is clear. There is significant change to bring about, and through that we must manage RSA with clarity, determination and effectiveness. Our goal is to make the Group’s business attractive, sustainable and as valuable as it can be.
• We are in a capital intensive, regulated industry. After the world’s economic shocks of 2008–09, the capital bar is being set ever higher. RSA cannot achieve its objectives without a strong capital position. Our customers, rating agencies and regulators demand this, as we must demand it of ourselves. Without such strength, and the discipline to sustain it, the company cannot succeed. Business and strategic decisions become constrained and suboptimal, and the company’s potential will not be realisable.
We are taking strong action and already in 2014 improvement has come from a £550m Adverse Development reinsurance policy taken out, the sale and leaseback of our Swedish headquarters and the sale of most of the equities in our investment portfolio. Selected business disposals are underway and we have a target for 2014 of £300m of proceeds from these. There will be other smaller non-core disposals thereafter and a tougher regime throughout the Group of capital discipline, including significant portfolio reductions where target risk/return metrics are not reached. We are sharply increasing our focus on expenses and aim to improve expense ratios across the business with associated restructuring costs for implementation to come.
However, this self-help, while extensive, is not enough. Further disposals at this time would take too long and be uncertain as to value, especially were we to be perceived as distressed sellers. They would also risk value damage from loss of capital diversity and heavier weighting of legacy liabilities in the remaining group.
The actions already taken, together with the proposed rights issue (which is fully underwritten), will increase our capital surplus on an Insurance Groups Directive (IGD) basis to an estimated £1.3bn and on an Economic Capital (ECA) basis to an estimated £1.4bn. Ongoing action, including disposals, will improve this further.
3. Improve business performance and the Groups ability to sustain it. This means underwriting, portfolio, expense and distribution actions. It means technology actions and people actions too.
Together, these actions represent a fast and determined ‘reset’ of RSA’s direction and finances. However, it is likely to take a few years to get the whole of the Group performing as we would like. In the earlier part of that period there are likely to be other adjustments to strategy and finances as the overhaul deepens and takes hold, not least in terms of reorganisation programmes and technology investments.
We currently hope to achieve returns in the 12–15% range on tangible equity over the medium-term on an equity base that rises still further as a result of completing the actions we have outlined.
RSA in the future Our strong and shared ambition is to see RSA as a resilient and valuable company, performing consistently at its best. We are a leading, international insurer. Where we do business we will do it well, and be known for our service and appeal to customers.
Our business needs to operate well relative to comparable peers and make returns in excess of the cost of the increased tangible capital we will employ. We will keep working until that is achieved.
Through the successful execution of these strategic priorities, we will deliver value to shareholders through above average returns on a growing tangible net asset base, as well as through our dividend policy.
PRUDENTLY MANAGED Our aim is to manage our business in a conservative manner to ensure that shareholders are not overly exposed to volatility or unexpected risks. In practical terms this means ensuring that: • Risks are identified early with sensible mitigating actions put in place. This is why we were especially disappointed when the issue in Ireland emerged in 2013. We set very high standards for our people to maintain and when people fall short of those standards we are committed to taking decisive action.
In early 2014, we asked Towers Watson, the actuarial firm, to undertake an independent external review of our reserves. They concluded that RSA’s actuarial indication net claims reserves fall within a range of reserves regarded as reasonable by them.
Our own assessment of the margin in reserves (the difference between our actuarial indication and the booked reserves in the financial statements) is 5% of total booked claims reserves.
EASY TO UNDERSTAND We recognise that insurance is a complex business and that this complexity sometimes puts off investors from investing in the sector. We are committed to improving the simplicity and depth of disclosure about the business to help investors understand the strategy and prospects for the Group.
During 2013 we have: • Prepared and delivered investor briefings on our Scandinavian and Canadian businesses which have been made available to all investors through online channels.
• Provided full and open disclosure on the issues we uncovered in Ireland.
• Engaged with all investors, both large institutions and smaller retail investors, through a proactive programme that included meeting with around 450 investors during 2013.
COMFORTABLY CAPITALISED In addition to any margin in claims reserves, insurance companies need to ensure that they hold sufficient capital to deal with the inherent uncertainties in the insurance world. Going forward, we are ensuring that we hold sufficient capital to withstand all but an extreme shock to our business.
There are several ways to measure capital adequacy within an insurance company. Our lead regulator, the PRA, focuses on two measures. Firstly, the Insurance Groups Directive (IGD) or Solvency I ratio and secondly, the Individual Capital Assessment (ICA) ratio. In addition we run an internal economic capital assessment model (ECA) which assesses the likely capital requirements of the group in an extreme stressed scenario.
Going forward we will aim to maintain a strongly capitalised balance sheet with a focus on tangible shareholders’ equity. If capital levels fall and our target ratios are breached, we will take remedial action. Any capital above target levels will be an indication of the surplus capital in the Group available for investment or return to shareholders.
FOCUSED ON MARKETS WHERE WE CAN ACHIEVE PROFITABLE GROWTH We remain committed to active management of our portfolio. We have an attractive portfolio of businesses which provide a good mix of exposure to developed markets as well as high growth developing markets. Where we do not believe that we can achieve attractive returns for shareholders in a market we will take decisive action to remediate that business or, in more extreme circumstances, exit from that market. Where we see opportunities to deploy additional capital in a market, we will seek to do so, providing the Group’s capital standards are not breached.
Scandinavia We are the number three P&C insurer in Sweden and Denmark, and number seven in Norway. These markets are very profitable with a highly consolidated market structure. The market structure has been very stable for a number of years with market shares changing very little. Distribution is almost exclusively via direct channels and there is a tendency for customers to buy most of their insurance from a single provider.
UK and Western Europe We are one of the largest commercial insurers in the UK and have a sizeable personal lines business. Whilst the UK insurance market has been a tough environment in which to operate, we know that when economic conditions improve, it is a market that offers attractive returns. We are a leading Commercial Property insurer in the UK and we have a leading Marine business. In personal lines, our Household and Pet businesses benefit from our strong relationships with some of the UK’s most recognised retailers, and offer good returns on capital. The UK insurance market is mature with high penetration and, therefore, growth prospects are linked to the outlook for wider economic growth. On an underlying basis we would expect to grow in line with anticipated low single-digit market growth.
Canada We have a top four position in Canada’s P&C insurance market, up from 10th position in 2005. We’re uniquely positioned in terms of distribution in the Canadian marketplace with an established offering across intermediated, direct and affinity channels which means that we are attractive to a broad base of customers. We have built a speciality business with leadership positions in chosen segments, and we have a proven track record of acquisitions and outperformance. Our 2012 acquisition of L’Union Canadienne in Quebec completes our footprint across the entire country. We have a track record of good financial performance with combined ratios normally in the low 90s. All of these place us in a great position to take advantage of industry trends going forward.
• In Canada, we have successfully completed the integration of L’Union Canadienne which we acquired in 2012. Not only will this lead to a more efficient business through synergy benefits, but also gives us increased exposure to the highly attractive Quebec market.
Definition Total shareholders’ funds, excluding goodwill, intangibles, and preference share capital
Commentary An important ratio used across the insurance industry that measures underwriting profit as a proportion of revenue. It is often used as a relative measure of underwriting efficiency when comparing against peers. The aim is to keep this ratio as low as possible without compromising the quality of reserves or becoming uncompetitive on price.
Commentary We aim to put customers at the heart of everything we do and delivering for our customers is an important part of our strategy. Measures such as NPS are important in helping us keep on track to deliver on this commitment.
Definition Profit after tax attributable to ordinary shareholders adjusted for reorganisation costs, transaction costs and net gains, in relation to opening tangible shareholders’ funds (i.e. excluding goodwill and intangible assets)
MOTIVATED, ENGAGED AND SKILLED EMPLOYEES ARE CRITICAL TO OUR LONG-TERM SUCCESS.
We are committed to the promotion of equal opportunities for all employees, creating a working environment that supports diversity and inclusion. We seek to ensure that recruitment, talent selection, development, reward, performance management and internal promotion are all carried out solely on the grounds of ability, and are entirely free from any form of discrimination. We are committed, wherever possible, to employing and developing people who are disabled, or become disabled, during their career with the Group.
This focus is underpinned by robust performance management processes to ensure a rounded assessment of employee performance. All employees are set clear annual goals built around three key areas of people, customer and outperformance. Alongside these goals we also set clear Group-wide expectations of employee behaviour. In 2013, our employee behaviours were revised to reflect the Group’s increased customer focus. All employees have twice yearly performance reviews and ratings, which are formally validated against peers to ensure consistency.
As well as assessing current performance we have a rigorous process to support personal development, evaluate future potential and ensure a strong and robust talent pipeline. The Executive Team actively manage senior succession plans, and annual talent and succession reviews are completed across all of the Group’s businesses and functions. To further strengthen our approach, in 2013 we initiated a partnership with leading consultancy YSC and implemented a new potential model. This model enables us to identify and externally benchmark our highest potential talent and get focused insight to tailor appropriate development interventions.
• The Senior Talent Acceleration Programme – a new programme designed specifically for high-potential leaders who could step up to leading a function.
• In line with our diversity strategy, we aspire to have equal numbers of male and female employees on these programmes. In 2013 the representation of females was 47% on the Executive Development Programme, up from 18% in 2012, 27% on the new Senior Talent Acceleration Programme and 43% on the Fast Track Programme.
The results of the 2013 engagement survey placed RSA in the top 5% of global organisations with 1,000 or more employees. In 2013, the Group also won a range of awards recognising it as a great place to work. These included the Gallup Global Workplace Award, presented annually to the world’s most engaged and productive organisations and being placed in the Top 10 of the UK’s Sunday Times Best Big Companies to Work For, for the second consecutive year.
EMPLOYEE RELATIONS Across the Group we place a major emphasis on informing and involving employees with clear and regular communication around our strategy, and all changes that affect our people. We have established channels to support collaboration and the sharing of best practice such as our intranets and our ‘Share’ e-newsletter. There are also regular webexes with senior leaders as well as business and functional conferences.
CORPORATE RESPONSIBILITY WE MANAGE OUR BUSINESS RESPONSIBLY AND AIM TO HAVE A POSITIVE IMPACT ON OUR CUSTOMERS AND SOCIETY.
STRATEGY As the world’s population continues to grow, demand for housing, food, clean water and energy will put considerable strain on finite natural resources. Meanwhile, continuing changes to our climate will add to the risks people face in going about their daily lives.
At RSA we view corporate responsibility (CR) as an opportunity to help address these challenges. We believe that by working together we can make a difference to our staff, customers and the communities in which we operate.
We have a track record we are proud of. In 2013, we retained platinum status in the Business in the Community CR Index, ranked ‘Prime’ by Oekom and were listed in the FTSE4Good Index.
2013 saw us develop and implement an exciting new five year (2014–18) CR strategy with targets covering three themes: Safe, Secure World; Thriving Communities; and Sustainable Future. The strategy is based on extensive internal and external stakeholder engagement and analysis of material issues – the results are outlined in the matrix on the right.
To support the delivery of our goals, we have established a CR Steering Committee, made up of senior leaders. Each of the themes are led by a member of the Executive Committee.
Trust and Transparency Employment standards including Diversity Quality of management and Governance Environmental and Social impact of products and operations
ISSUE Globally, we have seen substantially more weather-related catastrophes in the last five years than in the previous thirty. These have also been increasingly costly in terms of insured and uninsured losses. We need to be prepared for this trend to continue in the future.
We understand the impact adverse weather can have on our customers, from flooding to extreme cold and periods of drought. We have an important role to play in helping people manage the associated risks. We also have a responsibility to limit the environmental impact of our own activities.
RESPONSE We want to make roads safer for everyone. This year we ran 11 road safety campaigns across the Group. These targeted locally relevant issues, so for example, in Scandinavia we focused on night-time visibility for vulnerable road users and in Latvia we worked with our fleet customers on safer driving. Other countries chose the safety issues most relevant to their customers.
RESPONSE Our ambition is to be counted among the world’s most environmentally sustainable businesses. Over the next five years we will establish a network of sustainability champions who will be trained, empowered and challenged to find ways to reduce energy and resource use in our direct and indirect activities. This network will also investigate solutions that help our customers respond to the challenges presented by environmental change. Work to initiate this network began in late 2013 with Global Action Plan, an award-winning environmental change charity, and with our sustainability partners, WWF. In the UK, for the third consecutive time, we have achieved the Carbon Trust Standard.
SAFE, SECURE WORLD ACTION In Denmark, Codan developed its programme with the Children’s Accident Foundation, a charity it set up with a local children’s hospital five years ago. This year it distributed 70,000 free reflectors and held night-time ‘Reflectors Races’ with over 500 participants. In Sweden, Trygg-Hansa handed out 85,000 reflective slap wraps used on wrists and ankles at more than 100 schools, with people able to request more free reflectors via our website, while 450,000 existing customers received an e-newsletter with more information about the day. Meanwhile in Norway, Codan volunteers handed out 30,000 reflectors. This year more than 300 RSA people volunteered to help make the events a success. All the National Reflectors Days boosted their impact with lots of social media activity on websites, Facebook and Twitter.
In Russia, INTOUCH’s Responsible Driving Movement created a community which united responsible drivers who believe in safe roads. In Moscow, billboards with safety warnings were put up on five streets known to be particularly dangerous and seen
To meet our targets, we will be organising more road safety campaigns across the Group and extending their reach and impact. We will continue to address the issues most material to the countries we operate in, working with partner organisations to deliver our vision of creating safer roads for everybody.
Team’, a network of athletes who act as positive role models for young people. We are also supporting the School for Social Entrepreneurs, sponsoring seven entrepreneurs through their action-learning programme and providing each with a mentor from RSA. As Tara Kneafsey, Commercial Director of SME, said: “This partnership fits perfectly with RSA. It reflects our heritage as a business founded to meet a social need. It’s also about our future as we are targeting growth with SMEs. This gives us an opportunity to gain some real insight into a sector that’s growing fast, with social enterprises being set up at twice the rate of traditional small firms.”
In 2014, we will continue to make a positive impact in our communities through our strategic themes of Education and Employability, and Enterprise and Entrepreneurship. We will also carry on empowering our people to tackle the issues close to their hearts.
To celebrate our 300th birthday, in 2011 RSA ran an ‘Arctic Challenge’ to raise awareness of the impact of global warming. The idea that won the ‘Bright Green Ideas Challenge’ enables employees to save costs and help protect the environment by leasing environmentally sustainable, low CO2 cars, insured by RSA, through our staff benefits programme. In 2013, this idea came to life in the UK as ‘Green Drive’ and already 100 of our people are taking advantage of it. The winning team went on a trip to the Arctic to experience for themselves the impacts of climate change and see why it is important they help reduce their own and RSA’s carbon footprint.
Our CR policies form part of our operational risk framework, with compliance reviewed by the Group Executive Committee and Group Board.
HUMAN RIGHTS RSA policy requires compliance with corporate best practice which encourages underwriters to consider human rights implications. Our high risk country referral guide forms part of our Underwriting Policy. Countries are graded against their risk using a number of criteria, including operational risk, socio-political environment (including human rights) and including sanctions applied by UK HM Treasury.
RESPONSIBLE INVESTMENTS During 2013 the majority of our UK equity assets were managed by F&C Asset Management. F&C follows a policy of active engagement on environmental, social and governance issues. Last year, F&C engaged with 17 companies on a wide range of issues from climate change to labour standards across our portfolios.
RISK MANAGEMENT APPROACH We take a broad view of the scope of risk management which is taken to include the risk of underperformance as well as adverse events and the failure of processes. This approach is reflected in our risk appetite statement and key risk indicators which cover all aspects of our strategic objectives. The risk appetite statement is updated annually in line with the strategic review. Our risk management system is defined in a comprehensive suite of risk management policies, supported by detailed procedures. A central task of the risk management function is to monitor adherence to these policies and procedures.
The interrelated risks of adverse financial markets (including low yields) and low capital generation remained the greatest strategic risks during 2013. We have enhanced our capital risk appetite and capital strategy as the basis for ranking the options for improving capital strength and returns. In addition, we made targeted reductions in our risk appetite and risk profile during 2013.
• Geographic diversification • High quality, low risk investment strategy and portfolio • Tactical actions to mitigate reduction in yields • Defensive positioning to Eurozone
• Rigorous legal entity solvency management • Internal dividend policy • Regulatory dialogue
IT stability or agility limitations impair service levels or delivery of strategic change due to cost and management capacity. Constraints include risk of disruption, age and complexity of legacy estate and competing priorities
• IT Change stack oversight to track delivery of project and benefits
• Development and funding of dedicated e-business capability • New Group CIO with remit to develop long-term strategic approach • IT Risk framework developed to improve oversight and governance
Failure to align strategy, execution and financial performance with shareholder expectations
• Granular MI on rating and claims trends • Underwriting strategy statements, licence and controls • Refined portfolio classification and pricing tools • Quarterly Business Reviews and BRC governance • Accumulation management and large loss review actions
Failure to attract and retain key staff for specialist technical roles
• Talent boards and Engagement programme • Review of remuneration system • Robust succession planning
Failure of reward systems to align with corporate aspirations and external stakeholder expectations
• Rise of China/India/new market leaders and capital flows and international trade to fuel their growth • Next billion consumers emerging in emerging markets as they build their middle class • Risk of developed markets stagnating or declining (e.g. caused by Eurozone break up) • US resurgence and path to energy independence (e.g. driven by fracking) • China hard landing or soft landing 2 New global security threats
• Political volatility including terrorist threats, Middle East conflict and the ‘Arab Spring’ spreading to other emerging markets
• Greater need for sales/price transparency • Limitation of product pricing (e.g. review of gender biased pricing in the EU) and banning of high cost products • Emerging markets regulation converging to western norms • Continued uncertainty around Solvency II/Prudential regulation • Increased backlash against business driven by compensation culture and tax avoidance scandals 5 Environmental change and responses to it
• Environmental risks including extreme weather events and consequent higher attritional losses • Adverse government intervention in response (e.g. mandatory flood insurance at below cost prices) • Government prevention responses (e.g. renewable investment, carbon tax, etc.) • Energy and water scarcity prompting alternative energy sources, substitute materials and sustainable forms of transportation (e.g. fuel cell, hybrid, electric, rail)
By analysing the cashflows in our model, we can assess the extent to which the overall level of risk is attributable to broad categories of risk.
Our conservative investment strategy means that investment risk forms a relatively small proportion of our overall risk compared with the industry.
A Insurance Risk B Investment Risk C Operational Risk D Pension Risk
RESULTS OVERVIEW 2013 was an extremely disappointing year for the Group. The loss after tax of £338m (2012: £327m profit) reflected the impact of the issues we faced in Ireland during the year, adverse weather across Scandinavia, Canada and the UK, as well as write downs of software intangible assets and goodwill. Despite this, there have been some good underlying performances, and on a normalised1 basis the result was a post-tax profit of £304m. In December, following a detailed review of the capital position of the Group, the Board agreed that a full review of the business should be undertaken. The progress of this review, which was announced together with the Group’s preliminary results on 27 February 2014, has enabled us to strengthen our capital position, and begin focusing the Group for 2014 and beyond.
NET WRITTEN PREMIUMS Net written premiums were up 3% at constant exchange to £8.7bn (up 4% as reported). Continued good growth in Canada and Emerging Markets, up 11% and 16% respectively, was offset by the UK and Western Europe which was down 4%, whilst Scandinavia was flat. Across the Group, rate on renewals added three points of growth whilst volumes down two points following
OPERATING RESULT The operating profit of £286m (2012: £667m) reflected the significant weather losses seen across Canada, Scandinavia and the UK; the financial impact of the irregularities identified in the Irish claims and finance functions; reserve strengthening in Ireland and the UK; and lower levels of investment income. The normalised1 operating profit was £601m.
Underwriting result The underwriting result was a profit of £57m (2012: £358m) with a current year profit of £12m (2012: £167m) and a prior year profit of £45m (2012: £191m). The combined ratio of 99.6% was four points higher than 2012 (95.6%).
Canada, Scandinavia and the UK, whilst prior year development of 1.0% (2012: 2.7%) was lower due to the reserve strengthening in Ireland and margin additions in the UK.
The commission ratio of 14.5% was 0.7 points higher than last year due to ongoing shifts in business mix as affinity growth continues to outpace growth in direct channels in certain regions. The expense ratio of 15.6% is 0.2 points lower than 2012 (15.8%).
The prior year underwriting profit of £45m reflects positive prior year development across Scandinavia, Canada and Emerging Markets, partly offset by strengthening at an overall UK and Western Europe level. In terms of accident year, 2012 is unchanged with positive development in Canada, Italy, UK Commercial Motor and Scandinavia offset by strengthening in Ireland and UK Liability. The earlier years produced net positive run off of £61m despite deterioration in the 2009 and 2010 years which was impacted by the reserve strengthening in Ireland.
Investment result The investment result was £333m and comprised investment income of £493m, offset by the discount unwind of £160m.
LOSS AFTER TAX The loss after tax was £338m (2012: £327m profit) and return on equity was (9.8)% (2012 restated: 8.7%).
Other items Other items of £530m included total gains of £32m (2012: £28m) reflect realised gains from the sale of equities and bonds during the year partly offset by a modest decline in the value of investment properties and derivatives.
Reorganisation costs were £356m (2012: £24m). These costs mainly include the impairment of goodwill in Poland and Argentina as a result of lower economic growth expectations and economic uncertainty, and just over £200m of software impairments in our UK business in recognition that our investments between 2006 and 2011 are not producing the benefits anticipated and fresh technology investment is now needed.
Investments The total value of the investment portfolio (including cash) is £13.8bn, representing a decrease of 4% over the year mainly due to adverse foreign exchange and mark-tomarket movements. Of the total investment portfolio, 90% was invested in high quality fixed income and cash assets as at the year end.
Reserves Understandably, our reserving position has recently come into focus. We maintain that the culture, methodologies and governance around the reserving process drive a prudent reserving policy and reserves remains significantly to the right side of best estimate. The events in Ireland in 2013 have tested but do not fundamentally change our view on this. Prior year profits have historically been a consistent and high quality part of the underwriting result. Nevertheless, there will always be some portfolios that require reserve strengthening each year. In the case of Ireland, the size of strengthening was significantly larger than we would normally encounter, and this was very disappointing for us. What is important though is that RSA has a diverse set of portfolios, and each year there are more portfolios that run off positively than require strengthening, such that we have a strong track record of positive prior year development.
We have confidence in the adequacy of our overall claims reserves. Our own assessment of the margin in reserves (the difference between our actuarial indication and the booked reserves you see in the accounts) is 5% of total booked claims reserves.
However, the events of 2013 and the commencement of the business review have proved an appropriate point at which to gain some external independent assurance over RSA’s reserving position. We appointed Towers Watson to review our own Actuarial Indication net of reinsurance claims reserves. This review covered specified segments of our global business, excluding Ireland, representing around 90% of the Group’s total net claims reserves. The review was based on data as at 30 September 2013, with the exception of Canada which was based on the 2013 year end position. Towers Watson concluded that RSA’s actuarial indication net claims reserves fall within a range of reserves regarded as reasonable by them.
Following the 2013 year-end, we have purchased an Adverse Development Cover, underwritten by Berkshire Hathaway and covering the insurance liabilities in existence at 31 December 2012. It provides £550m of cover with an attachment point which is £550m above our undiscounted actuarial indication. RSA retains 20% of the exposure. This cover provides significant benefit to our capital and rating agency models as it reduces our exposure to significant adverse development.
On regulatory capital, our IGD surplus was £0.2bn at the year end (2012: £1.2bn), representing coverage of 1.1 times the requirement (2012: 1.9 times).
Our Economic Capital surplus, when calibrated to Standard & Poor’s long-term A rated bond default curve, equivalent to a probability of insolvency over one year of 1 in 1,250 years, stood at £0.7bn (2012: £0.7bn), representing coverage of 1.3 times the requirement.
The business review actions already taken, together with the proposed rights issue (which is fully underwritten), will increase IGD surplus to an estimated £1.3bn and ECA surplus to an estimated £1.4bn. Ongoing action, including disposals, will improve this further.
PENSION FUND In July 2013, we announced that the Group had agreed, with the Trustees of our main UK pension schemes, the pension deficit funding contributions following the completion of the latest triennial actuarial valuations.
On an IAS 19 accounting basis the UK pension fund position has improved by £53m since 31 December 2012 to a deficit of £58m. This is driven by funding contributions in the year and the remeasurement of assets following the introduction of IFRS 13 Fair Value Measurement. The overseas pension deficit has improved by £29m since 31 December 2012, to a deficit of £67m, principally due to an increase in the discount rate applied to the Canadian pension scheme.
2013 DIVIDEND The 2013 results, together with the launch of a rights issue, mean that a final dividend cannot be justified. The total dividend for 2013 is therefore 2.28 pence per share (2012: 7.31 pence).
SUMMARY Despite the disappointments of 2013, we believe that following the thorough review of the business, the actions we have already taken, and the actions that we are planning to complete in the coming months, the Group is now well placed for the future.
Net written premiums of £1,863m in Scandinavia were flat at constant exchange (2012: £1,791m as reported; £1,870m at constant exchange) with growth in Sweden and Norway offset by targeted reductions in Denmark where we continue to focus on improving profitability.
Growth in Sweden was driven by good new business levels in Household and Personal Accident, both up 6%. In Norway growth was driven by Household, up 33%, as we benefit from strong volumes coming through our agent distribution network, and Care, up 25%, driven in part by our strategic partner, Vertikal.
In Denmark we continue to make progress in returning the business to stronger profitability. In particular, we have continue to push hard on risk selection and targeted rate increases and, as a result, we’ve seen volume reductions across most lines, with premiums down 6% overall.
The Scandinavian underwriting result was a profit of £225m (2012: £237m). The result was affected by windstorm St. Jude, in October, which heavily impacted Denmark, with record wind speeds with a total net cost to RSA in Scandinavia of £25m. Windstorm Xaver, in December, also impacted Denmark and Sweden resulting in a net loss of £11m. In total, weather losses in Scandinavia were over half a point of the combined ratio adverse to the long-term average. In addition to this, the first half of 2013 saw an unusual level of large Commercial losses, particularly in Swedish Property and Renewable Energy. The pattern of large losses reverted to more
normal levels in the second half. Despite these events, the business delivered a combined ratio of 88.1%.
After including investment returns of £79m (2012: £94m), the insurance result was £304m (2012: £331m).
Net written premiums in Canada were up 11% on a constant exchange rate basis to £1,755m (2012: £1,614m as reported; £1,584m at constant exchange) with 4% organic growth. The integration of L’Union Canadienne (UC) has been successful and delivered £148m of premiums (7 points of growth) in 2013 which was in line with our expectations.
UK AND WESTERN EUROPE In the UK we have made further progress on refocusing the business, however, we face continued challenging conditions in Personal Motor, and the strengthening of reserves in Liability which included an addition of £60m to reserve margin. We also faced a tough year in our Irish business, but continued to make excellent progress in remediating our business in Italy.
In UK Commercial we are making good progress on refocusing the business. Excluding the £60m addition to margin, underwriting profit would have been £45m and combined ratio of 96.8% but the addition to margin led to an overall loss of £15m (2012: £41m loss) with a combined ratio of 100.6% (2012: 100.9%). Premiums were down 6% mainly reflecting a reduction of 13% in Motor which was driven by targeted reductions we have made throughout the core portfolio as well as the new arrangements for our contract with Motability. Property premiums were down 5% with an underwriting result of £82m reflecting favourable large loss experience and the benefit of the corrective actions. Motor delivered a much improved profit of £8m (2012 restated: £49m loss). The underwriting loss of £119m in Liability reflects encouraging progress in our core Liability business but this has been more than offset by our Legacy book where we have strengthened reserves for deafness and Professional Indemnity, including an addition of £60m to margin.
In Western Europe, the Irish underwriting loss of £220m reflects our previous announcements concerning the irregularities in the claims and finance functions and reserve strengthening. The European Specialty loss of £41m reflects continued large loss activity, particularly in Germany, and we are taking corrective action on the affected accounts. We have made significant progress in Italy with a much improved 2013 underwriting loss of £1m (2012: loss of £50m) driven by the remedial actions we have taken.
OUTLOOK In UK Commercial we will focus on maintaining the momentum we have generated on remediating the business and in UK Personal we will focus on maintaining growth in Household and Pet whilst reducing our exposure to Motor and driving remedial action. We have an ongoing focus on managing our costs, and we have delivered a 13% reduction in headcount in our UK business since the beginning of 2012. This focus on costs will continue. In Italy we will continue to deliver on the remedial actions we have put in place, whilst in Ireland we are committed to returning the business to profitability.
A UK Household B UK Personal Motor C UK Pet D UK Commercial
Motor G UK Marine H Ireland I Italy J European Specialty
EMERGING MARKETS Our Emerging Markets business has delivered good premium growth and improving profitability, with continued operating leverage. Emerging Markets premiums grew 16% at constant exchange to £1,403m (2012: £1,237m as reported; £1,210m at constant exchange). Including non-consolidated associates in India and Thailand, premiums were up 14% at constant exchange to £1,720m (2012: £1,540m as reported; £1,505m at constant exchange).
Underwriting profits of £46m were up £13m from 2012 with good profitability across all three regions. The combined ratio of 96.9% was in line with 2012. Continued operating leverage on expenses led to a 1.5 point improvement in the expense ratio from 21.6% to 20.1%. However, this was offset by a 1.5 point increase in the loss ratio to 57.3%.
Emerging Markets delivered an investment result of £42m (2012: £45m) leading to an insurance result of £88m which was up 13% from 2012.
In Latin America, premiums were up 15% at constant exchange to £837m (2012: £766m as reported; £725m at constant exchange), including £48m from the 2012 acquisitions in Argentina. In addition to the 2012 acquisitions, there was organic growth of 9% across the region demonstrating strong progress in changing economic conditions. Underwriting profits were £19m (2012: £21m as reported; £19m at constant exchange).
In Central and Eastern Europe and the Middle East (CEEME), premiums were up 14% at constant exchange to £415m (2012: £351m as reported, £363m at constant exchange). Excluding the impact of the exit of our Czech business in 2012, CEEME premiums were up 16% at constant exchange. There was strong growth in all countries but particularly Oman (up 23%) and Russia (up 53%). The underwriting result of £20m mainly reflects a strong performance in Central and Eastern Europe.
In Asia, premiums were up 24% at constant exchange to £151m (2012: £120m as reported, £122m at constant exchange) with strong double-digit growth across all operations, particularly in Hong Kong (up 27%) and Singapore (up 20%). Our associates in Thailand and India grew 7% at constant exchange. Underwriting profit in Asia was £7m (2012: £5m).
OUTLOOK Despite both political and economic headwinds in some of our emerging market countries, insurance penetration is still improving and we expect to achieve strong high single-digit/low double-digit organic growth. We also expect to make further improvements in profitability by driving our acquisition costs down through leveraging scale and efficiency. That said, decisions arising from the strategic review may impact results in places.
A Latin America B Central and Eastern Europe C Middle East D Asia
THE BOARD PROMOTES HIGH STANDARDS OF CORPORATE GOVERNANCE THROUGHOUT THE COMPANY AND HAS A SOLID GOVERNANCE FRAMEWORK IN PLACE.
BOARD BALANCE AND COMMITMENT As Chairman of the Board, I am responsible for ensuring that the Board and its Committees operate effectively and have the right balance of skills and experience required. The matters reserved for the Board, the Committee terms of reference and membership of each Committee have been reviewed to ensure they are appropriate and that Committees benefit from varied expertise.
In December, Simon Lee, Group Chief Executive, resigned with immediate effect. As I said at the time, I would like to thank Simon for his contribution to the Company over the last decade. He has provided leadership to the business over the last two years, a period that has featured a number of significant challenges. In his previous role as Chief Executive of International he was instrumental in developing the Group’s global portfolio. In February 2014, I was delighted to welcome Stephen Hester as the new Group Chief Executive. Stephen brings a wealth of experience and extensive global financial services expertise. He has the unanimous support of all the directors and we are confident that, with the support of the Board and the Executive Committee, he will work quickly to take the Group forward.
Edward Lea and Malcolm Le May have indicated that they do not intend to stand for re-election at the forthcoming Annual General Meeting and will retire as directors with effect from 8 May 2014. With effect from that date, Johanna Waterous will succeed Edward Lea as the Senior Independent Director and Kath Cates will succeed him as Chair of the Board Risk Committee. Jos Streppel will succeed Malcolm Le May as Chair of the Group Investment Committee on the same date. I would like to thank Edward and Malcolm for their significant contribution to the Board over the last 11 and 10 years respectively.
We recognise the importance of diversity for Board effectiveness and are committed to achieving our diversity target which is set out in my report on the Group Nomination Committee on page 61.
Throughout my first year as Chairman, I have kept the Board’s performance under review with the aim of improving effectiveness. Given the additional business challenges in respect of the investigation into Ireland’s financial and claims irregularities and the business review being undertaken, my colleagues on the Board have demonstrated commitment and dedication in making themselves available to contribute to the discussions and decisions to be made at short notice and I am grateful to them.
During 2013, a review of the executive directors’ remuneration framework was undertaken with the intention of simplifying the existing incentive arrangements, creating further alignment of these with shareholders’ interests and the Company’s business strategy. Its structure and terms satisfy the principal requirements of leading UK corporate governance bodies in relation to remuneration policy. In addition a review of Non-Executive Directors’ fees was undertaken during the year, which resulted in a targeted increase in fees following a benchmarking exercise. Further details of the new Long-Term Incentive Plan (the ‘Performance Share Plan’) and Non-Executive Directors’ remuneration are detailed in the Directors’ Remuneration Report on pages 69 to 93.
Further information on compliance against the Main Principles of the Code is contained in the Directors’ Remuneration Report and Group Audit Committee Report as applicable.
2014 AND BEYOND We are determined as a Board to deliver on our key objectives and demonstrate our resilience in these challenging times to re-emerge as a stronger Group. I would like to take this opportunity to thank my fellow directors for the contribution and commitment they have made to this end.
Skills and experience: Martin was appointed as Chairman and Director in January 2013. Martin has considerable knowledge and understanding of the financial services sector and Board experience. Previous roles include Non-Executive Director and Chairman of the Audit Committee, Lloyds Banking Group plc, 34 years at Deloitte LLP, 26 years of which as Partner, Chairman of Deloitte LLP from 1995 to 2007 and a Director, Deloitte Touche Tohmatsu from 1999 to 2007. External appointments: Chairman of Great Portland Estates plc, Non-Executive Director and Chairman of the Audit Committee of Ship Midco Limited, trading as Worldpay and a Board member of the Financial Services Trade and Investment Board.
Skills and experience: Stephen was appointed as Group Chief Executive and Director in February 2014. Previous roles include Chief Executive Officer, The Royal Bank of Scotland Group plc, 2008–13, where he led the largest ever corporate restructuring and recovery programme; Chief Executive, British Land plc from 2004 to 2008, Chief Operating Officer, Abbey National plc and a number of senior roles at Credit Suisse First Boston in London and New York. Stephen has over 30 years’ experience in financial services and FTSE100 companies with expertise in transforming the performance of businesses. External appointments: Trustee of The Royal Botanic Gardens, Kew Foundation.
Skills and experience: Adrian was appointed as an Executive Director in July 2011 having been Chief Executive of the UK since September 2008. Adrian is a qualified management accountant and has been with the RSA Group since 1989. He was previously the UK Chief Operating Officer with responsibility for Claims, Sales and Service, IT and Change across Personal and Commercial lines, and prior to that he was UK Director of Personal lines, leading the launch of MORE TH>N. External appointments: Adrian is a Director of Employers’ Liability Tracing Office and DKH Legacy Trust.
Skills and experience: Kath Cates was appointed as a Non-Executive Director in September 2013. She has over 20 years of experience in global financial services and until recently was Chief Operating Officer, Wholesale Banking for Standard Chartered Bank. Previous roles include 22 years at UBS. Kath has gained a deep knowledge of control, governance and risk management, working in emerging markets and across different sectors and cultures. External appointments: None currently held.
Skills and experience: Malcolm Le May was appointed as a Non-Executive Director in March 2004. Previous roles include CEO Investment Banking (Europe) at UBS, Deputy CEO of ING-Barings and Morley Fund Management and President Europe at JER Partners. Malcolm has significant experience of financial and investment management. External appointments: Non-Executive Director of Pendragon plc, Provident Financial plc and Consultant to Ernst & Young LLP.
Skills and experience: Jos Streppel was appointed as a Non-Executive Director in October 2011 and 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 and Advisor to the Tilburg Centre of Finance. External appointments: Chairman of KPN, Vice-Chairman of Van Lanschot, a Dutch private banking and asset management firm, Director of Arq Foundation, Chairman of Duisenberg School of Finance and Chairman of the Advisory Board of the Royal Dutch Society of Actuaries.
Mike was appointed CEO of Scandinavia in February 2011. Mike is also CEO of Codan A/S and CEO of Trygg-Hansa. He joined RSA in 2006 and was previously Managing Director for RSA’s UK Personal lines operation, which includes MORE TH>N and the Managing Director of RSA’s UK retail business. Before joining RSA, Mike worked in the energy, telecoms and retail sectors, beginning his career at WH Smith Limited, before subsequently moving to various Centrica-owned businesses, including British Gas and Onetel.
Rowan was appointed to the position of President and CEO of RSA Canada in September 2003 and is a member of the Canadian Board of Directors. Since joining RSA in 1987, Rowan 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.
Paul was appointed Chief Executive of Emerging Markets in 2006. He has over 20 years’ senior management experience in the financial services sector including three years at AXA and 10 years at GE Capital, including work in Asia and Eastern Europe on acquisition integration and business development.
Neil was appointed Group Global Specialty Lines Director in April 2013. He joined RSA in 2009 as UK Underwriting and Strategic Claims Director, having previously worked at Zurich Financial Services as Chief Underwriting Officer for International Businesses. He has 30 years of experience in the industry.
Following a review by PwC into the financial and regulatory reporting processes and controls within the Irish business, and Group oversight and controls of the Irish business, PwC’s review described the Group’s System of Governance and Control Framework, as appropriate in terms of structure and design for an international insurance group of this size and complexity, and elements of the framework’s design compared favourably across the market. The PwC review concluded that there were no obvious indicators relating to the issues identified in the Irish business that were ignored, at either Regional or Group level, and neither external audit or independent reserve review during 2013 and prior years identified the specific issues that have led to the reported losses in the Irish business. The PwC report made a number of recommendations which are being incorporated into assurance processes.
The Board is responsible for reviewing the effectiveness of the Board and senior executive management and determining the remuneration policy for the Executive Directors, the Chairman, Group General Counsel, and Group Company Secretary and senior executives.
In addition to the schedule of matters reserved for the Board, each of its Committees have written terms of reference defining their role and the authority delegated to them. A summary of the matters reserved for the Board and the terms of reference for each Board Committee were reviewed in the year. The terms of reference are available on the Company’s website www.rsagroup.com/ termsofreference. Further details on the principal duties of each Board Committee can be found under the Board Committees section commencing on page 60, in the Group Audit Committee Report on pages 64 to 68 and the Directors’ Remuneration Report on pages 69 to 93.
• Succession planning and Board composition based on the recommendations by the Group Nomination Committee
• Ensuring relevant objectives are established for the Group Chief Executive and his executive team
• Reviewing with the Group Chief Executive the overall management performance of the Company and its senior executives
Responsible for: • Developing targets and goals for the executive management of the Company
Has delegated authority, through the Group’s Delegated Authority Framework, which defines the limits of expenditure. From time to time additional authorities are delegated from the Board to cover specific matters as required.
• Chairing the Group Nomination Committee when considering matters relating to the Chairman of the Board
• To be available to shareholders on matters which have not been resolved or are not appropriate to be dealt with by the Chairman, Group Chief Executive or other Executive Director
• Participation on Board Committees. Committee selection is regularly reviewed by the Group Nomination Committee based on skills and experience
• Key functional updates and developments • Review of regional strategies with presentations from management teams
• Approval of the Group Risk Appetite • Monitoring material claims and reinsurance matters • Capital Risk Appetite
• Conduct Risk • Review of strategic and operational plan risk profiles • Review of financial and regulatory reporting controls • Group oversight and controls of the Irish business
A Strategy B Financial C Risk Management and Controls D Governance
EFFECTIVENESS COMPOSITION OF THE BOARD Martin Scicluna became Chairman of the Group on 1 January 2013 and for a short period between 13 December 2013 and 4 February 2014, was Executive Chairman, following the resignation of Simon Lee on 12 December 2013, who had served as a director for seven years. Noel Harwerth and John Maxwell who had served nine years, resigned as directors with effect from 31 March 2013. Kath Cates was appointed as a director with effect from 1 September 2013 and Stephen Hester was appointed as a director and Group Chief Executive on 5 February 2014. Edward Lea and Malcolm Le May have indicated that they do not intend to offer themselves for re-election at the 2014 AGM and will leave the Board after 11 and 10 years respectively as Non-Executive Directors on 8 May 2014.
In accordance with the Code, the Board believes that it has the appropriate balance of skills, experience, independence and knowledge to enable it, and its Committees to discharge their duties and responsibilities effectively. The Board is satisfied that it is of a size appropriate to the needs of the business and that no individual or small group of directors can dominate the Board’s decision making.
INDUCTION, TRAINING AND DEVELOPMENT OF DIRECTORS Upon appointment to the Board and any Committee, directors undertake an induction programme, receiving a broad range of information about the Company which is tailored to their existing knowledge and experience. This includes information on the operational performance and business of the Group, and details of Board procedures, governance matters and directors’ responsibilities, along with a series of meetings with members of the Board and executive management on business and regulatory matters. The Group General Counsel and Group Company Secretary is responsible for assisting the Chairman with arranging induction, training schedules and professional development for the directors, and for bringing all governance matters to the attention of the Board.
Each director has an individual training plan for the development and enhancement of their specific business knowledge which is subject to discussion with the Chairman. The directors have access to the services and advice of the Group General Counsel and Group Company Secretary, and in addition may take independent professional advice at the expense of the Company in the furtherance of their duties.
• Claims • Group Secretariat • Regulatory Compliance • Capital • Internal Audit • Global Specialty Lines • Broker Business • HR • IT and e-business • Plus additional tailored meetings and training depending on the individual’s skills and experiences.
“As a new Non-Executive Director, the Company provided me with a comprehensive overview of all the key components of the business. Coming from a financial services background outside the insurance sector, I requested ‘deep-dives’ into many areas including reserving, reinsurance and a detailed run through the technical aspects of the different capital measures applied. Meeting with external auditors as well as Group Internal Audit was particularly valuable, and I was also able to attend a global Risk conference to understand the framework and key issues. The whole induction was very thorough, and I now feel well-equipped to discharge my responsibilities as a member of the Board, the Board Risk Committee and the Group Audit Committee.”
As part of the ongoing performance evaluation exercise and in accordance with the Code, the Senior Independent Director met with the Non-Executive Directors to review the Chairman’s performance. The review concluded that the Chairman had led the Board in an effective way throughout the year.
COMMITMENT The letters of appointment for the Chairman and each of the Non-Executive Directors set out the anticipated time commitment, being an average of two days per week for the Chairman and 28–32 days per year for Non-Executive Directors. Non-Executive Directors are required to allocate sufficient time to meet the expectations of the role, in attending Board and Committee meetings and the AGM. In addition, directors may be required from time to time to attend additional meetings, training and briefings.
PERFORMANCE EVALUATION In accordance with the Principles of the Code, an external evaluation of the effectiveness of the Board, its Committee and individual directors, was undertaken in the year by Boardroom Review Limited (‘Boardroom Review’). Boardroom Review is a company which has provided independent advice in the field of evaluation since 2004 but which has not previously advised the Company. Boardroom Review has no other connection with the Company and was appointed following a comprehensive review of external providers.
The evaluation was conducted over a period of three months, including interviews with each director, a thorough review of Board and Committee documents and attendance at a Board meeting as an observer.
The review considered the balance, skills, experience, diversity, independence and knowledge of the Company, and focused on three key aspects: Board environment, the work of the Board and use of time. Each of these aspects was further broken down into key elements such as culture, composition, strategy and operations, risk and control, performance management, planning and allocation of time.
DELEGATED AUTHORITY AND CORPORATE GOVERNANCE FRAMEWORK The purpose of the Corporate Governance Framework is to determine how the Group meets its legislative and regulatory governance requirements, enabling effective and efficient decision making by the Board and Committees. It defines clear responsibilities and defines how the Group is directed and managed.
• The Company’s exposure to price risk, credit risk, liquidity risk and cashflow risk
Details of events which have occurred after the reporting period are set out in note 36 on page 165.
ARTICLES OF ASSOCIATION The Company’s Articles of Association may be amended by special resolution of the Company’s ordinary shareholders. The current Articles of Association were adopted at the 2010 AGM and are available on the Company’s website at www.rsagroup.com/articles_pdf. Changes proposed to the Articles of Association as recommended by the Board for approval by the shareholders at this year’s AGM are set out in the Notice of Meeting.
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
The Board confirms that it has reviewed the schedule of directors’ conflicts of interest during the year and that the procedure in place operated effectively in 2013. None of the directors had any interest in any other contract with the Company, or any of its subsidiaries during 2013, apart from those disclosed in the Related Party Transactions note 33 on page 163.
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.
The Company does not have agreements with any director or employee that would provide compensation for loss of office or employment resulting from a takeover except that provisions of the Company’s share schemes and plans may cause options and awards granted to employees under such schemes and plans to vest in such circumstances.
DIRECTORS’ INDEMNITY Article 140 of the Articles of Association provides that, among other things and insofar as permitted by law, the Company may indemnify its directors against any liability and may purchase and maintain insurance against any liability. The Company has granted an indemnity to each of the directors, pursuant to the power conferred by Article 140 of the Articles of Association. The indemnities granted constitute qualifying third-party indemnity provisions, as defined by section 234 of the Companies Act 2006.
The directors and officers of the Company and its subsidiaries also have the benefit of insurance which provides suitable cover in respect of legal actions brought against them.
Robust performance and talent management processes are in place across the Group to ensure an ongoing focus on development, the acquisition of talent and ensuring a robust talent pipeline. The Group runs a number of talent programmes for senior and emerging talent and in 2013 a rigorous new talent assessment process was introduced. The Group has a strong track record of retaining talent with low attrition levels among high performing and high potential populations. The Company continues to be recognised in the insurance market for its deep technical expertise.
The Group is committed to the promotion of equal opportunities, diversity and inclusion. In 2013, a new diversity and inclusion programme was launched with focused activity to support its delivery. This includes actions to strengthen the pipeline of female employees in senior leadership positions, including a global female sponsorship programme, female network events and mentorship programmes.
SHAREHOLDERS The Group is committed to proactive and constructive interaction with shareholders and other market participants. During 2013 the Company held 449 meetings with institutional investors, and met with 17 of the top 20 shareholders on at least one occasion. The key themes of these meetings centred on events during the year and the outlook and strategic direction of the Group. The Group also held a meeting with the UK Shareholders Association on 29 November 2013.
The Group’s share register consists of a combination of income, growth and value institutional investors predominantly from the UK, Europe and North America. During 2013 there has been a sizeable increase in the proportion of non-UK shareholders, with the top 20 shareholders including investors from Scandinavia, Canada, the US and Asia.
Trusts but has no obligation to do so and, in respect of the Royal & Sun Alliance ESOP Trust No. 3, the Trustee may have regard to the financial interests of the beneficiaries in exercising its voting rights over the Company’s shares.
The Company did not repurchase any of its shares during 2013. The Company operates a sponsored American Depositary
Dividends The Company will not be offering a final dividend in respect of the financial year ending 31 December 2013. An interim dividend of 2.28p per ordinary share was paid in November 2013 being the total dividend payable for the year (2012: 7.31p).
The Company’s preference shares receive a dividend at the rate of 7.375% per annum, paid in two instalments, on or as near as practicably possible, 1 April and 1 October each year.
AGM The AGM will be held at 200 Aldersgate, St Paul’s, London EC1A 4HD on Friday, 9 May 2014 at 11.00am. A letter from the Chairman and the Notice convening the AGM (the ‘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/ AGM2014. Presentations are given on the Company’s performance and activities during the year 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 at the AGM.
Ameriprise Financial, Inc. and its group 188,902,771 5.13% Direct, Indirect & CFD 188,902,771 5.13% Direct, Indirect & CFD
Artemis Investment Management LLP 182,450,614 4.96% Direct & Indirect 182,450,614 4.96% Direct & Indirect
Standard Life Investments Ltd 152,266,879 4.42% Direct & Indirect 152,266,879 4.42% Direct & Indirect
Notes: 1. Interests subject to DTR 5.1.5 which have been notified as falling below 5% are not included in the above table.
The Company is listed on the London Stock Exchange under the code RSA. The average total daily trading volume during 2013 was approximately 14 million ordinary shares. The closing market price of an ordinary share in 2 January 2013 was 127.8p and the closing market price on 31 December 2013 was 91.4p. The highest daily closing price of an ordinary share was 136.3p on 19 February 2013 and the lowest daily closing price was 90.1p on 16 December 2013.
The greenhouse gas emission reporting covers the UK and Western Europe, Scandinavia, Canada and Emerging Markets businesses, including wholly owned subsidiaries, leased premises and joint ventures. All material emissions sources reported on, are ones deemed to be the responsibility of the Company. The sources align to operational and financial control boundaries. Where data is not provided by the operating entity, estimates have been provided based on relative calculations against other businesses within the Group. For a full methodology statement and scope visit www.rsagroup.com/rsagroup/en/corporate-responsibility.
CORPORATE RESPONSIBILITY The Group’s Corporate Responsibility programme supports the communities in which we operate with direct corporate donations to registered charities and through supporting our people to volunteer and fundraise. The strategy focuses on helping to create ‘Thriving Communities’ by targeting two specific issues: Education and Employability; and Enterprise and Entrepreneurship. More detail can be found in the Strategic Report on pages 8 to 43.
Public Affairs The Group contributes to public policy debate on issues relevant to the business in countries where it operates, either individually or through industry bodies such as the Association of British Insurers and the Confederation of British Industry. This can include issues such as flooding, motor insurance, asbestos, renewable energy and regulatory reform. The Company engages with policy makers to improve understanding of the role the insurance industry plays in society and the economy.
Employees apply the principles of openness, transparency, honesty and integrity to all of their activity with policy makers. The Company adheres to principles of best practice, declaring the interests which it represents and ensuring that to the best of its knowledge, information provided is unbiased, complete, up-to-date and not misleading.
The Corporate Governance Framework – structure of the Board and Committees diagram below, illustrates both the relationship of each Committee to the Board, and also those subsidiary committees that report information and support the purpose of each Board Committee.
Terms of reference for each of the Board Committees set out the authority of the Committee delegated from the Board in order for the Committee to carry out its duties. Each Committee reviewed its terms of reference during the year and these were subsequently approved by the Board. The terms of reference for all the Board Committees are available on the Company’s website at www.rsagroup.com/termsofreference.
Johanna Waterous 3/3 Notes: * Chair of Committee 1. John Maxwell ceased to be a member of the Committee with effect from 1 March 2013. 2. Alastair Barbour and Hugh Mitchell became members of the Committee with effect from 1 March 2013 and Martin Scicluna with effect from 8 February 2013.
The principal role of the Committee is to keep under review the capabilities required by the Board, consider the leadership needs of the Group and review succession planning for the Board. The Committee makes recommendations to the Board in relation to the appointment of any new Executive and Non-Executive Directors and the re-appointment of directors on an annual basis with a view to ensuring the continued ability of the Company to compete effectively in the marketplace, and attract and retain key people. The key areas of focus for the Committee during 2013 are shown in the table below.
Edward Lea and Malcolm Le May have decided not to offer themselves for re-election at the 2014 AGM and will leave the Board after 11 and 10 years respectively as Non-Executive Directors on 8 May 2014.
We recognise the importance of diversity for Board effectiveness and have established a new diversity policy. It is our intention to meet the Davies Report requirements and intend that by 2015, 25% of the Board will be women. We remain committed to ensuring that appointments are ultimately made on merit against the agreed selection criteria.
Jos Streppel2 2/2 Notes: * Chair of Committee 1. Simon Lee ceased to be a member of the Committee with effect from 12 December 2013. 2. Martin Scicluna became a member of the Committee with effect from 8 February 2013 and Jos Streppel from 1 March 2013.
3. Stephen Hester became a member of the Committee with effect from 5 February 2014.
Membership of the Committee comprises myself as Chairman, Alastair Barbour, Jos Streppel, Martin Scicluna, Stephen Hester and Richard Houghton. The Group Investments Director attends all meetings of the Committee to provide an update on the economic and market background and outlook affecting the Group, the investment activities taken since the Committee last met and any portfolio actions which require the Committee’s approval.
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. The key areas of focus for the Committee during 2013 are shown in the table below.
Although further actions were undertaken to enhance returns the Group Investment Committee continued to ensure that the Group maintained its low risk approach to the management of investment assets. All strategies reviewed and approved were consistent with maintaining the prudent risk framework and the Committee monitored asset disposition to ensure implementation remained in line with expectations.
Malcolm Le May Non-Executive Director and Chairman of Group Investment Committee
Details of the Group’s investments are contained in the Financial Review on pages 36 to 43.
5. Stephen Hester became a member of the Committee with effect from 5 February 2014.
As Chairman of the Board Risk Committee, I am pleased to present the Committee’s report for 2013 to shareholders.
I became Chairman of the Committee in March 2013, succeeding Noel Harwerth. Current membership of the Committee comprises Martin Scicluna, Alastair Barbour, Stephen Hester, Richard Houghton, Malcolm Le May and Kath Cates. Regular attendees include the Chief Risk Officer, Group Risk Director, Group Chief Auditor, Director of Underwriting, the Group General Counsel and Group Company Secretary, and the Group Head of Regulatory Risk and Compliance. Regional risk and underwriting officers and other employees or advisers may attend at the invitation of the Committee, and since June the external auditor has also attended meetings. Attendance at Committee meetings is shown in the table above.
The Committee is authorised by the Board to advise on risk management issues, recommend the Group framework of risk limits and risk appetite to the Board for approval and oversee the risk management arrangements of the Company and the Group generally. The Committee ensures that the material risks facing the Group have been identified, and that appropriate arrangements are in place to manage and mitigate those risks effectively.
The key areas of focus for the Committee are shown in the table below, with further detail provided in the report that follows.
During the year the Group risk appetite was reviewed by the Committee and refreshed as necessary through the year, before its approval by the Board. The risk department undertook an independent analysis of the Group’s operating plan from a risk perspective, which was reviewed and challenged by the Committee and outcomes communicated to management.
The Business Risk review presented at each meeting to the Committee covered insurance risk, including remediation progress on specific risk portfolios, financial risk, and reinsurance risk and strategy. The Committee’s review of capital included trends, drivers and sensitivities across different measures and consideration of a new capital appetite structure and forecasting.
The Group’s remuneration policy is reviewed by the Committee at least annually, to ensure that risk is properly considered in the overall setting of the policy for the Group and the remuneration of Executive Directors and other senior executives.
Technology risk was reviewed along with a new technology risk framework, and how cyber risks across the Group’s different operations are being addressed. Pension risk, along with risks affecting people, reputation and conduct were considered during the year, and the programme of stress and scenario testing continued, with the addition of a detailed reverse stress-test exercise.
In addition, significant risk events and breaches, with any evident or emerging trends, were the subject of ongoing analysis by management and consideration by the Committee, one aspect of which was the review of a root cause analysis pilot study looking at selected material losses, including articulation of management, governance and cultural factors.
The emerging risks profile was refreshed in liaison with external agencies, building on participation with the CRO Forum Emerging Risks Working Group and the World Economic Forum Risk Advisory Council. There has been a rotating focus on individual regions, with
regional presentations from all regional risk officers over the last 15 months and an additional committee has been established at the corporate centre to provide greater insight to the Committee.
The Committee considered significant changes in the risk profile and risk appetite during the year. The Group’s capital positions weakened during the year due to internal and external factors, which reduced resilience, increased sensitivity to a range of risks and contributed to heightened reputational risk. The most material factors eroding capital buffers were adverse performance (such as weather and Ireland) as well as certain changes of treatment in calculations including those by Standard & Poor’s and rising interest rates (affecting the Solvency 1 IGD ratio). Together with qualitative considerations related to the Ireland events, this led Standard & Poor’s to downgrade the Group’s core operating entities from A+ to A-.
Edward Lea Senior Independent Director and Chairman of Board Risk Committee
DIRECTORS’ RESPONSIBILITY STATEMENT The Directors’ Responsibility Statement appears on page 94 and is incorporated by reference into this Report.
As an introduction to the Report, the key areas of focus for the Committee are shown in the table below, with further detail provided in the Report that follows.
• Selection and recommendation regarding the appointment of the external auditor
• Group and regional Internal Audit Reports and plan for 2014
A primary focus for the Committee has been reviewing all scheduled results announcements; the 2012 Annual Report and Accounts with particular emphasis on their fair presentation; the reasonableness of judgements made; valuation of assets and liability balances and the appropriateness of significant accounting policies used in their preparation, together with the application of those policies.
The Committee has reviewed the Group’s financial reporting, internal control and risk management systems. Events in Ireland, as described on page 16 and discussed below, have been a significant focus in the last quarter of the year and the Committee was active in overseeing the various reviews carried out by PwC, Group Internal Audit and KPMG to assist in understanding what transpired and provide assurance that the same issues did not exist elsewhere in the Group.
The Committee also oversaw an effectiveness review of the Group’s Financial Control Framework. This involved consideration and approval of the review plan, regular updates and challenge to management at progress meetings. The proposed changes include enhancements to the existing framework, recommendations regarding accountability, increased coverage and scope which are aimed at providing additional assurance as part of the system of control for the Group.
ROLE AND RESPONSIBILITIES The purpose of the Committee is to assist the Board in discharging its responsibilities for the integrity of the Annual Report and Financial Statements, for the effectiveness of the systems of internal control and financial and regulatory risk management systems, and for monitoring 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 Committee duties, and is satisfied that it has received sufficient, reliable and timely information during 2013, in order to discharge its duties.
MEETINGS The Committee held six meetings during the year: four were timed to allow consideration of the financial information being presented to the market in respect of the Group’s annual and half-year results and to consider key financial matters supporting the two interim management statements; one in January considered the change of external auditor; and the final meeting in December considered and approved the Group Internal Audit and Regulatory Risk and Compliance plans for 2014, and considered matters which were anticipated would impact the 2013 year-end financial reporting processes.
Following the Committee’s annual effectiveness review, the Company, led by the risk team and supported by both this Committee and the Board Risk Committee, is undertaking a review of the whistleblowing policy to ensure it continues to be readily accessible, communicated to, and understood by, employees across the Group.
– In addition, the Committee reviewed the rates used for discounting long-tail liabilities and determined that the current methodology adopted by management was in line with accounting standards and that management’s recommendation to reduce UK rates from 5% to 4% was appropriate
– The Committee received and considered detailed written and verbal reporting from the external auditor setting out their observations and conclusions in respect of the recorded insurance contract liabilities.
Valuation of goodwill and other intangibles: • Significant acquisitions are reported to the Committee on a quarterly basis. In particular, the Committee focused on the purchase accounting relating to the 2012 acquisitions in Argentina and Canada and satisfied themselves that the acquisitions are appropriately reflected in the financial statements. At the year-end a comprehensive review of goodwill and intangibles was presented to the Committee, which detailed the main assumptions used to support the recoverability of each asset, together with sensitivities to key assumptions. The Committee considered in particular the carrying value of the software in the UK and agreed a write down reflecting the results of the business review and consequent change in use and life of some elements of the IT systems. The Committee received more detailed information on the goodwill attributed to the Irish business, and, after discussion and challenge, accepted the recommendation of management’s judgement on its carrying value. Management also updated the Committee on the results of impairment reviews covering all material goodwill balances across the Group and the Committee supported assessment of management’s goodwill impairments for Poland, Argentina, UK and Italy.
Assessment of the Annual Report and Accounts: • At the request of the Board, the Committee considered whether the 2013 Annual Report and Accounts were fair, balanced and understandable, and whether the disclosures were appropriate. To ensure that new accounting standards were understood and appropriately reflected in the financial statements, the Committee received quarterly updates of all relevant accounting standards that could impact the financial statements. In particular the impact of changes to IAS 19 Employee Benefits and IFRS 13 Fair Value Measurements were discussed. Taken as a whole, the Committee is satisfied that the Annual Report and Accounts is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s performance, business model and strategy.
IRELAND As announced in November 2013, PwC were appointed to undertake an independent review into the financial and regulatory reporting processes and controls within the Irish business, and Group oversight and controls of the Irish business. In order to further establish that the financial irregularities encountered in Ireland had not occurred elsewhere, the Board commissioned additional work to be undertaken by external auditor KPMG and by Group Internal Audit.
The PwC report makes a number of recommendations including conducting a review into the verification of policy adherence, enhancing the clarity of control standards and effectiveness of local implementation, and improving the balance of trust, integrity and accountability with challenge and independent verification. The Board has confirmed that PwC’s recommendations to enhance the operational effectiveness of Group-wide assurance processes and Irish financial controls have been adopted. A local programme of remediation has already begun and the Group continues to work with the Irish regulator, the Central Bank of Ireland.
These recommendations have already been incorporated into a refresh of assurance processes across the Group, many elements of which are already underway, and the Company will continue to engage with the PRA as this work progresses.
Additional assurance testing, at a materiality level set by reference to individual territories’ balance sheets by our external auditor KPMG and Group Internal Audit, confirmed that the financial and claims irregularities were isolated to Ireland. The work undertaken by KPMG, which extended to 29 territories, was an early commencement and deepening of the work to support their year-end audit to test that certain balance sheet items, and income recognition, had not been inappropriately accounted for as occurred in Ireland. Having received their report the Board is satisfied that the issues investigated have not been repeated elsewhere in the Group. Group Internal Audit were commissioned to examine the effectiveness of controls over Large Loss Case Reserving. Their report, which covered 20 territories, concluded that the controls are adequate and effective and found no evidence of suppression of, or delays in adjusting, large claims reserves.
The effectiveness review of the Financial Control Framework referred to above has been extended to take into account the lessons learned from Ireland.
In February 2014, the Committee and the Board reviewed the systems of internal control in operation during 2013. As referred to above and on page 16, the Irish business had suffered a significant control failure which was investigated by a number of independent external and internal reviews. The results of these reviews were presented to the Board and disclosed to shareholders on 9 January 2014. The conclusion reached by the Board in conjunction with management on the basis of the reviews was that the issues identified in Ireland were isolated to that country and that no other significant failings or weaknesses in the Group’s control environment were identified.
The Committee received regular reports from the Group Chief Auditor on the integrity of the control environment, and from the external auditor based on its audit work. Findings and recommendations arising from internal and external audit work are discussed by the Committee together with any control improvements recommended. These are also discussed between the businesses. During the year the Committee discussed the reliance of the business on effective IT systems and agreed changes to provide additional oversight to some IT testing processes, improved training for staff and better documentation standards.
Business managers across the Group complete a quarterly self-certification process which requires them to confirm the adequacy of controls and their compliance with Company policies, local laws, rules and regulations.
The reporting framework delivers information to enable the systems of internal control to be monitored and their effectiveness to be reviewed as required by the Code. The Board considers that an ongoing process for identifying, evaluating and managing the significant risks faced by the Group has been in place during 2013 and up to the date of approval of the Annual Report and Accounts. This process accords with the latest Turnbull Guidance.
The Committee receives and reviews a report on the non-audit services and spend quarterly, together with information on fees agreed and billed by the other major accounting firms. During the year KPMG provided non-audit services totalling £2.2m, of which £1.3m related to the extended audit work following the identification of financial and claims irregularities in Ireland. This additional work was approved by the Board in line with the Non-Audit Services Policy.
The Company undertakes a thorough review of the effectiveness of the external auditor on an annual basis, usually on completion of the audit process. In the year under review, the process has been amended to accommodate the fact that this is the first year of audit by KPMG and has in part been concurrent with the audit. The review has covered the perceived quality, effectiveness, objectivity and independence of the external auditor together with their compliance with the Committee’s guidance referred to above. It was conducted by seeking the views of the Committee, senior management and members of the Group financial reporting team, and asking for opinions against set criteria and the performance of the external auditor against those criteria. On the basis of the review, the Committee is satisfied with the work of KPMG and that they are objective and independent. Accordingly, the Committee has recommended to the Board that a resolution be put to the 2014 AGM for the re-appointment 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
EXTERNAL AUDITOR In 2013, the Board recommended to shareholders the appointment of KPMG LLP as external auditor to the Company. This followed a rigorous tender process, overseen and directed by the Committee in which five audit firms were invited to tender.
The process included provision of detailed information, meetings and presentations to both management and the Committee. There were 29 members of management involved in meeting with the tendering firms and all evaluated the firms against selection criteria covering industry knowledge, people, audit approach, proactivity, organisational fit and coverage, customer focus and fees. Of the firms who tendered, two were invited to make formal presentations to the Committee. These presentations took the form of meetings at which proposed audit strategy including planning, scope and risk identification was presented, discussed and challenged. Following those meetings, the Committee recommended to the Board that the appointment of KPMG LLP be recommended to shareholders. A resolution was put to shareholders and passed at the 2013 AGM.
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.
As Chairman of the Group Remuneration Committee of the Board, I present this Report for your approval covering the year to 31 December 2013.
This has been a very disappointing year. Overall, financial performance has been poor, despite good underlying growth occurring across many parts of the business. Group Combined Operating Ratio for the year is 99.6%, Net Written Premium is £8,664m, with the Group reporting a pre-tax loss of £244m. Consequently, I can advise that: • Salaries will remain unchanged for the Executive Directors
It has been a year of unforeseen events. Simon Lee resigned as the Group Chief Executive on 12 December 2013 and left with immediate effect. As has been previously announced, he was paid strictly in accordance with his employment contract, therefore, he will not receive a bonus for 2013 and all unvested and unexercised LTIP awards have lapsed. The Board requested that Mr Lee did not serve his contractual 12 months’ notice period and, instead, he is being paid in lieu of this, covering the equivalent of his base salary only. The payments are made to him in monthly instalments, set off against the value of any remuneration he may receive for future employment or engagement before the expiry of this 12 month period. Mr Lee has not received any ex-gratia compensation for loss of office. The details of Mr Lee’s total remuneration for 2013 are noted on page 82.
The Board is pleased to have appointed Stephen Hester on 5 February 2014, to replace Simon Lee. His annual salary is £950,000, to be first reviewed in April 2015. In addition, Mr Hester receives a range of employment benefits including an annual company car allowance of £20,000 and private medical cover. As Mr Hester has taken out enhanced pension protection, he is paid a supplement equal to 30% of his base salary in lieu of joining the RSA stakeholder pension plan. His notice period is 12 months.
2. RSA’s remuneration philosophy and strategy 71 3. RSA’s remuneration policy for Executive Directors 72 4. RSA’s remuneration policy for Non-Executive Directors 76 5. Paying for performance 78 6. Contractual terms 79 7. Engagement on Directors’ remuneration 79
Mr Hester did not receive any sign-on payments and, since he had already left his previous employer, no compensatory awards were made.
In terms of incentives, Mr Hester has an on-target bonus opportunity of 80% of salary, rising to 160% of salary at maximum, of which half must be deferred into RSA shares for three years. In recognition of Mr Hester’s experience, the scale of the challenge ahead and also to give him the opportunity to build his shareholding in RSA, his 2014 LTIP grant will be for 300% of salary, at maximum vesting. This is contingent, however, on shareholder approval of the new LTIP at the AGM on 9 May 2014. Consistent with the Remuneration Policy noted on pages 74 to 75, his future LTIP grants will be made at no more than 230% of salary, which is the Group’s usual level of award for Executive Directors. No matching share grants will be made to enhance these LTIP awards, as this practice has now ceased.
• The Annual Bonus Plan and the LTIP will actively align management’s and shareholders’ interests by assessing: profitable growth, underwriting performance, shareholder returns, balance sheet strength, capital strength, expense ratio and management actions, which includes a focus on risk. Some of the performance metrics will be assessed individually, while others will be included within a specific Business Review Scorecard underpinning the execution of the Group’s strategy.
• Executive Directors will defer 50% of their bonus awards into RSA shares for three years, which doubles the previous level of compulsory deferral. Voluntary bonus deferral now ceases.
• The level of required shareholding for the Group Chief Executive rises from 200% to 300% of salary.
The Remuneration Policy sets out the context for these changes on pages 71 to 79. The implementation of the Group’s remuneration approach in 2013 is given on pages 80 to 89. Specifically, how the Remuneration Policy is being implemented in 2014 is noted on pages 90 to 92.
This has been the most exceptional of years, and the Committee has responded accordingly to ensure that the remuneration arrangements of the Group are appropriate, both now and into the future. The Board looks forward to your support for this Report.
This Report is prepared in accordance with the amended requirements of Schedule 8 of SI 2008/410 The Large and Medium-sized Companies and Groups (Account and Reports) Regulations 2008, which came into effect for periods ending on or after 30 September 2013. The Policy has been developed taking into account the principles of the UK Corporate Governance Code 2012.
• How remuneration packages will be structured and managed for current, newly-appointed and departing directors
2. RSA’S REMUNERATION PHILOSOPHY AND STRATEGY RSA’s remuneration philosophy and strategy are directly informed by the business strategy, which is set out in the Strategic Report on pages 8 to 43 of this Report.
• A significant proportion of the overall remuneration package takes the form of variable pay, giving focus to stretching short and long-term objectives which directly support the achievement of strategic priorities and are aligned to shareholders’ interests
• The remuneration framework is reviewed regularly to ensure that it continues to appropriately reward executives, while protecting shareholders’ interests and complying with principles of good risk management and reward governance.
Base salary (fixed remuneration) Salaries are aligned to market competitive levels. This is to attract and retain high calibre executives, essential for ensuring RSA’s ongoing success.
• Performance conditions do not apply, but business and individual performance may be considered when conducting the review process. Although salaries are reviewed annually, there is no automatic right for any Director to receive a salary increase.
• The Executive Directors’ salaries effective 1 April 2014 are noted on page 90.
• Performance conditions do not apply. • No Executive Director will receive a pension benefit in excess of 30% of salary. • The Executive Directors’ pension benefits for 2013 are detailed on pages 82 to 83.
Annual Bonus Plan (variable remuneration) Supports RSA’s short-term objectives. Targets are directly linked to the operational plan and reflect RSA’s priority to create shareholder value through sustained growth and profitability, based on its risk profiles. Deferral into shares creates shareholder alignment.
• 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 2013 bonus awards are detailed on page 83.
• Bonus measures changed to give greater strategic alignment and capture operational priorities.
• Clawback Policy strengthened. • Leaver treatment modified regarding deferred bonuses. • Changes are noted on pages
• UK-based Executive Directors can participate in RSA’s flexible benefits programme and acquire shares through voluntary HMRC-approved share plans (Sharesave and Sharebuild). They can also claim expenses according to RSA’s business and travel policies.
• Under RSA’s Clawback Policy, cash and deferred share awards arising from the Annual Bonus Plan can be reduced or forfeited prior to receipt under a range of circumstances and other sanctions can apply. The policy is noted in detail on page 85. The Committee reviews the policy annually and may amend or update it, as required.
• Committee can exercise discretion to change the bonus measures, how they are weighted, calculated and targeted. It can also change the Directors’ bonus awards (both upwards and downwards) once the measures have been tested, provided this is appropriate and in shareholders’ interests. The Committee can make such amendments as are necessary to respond to regulatory, legal or accounting requirements. Shareholders will be notified if this has been carried out by disclosure in the relevant Directors’ Remuneration Report.
• Group Executives are targeted against performance of the entire Group. Executive Directors who have a regional accountability will be targeted against the performance of both the Group and their business areas.
• Targets are set with reference to the Group’s operational plan. • No additional performance conditions apply to the deferred bonus shares once they are granted.
• Compulsory deferral rises from 25% to 50% of the total bonus.
Long-term Incentive Plan (LTIP) (variable remuneration) Supports RSA’s long-term strategy. Targets reflect RSA’s priority to create shareholder value through sustained earnings and share price growth.
• Under RSA’s Clawback Policy, unvested share awards granted from 2013 onwards can be subject to forfeiture (partial or full) covering a range of circumstances and other sanctions can apply. The policy is noted in detail on page 85. The Committee reviews the policy annually and may amend or update it, as required.
• For recruitment purposes, or in highly exceptional circumstances, such as for retention, the Committee may agree to a conditional performance-related award being made up to an additional 170% of salary. This would be considered a ‘one-off ’ award. Where an exceptional award is made, full disclosure will be given on the rationale.
• The Committee can exercise discretion to temporarily waive or reduce the holding requirement or allow shares to be sold in exceptional business or personal circumstances (e.g. ill-health, divorce, financial hardship).
• Normal maximum opportunity reduces from 309% to 230% of salary. Exceptional maximum performance-linked grant is 400% of salary.
• Two-year retention period. • Clawback Policy strengthened. • Change in relative TSR
• For the purpose of reporting to shareholders, the holding levels will be determined using the mid-market closing price of an RSA ordinary share and executives’ annual gross basic salaries, both as at 31 December in the reporting year.
• Appointment salaries are set using the same approach as for the Directors’ salary reviews, as noted on pages 72 to 73 above. The Committee can exercise discretion on the timing and level of salary reviews for newly appointed Directors reflecting the individual’s development and performance in the role.
• Policy adheres to previous internal practice, except that restricted shares have not been utilised to satisfy a compensatory award at Executive Director level.
• Fees are paid in cash, subject to any required statutory deductions which are taken at source. • The Company has the discretion to introduce new fees or change the Non-Executives Directors’ terms.
• Details of the Chairman’s fee and the Non-Executive Directors’ fees earned for 2013 are noted on page 82.
• Performance conditions do not apply. • Contractual terms are noted on page 79.
• Where the Director is an external appointment, the Committee may agree to a compensatory package reflecting incentives or benefits forfeited upon resignation. This will only be permitted on receipt of reasonable evidence of loss. There will be no cash sign-on payments where there is no loss.
• Typically, the form of award that is being forfeited (e.g. cash or shares) will be replaced by the same form of award at RSA. Share awards, if they are subject to performance conditions, will generally be compensated by performance share grants in the LTIP. A fair value approach will be applied to determine the value of any compensatory share awards.
• Committee can exercise discretion on how to settle any buyout and over what time period to phase any compensatory awards. It will have regard to the performance and vesting periods of the Director’s forfeited incentives when determining this.
• Restricted shares may be issued and, if so, these will not carry any financial performance conditions, only continued service with the Group or such other conditions as the Committee may agree. Restricted shares will only be awarded to an Executive Director in the case of compensation for loss upon recruitment.
• If a loss of office were to occur giving rise to a redundancy payment under prevailing employment legislation, the payment will be calculated taking account of the Director’s length of service with the Group and his annual gross basic salary as at his employment termination date. Benefits continue until the employment termination date or the date the contractual notice period expires, whichever is the latter; they can be settled as payments.
• Based on the leaving circumstances and having regard of shareholders’ interests, the Committee can exercise discretion to reduce or lapse awards or enable a proportion of awards to be received but only in highly exceptional circumstances and where appropriate. Shareholders will be informed if discretion is applied, and details will be provided wherever possible.
Purpose and Strategic Link Policy for 2014 onwards Opportunity and performance conditions Key policy changes from 2013
• The Chairman is provided with secretarial support and the use of an office. • Non-Executive Directors may claim expenses in line with RSA’s business and travel policies; some of these expenses do not qualify for HMRC tax relief. They receive no other benefits, but they can have RSA insurance products at a discount. • As the Non-Executive Directors are not employed by the Company, they are not eligible to receive a bonus award or participate in any of RSA’s share plans.
The following charts show how much the Executive Directors could earn for the 2014 financial year based on the application of the Remuneration Policy (described on pages 72 to 77). Their remuneration potential changes according to varying levels of performance achievement. The assumptions that were used to prepare these charts are noted below. Also below are the timings of when each component of the remuneration package would be physically delivered to the executives.
3. The ‘maximum’ scenario shows the remuneration receivable with both the Annual Bonus Plan and the LTIP paying out in full (i.e. 160% of salary and 300%/230% of salary, respectively).
During 2013, the Committee actively engaged its leading shareholders on changes it was considering arising from the remuneration review. The Committee Chairman wrote to the Company’s 20 largest shareholders and the UK’s leading corporate governance bodies on the structure of its incentive programmes and the directors’ shareholding requirements. This communication continued the dialogue the Committee had begun the previous year, following a series of changes it had made to the Group’s remuneration framework beginning in 2011. The Committee reflected views given on its proposals as noted on page 70.
Also during the year, the Committee Chairman and Chairman met with representatives from several key institutional investors to discuss remuneration. Shareholder meetings will continue to be held for as long as all parties feel they are beneficial; this is aside of the AGM, analyst briefings and shareholder ‘road shows’ and meetings.
RSA’s employees The Committee is proud of RSA’s world-class levels of employee engagement, which are measured through independently-verified surveys and reports across the Group. Information is exchanged between employees, the Board and RSA’s leaders in a number of ways, some via formal consultation forums. The European Works Council (EWC) is one such forum.
As with any RSA employee, the Executive Directors may be suspended from their duties in the event of their misconduct or during an investigation which might result in their dismissal.
1. INTRODUCTION This section of the Directors’ Remuneration Report describes the way in which remuneration decisions have been carried out in the financial year ended 31 December 2013. There is a statement on how the Group intends to implement its Remuneration Policy in 2014 on pages 90 to 92. Some of the information contained in this section of the report is subject to audit and, where this is the case, it is noted.
The Committee determines the remuneration and contractual terms for the Executive Directors and the Executive Team (whose profiles are contained on pages 46 to 49. It also approves the fee and contractual terms of the Chairman (whose profile is on page 47).
Johanna Waterous2 3/3 Notes: * Chair of Committee 1. Edward Lea was a member of the Committee until 1 March 2013. 2. Johanna Waterous was appointed to the Committee effective 1 March 2013.
Derek Walsh Group General Counsel & Group Company Secretary (Secretary to the Committee)
January • Review of performance update and associated payout projections of the Annual Bonus Plan 2012 and LTIP cycle 2010–12 (vesting in 2013)
February • Review of Directors’ base salaries and approval of increases for 1 April 2013
• Testing of the performance conditions underpinning the Annual Bonus Plan 2012 and the LTIP cycle 2010–12; approval of Directors’ awards
• Update on the Annual Bonus Plan 2013 and LTIP cycles 2011, 2012 and 2013
September • Approval for a supplementary grant of conditional LTIP awards in November 2013 for non-Board employees
Salary Taxable benefits1 Bonus2 LTIP Pension related benefits5 Other remuneration6 Total
2. Bonus: comprises awards in respect of performance measures relating solely to the financial year shown, in accordance with the plan described on page 83. No Executive Director received a bonus in respect of the 2013 financial year, and therefore no deferred shares will be awarded. (2012: A 25% portion of the bonus shown was awarded in Compulsory Deferred Shares, and Executive Directors could elect to defer a further 33% of the net cash bonus into Voluntarily Invested Deferred Shares).
9. Simon Lee resigned from the Board and his employment ended on 12 December 2013. The salary value shown in the table for 2013 is the pro-rated amount. Pay in lieu of notice is not included in this table, and is captured in the Loss of Office section on page 88.
10. Kath Cates was appointed as a Director on 1 September 2013. The table shows the total remuneration paid for the period 1 September to 31 December 2013. 11. Noel Harwerth and John Maxwell resigned as Directors with effect from 31 March 2013. The table shows the total remuneration paid for the period 1 January to 31 March 2013. 12. Hugh Mitchell was appointed as a Director on 26 September 2012. 13. John Napier retired as a Director and Chairman on 31 December 2012. 14. Martin Scicluna was appointed as a Director and Chairman on 1 January 2013. A £21,000 portion of the above fees relate to the period from 13–31 December 2013 when he was appointed to the role of Executive Chairman. At his request, there was no increase in fee for this period.
Base salary The Committee reviewed the Executive Directors’ salaries during 2013, 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. The table below notes the Executive Directors’ salaries effective from 1 April 2013.
Employment benefits The Executive Directors received a range of employment benefits during the year, including car and medical benefits, and the value of these is noted in the table on page 82.
Pension provision (audited) The Executive Directors’ pension benefits for 2013 were as follows: • Adrian Brown received a taxable cash allowance of 17.5% of base salary, having opted out of the defined contribution scheme from 31 January 2012.
• Simon Lee received a taxable cash allowance of 25% of base salary for the period he was employed during 2013 and 2012.
The aggregate value paid by RSA into the Company’s stakeholder pension scheme for the Executive Directors in 2013 was £44,172 (2012: £20,849).
Annual Bonus Plan (audited) For the 2013 financial year, the Executive Directors’ Annual Bonus Plan consisted of stretching targets aligned to Group underlying Return on Equity (ROE) and operational objectives personal to their roles which were assessed against a performance scorecard. The Chief Executive, UK and Western Europe was additionally targeted against the Combined Operating Ratio (COR) performance for his region.
The maximum bonus opportunity that could be earned by the Executive Directors in 2013 was 160% of salary, of which half of any award would be compulsorily deferred into RSA shares for three financial years and subject to malus adjustment under the Group’s Clawback Policy detailed on page 85. As set out on pages 72 to 75, voluntary deferral and matching shares no longer form part of the incentive framework, and so these were not applicable to any awards arising from this year’s Plan.
The Executive Directors’ bonus awards are stated below for the 2013 and 2012 financial years.
Notes: 1. The values shown are inclusive of the Compulsory Deferred Share awards. 2. The bonus awards were determined by the Committee relative to the following annual gross basic salaries: Adrian Brown: 2013: £484,500 2012: £475,000 Richard Houghton: 2013: £494,400 2012: £480,000 Simon Lee: 2013: £824,000 2012: £800,000 3. Simon Lee resigned from the Board and his employment ended on 12 December 2013, and therefore any eligibility for a bonus award ceased on this date.
LTIP performance measures Threshold target: 25% vesting3 Maximum target: 100% vesting3 Actual performance Threshold target: 25% vesting3 Maximum target: 100% vesting3 Actual performance
The Performance Shares and Compulsory Deferred Matching Shares were weighted 70% on the ROE performance measure, and 30% on the Relative TSR measure. The Voluntarily Invested Deferred Matching Share awards were weighted 100% on the ROE performance measure. Consequently, the overall proportion of awards that vested was as follows: Form of LTIP award
The details of the Executive Directors’ vested awards are set out in the table below: LTIP vesting
Granted Vested Value Granted Vested Value Granted Vested Value Granted Vested Value 2011–131
Notes: 1. For all forms of awards, the performance period is three years and ends on 31 December 2015.
4. Basis of Award: Under the historical incentive arrangements, Executive Directors could receive two Matching Shares for each share deferred through the 2012 annual bonus plan, on either a compulsory or voluntary deferral basis. 25% of the Executive Directors’ total gross bonus award for the 2012 financial year was awarded in Compulsorily Deferred Shares and eligible for matching. An additional 33% of the net bonus award could be deferred into Voluntarily Invested Deferred Shares and eligible for matching.
Executive Directors’ required shareholding 2013 RSA believes it is in shareholders’ interests for its executives to hold shares in the Company. Under the guidelines applicable during 2013, executives were expected to build up a minimum holding over a five-year period and maintain it thereafter. The required shareholding levels that applied during 2013 are shown below. For 2014, the Committee increased the Group Chief Executive’s required shareholding to 300% of salary as noted on page 92. Position % of salary
2. The valuation is against the mid-market closing price of an RSA ordinary share as at 31 December 2013 of 91.4p per share. 3. The gross base annual salary as at 31 December 2013.
4. Simon Lee resigned from the Board and his employment ended on 12 December 2013. His shareholding is shown at that date, and valued using his gross annual base salary and the mid-market closing price of an RSA ordinary share at that date (99.7p per share).
Scheme interests held Details of Executive Directors’ existing awards in the Group’s incentive schemes and all-employee share plans for the financial year are set out below. Full details of all Directors’ shareholdings and options to subscribe for shares are recorded in the Group’s Register of Directors’ Interests which is open to inspection by shareholders at the AGM and at the Company’s registered office during standard business hours.
The 1999 ESOS is an executive share option scheme under which options were granted with an exercise price equal to the fair value of the shares at the date of grant. Any outstanding options expire 10 years from the date of grant. No grants have been made under the 1999 ESOS since 2006. The 1999 ESOS expired in 2009 although a number of options remain outstanding in accordance with the rules of the scheme. The relevant performance conditions were achieved in respect of the options noted in the table below.
Sharesave award described in note 3 below, and options under the 1999 ESOS scheme which lapsed during the year, all Mr Lee’s outstanding share options lapsed on 12 December 2013. 3. Simon Lee’s Sharesave award remains exercisable until 31 May 2014 in accordance with the 2009 Sharesave Rules under which it was granted. The status of the information on this award is given as at close of business on 12 December 2013. 4. The official closing middle market price at its highest during the year was 136.3p per share and at its lowest was 90.1p per share. On the last dealing day of the year it was 91.4p per share.
Mr Lee is required to mitigate his losses, and therefore the monthly instalments would be reduced on a pro-rated basis or cease if he receives payment or remuneration in respect of any alternative employment he accepts during the period. Mr Lee will not receive any benefits (or compensation in lieu) in respect of this period. He was paid £31,693 in lieu of accrued annual leave days not taken during 2013.
Mr Lee is not entitled to receive a bonus in respect of the 2013 or 2014 financial years.
A total of 4,481,450 shares granted to Mr Lee under the 2006 Long-term Incentive Plan lapsed on his employment termination date. This included all outstanding LTIP awards, except his 185,417 Voluntarily Invested Deferred Shares which he retained in accordance with the Plan rules (the latter were purchased using part of prior years’ net bonus awards, and were valued at £184,861 based on a share price of £0.997 on 12 December 2013). In addition, Mr Lee’s vested and unexercised share options granted under the 1999 Executive Share Option Scheme totalling 1,024,447 options, lapsed with immediate effect. Mr Lee’s participation in RSA’s voluntary all-employee share plans were treated in accordance with the rules of these plans for employees who resign.
4. 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.
XXXX90 11. IMPLEMENTATION OF REMUNERATION POLICY IN 2014 This section outlines decisions taken by the Committee in respect of the 2014 financial year, and how the Committee intends to implement the Directors’ Remuneration Policy during 2014.
At a glance The table below summarises how the Remuneration Policy will be implemented in the 2014 financial year.
Performance measures for 2014 are: – Group underlying Return on Tangible Equity (ROTE) – Group underlying Profit Before Tax (PBT) – Regional Underwriting Result – Group/Regional COR – Business Review Scorecard (comprising Capital Strength metrics and Management Actions) – Personal Scorecard
• Annual Bonus Plan: An on-target opportunity of 80%, rising to 160% of salary at maximum, linked to the achievement of the Plan’s targets. Half of any bonus award will be deferred in RSA shares for three years.
• Long-term incentives: Subject to the Group’s remuneration arrangements receiving shareholder approval at the 2014 AGM, Mr Hester will be granted an opportunity over Performance Shares, along with other executives. His first grant in 2014 will have a face value equivalent to 300% of salary, and successive annual grants will be made no higher than 230% of salary. When vested, all shares must be held for a further two years (less those sold to cover statutory deductions).
• Shareholding requirement: 300% of salary, to be built up over a five-year period.
Base salary The Committee has reviewed the Executive Directors’ base salaries and has determined that no increases will apply from April 2014. From 1 April 2014, Adrian Brown and Richard Houghton’s salaries will be maintained at £484,500 and £494,400, respectively. In accordance with the terms of his appointment, Stephen Hester’s salary will first be reviewed on 1 April 2015.
Long-term Incentive Plan Following the remuneration review, a new LTIP has been designed and will be submitted for shareholder approval at the AGM on 9 May 2014. As detailed on pages 74 to 75, the normal maximum LTIP opportunity has been reduced from 309% of salary to 230% of salary.
The plan directly supports the building of shareholder value by targeting growth in Group underlying Return on Tangible Equity (ROTE), relative Total Shareholder Return (TSR) and a Business Review Scorecard which comprises: growth in Tangible Net Asset Value per Share (TNAV), cumulative earnings and a range of capital strength metrics.
Additional committee fee1 £5,000 £5,000 Note: 1. From 1 July 2013, a fee of £5,000 applies for each committee a Non-Executive Director is a member of other than as Committee Chairman; prior to this date, a £5,000 flat fee was paid per annum for Committee membership.
12. STATEMENT OF VOTING AT GENERAL MEETING The following voting was recorded at the AGM on 15 May 2013 regarding the resolution to approve the Directors’ Remuneration Report: Resolution to approve the Directors’ Remuneration Report Votes For Votes Against Total Votes Cast Votes Witheld1
13. DILUTION RSA monitors its dilution levels on a regular basis to ensure that they remain within the headroom limits set by the Association of British Insurers (ABI). As at 31 December 2013, the dilution levels were as follows: ABI Limit RSA dilution %
The Directors are responsible for preparing the Annual Report and Accounts in accordance with applicable laws and regulations. Company law requires the Directors to prepare such financial statements for each financial year. Under that law the Directors are required to prepare Group financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and Article 4 of the IAS Regulation and have also chosen to prepare the Parent Company financial statements under IFRS as adopted by the European Union. 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 these financial statements, International Accounting Standard 1 requires that Directors: • Properly select and apply accounting policies; • Present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; • Provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable the users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance; and
Stephen Hester Richard Houghton Group Chief Executive Group Chief Financial Officer 26 February 2014 26 February 2014
1. Our opinion on the Group financial statements is unmodified We have audited the financial statements of RSA Insurance Group plc (‘RSA’) for the year ended 31 December 2013 set out on pages 99 to 172. In our opinion: • the financial statements give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at 31 December 2013 and of the Group’s loss for the year then ended; • the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union (‘IFRS as adopted by the EU’); • the Parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU and as applied in accordance with the provisions of the Companies Act 2006; and
2. Our assessment of risks of material misstatement In arriving at our audit opinion above on the Group financial statements the risks of material misstatement that had the greatest effect on our Group audit were as follows: Insurance liabilities (provision for losses and loss adjustment expenses) £11,148 million Refer to page 66 (Group Audit Committee Report), page 108 (accounting policy) and pages 147 to 150 (financial disclosures).
• Our response: We were assisted by our own actuarial specialists to understand and challenge the Group’s reserving practices throughout our audit procedures in this area. Our audit procedures included, among others, evaluating and testing the key controls around the reserving process, including controls over the completeness and accuracy of the data that support key reserving calculations and 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). In certain locations we have carried out our own reprojections of insurance liabilities for certain classes of business in order to assess the reasonableness of estimates made by management. We evaluated the governance around the overall reserving process including scrutiny applied by local, regional and Group reserving committees and Group level actuarial reviews (as described on page 116) through evaluating whether those responsible had appropriate qualifications and experience, examining the output to assess the scope and depth of these processes and effectively reperforming this review for the most significant and subjective insurance liabilities and the key assumptions applied. We assessed key reserving assumptions including loss ratios, frequency and severity of claims, and where appropriate, discount rates for longer tail classes of business by territory and line of business, and over time, comparing them to expectations based on the Group’s historical experience, current trends and our own industry knowledge. We evaluated whether appropriate prudence had been applied in this context and whether reserving was consistent in approach, with sufficient justification for changes in assumptions. We used our industry knowledge to benchmark the Group’s reserving methodologies and estimates of losses. Our audit focused particularly on lines of business with the most inherent uncertainty. These include the longer-tailed risks such as Asbestos and Deafness classes, the Danish Workers Compensation class, the Swedish Personal Accident classes, the Canadian General Liability class and classes of business affected by emerging industry issues such as the impact of Periodic Payment Orders on UK motor business. In view of the issues identified in the Irish business, we have performed our own independent reprojections of the insurance liabilities in that business in order to conclude on the reasonableness of the estimates made by management. We assessed whether the Group’s disclosure in relation to insurance liabilities, including the discount rate and historic claims development, were appropriate.
• The risk: During the year financial and claims irregularities were identified in the Group’s Irish business. These irregularities involved inappropriate collaboration amongst a small number of senior executives which undermined control effectiveness in some instances. We therefore consider there to be a heightened risk to our audit across the Group due to the potential for local management to override financial reporting controls.
Goodwill and other intangible assets £1,103 million Refer to page 66 (Group Audit Committee Report), page 106 (accounting policy) and pages 135 to 137 (financial disclosures).
• We have also assessed the adequacy of the Group’s disclosures in respect of goodwill and other intangible assets, and in particular the disclosure of sensitivity to key assumptions (see note 8).
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF RSA INSURANCE GROUP PLC ONLY CONTINUED
Pensions and post-retirement obligations net pension deficit of £125 million Refer to page 66 (Group Audit Committee Report), page 110 (accounting policy) and pages 154 to 159 (financial disclosures).
• The risk: Many financial reporting controls depend on the correct functioning of related elements of the operational and financial IT systems, for example interfaces between policy administration and financial reporting systems or automated controls which are designed to prevent inaccurate or incomplete transfers of financial information. This is an area of significant risk in our audit due to the complexity of the IT infrastructure, particularly in the UK, where there are legacy systems which require increased manual inputs.
• Our response: 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 whether changes made to the systems were appropriately approved, and assessing whether appropriate restrictions were placed on access to core systems through testing the permissions and responsibilities of those given that access. Where IT controls were not operating effectively and we were therefore unable to rely on certain automated IT controls, we considered whether financial information was impacted and extended the scope of our work by performing additional audit procedures in a limited number of areas. In the areas where we performed additional procedures we were able to place reliance on manual compensating controls, such as reconciliations between systems and other information sources, or perform additional testing, such as extending the size of our sample sizes, to obtain sufficient appropriate audit evidence over the financial statement balances that were impacted.
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 £50m. This has been determined with reference to a benchmark of gross written premiums (of which it represents 0.5%), which we consider to be one of the principal considerations for members of the Company in assessing the financial performance of the Group.
In addition to the audits undertaken for group reporting purposes, as described in our procedures above in response to management override of controls, we have extended our audit procedures in response to the issues identified in the Group’s Irish business. This supplementary testing was undertaken in all the locations in which the Group operates and performed to levels of materiality akin to that applied in the local statutory audits of the entities concerned.
• the information given in the Strategic Report and Directors’ and Corporate Governance Report for the financial year for which the financial statements are prepared is consistent with the financial statements.
In particular, we are required to report to you if: • we have identified material inconsistencies between the knowledge we acquired during our audit and the directors’ statement that they consider that the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s performance, business model and strategy; or
• certain disclosures of directors’ remuneration specified by law are not made; or
Under the Listing Rules we are required to review: • the Directors’ statement, set out on page 55, in relation to going concern; and
• the part of the Corporate Governance Statement on page 45 relating to the Company’s compliance with the nine provisions of the UK Corporate Governance Code (2010) specified for our review.
Stuart Crisp (Senior Statutory Auditor) for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants London
Net share of loss after tax of associates 11 (2) (6)
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2013
Balance at 1 January 2012 as previously reported 971 1,144 (1) 125 454 8 243 857 3,801 114 3,915
Reserve transfer (note 19) – (420) – – – – – 420 – – –
Total comprehensive income for the year (note 18) – – – – 113 – (61) 180 232 4 236
Shares issued for cash (note 19) 2 5 – – – – – – 7 – 7
Changes in shareholders’ interests in subsidiaries – – – – – – – (3) (3) 1 (2)
The financial statements were approved on 26 February 2014 by the Board of Directors and are signed on its behalf by: Richard Houghton Group Chief Financial Officer
Effect of exchange rate changes on cash and cash equivalents (56) (29)
Cash and cash equivalents at end of the year 17 1,162 1,329
CONSOLIDATED FINANCIAL STATEMENTS The consolidated financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU). The consolidated financial statements are prepared under the historical cost convention as modified by the revaluation of available for sale financial assets, investment property, Group occupied property, financial assets held for trading, all derivative contracts and held for sale assets.
IAS 1 Presentation of Financial Statements The Group has applied Amendment to IAS 1 ‘Presentation of Financial Statements – Presentation of Items of Other Comprehensive Income’. There is a change in the presentation of items in the consolidated statement of comprehensive income on page 100 which now identifies separately items that may be reclassified to the income statement.
The information for the year ended 31 December 2012 has been presented in accordance with the revised standard.
Amendments to IFRS 7 The Group has adopted ‘Disclosures: Offsetting Financial Assets and Financial Liabilities (Amendments to IFRS 7)’. There are additional disclosures made to explain existing rights where under specified circumstances the Group has the benefit of additional security over an asset through a right of offset against certain liabilities.
The adoption of the amendments to IFRS 7 has no impact on either the total financial results or the financial position of the Group.
The adoption of IFRS 13 increased the value of the Group’s pension schemes’ assets by £160m which is recognised in other comprehensive income (see note 27).
There are a number of other changes to IFRS that became mandatory in 2013 but which have no significant impact on the financial statements of the Group.
Subsidiaries Subsidiaries are entities over which the Group has the power to govern the financial and operating policies so as to obtain benefits from their activities, generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases.
For business combinations completed on or after 1 January 2010 the cost of acquisition includes the fair value of deferred and contingent consideration at the acquisition date and subsequent changes in the carrying value of the consideration are recognised in the income statement. For business combinations completed prior to 31 December 2009, the cost also includes costs directly attributable to the acquisition and the value of contingent consideration on settlement.
The Group’s share of its associates’ post acquisition profits or losses are recognised in the income statement and its share of post acquisition movements in reserves is recognised in the statement of comprehensive income. The cumulative post acquisition movements are adjusted in the carrying amount of the investment. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate.
Goodwill Goodwill, being the difference between the cost of a business acquisition and the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities acquired, is initially capitalised in the statement of financial position at cost and is subsequently recognised at cost less accumulated impairment losses. The cost of the acquisition is the amount of cash paid and the fair value of other purchase consideration.
For business combinations completed prior to 31 December 2009, the cost also includes costs directly attributable to the acquisition and the value of contingent consideration on settlement.
Goodwill is allocated to cash generating units for the purpose of impairment testing. Goodwill is subject to an impairment review at least annually. An impairment review is also carried out whenever there is an indication that goodwill is impaired. Where the carrying amount is more than the recoverable amount, impairment is recognised in the income statement. An impairment loss recognised for goodwill is not reversed in a subsequent period.
When valuing insurance liabilities in a business combination, provisions for losses and loss adjustment expenses are discounted to present value. Following the acquisition, the acquired provisions for losses and loss adjustment expenses are, where applicable, valued in accordance with Group accounting policies at full nominal value. This increase in insurance liabilities is matched by the recognition of an intangible asset arising from acquired provisions for losses and loss adjustment expenses, representing the present value of future investment income implicit in the claims discount. The intangible asset is amortised over the expected run off period and is tested within the liability adequacy test of insurance contract liabilities where the balances of intangible assets associated with insurance contracts are deducted from the carrying amount of the insurance contract liabilities. The run off period is normally between 5 and 11 years.
Expenditure that enhances the future economic benefits arising from computer software is recognised as an intangible asset.
Computer software and other intangible assets are carried at cost less accumulated amortisation and less any accumulated impairment losses. Amortisation on computer software and other intangible assets is calculated using the straight line method to allocate the cost over their estimated useful lives, which is normally estimated to be between 3 and 12 years.
Impairment losses previously recognised on other 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.
Group occupied property is stated at fair value, less subsequent depreciation for buildings. Fair value movements are recorded in other comprehensive income within revaluation reserves. All other assets are stated at depreciated cost.
The assets’ residual values and useful lives are reviewed and adjusted if appropriate.
Increases in the carrying amount arising on the revaluation of Group occupied property are credited to revaluation reserves in other comprehensive income. Decreases that offset the previous increases of the same asset are charged against revaluation surplus directly in other comprehensive income; other decreases are charged to the income statement. Each year the difference between depreciation based on the fair value of the asset charged to the income statement and depreciation based on the asset’s original cost is transferred from revaluation reserve to retained earnings.
Investment property is recorded at fair value. Unrealised gains and unrealised losses or changes thereof are recognised in net investment return.
The Group designates investments in equity and debt securities in accordance with its investment strategy on the basis on which the investment return is managed and its performance is evaluated internally. Where the investment return is managed on the basis of the periodic cashflows arising from the investment, a financial asset is designated as an available for sale financial asset. Where the investment return is managed on the basis of the total return on the investment (including unrealised investment gains), the financial asset is designated as at fair value through the income statement. Other investments comprising loans and other deposits are classified as loans and receivables.
For available for sale financial assets, where the cumulative changes in fair value recognised in other comprehensive income represent a loss, the individual asset or group of assets is reviewed to test whether an indication of impairment exists.
DERIVATIVE FINANCIAL INSTRUMENTS Derivatives are recognised in the statement of financial position on a trade date basis and are carried at fair value. Derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument and the nature of the item being hedged. Where a derivative is not designated as a hedging instrument, changes in its fair value are recognised in the income statement.
HEDGING 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
• The hedge is expected to be highly effective in achieving offsetting changes in fair value or cashflows attributable to the hedged risk, consistent with the originally documented risk management strategy for that particular hedging relationship
Where a foreign exchange derivative is designated as a hedging instrument against the net investment in foreign entities, the effective portion of the hedge is recognised in other comprehensive income; the gain or loss relating to the ineffective portion is recognised immediately in the income statement. Gains and losses accumulated in other comprehensive income are included in the income statement when the underlying hedged item is derecognised.
ESTIMATION OF THE FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES The methods and assumptions used by the Group in estimating the fair value of financial assets and liabilities are: • For fixed maturity securities, fair values are generally based upon quoted market prices. Where market prices are not readily available, fair values are estimated using either values obtained from quoted market prices of comparable securities or estimated by discounting expected future cashflows using a current market rate applicable to the yield, credit quality and maturity of the investment
• For notes, bonds, loans payable and loan capital, fair values are determined by reference to quoted market prices or estimated using discounted cashflow calculations based upon prevailing market rates. Loan capital is carried at amortised cost and, when different, fair value is disclosed in the relevant note. For borrowings that carry a variable rate of interest (other than loan capital), carrying values approximate to fair values
• Level 3 fair value measurements are those derived from valuation techniques that include significant inputs for the asset or liability that are not based on observable market data (unobservable inputs).
Product classification Insurance contracts are those contracts that transfer significant insurance risk at the inception of the contract. Insurance risk is transferred when the Group agrees to compensate a policyholder if a specified uncertain future event (other than a change in a financial variable) adversely affects the policyholder. Any contracts not meeting the definition of an insurance contract under IFRS are classified as investment contracts or derivative contracts, as appropriate.
Recognition of income Premiums written are accounted for in the period in which the contract is entered into and include estimates where the amounts are not determined at the end of the reporting period. Premiums written exclude taxes. Duties levied on premiums and directly related expenses, e.g. commissions are recognised as an expense. Premiums are earned as revenue over the period of the contract and are calculated principally on a daily pro rata basis.
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 premiums. Deferred acquisition costs (DAC) are amortised on the same basis as the related unearned premiums are earned.
The provisions for losses and loss adjustment expenses whether reported or not, comprise the estimated cost of claims incurred but not settled at the end of the reporting period. It includes related expenses and a deduction for the expected value of salvage and other recoveries. The provision is determined using the best information available of claims settlement patterns, forecast inflation and settlement of claims. The provisions for losses and loss adjustment expenses relating to long-term permanent disability claims in the UK and Scandinavia are also determined using recognised actuarial methods.
The provisions for losses and loss adjustment expenses, and related reinsurance recoveries, are discounted where there is a particularly long period from incident to claims settlement or when nominal interest rates are high and where there exists a suitable claims payment pattern from which to calculate the discount. In defining those claims with a long period from incident to claims settlement, those categories of claims where the average period of settlement is six years or more has been used as a guide. The discount rate used is based upon an investment return expected to be earned by assets, which are appropriate in magnitude and nature to cover the provisions for losses and loss adjustment expenses being discounted, which in practice are bonds and property, during the period necessary for the payment of such claims.
For those individual schemes in deficit, the resulting net liabilities are recognised in the statement of financial position in provisions. For those individual schemes in surplus, an asset is recognised in the statement of financial position in other debtors and other assets to the extent that the Group can realise an economic benefit, in the form of a refund or a reduction in future contributions, at some point during the life of the scheme or when the scheme liabilities are settled.
• The past service costs and gains or losses on settlements
Remeasurements of the net defined benefit liability (asset) comprise actuarial gains and losses and the return on plan assets (excluding amounts included in net interest on the net defined benefit liability (asset)) and are recognised in other comprehensive income.
Actuarial gains and losses arise from changes to actuarial assumptions when revaluing future benefits and from actual experience in respect of scheme liabilities.
Share based payments The value of employee share options and other equity settled share based payments is calculated at fair value at the grant date using appropriate and recognised option pricing models.
PROVISIONS Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is more likely than not that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated.
DIVIDENDS TO EQUITY HOLDERS The final dividend is recognised as a liability when approved at the Annual General Meeting.
ASSETS AND LIABILITIES HELD FOR SALE AND DISCONTINUED OPERATIONS Assets are classified as held for sale if their carrying amount is to be recovered principally through a sale transaction, that is highly probable to be completed within one year from the date of classification, rather than through continuing use. Such assets are measured at the lower of carrying amount and fair value less costs to sell and are classified separately from other assets in the statement of financial position. Assets and liabilities of a disposal group are not netted. In the period where a non current asset or disposal group is recognised for the first time, the statement of financial position for the comparative prior period presented is not restated.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS Pronouncements issued by the International Accounting Standards Board (IASB) and adopted by the EU but which are not yet mandatory for adoption and have yet to be adopted in the Group financial statements are described below: New and revised IFRS that will be applied by the Group in its 2014 financial statements The Group will apply IFRS 10 ‘Consolidated Financial Statements’, IFRS 11 ‘Joint Arrangements’ and IFRS 12 ‘Disclosure of Interests in Other Entities’. None of these are expected to have a significant impact on the financial statements of the Group. There are a number of other changes to IFRSs that become mandatory in 2014 but which have no significant impact on the financial statements of the Group.
Other new and revised IFRS that are not mandatory for adoption in 2014 There are a number of new IFRS and revised IFRSs that have been issued and which are mandatory after 2014. It is expected that none of these changes will have a significant impact on the financial statements of the Group.
Other new IFRS that are not yet adopted by the EU The IASB has issued a new IFRS and a number of changes to existing IFRS that have not yet been adopted by the EU. The most significant of these ongoing developments for the Group is the project to replace IAS 39 ‘Financial Instruments: Recognition and Measurement’.
The insurance contract liabilities of an insurance company include the provision for unearned premiums and unexpired risks and the provision for losses and loss adjustment expenses. Unearned premiums and unexpired risks represent the amount of income set aside by the company to cover the cost of claims that may arise during the unexpired period of risk of insurance policies in force at the end of the reporting period. Outstanding claims represent the company’s estimate of the cost of settlement of claims that have occurred by the end of the reporting period but have not yet been finally settled.
ESTIMATION TECHNIQUES Claims and unexpired risks provisions are determined based upon previous claims experience, knowledge of events and the terms and conditions of the relevant policies and on interpretation of circumstances. Particularly relevant is experience with similar cases and historical claims payment trends. The approach also includes the consideration of the development of loss payment trends, the potential longer term significance of large events, the levels of unpaid claims, legislative changes, judicial decisions and economic, political and regulatory conditions.
The provisions for losses and loss adjustment expenses are subject to close scrutiny both within the Group’s business units and at Group Corporate Centre. In addition, for major classes where the risks and uncertainties inherent in the provisions are greatest, regular and ad hoc detailed reviews are undertaken by advisers who are able to draw upon their specialist expertise and a broader knowledge of current industry trends in claims development. As an example, the Group’s exposure to asbestos related losses is examined on this basis. The results of these reviews are considered when establishing the appropriate levels of provisions for losses and loss adjustment expenses and unexpired periods of risk.
It should be emphasised that the estimation techniques for the determination of insurance contract liabilities involve obtaining corroborative evidence from as wide a range of sources as possible and combining these to form the overall estimate.
The Group evaluates the concentration of exposures to individual and cumulative insurance risk and establishes its reinsurance policy to manage such exposure to levels acceptable to the Group.
LITIGATION, DISPUTES AND INVESTIGATIONS The Group, in common with the insurance industry in general, is subject to litigation, mediation and arbitration, and regulatory, governmental and other sectoral inquiries and investigations in the normal course of its business. In addition, the Group is exposed to the risk of litigation in connection with its former ownership of the US operation. The directors do not believe that any current mediation, arbitration, regulatory, governmental or sectoral inquiries and investigations and pending or threatened litigation or dispute will have a material adverse effect on the Group’s financial position, although there can be no assurance that losses or financial penalties resulting from any current mediation, arbitration, regulatory, governmental or sectoral inquiries and investigations and pending or threatened litigation or dispute will not materially affect the Group’s financial position or cashflows for any period.
REINSURANCE The Group is exposed to disputes on, and defects in, contracts with its reinsurers and the possibility of default by its reinsurers. The Group is also exposed to the credit risk assumed in fronting arrangements and to potential reinsurance capacity constraints. In selecting the reinsurers with whom the Group conducts business its strategy is to seek reinsurers with the appropriate combination of financial strength, price and capacity. The Group Corporate Centre publishes internally a list of authorised reinsurers who pass the Group’s selection process and which its operations may use for new transactions.
INVESTMENT RISK The Group is exposed to market risk and credit risk on its invested assets. Market risk includes the risk of potential losses from adverse movements in market rates and prices including interest rates, equity prices, property prices and foreign exchange rates. The Group’s exposure to market risks is controlled by the setting of investment limits in line with the Group’s risk appetite. From time to time the Group also makes use of derivative financial instruments to reduce exposure to adverse fluctuations in foreign exchange rates and equity markets. The Group has strict controls over the use of derivative instruments.
Credit risk includes the non performance of contractual payment obligations on invested assets and adverse changes in the credit/worthiness of invested assets including exposures to issuers or counterparties for bonds, equities, deposits and derivatives. Limits are set at both a portfolio and counterparty level based on likelihood of default to manage the Group’s overall credit profile and specific concentrations within risk appetite. The Group’s insurance investment portfolios are concentrated in listed securities with very low levels of exposure to assets without quoted market prices. The Group uses model based analysis to verify asset values when market values are not readily available.
FOREIGN EXCHANGE RISK The Group publishes consolidated financial statements in Pounds Sterling. Therefore, fluctuations in exchange rates used to translate other currencies, particularly the Danish Krone and Swedish Krona, the Euro and the Canadian Dollar, into Pounds Sterling will impact the reported consolidated financial position, results of operations and cashflows from period to period. These fluctuations in exchange rates will also impact the Pound Sterling value of, and the return on, the Group’s investments.
Solvency II, the new solvency framework being developed by the EU is intended to achieve greater harmonisation of approach across EU member states to assessing capital resources and requirements. The planned implementation date is now 1 January 2016, although there still remains continued uncertainty as to the final rules. The Group is actively involved in shaping the outcome through its involvement with European and UK regulators and industry bodies, whilst progressing its implementation plans. The directors are confident that the Group will continue to meet all future regulatory capital requirements.
As an insurance company, the Group is in the business of actively seeking risk with a view to adding value by managing it. This section summarises the key risks to the Group and the steps taken to manage them.
Pricing for the Group’s products is generally based upon historical claims frequencies and claims severity averages, adjusted for inflation and modelled catastrophes trended forward to recognise anticipated changes in claims patterns. While claims remain the Group’s principal cost, the Group also makes allowance in the pricing procedures for acquisition expenses, administration expenses, investment income, the cost of reinsurance and for a profit loading that adequately covers the cost of the capital.
All of the Group’s underwriters have specific licences that set clear parameters for the business they can underwrite, based on the experience of the individual underwriter. Additionally, the Group 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, which provides a consistent assessment of each portfolio performance against a set of key performance indicators. Under the portfolio management system, key risk indicators are tracked to monitor emerging trends, opportunities and risks and, on an annual basis, a review forum of business and underwriting leaders undertake a detailed review of each portfolio utilising data from the quarterly reviews.
The Group has a Group Reserving Committee consisting of the Group Chief Executive, Group Chief Financial Officer, Group Underwriting and Claims Director, Group Chief Actuary and Group Chief Risk Officer. A similar committee has been established in each of the Group’s major operating segments. The Group Reserving Committee monitors the decisions and judgements made by the business units as to the level of reserves recommended and makes the final decision on the reserves to be included within the consolidated financial statements. In forming its collective judgement, the Committee considers the following information: RISK MANAGEMENT
The Group remains primarily liable as the direct insurer on all risks reinsured, although the reinsurer is liable to the Group to the extent of the insurance risk ceded.
CREDIT RISK Credit risk is the risk of loss of value of the financial assets due to counterparties failing to meet all or part of their obligations. The Board Risk Committee (BRC) is responsible for ensuring that the Board approved Group credit risk appetite is not exceeded. This is done through the setting and imposition of Group policies, procedures and limits. In defining its appetite for credit risk the Group looks at exposures at both an aggregate and business unit level distinguishing between credit risks incurred as a result of offsetting insurance risks or operating in the insurance market (e.g. reinsurance credit risks and risks to receiving premiums due from policyholders and intermediaries) and credit risks incurred for the purposes of generating a return (e.g. invested assets credit risk).
Limits are set at both a portfolio and counterparty level based on likelihood of default, derived from the rating of the counterparty, to ensure that the Group’s overall credit profile and specific concentrations are managed and controlled within risk appetite. Financial assets are graded according to company standards. AAA is the highest possible rating. Investment grade financial assets are classified within the range of AAA to BBB ratings. For invested assets, restrictions are placed on each of the Group’s investment managers as to the level of exposure to various rating categories including unrated securities.
The following table provides information regarding the aggregated credit risk exposure for financial assets of the Group as at 31 December 2013: 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 35 533 1,040 218 50 55 1,931
The Group regularly monitors its aggregate exposures by reinsurer group against predetermined reinsurer group limits, in accordance with the methodology agreed by the BRC. The Group’s largest reinsurance exposures to active reinsurance groups are Swiss Re, Munich Re, and HDI-Gerling. At 31 December 2013 the reinsurance asset recoverable from these groups does not exceed 3% of the Group’s total financial assets. Stress tests are performed by reinsurer counterparty and the limits are set such that in a catastrophic event, the exposure to a single reinsurer is estimated not to exceed 3% of the Group’s total financial assets. Certain of the Group’s subsidiaries are members of government mandated pools in various parts of the world. As of 31 December 2013 the largest pool (by premium volume) is Pool Re operated by the UK Government to provide terrorism cover.
The following table provides information regarding the carrying value of financial assets that have been impaired and the ageing of financial assets that are past due but not impaired as at 31 December 2013: Neither past due nor impaired £m
Loans and receivables 146 – – – – – 146 (6)
Reinsurers’ share of insurance contract liabilities 2,020 – – – – 6 2,026 (4)
Reinsurers’ share of insurance contract liabilities 1,931 – – – – 18 1,949 1
Cash and cash equivalents 1,329 – – – – – 1,329 –
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.
At 31 December 2013, the Group had pledged £871m (2012: £895m) of financial assets as collateral for liabilities or contingent liabilities and had accepted £463m (2012: £827m) in collateral. The nature of the assets pledged as collateral comprises government securities of £801m (2012: £831m), cash and cash equivalents of £37m (2012: £32m) and non government debt securities of £33m (2012: £32m). The terms and conditions of the collateral pledged are market standard in relation to letter of credit facilities.
At 31 December 2013, the Group had entered into short-term sale and repurchase agreements for UK government securities. The Group continues to recognise the debt securities in the statement of financial position as the Group remains exposed to the risks and rewards of ownership. The carrying value of these debt securities recognised in the statement of financial position is £300m (2012: £295m) and the carrying value of the associated liabilities is £300m (2012: £295m).
The following table sets out the carrying amounts of recognised financial instruments that are subject to the above agreements: At 31 December 2013
The Group Investment Committee (GIC), on behalf of the Group Board, is responsible for reviewing and approving the investment strategy for the Group’s investment portfolios. It provides approval for all major changes of the Group’s investment strategy and, in particular, approves any substantive changes to the balance of the Group’s funds between the major asset classes. Importantly, the GIC also approves the terms of reference of the Group’s main operational investment committee, the Group Asset Management Committee (GAMC). The BRC issues GAMC with investment risk limits.
Equity price risk The Group’s portfolio of equity securities is subject to equity risk arising from changes in market price. Thus if the value of equities rise, so will the fair value of its portfolio and vice versa as set out in the sensitivity analysis on page 122.
Currency risk The Group operates in 32 countries. Accordingly, its net assets are subject to foreign exchange rate movements. The Group’s primary foreign currency exposures are to the Danish Krone, Euro, Canadian Dollar and the Swedish Krona. If the value of Sterling strengthens then the value of non Sterling net assets will decline when translated into Sterling and consolidated.
The Group incurs exposure to currency risk in two ways: • Operational currency risk – by underwriting liabilities in currencies other than the currency of the primary environment in which the business units operate (non functional currencies)
Structural currency risk is managed at a Group level through currency forward and foreign exchange option contracts within the limits that have been set. 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. Consequently, this may affect the value of the consolidated shareholders’ equity expressed in Sterling.
At 31 December 2013, the Group’s total shareholders’ equity analysed by currency is: Pounds Sterling £m
Decrease in other comprehensive income 2013 £m 2012 £m 2013 £m 2012 £m
Impact on fixed interest securities of increase in interest rates of 100bps3 – – (427) (446)
Direct impact on equities of a 15% fall in equity markets (6) (25) (87) (84)
LIQUIDITY RISK Liquidity risk is the risk that the Group may be unable to pay obligations when due as a result of assets not being available in a form that can immediately be converted into cash. The investment risk limits set by the BRC ensure that a large part of the Group’s portfolio is kept in highly liquid marketable securities sufficient to meet its liabilities as they fall due based on actuarial assessment and allowing for contingencies. The limits are monitored at a Group level as part of the Group Risk exposure monitoring and BRC reporting process.
Subordinated guaranteed US$ bonds – – – – – – 15 15 13
Subordinated guaranteed dated notes – – – – – 500 – 500 493
Deposits received from reinsurers 33 – – – – – – 33 33
Interest on perpetual bonds and notes 112 109 73 73 62 71 9 509
The duration 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.
The capital and interest payable on the bonds and notes have been included until the dates on which the Group has the option to call the instruments and the interest rates are reset. For further information on the terms of the bonds and notes see note 20 to the financial statements.
Undiscounted interest payments are calculated based on underlying fixed interest (as detailed in note 20). Year end exchange rates have been used for interest projections on loans in foreign currencies.
REPUTATIONAL RISK Reputational risk is the current or prospective risk to earnings and capital arising from adverse perception of the image of the Group on the part of customers, counterparties, shareholders, investors or regulators. The External Communications team keeps under constant review the threats to the Group’s reputation, both internal and external, and the Risk function works with them to promote a culture of responsibility from the front line businesses to the Board. The tools used include a reputational risk register, clear and simple processes, training, external threat and perception monitoring and crisis management plans.
STRATEGIC RISK Strategic risk is the current and prospective impact on earnings or capital arising from adverse business decisions, improper implementation of decisions, or lack of responsiveness to industry changes. This risk is a function of the compatibility of an organisation’s strategic goals, the business strategies developed to achieve those goals, the resources deployed against these goals, and the quality of implementation. The strategic risk profile is kept under continuous review by the Group Executive Committee and forms a key element of quarterly Board Risk Committee meetings. The strategic risk profile is set out on page 33.
Own Risk and Solvency Assessment (ORSA) The Solvency II directive introduces a requirement for undertakings to conduct an ORSA. In anticipation of this requirement, the Group has updated its risk and capital management processes.
• The actions it will take to achieve and maintain the desired levels of risk and capital.
The assessment of risk and solvency needs is in principle carried out continuously. In practice, the assessment consists of a range of specific activities and decisions carried out at different times of the year as part of an annual cycle, supplemented as necessary by ad hoc assessments of the impact of external events and developments and of internal business proposals.
The overall position remains unchanged as losses due to issues identified in Ireland and adverse weather have been offset by profitability elsewhere in the Group.
Regulatory solvency position The Group remains fully compliant with both the PRA’s risk based ICA methodology and Solvency I, which is used to calculate the Insurance Groups Directive (IGD) requirement.
1. OPERATING SEGMENTS The Group is organised into four operating segments, Scandinavia, Canada, UK and Western Europe, and Emerging Markets with each operating segment managed by a Chief Executive Officer (CEO) who is directly accountable to the Group Chief Executive and the Board of Directors (who are combined to be the chief operating decision maker). Each of the CEOs is also a member of the Group Executive Committee. Scandinavia, Canada and UK and Western Europe represent the major geographical areas in which the Group operates through established businesses in mature markets. The UK is the Group’s country of domicile and one of its principle markets. Western Europe includes operations in Ireland and Italy. Emerging Markets comprises the Group’s operations in Latin America, Asia and Central and Eastern Europe and the Middle East. All operations are engaged in providing personal and commercial general insurance services. Central functions include the Group’s internal reinsurance function and Group Corporate Centre.
As described in the risk management section of the notes to the financial statements, sufficient net assets are maintained by each of the Group’s subsidiaries to satisfy local regulatory and internal risk based capital requirements. In addition the Group monitors the Group’s total capital position at all times. Assets and liabilities are reviewed by the chief operating decision maker at the Group level, and as such are not presented at the operating segment level.
2. 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: Investment income Net realised gains/(losses)
Other investments: Deposits, cash and cash equivalents 26 15 – (4) (1) (3) – – 25 8
The derivatives are used to provide a protection hedge for fair value changes of assets held within the investment portfolio.
During 2013 the accrued interest income on impaired financial assets was £nil (2012: £nil).
Reinsurance recoveries on loss and loss adjustment expenses paid (639) (555)
Reorganisation costs and impairment of intangible assets includes impairments of software and goodwill following the Group business review.
Other lease payments The operating lease payments recognised as an expense during the year are £77m (2012: £71m). The Group has no significant lease agreements that include contingent rent.
Fees payable to the auditor and its associates for other services: The audit of the Company’s subsidiaries, pursuant to legislation 4.2 4.5
Auditor’s remuneration in respect of 2013 relates to fees payable to KPMG LLP, appointed as Group auditors in May 2013. The fees payable in 2012 relate to the Group’s previous auditor, Deloitte LLP.
5. INCOME TAX EXPENSE The tax amounts charged in the income statement are as follows: 2013 £m
UK corporation tax is calculated at 23.2% (2012: 24.5%) of the estimated assessable profit for the year. Since the Group operates around the world, it is subject to income taxes in many different jurisdictions. Taxation for jurisdictions other than the UK is calculated at the rates prevailing in those jurisdictions. Of the above taxation attributable to the Group £21m (2012: £2m) relates to UK and £73m (2012: £119m) to overseas.
Different tax rates of subsidiaries operating in other jurisdictions 28 18
Basic Basic earnings per share is calculated by dividing the profit attributable to the ordinary shareholders of the Parent Company by the weighted average number of ordinary shares in issue during the period, excluding ordinary shares purchased by various share trusts and held as own shares.
(Loss)/profit attributable to the shareholders of the Parent Company (347) 320
The weighted average number of anti-dilutive share options and awards excluded from the calculation of diluted earnings per share above is 43,543,318 (2012: nil).
Interim paid in respect of current year 2.28 3.41 83 121
Other intangible assets include customer lists, renewal rights and acquired brands.
Amortisation expense of £109m (2012: £82m) has been charged to underwriting and policy acquisition costs with the remainder recognised in other operating expenses.
Further software impairment charges of £4m (2012: £12m) have been charged to underwriting and policy acquisition costs during the year due to the integration of operational systems in Scandinavia.
Impairment tests for goodwill Goodwill is allocated to the Group’s cash generating units (CGUs), which are contained within the following operating segments as follows: 2013 £m 2012 £m
The following sensitivity analysis shows the available headroom compared to the carrying value for reasonable changes to the key assumptions used in the impairment review of the Irish CGU which included a terminal growth rate of 1.7% and discount rate of 10.1%.
Headroom Sensitivity 1% decrease in terminal value growth rate 8 1% increase to discount rate (2)
The movement in the carrying value of investment property is detailed below: 2013 £m 2012 £m
11. INVESTMENTS IN ASSOCIATES The Group has the following investments in associates: Country Ordinary shareholding
Group occupied property – land and buildings – – 65 65
Available for sale financial assets: Financial assets at fair value through the income statement: Debt securities – – 27 27
Derivative assets: At fair value through the income statement – 27 – 27
Fair value of liabilities not measured fair value – 1,440 17 1,457
Group occupied property – land and buildings – – 153 153
Available for sale financial assets: Financial assets at fair value through the income statement: Debt securities – – 38 38
Fair value of liabilities not measured fair value – 1,493 17 1,510
Total gains/(losses) recognised in: Other comprehensive income 4 – – – 4
Of the total gains/(losses) for the period recognised in the income statement (shown in the reconciliation above), losses of £19m (2012: £9m) relates to assets held at the end of the reporting period.
Group occupied property and investment property In line with the professional standards of qualified external valuers, Group occupied properties are generally valued on a vacant possession basis, unless more relevant recent market data is available and investment properties are valued at their highest and best use.
The external independent valuers have appropriate recognised professional qualifications and recent experience in the location and category of the properties being valued.
The fair value measurement of these Level 2 financial liabilities is based on pricing obtained from a range of financial intermediaries who base their valuations on recent transactions of the Group’s loan capital instruments and other observable market inputs such as applicable risk free rates and appropriate credit risk spreads.
Reinsurers’ share of provisions for losses and loss adjustment expenses 1,660 1,650
Reinsurers’ share of provision for unearned premiums at 1 January 299 302
The following changes have occurred in the reinsurers’ share of provision for losses and loss adjustment expenses during the year: 2013 £m 2012 £m
Reinsurers’ share of provisions for losses and loss adjustment expenses at 1 January 1,650 1,771
Share of associates other comprehensive expense (1) – (1) (2) – (2)
Fair value losses net of tax (257) – – (257) – (257)
Remeasurement of net defined benefit pension liability net of tax – – 17 17 – 17
Other comprehensive (expense)/income for the year (256) (116) 6 (366) (4) (370)
Exchange gains/(losses) net of tax (5) (61) – (66) (4) (70)
Share of associates other comprehensive income 1 – – 1 – 1
Remeasurement of net defined benefit pension liability net of tax – – (137) (137) – (137)
Other comprehensive income/(expense) for the year 113 (61) (140) (88) (3) (91)
19. 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 27.5p each and preference shares with a nominal value of £1 each. The issued share capital at 31 December 2013 is: 2013 £m 2012 £m
Issued and fully paid 3,681,798,995 ordinary shares of 27.5p each (2012: 3,595,951,315 ordinary shares of 27.5p each) 1,012 989 125,000,000 preference shares of £1 each (2012: 125,000,000 preference shares of £1 each) 125 125
Employee share schemes 5,528,875 ordinary shares (2012: 6,153,749 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 scheme. These shares are presented as own shares.
At 31 December 2013, the total number of options over ordinary shares outstanding under the Group employee share option plans is 46,281,370 (2012: 51,342,336) and the total number of potential shares outstanding under the long-term incentive plan and under the Sharebuild scheme is 65,640,637 ordinary shares (2012: 71,975,051 ordinary shares). Further information on the employee share schemes is provided in note 28 and in the remuneration report within the corporate governance section.
Provision for unearned premiums (gross of acquisition costs) at 31 December 4,787 4,790
Provisions for losses and loss adjustment expenses The following changes have occurred in the provisions for losses and loss adjustment expenses during the year: 2013 £m
Consolidated claims development table gross of reinsurance and prior £m £m £m £m £m £m £m £m 2011 £m 2012 £m 2013 £m
At end of accident year 10,928 2,885 3,031 2,704 3,075 2,974 2,839 3,827 3,482 3,451 3,667
Current year provision before discounting 2,319 133 153 193 299 302 446 727 1,337 1,841 3,667 11,417
Consolidated claims development table net of reinsurance and prior £m £m £m £m £m £m £m £m 2011 £m 2012 £m 2013 £m
Current year provision before discounting 1,756 112 134 178 263 301 388 605 1,086 1,663 3,192 9,678
Total insurance and reinsurance liabilities 643 558 23. BORROWINGS The Group’s borrowings of £301m (2012: £296m) primarily relate to loans from credit institutions under a repurchase agreement. Further information is contained in the Risk Management section.
At 31 December 2013 total unsecured loans from credit institutions under committed credit facilities of £500m (2012: £500m) are available to the Group. There are no amounts outstanding at 31 December 2013 (2012: £nil). The facility expires in 2017.
The current tax and deferred income tax (charged)/credited to each component of other comprehensive income is as follows: Current tax Deferred tax Total 2013 £m 2012 £m 2013 £m
Fair value gains/(losses) on available for sale financial assets 35 23 47 (44) 82 (21)
Total credited/(charged) to other comprehensive income 36 24 34 (6) 70 18
The aggregate current tax and deferred tax relating to items that are charged directly to equity is £(1)m (2012: £(2)m).
At the end of the reporting period, the Group has unused tax losses of £2,766m (2012: £2,130m) and unused tax credits of £16m (2012: £15m) available for offset against future profits. A deferred tax asset of £221m (2012: £141m) has been recognised in respect of losses and unused tax credits. No deferred tax asset has been recognised in respect of £1,685m (2012: £1,568m) tax losses and unused tax credits of £13m (2012: £11m) due to the unpredictability of future profit streams. Tax losses include £146m (2012: £176m) which will expire between 2014 and 2033, of which £59m (2012: £68m) have been recognised for deferred tax. Other tax losses and unused credits may be carried forward indefinitely.
In addition, the Group has recognised a deferred tax asset of £28m (2012: £104m) in respect of other deferred tax reliefs of £499m (2012: £449m). No deferred tax has been recognised in respect of £361m (2012: £nil) of these reliefs due to the unpredictability of future profits streams.