IN CHALLENGING TRADING CONDITIONS AND VOLATILE FINANCIAL MARKETS, 2008 HAS BEEN ANOTHER STRONG YEAR.
BUSINESS REVIEW 11 Group strategy 12 Progress against strategic priorities 14 International business review 18 UK business review 22 Emerging Markets business review 26 Financial review 30 Risk framework 33 Corporate responsibility 36 Executive team 38 Board of Directors
FINANCIAL STATEMENTS 62 Responsibility statement 63 Independent auditors’ report to the members of RSA Insurance Group plc 64 Consolidated income statement 65 Consolidated statement of recognised income and expense 66 Consolidated balance sheet 67 Consolidated cashflow statement 68 Significant accounting policies 76 Estimation techniques, risks, uncertainties and contingencies 79 Risk management 89 Notes to the financial statements 124 Independent auditor’s report to the members of RSA Insurance Group plc 125 Parent Company balance sheet 126 Statement of changes in equity of the Parent Company 127 Parent Company cashflow statement 128 Notes to the separate financial statements
INTERNATIONAL COMPRISES OUR BUSINESSES IN THE MATURE MARKETS OF SCANDINAVIA, CANADA, IRELAND AND ITALY.
Intouch, our business in Central and Eastern Europe has market leading direct operations in Poland, Russia and the Czech Republic.
We have delivered on a statement made last year that we believed that we had “the experience and control processes to operate effectively in what we expected to continue to be difficult and demanding market environments” and that we could deliver “a relative increase in profit and strategically enhance our market positions where we choose to operate”.
The main sources of profit growth were increased net written premiums up 11% with growth in all regions and continuing cost and efficiency gains. The largest contributors were International and Emerging Markets with strong growth helped by the relative currency changes. This reflects some of the strategic benefits of our geographically diverse Group.
There is no role for complacency in 2009. We continue to raise our management performance and plan to improve even further. It is an area of comparative strength for our Company and the best contingent action against any adverse circumstances. As a result we remain well positioned to take advantage of market opportunities as they rise.
In 2008 we increased net written premiums by 11% to £6.5bn, reflecting our disciplined approach in the UK and continued growth in International and Emerging Markets.
The investment result was £594m (2007: £629m) and included an 11% increase in investment income to £654m, offset by a lower level of total gains (£32m compared with £119m in 2007). This is a good result and the Group continued to benefit from its low risk investment strategy.
Given the strong investment and underwriting performance, the operating result increased by 7% to £867m, while profit before tax increased by 13% to £759m.
Underlying return on equity remained strong at 18.5%. Net asset value per share increased by 23% to 112p, and by 15% to 101p excluding the pension fund surplus.
INTERNATIONAL International again delivered a strong top and bottom line performance. Net written premiums increased by 19% to almost £3bn (6% on constant exchange) driven by growth in Canada, Scandinavia and Other Europe. We increased the underwriting profit by 27% to £262m, and the COR was 91.2%.
The rating environment across Scandinavia remains stable and we continue to put rate through the book with single digit increases across most lines.
In Personal lines, we increased rate in Household by 7% and Motor by 4% and we have seen continued evidence that the market’s hardening. In Commercial, we have maintained our discipline. Motor pricing is back in positive territory, with Property held flat and only minor reductions in Liability.
In Ireland, the market remained competitive and premiums were in line with 2007.
We have also taken action on rate, increasing it by 6% in Personal lines and between 2% and 7% across Commercial lines.
UK The UK market remains competitive and we are maintaining our strategy of targeting profitable growth, putting rate through where required and withdrawing capacity where we cannot achieve our target returns.
In Commercial, overall premiums were in line with 2007 at £1.6bn, with strong growth in specialty lines, including Risk Solutions which increased by 9%, Marine by 13% and targeted growth in Commercial Fleet. This offset the withdrawal of capacity in lines of business such as Liability and small and mid corporate Property where we could not achieve our target returns.
We continued to take action on rate, increasing Personal Motor rates by 6% and Household by 5%, and Commercial rates by 6% in Liability, 7% in Property and 8% in Motor. Across the market we are starting to see more consistent rating action from major competitors.
EMERGING MARKETS In Emerging Markets, we again delivered strong growth. Premiums increased by 20% to over £0.7bn (7% at constant exchange)
In terms of the economic outlook, as expected we have seen the impact of the economic downturn. We planned for it and have taken action on expenses to protect profitability, including reducing headcount by around 400 which represents around 10% of the Emerging Markets’ workforce.
In the Baltics, premiums increased by 21% (4% at constant exchange) and while growth has slowed as a result of economic conditions, we have taken action to protect profitability.
In Asia and the Middle East, we delivered another excellent result. Premiums increased by 43% (30% on constant exchange) with strong growth in UAE Motor and Construction and Engineering.
In Latin America, premiums increased by 22% (10% on constant exchange) with double digit increases across Chile, Brazil, Argentina and Colombia.
Our associates in India and Intouch in Eastern Europe maintained good momentum and premiums increased by 37% to £140m (25% on constant exchange). In India our business performed strongly. We have grown ahead of the market and expanded our agency network by around 2,700 new agents.
We continue to benefit from our low risk investment strategy. 90% of the total investment portfolio is invested in high quality fixed income and cash assets. The fixed interest portfolio remains concentrated on high quality short dated assets, with 99% of the bond portfolio investment grade, and 83% rated AA or above. The bond holdings are well diversified geographically, with 74% invested in assets other than Sterling and 48% invested in non government bonds. During 2008, the investment portfolio increased by 11% to £14.7bn.
Our high quality investment portfolio and underwriting discipline have driven our strong capital position.
Shareholders’ funds increased by 25% to £3.8bn, primarily reflecting after tax profits, foreign exchange and the increase in the pension fund surplus. The IGD surplus increased by 13% to £1.7bn, representing coverage of 2.5 times the requirement.
The rapidly weakening economy caused substantial downward pressure on financial markets with equity, corporate bond and property values falling sharply. Complex financial securities or structures were marked down particularly aggressively. Declining asset prices have weighed heavily on the insurance sector, particularly life companies, which have a high exposure to risk assets.
It is critical that policymakers ensure that any future regulatory regime remains proportionate and supports sectors which continue to be healthy, such as general insurance. It is also important that the response to the banking crisis does not delay progress on important legislative proposals such as Solvency II, which presents significant opportunities for UK insurers that could help the future growth and stability of the industry.
IN WHAT WAS AN EXTREMELY CHALLENGING YEAR FOR FINANCIAL SERVICES, 2008 HIGHLIGHTED THE IMPORTANCE OF HAVING A FOCUSED BUSINESS MODEL, WITH HIGH LEVELS OF CONTROL AND TRANSPARENCY.
We have continued our focus on employee engagement. 86% of employees participated in our revised Employee Survey and we will use the insights to generate ideas and clear action plans to make changes across our business.
We take our impacts on society and the environment seriously, behaving ethically as individuals and as a company. As an insurer, we aim to ensure customers are protected from social and environmental risks, such as climate change.
Dow Jones Sustainability Index for the first time and to be awarded the Investor Relations Society award for Corporate Responsibility.
In 2009, we will continue to operate a high quality, low risk investment strategy. The investment result will be impacted by lower interest rates and continued investment market volatility, however we will continue to take action to mitigate this impact. These actions and the geographic diversification of the portfolio will limit the full impact of falling yields, and in 2009 we expect investment income to be around 2007 levels. Total gains will continue to be impacted by any further negative market movements in commercial property values as well as financial market volatility, and we are not anticipating a positive contribution from total gains in 2009.
We remain confident about the outlook for the Group and we are well positioned to take advantage of market opportunities.
We have a clearly defined risk appetite and have exited volatile lines.
The sustainability of our earnings is underpinned by our strong financial management.
We have a prudent reserving policy and hold a significant margin over the best estimate of our liabilities. We therefore expect positive prior year reserve development to be an ongoing feature of our results.
7% INCREASE IN OPERATING RESULT In 2008, the Group delivered another strong performance with a 0.4pt improvement in the COR to 94.5% and, against the backdrop of volatile financial markets, a strong investment result. This result highlights the strength and diversity of our portfolio, our actions on rate and expenses, and the benefits of our high quality, low risk investment strategy.
£200M EXPENSE SAVINGS DELIVERED AHEAD OF SCHEDULE In mid 2008 we delivered our Group expense savings targets of £200m and have made good progress towards achieving the additional £25m expense savings target set in Scandinavia. These savings are to be achieved by mid 2010 and will double Scandinavia’s expense savings to £50m and reduce the expense ratio to around 14%.
In 2008 CNS contributed almost 10% of Canada’s premiums and has helped the Canadian business continue to outperform the competition.
International comprises the Group’s operations in Scandinavia, Canada, Ireland and Italy. These businesses have strong positions in these attractive markets and we aim to outperform in terms of both growth and profitability.
Our geographic spread and segmented approach enables us to target growth in profitable segments where our technical expertise gives us competitive advantage.
In Personal lines, premiums are up 14% to £875m (1% on constant exchange) reflecting continued growth from WLI in Norway and good retention across the region.
CANADA Canada has delivered another excellent performance, net written premiums are up 26% to £884m (15% on constant exchange), and the underwriting result is up 14% to £57m. Profitability remains strong with a COR of 92.9% (2007: 92.4%) despite adverse weather, with some of the worst winter storms in Ontario for almost 70 years.
OTHER EUROPE In Other Europe, which comprises our operations in Ireland and Italy, premiums are up by 19% to £512m (2% on constant exchange). The COR of 97.1% (2007: 89.1%) reflects the impact of the floods in Ireland as well as the exceptional level of prior year development in 2007.
In Italy, we continue to grow ahead of the market with premiums up 3% on constant exchange reflecting growth in Personal Motor and increased distribution, with 37 new agents signed this year.
In Scandinavia, the rating environment remains stable and we continue to achieve single digit rate increases across most lines. In Canada, we are seeing continuing evidence that the Personal market is hardening, and although Commercial remains competitive, we are starting to see an improving trend. The Irish market remains competitive, while the Italian insurance market contracted over 2008 reflecting lower levels of economic activity.
We have built a track record of delivering strong top and bottom line performance. Although economic conditions will present some challenges in 2009, we are seeing positive rating trends in our markets, and with our ongoing actions on expenses and our strong portfolio, we are confident that we will continue to deliver sustainable profitable performance.
With these initiatives and our investment in specialist teams, we have expanded our Marine business by more than 70%
since 2003, with strong customer retention and a consistent track record, and have delivered more than 20 successive quarters of positive underwriting results.
We are the UK’s largest Commercial insurer. We are the largest in Commercial Property and the second largest in Motor and Liability and a leading Marine underwriter. We are the UK’s third largest Personal lines insurer, with the number two position in Household and number four in Motor.
In Personal, we are using increased customer segmentation and pricing sophistication to launch innovative products and marketing initiatives to acquire new customers and build retention. Our reputation for delivering quality affinity propositions for our partners and their retail customers is attracting new deals and helps us retain existing partnerships.
We are maintaining our strategy of targeting profitable growth, taking the right action on rate and selective capacity withdrawal. Total premiums are up 1% to £2,711m. Retention remains strong at around 80% across the portfolio. The underwriting result is £99m (2007: £65m), with the expected lower level of prior year development and increased large losses partially offsetting the benefits of improved weather.
COMMERCIAL In Commercial, premiums are in line with last year at £1.6bn, with strong growth in specialty lines, including Risk Solutions which is up 9%, Marine up 13% and targeted growth in Commercial Fleet offsetting the withdrawal of capacity in lines of business such as Liability and small and mid corporate Property.
We have continued to take action on rate, achieving increases of 6% in Liability, 7% in Property and 8% in Motor.
The COR was 99.3% (2007: 95.9%), with adverse large loss experience and lower prior year development reducing the Property and Casualty results, however, this has been offset by good profitability in Marine and in our Legacy operations.
In 2008 we expanded our Risk Solutions European business and opened a new office in Munich. This was followed by the opening of our office in Madrid in February 2009, increasing the number of our European operations to six.
We are committed to maintaining underwriting discipline and targeted profitable growth. While the economic downturn is impacting premium volumes, we are seeing signs that rates are beginning to harden, which should partially mitigate this. In addition, with our continued action on rate and our programme to deliver an additional £70m of expense savings by mid 2010, we are confident that the UK business will continue to deliver sustainable profitable performance.
EV IEWRSA Seguros is the market leader in Chile with 16% market share, employing over 500 people. In 2008 we grew by 16%, slightly faster than the market and achieved a combined operating ratio of 92.3%.
In 2008, Affinity was one of our key drivers of growth with premiums increasing by 12%. One of our most established relationships is with Falabella, a leading retail group and a powerful brand in Latin America.
We provide Falabella with a dedicated relationship manager and support team to ensure that we provide a high standard of service to them and their customers.
We are focusing on Motor, Affinity, Large & Complex Risks and Small and Medium Enterprises (SME).
Motor is 45% of the portfolio and is a significant driver of growth and profitability. We are leveraging the Group’s expertise to improve our pricing and claims capability to give us competitive advantage in the markets in which we operate.
Affinity is a significant opportunity given the scale of the populations in markets such as Brazil and India. It is a route to customers who have not previously been able to purchase
insurance and can provide much needed simple, low cost products. We are working with utility companies, among others, to cost effectively access these large markets using their existing billing systems.
In Emerging Markets, premiums are up by 20% to £738m (7% on constant exchange) and up by 26% (12% on constant exchange) after excluding Venezuela, which we sold in December 2007. The underwriting result is up 28% to £23m and the COR was 96.4% (2007: 95.3%).
In the Baltics, premiums are up by 4% on constant exchange and, while growth has slowed as a result of economic conditions, we have taken action on rate and expenses to protect profitability.
Our associates in India and Central and Eastern Europe continue to build momentum, and premiums are up by 37% to £140m (25% on constant exchange). In India, the business has performed strongly, growing ahead of the market and increasing the agent network by 2,700.
Across the region, we are successfully implementing our Affinity strategy and in 2008 we signed deals with 47 retailers and financial institutions.
In a year of challenging trading conditions and volatile investment markets, we have once again delivered strong results and have strengthened the Group’s net asset and regulatory capital position. These results continue to demonstrate the positive impact of our tight operational and financial management and the benefit of the Group’s strong and diversified portfolio.
The Group continues to maintain a low risk investment strategy with the portfolio dominated by high quality fixed income and cash assets. The investment result is £594m (2007: £629m), and reflects increased investment income offset by the expected decrease in total gains from £119m in 2007 to £32m.
Investment income is up 11% to £654m, reflecting action taken to lock in higher bond yields as well as foreign exchange gains of £40m. The average underlying yield on the portfolio (excluding the yield on the ADC funds withheld account) was 4.6% (2007: 4.4%).
In 2008, we took a number of actions to enhance yield on the bond portfolio, including selling low yielding government bonds and reinvesting at longer duration to take advantage of higher yields. In addition, we purchased a net £600m of high quality, well diversified non government securities. The net purchases of non government bonds were at an average credit rating of AA-, well diversified by sector and were spread over more than 100 names. These actions are consistent with our high quality, low risk investment strategy and we have maintained the overall high credit quality of the portfolio. In 2009, we will continue to be a cautious purchaser of high quality non government credit and selectively extend duration.
In addition, the portfolio benefits from being well diversified geographically, with over 70% of the bond portfolio invested in currencies other than Sterling. While most of these markets are also seeing interest rate reductions, this has been offset by foreign exchange gains.
OTHER MOVEMENTS AND PROFIT ON DISPOSALS Other movements comprises interest costs of £108m and amortisation of £18m. Interest costs are £108m, up from £104m, with the increase reflecting repo activity and the foreign exchange impact on interest payments on our Euro denominated bonds. Amortisation of £18m (2007: £18m) was charged in respect of renewal rights and on acquired claims provisions. Profit on disposal is £18m (2007: loss of £22m) and predominantly comprises the recycling of foreign exchange on the liquidation of a French subsidiary.
The tax charge is £173m compared with £29m in 2007, which included the release of £103m of deferred tax provisions in respect of the Scandinavian security funds. The 2008
CASH AND CASH EQUIVALENTS 57 83 (31) LAND AND BUILDINGS 16 17 (6)
UNREALISED GAINS/(LOSSES), IMPAIRMENTS AND FOREIGN EXCHANGE (118) (55) (115) TOTAL GAINS 32 119 (73) UNWIND OF DISCOUNT INCLUDING ADC (92) (81) (14)
Profit after tax is £586m and the underlying Return on Equity remains very strong at 18.5%.
The Group’s operating cashflow has increased by 20% to £780m benefitting from strong operational cash flows and the disposal of Group occupied properties. Tax paid of £101m is £26m lower than 2007, primarily due to the timing of statutory instalments in Scandinavia and Canada. Interest paid increased by £15m to £107m, reflecting repo activity and the foreign exchange impact on the Euro bonds. Group dividends have increased by £70m to £181m, due to the dividend increase and the lower take up of scrip dividend in 2008. The pension funding payment of £37m is part of our pension scheme asset reallocation strategy. The issue of share capital and corporate activity in 2007 primarily related to the purchase of the Codan minorities. Corporate activity in 2008 of £101m includes a number of small acquisitions in the UK and International, further capital investment in our associates and the disposal of run off books in the UK and Scandinavia.
The investment portfolio increased by 11% to £14,727m over the year, with foreign exchange gains of £1,611m and other positive movements of £71m offset by mark to market movements of £233m. The foreign exchange benefit reflects the appreciation of the Canadian Dollar, the Euro, the Danish Krone and the Swedish Krona against Sterling. The mark to market movement on the bond portfolio is a positive £304m, and the movement on equities a negative £363m. The movement on equities is partially offset by the £141m gain on the equity hedges, which is recognised in total gains.
Equities (excluding preference shares and Collective Investment Vehicles backed by fixed income and cash) comprise 5% of the portfolio. We have hedged our equity exposure for the past 4 years and around 75%
OPERATING CASHFLOW 780 652 TAX PAID (101) (127) INTEREST PAID (107) (92) GROUP DIVIDENDS (181) (111) DIVIDEND TO MINORITIES (8) (31) NET CASHFLOW 383 291 ISSUE OF SHARE CAPITAL 19 304 PENSION ASSET REALLOCATION FUNDING (37) (86) NET MOVEMENT OF DEBT (2) 223 CORPORATE ACTIVITY (101) (888) CASH MOVEMENT 262 (156) REPRESENTED BY: DECREASE IN CASH AND CASH EQUIVALENTS (91) (352) PURCHASE OF OTHER INVESTMENTS 353 196
The commercial property portfolio is only 2% of investment assets and comprises high quality commercial properties and does not include any development properties. The Group’s CDO exposure is £81m, and includes £76m of CLOs which have experienced no downgrades.
CAPITAL POSITION At 31 December 2008, the Group held an Insurance Group’s Directive (IGD) surplus of £1.7bn, an increase of £0.2bn from 2007. The improvement in IGD surplus is mainly attributable to the profits for the year and positive foreign exchange movements, offset by the dividend, unrealised investment losses and an increase in the capital requirement in line with business growth. The coverage ratio remains very strong at 2.5 times (31 December 2007: 2.5 times). A further 30% fall in the FTSE from the year end level of around 4,400 would reduce the IGD surplus by an estimated £0.2bn.
At 31 December 2008, the Group had surplus economic capital of around £1.8bn, based on a risk tolerance consistent with Standard & Poor’s (S&P) long term A rated bond default curve. This is equivalent to a probability of solvency over 1 year of 99.94%.
The Group calculates its economic capital position using a global multi year stochastic economic capital model and the 2008 surplus has been calculated to fully reflect current lower asset values and lower current and future investment returns. The model is a key decision making tool and is used for a range of strategic, operational and financial management purposes throughout the Group, and has also been the basis for the Group’s Individual Capital Assessment (ICA) submissions to the FSA since 2004.
The ICA is a forward looking economic assessment of the capital requirements of the Group based on our assessment of the risks to which we are exposed. The Group has received its Individual Capital Guidance from the FSA, which at the request of the FSA remains confidential.
The assets in the pension funds performed strongly over the year, reflecting the defensive asset mix, with only 22% invested in equities.
We remain confident of the Group continuing to deliver sustainable profitable performance and this is reflected in the 10% increase in the 2008 final dividend and our expectation of delivering a COR of around 95% in 2009.
GOVERNMENT BONDS 5,333 743 261 (326) 6,011 NON GOVERNMENT BONDS 4,248 604 43 736 5,631 CASH 1,509 167 – (62) 1,614
RISK MANAGEMENT The Board is responsible for the Group’s systems of risk management.
RISK FRAMEWORK The Group has continued to adopt the ‘3 lines of defence’ governance model. The framework for the oversight and management of risk is as follows: Management – the first line of defence in setting strategy, performance measurement, establishment and maintenance of internal control and risk management in the business Risk assessment – the second line, operating a formal risk management framework within which the Group policies and minimum standards are set and objective oversight and challenge of risk management across the Group is achieved. This includes the Board Risk Committee, supported by the Group Risk functions, and a Group wide network of regional risk committees Independent assurance – the third line of defence, providing independent and objective assurance of the effectiveness of the Group’s systems of internal control established by the first and second lines of defence. This is the Group Audit Committee, supported by Group Internal Audit.
GROUP RISK POLICY STATEMENTS Group risk policy statements set out the minimum standards to be maintained by the Group’s operations in order to manage their risks in a way that is consistent with the risk appetite. Business managers are responsible for complying with Group and local risk policies and for managing risk by taking mitigating actions where risks are outside the appetite. The Board Risk Committee’s oversight and challenge role includes consideration of risk mitigation.
RISK CATEGORIES Within the Group the risk elements are viewed under headings that broadly correspond to those used in the Financial Services Authority’s Prudential Sourcebook for Insurers (INSPRU), and Senior Management Arrangements, Systems and Controls (SYSC). Additional information is provided in the Risk Management section on page 79 to the financial statements. Details of some of the key current practices, tools and other arrangements for each risk category are set out below.
Claims development and reserving levels are closely monitored by Reserve Committees. Each region’s Reserve Committee determines a recommended level of outstanding claims reserves, in accordance with the Group Reserving Policy. The Group Reserving Committee considers the reasonableness of these recommendations. It then determines the level of aggregate outstanding claims reserves to be carried by the Group.
The Group’s reinsurance strategy and appetite are set and agreed by the Board Risk Committee and published and disseminated via the Group reinsurance policy statement. The Group Reinsurance Credit Committee oversees the implementation of the counterparty credit aspects of this strategy. The reinsurance team monitors and controls reinsurance activity throughout the Group and has responsibility for the purchase of the Group’s worldwide programme of treaties. All major treaty purchases are analysed using various sophisticated modelling tools to ensure that the level of cover purchased is capital efficient and aligned with Group risk appetite and strategy.
1. PROLONGED ECONOMIC DOWNTURN IN OUR KEY MARKETS NEGATIVELY IMPACTS PREMIUM GROWTH AND INCREASES CLAIMS FREQUENCY We will maintain our focus on underwriting discipline and targeted profitable growth. In addition, the Group benefits from the actions taken to de-risk the underwriting portfolio over the past five years, and as a result, we have very limited exposure to economically triggered contracts. We have a suite of indicators in place to monitor for any emerging trends in claims frequency, which allow us to take early corrective action. These include early indicators of fraudulent claims and we have also strengthened resources in this area.
90% of the total investment portfolio is invested in high quality fixed income and cash assets. The fixed interest portfolio remains concentrated on high quality short dated assets, with 99% of the bond portfolio investment grade, and 83% rated AA or above. The bond holdings are well diversified, with 74% invested in currencies other than Sterling, and 48% invested in non government bonds and the average duration on the total bond portfolio is 2.7 years.
We continue to invest in our technical skills and our sales and marketing capabilities. We target growth where it is profitable through specialist segmentation and focus on expanding in target trades and segments where our technical expertise gives us competitive advantage.
Quarterly portfolio reviews are carried out across the business, to assess the performance of each portfolio against key performance indicators. Key risk indicators are used to monitor emerging trends, opportunities and risks. Any portfolio that triggers a key risk indicator is flagged and investigated, with corrective measures implemented if required.
Quarterly audits of business won and lost ensure that risks accepted are priced to achieve target returns and that underwriting discipline is maintained.
5. ADVERSE LOSS EXPERIENCE THROUGH CATASTROPHIC LOSSES ARISING FROM AN INSURANCE EVENT OR SERIES OF EVENTS, INCREASING FREQUENCY AND SEVERITY OF LARGE LOSSES OR DETERIORATION IN LONG TAIL RESERVES The Group’s underwriting strategy is set centrally using risk aggregation models and limits to ensure that risks written are well diversified and are within the Group’s risk appetite.
Quarterly portfolio reviews monitor underwriting performance, ensuring that risks accepted are within the Group’s risk appetite and priced to achieve target returns. Emerging trends in large losses, frequency and severity are flagged and investigated.
The Group maintains a conservative reinsurance programme, which limits net losses to a specified amount each year.
We aim to make sure our approach is practical and focused on our main business impacts, delivering commercial benefits while recognising the value we add to society.
We focus on three key themes across the Group: the environment and climate change, safety and social inclusion. These issues have been identified as important by our customers, investors and employees. Forum for the Future, the sustainability charity who we ask to carry out an annual assessment, agree that we are focusing on the right issues.
Responsibility for CR lies with the Group CEO, who chairs the bi-annual Group Executive Committee review of CR and annual review by the Board. Briefings and training on specific CR issues are given as they arise.
CR targets and objectives are included in CEO goals which are cascaded to direct reports and relevant business functions. All employees are assessed against the brand beliefs, which help to ensure that doing the right thing forms part of the performance and remuneration structure at RSA.
Our CR data, processes and external reporting are verified by the Corporate Citizenship Company (AA1000, GRI, ISAE3000) with an extra audit on the Group’s carbon footprint forming part of our offsetting due diligence (GHG Protocol).
Our progress was recognised in 2008 by the award of the Investor Relations Society ‘Best communication of CR’, inclusion in the Dow Jones Sustainability Index (winner of ‘Sector Mover’) and being a ‘Gold’ rated ‘Times Top 100 Company.’
Further information on our approach, governance and policies can be found at: www.rsagroup.com/rsa/pages/responsibility/ ourapproach
2 emissions We are the providers of a VanCity ‘Purehome’ insurance proposition through CNS in Canada. The policy provides supplemental coverage to upgrade your home with more environmentally sound alternatives for windows, heating systems, flooring, paints, energy efficient appliances and more RSA Marine in China is helping to provide solutions for the growing sector of aquaculture where 70% of world production is located.
,8 li tr es p er ft e 4k g pe r ft e 5k g pe r ft e 2, 3 kW
A sustainable business needs to attract, develop and reward talented people, as well as giving responsibility and making them accountable for their actions. We continue to focus on developing employees throughout the business and at all levels through our major initiatives in 2008: Our Technical Academy now has over 10,000 members across the Group in the core disciplines of claims, actuarial and underwriting The Executive Development Programme is now entering its fifth year, bringing together leaders from across the Group to work collaboratively on critical strategic issues Our Graduate and FastTrack programmes supported thirty new employees in 2008 providing structured support and career paths for new starters and high potential individuals.
In 2008 we focused on employee engagement leveraging the insights from a revised Employee Survey. 86% of employees within RSA participated. The feedback obtained has been used to generate ideas and clear action plans to make changes across our business.
We remain committed to engaging in the climate change debate and working closely with a range of forums; including in 2008 the insurance working group of the United Nations Environment Programme for Financial Institutions and the ABI ClimateWise initiative.
During 2009, we look forward to rolling out our volunteer programmes across our Latin American business to help local communities selected by employees.
For full details of progress please see the full Corporate Responsibility Report.
IRELAND (WASTE DISPOSED) 10 UK (WASTE TO LANDFILL) 10 PAPER SWEDEN 51
(1) For completion by 2010. (2) For completion against a 2008 baseline.
GEORGE CULMER CHIEF FINANCIAL OFFICER George was appointed Chief Financial Officer and Group director in May 2004. He was previously Head of Capital Management at Zurich Financial Services and Chief Financial Officer of its UK operation. Before that George spent ten years with Prudential.
ANDY HASTE GROUP CHIEF EXECUTIVE Andy was appointed Group Chief Executive in April 2003, following previous roles as Chief Executive of AXA Sun Life plc and director of AXA UK plc. He is currently a non-executive director of ITV plc. Previously Andy was President and Chief Executive Officer of Global Consumer Finance Europe at GE Capital UK, Western Europe and Eastern Europe, and is the former President of National Westminster Bank’s US Consumer Credit Business.
MARK CHAMBERS GENERAL COUNSEL AND GROUP COMPANY SECRETARY Mark Chambers joined as General Counsel and Group Company Secretary in October 2004. Prior to joining the Group, Mark led the legal team at American Express for Europe, Middle East and Africa. Before that he worked for GE holding a number of senior positions with the consumer finance and insurance businesses. Before moving in house, Mark worked for Slaughter and May, a leading international law firm, in London and New York. Mark is a non-executive director of the University of Westminster and a member of the Finance and Business Committee of WWF-UK.
TIMOTHY MITCHELL GROUP UNDERWRITING AND CLAIMS DIRECTOR Tim was appointed Group Underwriting & Claims Director in November 2007 when he joined the Group. Tim has over 30 years experience in the insurance industry. He joined RSA from Zurich Financial Services where he held senior underwriting roles including three years as Global Chief Underwriting Officer for General Insurance. Tim has also held senior management roles at AIG and Continental Insurance.
SIMON LEE CHIEF EXECUTIVE, INTERNATIONAL BUSINESSES Simon has been Chief Executive of RSA’s International business since April 2003. He is Chairman of the Codan Group and of Trygg-Hansa and is a director of RSA Canada. Previously he spent 17 years with the National Westminster Bank Group, in the UK and US including time as Chief Executive, NatWest Offshore and Head of US Retail Banking.
DAVID WEYMOUTH GROUP OPERATIONS AND IT DIRECTOR David joined as Group Operations and IT Director in June 2007. David spent 27 years with the Barclays Group, where senior positions included Chief Operating Officer for Corporate Banking and Group Chief Information Officer and was part of the Group Executive Committee. He most recently spent two years consulting to a portfolio of blue chip and government organisations and acting as an independent Board Member at the DTI and for Chordiant Inc, the US Nasdaq quoted software business.
JOHN NAPIER Age 66. Director of the Group since January 2003 and Chairman of the Group since March 2003. Chairman of the Nomination Committee since March 2003. Member of the Remuneration Committee since January 2009. Non-executive Chairman of Aegis Group plc (media) since June 2008 and interim Chief Executive of Aegis Group plc (media) since December 2008. Former Non-executive Chairman and Executive Chairman of Kelda Group plc (water utility). Former Chairman of Booker plc (cash and carry). Former Managing Director of Hays plc (business services) from 1991 to 1998. Former Managing Director of AGB plc (international market research and information services).
EDWARD LEA Age 67. Director of the Group since July 2003. Chairman of the Group Audit Committee since October 2003. Director of Redbourn Group Limited (property management and investment). Director of Powertraveller Limited. Director of MacIntyre Care (charity). Previously a Director of BUPA.
GOVERNANCE 41 Directors’ report 44 Corporate governance 49 Remuneration report 57 Directors’ emoluments & interests
The employee, customer and the environment and community KPIs are detailed in the regional business reviews on pages 14 to 25, the corporate responsibility report on pages 33 to 35 and in this report.
Dividends The directors recommend a final dividend of 4.98p per ordinary share in respect of the year ended 31 December 2008 to be paid on 5 June 2009 to holders of ordinary shares on the register at the close of business on 6 March 2009, subject to shareholder approval. This, together with the interim dividend of 2.73p per ordinary share, will make a total dividend for the year of 7.71p per ordinary share.
Our new Brand was launched externally and internally in March 2008 and following a successful roll out around the Group, our new Brand Beliefs were implemented to replace the people ‘behaviours’. The Beliefs were embedded internally into our performance management process from July 2008.
Principal activity The Company is the holding company of the RSA group of companies (the ‘Group’) whose principal activity is the transaction of personal and commercial general insurance business. The Group operates in 33 countries and provides general insurance products and services in over 130 countries.
Business review The Companies Act 2006, section 417 requires the directors to present a business review in this report. The information that fulfils this requirement can be found in the sections below, which are incorporated by reference into this report: The Group CEO’s review on pages 6 to 10 The Group strategy on pages 11 to 13 The regional business reviews on pages 14 to 25 The financial review on pages 26 to 29 The key performance indicators on pages 6 to 25 The discussion of future developments of the business in the Group CEO’s business review on pages 6 to 10 and in the regional business reviews on pages 14 to 25 The discussion of principal risks and uncertainties facing the Group set out in the estimation techniques, risks, uncertainties and contingencies on pages 76 to 78, and in the risk framework on pages 30 to 32 and The corporate responsibility report on pages 33 to 35.
The business review has been prepared to the best of the directors’ knowledge in order to provide the Company’s shareholders with a fair review of the development/performance of the position of the Company (and the Group as a whole), together with a description of the principal risks and uncertainties which may affect the Group. It may not be relied upon for any other purpose.
2 emissions and the amount of the Group’s charitable donations. Financial KPIs are detailed in the Group CEO’s review on pages 6 to 10, the Group strategy on pages 11 to 13 and the regional business reviews on pages 14 to 25.
The Group continues to focus on the development of employees in order to ensure they can deliver high levels of performance. We believe we can create real competitive advantage by building and maintaining a high performance culture across the Group.
The Global Technical Graduate Programme continues into its second year, covering business and technical essentials, demonstrating our commitment to core insurance skills and personal development.
Our accelerated career programme, FastTrack, has continued in all regions. 30 individuals from 16 different countries joined the programme in 2008.
We have seen improvements in a number of key result areas in our global employee survey. In 2008 our focus was on employee engagement. Our new survey providers, Gallup, supported us in measuring employee engagement using the Gallup Q12© questions. With an overall response rate of 86%, our engagement levels represent a better than average result for first time clients. When comparing this year’s scores with the equivalent from our previous supplier we have made good progress in all areas.
Employees are kept well informed of the overall performance and objectives of the Group. Communications are regularly provided by email, intranet articles and staff publications. Key messages from our biannual Group Leaders Conferences are fed back to teams by local management.
The Company can increase its share capital and authorise the directors to allot further securities by ordinary resolution. As at 31 December 2008, the directors had authority to allot securities up to a nominal amount of £358,884,692.
The Articles may be amended subject to shareholder approval by special resolution at a general meeting of the Company.
Employee Benefit Trusts The Company operates the Royal & SunAlliance ESOP Trust, the Royal & SunAlliance ESOP Trust No 2 and the Royal & SunAlliance ESOP Trust No 3 (the ‘Trusts’). In each case, the Trustee is Lloyds TSB Offshore Trust Company Limited. In respect of any shares held in the Trusts, the Trustee may vote in respect of those shares, but is not obliged to. In respect of the Royal & SunAlliance 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.
Goldman Sachs Asset Management – 192,491,038 5.78% Standard Life Investments 111,042,332 63,001,930 5.23% Legal & General Group plc 137,792,333 15,354,571 4.60% Schroders plc – 134,071,533 4.02%
Directors The names of the directors, together with biographical details are set out on pages 38 and 39 and are incorporated into this report by reference.
Directors’ indemnity Article 144 of the Company’s Articles provides that, among other things and insofar as permitted by law, every director shall be indemnified by the Company against all costs, charges, expenses, losses or liabilities incurred in the execution and discharge of the directors’ duties, power or office.
Since 12 July 2006, the Company has granted an indemnity to each of the directors pursuant to the power conferred by Article 144. The indemnities granted constitute qualifying third party indemnity provisions (as defined by section 234 of the Companies Act 2006). The Board of Directors (the ‘Board’) believes that it promotes the success of the Company to provide this indemnity to its directors in order to ensure that the Group attracts and retains high calibre directors through competitive terms of employment in line with market standards.
Directors and officers of the Company and its subsidiaries also have the benefit of an insurance policy which provides suitable cover in respect of legal actions brought against them.
Auditors So far as each director is aware, there is no relevant audit information (as defined in section 234ZA(3) of the Companies Act 1985) of which the Company’s auditors are unaware, and each director has taken all steps that he ought to have taken as a director in order to make himself aware of, and to establish that the auditors are aware of, any relevant audit information.
By order of the Board Mark R Chambers General Counsel and Group Company Secretary 25 February 2009
This report sets out the Company’s approach to corporate governance in 2008. The report has been prepared in accordance with the Code of Best Practice set out in section 1 of the 2006 FRC Combined Code on Corporate Governance (the ‘Combined Code’) and sets out the extent of our compliance with the Code.
A director must not vote in respect of any contract or other proposal in which he (or any person connected with him) has a material interest otherwise than by virtue of his interest in securities of the Company. However, a director shall be entitled to vote in certain limited circumstances which are set out in full in the Articles. The Articles of the Company were amended at the 2008 AGM to, amongst other matters, address the new statutory provisions regarding directors’ duties in relation to conflicts of interest which came into force on 1 October 2008 under the Companies Act 2006. Following the aforementioned amendment the Company has put updated procedures in place to deal with conflicts of interest and these procedures have operated effectively throughout 2008.
The directors restrict the borrowings of the Company so that the aggregate amount, for the time being, remaining borrowed by the Group is not, without the previous sanction of an ordinary resolution of the Company, more than one and a half times the aggregate of: The amount paid up on the issued share capital of the Company and The total of the capital and revenue reserves of the Group (subject to certain adjustments).
Notes: 1. In addition to attendance as above, Andy Haste and George Culmer regularly attend, by invitation, meetings of the Group Audit Committee (GAC). Andy Haste regularly attends meetings of the Remuneration Committee.
2. Bridget McIntyre resigned as UK CEO on 2 September 2008 and as a director on 31 December 2008. 3. Johanna Waterous was appointed as a non-executive director with effect from 20 May 2008.
The Nomination Committee’s principal duties are to review the structure, size and composition of the Board and to evaluate the directors’ skills, knowledge and experience. When appointing new directors, regard is given to the size of the Board and the balance of executive and non-executive directors as well as the skills and experience already represented by the existing Board members, and those which would be desirable on the Board going forward. The Committee has access to external recruitment consultants in order to help fill any vacancies. The Committee considers the leadership needs and succession planning of the Board when making decisions on new appointments. Resolutions to reappoint directors at the AGM are
At all times during the year, at least half of the Board, excluding the Chairman, comprised non-executive directors. All non-executive directors have been determined by the Board to be independent. The Chairman meets regularly with the non-executive directors both individually and collectively without the executive directors being present. The Chairman met the independence criteria of the Combined Code on his appointment in 2003 and continues to meet the criteria set out in the Code. There have been no changes to his external commitments since then which might affect his responsibilities to the Group. Andy Haste was appointed as a non-executive director of ITV plc on 11 August 2008 at which time ITV plc was a constituent of the FTSE 100. ITV plc is currently a member of the FTSE 250. No other executive director served on the board of a FTSE 100 company during the year.
Appointments to the Board The directors and the Company (by ordinary resolution) may appoint a person who is willing to be a director either to fill a casual vacancy or as an additional director. A director who is appointed by the directors shall retire at the following AGM and will put himself forward to be elected by the shareholders. In accordance with the Company’s Articles and the Combined Code, the directors submit themselves for reappointment at the first AGM after their appointment and for re-election every three
The directors must present financial statements for each financial year, in accordance with applicable law, accounting standards and regulations, which give a true and fair view of the state of affairs of the assets, liabilities, financial position and the profit or loss and cashflows for the Company (and the Group as a whole) for that period. Financial statements for the Group are prepared in accordance with International Financial Reporting Standards (IFRS), the Companies Acts 1985 and 2006 and Article 4 of the IAS Regulations.
In preparing such financial statements the directors are required to: Select suitable accounting policies and apply them on a consistent basis using reasonable and prudent judgement State whether or not applicable accounting standards have been followed and explain any material departures State whether the Group financial statements have been prepared in accordance with IFRS and Use the going concern basis unless it is inappropriate to do so.
Induction and professional development On appointment, directors undertake an induction programme and receive a range of information about the Company when they join the Board. This includes background information on the Group and details of board procedures, governance issues and directors’ responsibilities. The induction programme also includes a series of meetings with members of the Board and executive management, together with various briefings and presentations regarding the business and regulatory matters from executives.
Development and training for the directors is an ongoing process which includes briefings on legislative changes and on corporate governance issues. Directors also receive regular presentations about the Company’s operations and there are regular discussions on strategy, customer marketing and employee satisfaction and environmental, social and governance matters. Opportunity is also created for non-executive directors to make informal visits to different parts of the Group and to meet with local management.
The Chairman is responsible for leading the Board, liaising as necessary with the Group CEO on developments between Board meetings and
To have oversight of internal and external audit functions To manage the systems of internal controls To review the Group’s financial performance To review all matters relating to the legal integrity of the Group and To provide assurance on the effectiveness of the Group’s risk management.
identify and mitigate, rather than eliminate, the potential risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material financial misstatement or loss. Following the review of the internal control systems, the Board confirms that the actions it considers necessary to rectify any significant failings or weaknesses identified as a result of the review have been, or are being, taken.
The Board, through the GAC, receives reports from the Group Chief Auditor and her team on the integrity of the control environment and also receives reports from the external auditors based upon their audit work. The GAC also receives reports on the adequacy of the Group’s arrangements for ensuring regulatory compliance from the Group Head of Regulatory Risk and Compliance. The Board, through the Board Risk Committee (BRC), considers reports from risk specialists to the Group, and reviews Group level risk management information.
Each quarter there is a self certification process completed by business managers across the Group to confirm the adequacy of controls and their compliance with Company policies, laws, rules and regulations.
Further detail on the overall risk framework is set out on pages 30 to 32.
Group Audit Committee The GAC is chaired by Edward Lea who has been Chairman of the Committee since October 2003. The other members of the Committee are Noel Harwerth, John Maxwell and Johanna Waterous, who joined the Committee on her appointment to the Board on 20 May 2008. In 2008, the Committee met five times. The attendance record of directors in 2008 is shown in the table on page 45. The Committee is comprised of independent non-executive directors who have recent and relevant financial experience. The Group CEO, Chief Financial Officer, Group Chief Auditor and Group Head of Regulatory Risk and Compliance are regular attendees. The Chairman and other members of executive management are also invited to attend from time to time. The outcomes of meetings are reported to the Board and the Board receives the minutes of all GAC meetings.
The GAC’s principal duties are as follows: To coordinate and have oversight of the Group’s financial reporting process To monitor compliance
Delegated authorities The Group operates a Delegated Authority Policy which specifies how executive authority is delegated from the Board to the Group CEO and on to other executives in the Group. Individual executive licences set out specific limits of authority in terms of entering into financial, underwriting and other business commitments. Each executive is responsible for ensuring a similar process of delegation is in place within his or her area of responsibility.
Any form of proxy sent by the Company to shareholders in relation to any general meeting must be delivered to the Company, whether in written form or in electronic form, not less than 48 hours before the time for holding the meeting (or in the case of a poll taken otherwise than at or on the same day as the meeting, not less than 24 hours before the time appointed for the taking of the poll).
At any general meeting every shareholder present shall have one vote on a show of hands, and on a poll every shareholder present in person or by proxy shall have one vote for each share of which he is the holder. In the case of an equality of votes, whether on a show of hands or on a poll, the chairman of the meeting shall be entitled to a casting vote. All resolutions were put to a poll at the AGM in 2008. Voting at the AGM is conducted electronically, with the results being announced to the London Stock Exchange and on the Company’s website.
Investment Committee The Investment Committee is chaired by Malcolm Le May and comprises all of the non-executive directors, the Group CEO and the Chief Financial Officer. The Committee met three times during 2008. Due to the unprecedented activity in the financial markets in 2008 the Board also received regular investment updates from the Group Investments Director. The Committee assists the Board in setting the Group’s investment strategy and monitors the execution of that strategy and the Group’s investment performance.
Financial control framework In 2006 the Company voluntarily delisted from the New York Stock Exchange and terminated its American Depository Receipt (ADR) programme. In January 2007 the Company suspended its US SEC registration and its reporting obligations to the SEC also ceased at that time. The registration was permanently terminated on 31 December 2007. As a result of the SEC deregistration, the Company is no longer required to be compliant with the US Sarbanes Oxley Act 2002. However, the elements of Sarbanes Oxley compliance which have added value have been carried forward in the Group’s financial control framework.
The terms of reference for key committees of the Board explaining their role and the authority delegated to them are available on the Company’s website www.rsagroup.com or on request from the General Counsel and Group Company Secretary.
In constitution and operation the Committee complies fully with the Combined Code as appended to the Listing Rules of the UK Listing Authority and as described in the corporate governance section of this report, on page 44.
Membership of the Remuneration Committee During the year the directors who served on the Committee were John Maxwell (Chairman), Edward Lea and Malcolm Le May.
All of the non-executive directors on the Committee were determined by the Board to be independent. The attendance of members in 2008 is shown in the table on page 45.
for Long Term Incentive Plan (LTIP) awards in 2008. When the Committee met in July it approved LTIP awards to be granted in September 2008 and approved the grant of Sharesave awards for 2008. It also received presentations from independent advisers and resolved to appoint Towers Perrin LLP as independent adviser to the Committee. In September the Committee reviewed the fees for the Chairman of the Board. In October the members of the Committee received an update on market movements in executive director remuneration. At its December meeting the Committee gave its approval to work being undertaken on share plans.
Financial targets are measured against combined operating ratio for Group and business areas Individual targets are approved by the Remuneration Committee Up to a further 33% of net cash bonus paid may be reinvested in voluntarily Deferred Shares under the LTIP
Performance Shares subject to stretching performance conditions Matching Shares awarded linked to Deferred Shares, also subject to performance conditions Annual awards that may vest after three years Non pensionable
Discretionary awards Participation reviewed annually ROE measure, together with TSR performance measured against a peer group of companies Full details of performance measures and vesting described on page 61
For the purposes of the charts, the bonus value is based on the cash bonus plus the fair value of the compulsory Deferred Shares. The LTI value is based on the fair value of awards of Performance Shares and half of the maximum potential number of Matching Shares that may vest (subject to performance) relating to voluntary and compulsory Deferred Shares under the LTIP. Details of how the fair values have been calculated are set out in note 27 on page 118.
Financial targets are measured against combined operating ratio (COR) targets which are the preferred measures for the Group. COR is the single indicator which most fully captures the underlying strength and performance of an insurance business. To achieve focused incentivisation, for each executive director financial targets are weighted towards the area of the business for which they have primary responsibility.
The financial targets that apply to the annual performance bonus for Andy Haste and George Culmer are a combination of targets relating to the overall Group COR result and the COR results of the regional operating businesses. The financial targets for Simon Lee’s annual performance bonus are weighted towards the International business while also retaining a target for the Group COR result as a whole.
The Committee is alert to market concerns surrounding base pay increases and closely monitors basic pay (and total remuneration) for executive directors in the light of both the market and individual and corporate performance, as well as the levels of pay increases available for all employees. The Committee is confident that the structures and processes in place for reviewing annual salary increases are robust.
The increase in base salary reflected movement in the relevant executive pay market at that time and the performance of the individual.
Account will be taken of personal performance in determining the scale of the award to each executive director and members of the Executive Team. For executives below this level, awards are made based on a formula which relates the size of award to performance and potential, as measured through the annual performance appraisal process.
In addition executives may invest an additional portion of bonus in Deferred Shares on a voluntary basis. Voluntary Deferred Shares are not at risk of forfeiture and may be withdrawn at any time (but the right to Matching Shares would lapse on those Deferred Shares withdrawn).
Conditional awards of Matching Shares Executives may receive a conditional award of Matching Shares pro rata to the number of Deferred Shares held. At threshold performance the matching ratio will be 0.625:1. The maximum matching ratio for Matching Shares:Deferred Shares will be 2.5:1, calculated on the gross value of the bonus invested in Deferred Shares. Details of the performance condition used are described below.
In 2008 (under the LTIP) an award of Matching Shares was made on a pro rata basis to the Deferred Shares. Matching Shares may vest subject to the performance conditions described on page 61 of this report.
The Committee reserves the right to reduce the permissible investment below this level. However, the LTIP will continue to operate on the same terms in 2009.
The primary long term incentive is the LTIP, the key features of which (and associated policies) are summarised in the sections below.
During 2008, trading in Fortis shares was suspended and the Committee resolved to remove Fortis from the comparator group for the purpose of measuring TSR performance for awards made in 2006, 2007 and 2008. The Committee reviews, on an ongoing basis, the composition of the comparator group and will consider adding companies for future awards in the event that the number of constituent companies drops below an acceptable level.
The Group’s TSR will be independently calculated and verified by the Committee for the purposes of awards made in 2009 under the LTIP.
Dilution Dilution levels for all schemes are held strictly within the Association of British Insurers (ABI) limits (10% over 10 years for all schemes and 5% for discretionary schemes). The dilution levels compared to ABI limits as at 31 December 2008 were: ABI limit RSA dilution 10% over 10 years for all share schemes 5.10% 5% over 10 years for discretionary schemes 3.09%
Share ownership guidelines Strengthened share ownership guidelines were introduced in 2004 for executive directors and members of the Executive Team. As part of the review of remuneration, the Committee resolved to increase the shareholding requirements for executive directors and members of the Executive Team.
The Group CEO is required to build and maintain a minimum shareholding in the Company equivalent to 200% of base salary (previously 150% of base salary). The other executive directors have a target of 150% of base salary (previously 100% of base salary) and other members of the Executive Team have a target of 75% of base salary (previously 50% of base salary). In order to ensure that progress is made towards this target, executives are required to retain shares to a value of 50% of the net of tax gain under all executive schemes until the relevant guideline is attained. This requirement will apply to awards under the LTIP and will continue to apply to awards under all existing long term incentive plans.
For awards to be made in 2009, the ROE target range will return to that previously approved by shareholders of 10% to 16%. If the average annual ROE over three years is 10%, 25% of that element of the award will vest. If underlying average ROE over three years is 16% or more, all of this portion of the award will vest. There will be a straight line vesting scale between these two points.
30% of the shares comprising the award will vest according to TSR performance against a comparator group of UK and international financial services companies. Below median performance, no part of the award subject to the TSR performance condition will vest. At median performance, 25% of the award will vest. At upper quintile (top 20%), 100% of the award will vest. Vesting will be on a straight line basis in between. Additionally, before any shares subject to the TSR condition vests, the Committee must be satisfied that the Company’s TSR performance is reflective of underlying financial performance.
Aegon AXA Alleanza Allianz AVIVA Baloise Generali Legal & General Munich Re QBE Swiss Re Zurich Financial Services
Andy Haste 2 April 2003 12 months George Culmer 1 May 2004 12 months Simon Lee 30 April 2003 12 months Bridget McIntyre* 1 November 2005 12 months * Bridget McIntyre’s contract was terminated by mutual consent on 31 December 2008.
The sums payable in respect of base salary, pension and benefits are subject to mitigation. They will be paid in 12 monthly instalments during 2009 and are subject to reduction, in whole or in part, by any amount received as remuneration or fees from employment, consultancy or any other arrangement until the final payment is made. The sum payable in respect of bonus for 2008 will be paid in March 2009.
External directorships Where appropriate, the Group encourages directors and other senior managers to accept, subject to the approval of the Chairman and the Group CEO, an invitation to join the Board of another company in a non-executive capacity, recognising the value of such wider experience. In these circumstances, they are permitted to retain any remuneration from the non-executive appointment. For executive directors and other members of the Executive Team, external appointments are limited to one.
* Assuming share price of 138.10p (the closing middle market price on the last dealing day of the year).
Pension provision and other benefits Policy: Reasonable provision in line with arrangements made in similar companies will be made to allow executives to plan effectively for their retirement but the Committee will not compensate executives affected by the tax limits effective 6 April 2006. Andy Haste is a member of the SAL Pension Scheme (SAL), a contributory defined benefit occupational pension scheme. In common with all other members of the Group’s defined benefit occupational pension schemes, from 1 January 2006 Andy Haste’s future benefits within SAL will accrue on a career average revalued earnings basis rather than on a final salary basis. The Group retains a cap within its defined benefits and Andy Haste’s benefit accrual is calculated with reference to a capped salary (£117,600 for the tax year commencing 6 April 2008). In addition to his benefits within SAL, Andy Haste receives an age related taxable cash allowance to enable him to make his own provision for retirement above the cap. In 2009 he will be paid an allowance of 29% of base salary for this purpose.
George Culmer is a member of the Royal & SunAlliance Stakeholder Pension Plan which is a contributory defined contribution occupational pension scheme. In 2009, as in 2008, he will receive employer contributions worth 15% of base salary, subject to an employee contribution of 5% of base salary up to the HM Revenue and Customs annual allowance as applicable. Additionally, George Culmer receives a taxable cash allowance of 15% of base salary, in order to bring his overall pension provision closer to the market median.
In addition, the executive directors participate in a number of benefits available to other senior managers including life assurance at the rate of four times base salary together with a spouse/dependant annuity, sickness and ill health early retirement benefits and private medical insurance. They also have a choice between a company car and a monthly cash car allowance. In common with other employees, the executive directors are eligible to participate in the Royal & SunAlliance Sharesave plan.
Service contracts The Committee’s policy on service contracts is that they should be subject to a maximum notice period of one year. Generally in the event
Total shareholder return for RSA and FTSE World Europe Non Life Insurance Index and FTSE 100 Index
The Committee determines the Chairman’s remuneration. The fee payable to John Napier in respect of his appointment as Chairman of the Board was £325,000 p.a. until the end of his previous term of appointment which ended on 31 December 2008, and was not increased for three years. In 2009, the fee payable to John Napier is £400,000 for the first year of his current appointment and will be subject to annual review by the Committee. The appointment may be terminated by the Chairman on three months’ notice to the Company.
The graph shows the TSR of the Group with reference to the FTSE World Europe Non Life Insurance Index and the FTSE 100 Index. The FTSE World Europe Non Life Insurance Index comprises the range of European insurance businesses which most closely match our competitor group, and the TSR comparator group selected for awards under the LTIP. The FTSE 100 Index comprises the 100 most highly capitalised companies of the UK market. TSR performance relative to the indices is shown over the five years from 31 December 2003 to 31 December 2008.
TSR reflects the change in value of ordinary shares in a company over time, as represented by the evolution of a notional initial investment of £100 in the shares and including any distribution of dividends.
Notes: 1. 2008 bonuses were calculated as described in the remuneration report on page 52. In 2008 a maximum cash bonus of 100% of salary was achievable. 2. George Culmer received an annual performance bonus of £489,720 in respect of performance year 2008. His allowances include 15% of base salary as a retirement allowance, paid monthly. During 2008 the amount paid was £78,000. He also received car benefits worth £26,000 and medical benefits worth £1,000. 3. Andy Haste received an annual performance bonus of £840,840 in respect of performance year 2008. His allowances include an age related percentage of base salary as a retirement allowance, paid monthly. During 2008 the allowance was 28% and the amount paid was £251,000. He also received car benefits and additional taxable travel benefits worth £40,000 and medical and life assurance benefits worth £9,000.
4. Simon Lee received an annual performance bonus of £367,200 in respect of performance year 2008. His allowances also included 17.5% of base salary as a retirement allowance, paid monthly. During 2008 the amount paid was £70,000. He also received car benefits and additional taxable travel benefits worth £16,000 and medical benefits worth £1,000.
5. Bridget McIntyre resigned as director on 31 December 2008. Her allowances included 15% of basic salary as a retirement allowance, paid monthly from 1 January to 31 August. From 1 September she elected not to receive further employer contributions to the Stakeholder Pension Plan. Her retirement allowance was increased to 30% of basic salary from 1 September 2008 to 31 December 2008 to take account of this. During 2008 the amount paid was £82,000. She also received car benefits and additional taxable travel benefits worth £19,000 and medical benefits worth £1,000.
Bridget McIntyre’s contract of employment was terminated by mutual consent, effective from 31 December 2008, when she stood down from the Board. The Committee approved termination payments that comprised an amount payable in lieu of notice, in line with the contractual entitlement, equivalent to one year’s base salary and a bonus for 2008.
No amount is payable in respect of a bonus for 2009. An amount equivalent to 30% of base salary is payable in respect of retirement allowance for the notice period. The balance comprises other contractual benefits.
2. The figures set out in the table above provide information as required by the Directors’ Remuneration Report Regulations 2002. The Listing Rules require the change in accrued pension to be shown excluding the effects of inflation and the transfer value of this increase. These figures are shown in the notes below. 3. The accrued pension figures shown are the annual amounts of member’s pension payable from normal retirement age. Increases to pensions when in payment are applied in accordance with the relevant scheme rules. On the death of the member leaving a surviving spouse and/or children, spouse’s and/or children’s pensions are payable in accordance with scheme rules.
Options granted following the AGM in May 2003 are exercisable as, at the end of the period of three business years starting with the business year in which the options were granted, the Group achieved a return on capital (ROC) of at least 6% per annum (after inflation and excluding items of an exceptional nature which in the view of the Committee do not reflect the underlying performance of the business) when averaged over the period. Options granted between September 1998 and May 2003 were also subject to a performance condition that the Group must achieve a ROC of at least 6% when averaged over a consecutive three year period. This performance condition was achieved in respect of all options granted between those dates. Options granted between April 1997 and September 1998 were subject to a different performance condition linked to TSR. For options to be eligible for exercise, the Group’s TSR has to be at or above the median of companies in the FTSE 100 Index over a consecutive period of three years, between the year of grant and the completion of the 10 year life of the option. The test is conducted twice per year, at the end of March and September, by independent external specialists. None of the terms or conditions of any of the existing options over shares of the Group were varied during the year. 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 in accordance with the provisions of the FSA Listing Rules.
The official closing middle market price at its highest during the year was 165.8p per share and at its lowest was 116.3p per share; on the last dealing day of the year it was 138.1p per share.
Options held during 2008 in respect of the ordinary shares of the Company as a result of executive and SAYE share option schemes are as follows: Number of Number of options at options at Exercise Dates Dates 1 January 31 December price exercisable exercisable 2008 2008 (pence) from to
Notes: All of the above options were granted for nil consideration.
George Culmer 1,3 Deferred Share awards 128,938 – 128,938 – – 128,938 08.04.08 Matching Share awards 386,814 – 386,814 – – 386,814 08.04.08 Andy Haste 1,3 Deferred Share awards 462,182 – 265,136 197,046 – 265,136 08.04.08
Simon Lee 1,3 Deferred Share awards 96,082 – 96,082 96,082 – – – Matching Share awards 288,246 – 288,246 288,246 – – – Bridget McIntyre 1,2 Deferred Share awards 150,000 – 150,000 150,000 – – – Matching Share awards 450,000 – 450,000 450,000 – – –
Notes: 1. The market price of ordinary shares on 14 June 2004, 8 April 2005 and 1 November 2005, the dates on which the above long term incentive scheme interests were granted, was 79.25p, 81.25p and 100p respectively. 2. Bridget McIntyre’s award of Deferred and Matching Shares was approved prior to her appointment on 1 November 2005. Due to dealing restrictions in accordance with the Model
Code, these awards could not be granted until 12 June 2006. The number of shares was calculated with reference to the share price on 1 November 2005. These awards vested on the third anniversary of her appointment. In all other respects these awards are subject to the same rules as other awards granted in 2005.
3. Matching Share awards are capable of vesting in respect of a maximum of three times the number of Deferred Shares awarded, subject to the achievement of TSR targets over a single two year period. TSR performance is measured relative to other companies specified by the Remuneration Committee. For awards granted in 2004 and 2005, TSR was measured partly relative to FTSE 100 companies and partly relative to the following financial services comparator group companies: Aegon, Legal & General Group, Allianz Group, Old Mutual, AXA, Prudential, AVIVA, RAS, Generali and Zurich Financial Services Group. For 50% of the Matching Share awards, where TSR is measured against the FTSE 100, full vesting will only occur at upper decile performance, vesting will occur in the ratio of shares under Matching Share awards to shares under Deferred Share awards of 2:1 at upper quartile performance and vesting in the ratio 1:1 will occur at median performance. For the other 50% of the Matching Share awards, where TSR is measured against the financial services comparator group, full vesting will occur if TSR is highest in the comparator group, vesting in the ratio 2:1 will occur at upper quartile performance and vesting in the ratio 1:1 will occur at median performance. Matching Share awards will not vest at below median performance. For awards granted in 2004, the targets were measured over the period from 1 April 2004 to 31 March 2006. For awards granted in 2005, the targets were measured over the period from 1 April 2005 to 31 March 2007. The relevant TSR figures were averaged over the three months before the beginning and end of this performance period. Additionally, no Matching Shares vest unless the Committee is satisfied that there has been a sustained improvement in the underlying performance of the Company over the performance period.
Long Term Incentive Plan Share awards Share awards Share awards Date by which held at granted held at qualifying 1 January during 31 December conditions Notes 2008 the year 2008 must be fulfilled
6. No other directors of the Company held long term incentive scheme interests during 2008.
We confirm to the best of our knowledge: The financial statements on pages 64 to 123, prepared in accordance with International Financial Reporting Standards as adopted by the EU, give a fair view of the assets, liabilities, financial position and profit of the Group The business review on pages 6 to 29, which is incorporated into the directors’ report, includes a fair review of the development and performance of the business and the position of the Group and The risk framework section on pages 30 to 32, which is incorporated into the directors’ report, includes a description of the principal risks and uncertainties faced by the Group.
Respective responsibilities of directors and auditors The directors’ responsibilities for preparing the Annual Report, the remuneration report and the consolidated financial statements in accordance with applicable law and International Financial Reporting Standards (IFRS) as adopted by the European Union are set out in the directors’ report.
Services Authority, and we report if it does not. We are not required to consider whether the Board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Group’s corporate governance procedures or its risk and control procedures.
We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the consolidated financial statements and the part of the remuneration report to be audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the consolidated financial statements and the part of the remuneration report to be audited.
Continuing operations Income Gross written premiums 7,273 6,596 Less: reinsurance premiums (811) (759) Net written premiums 6,462 5,837 Change in the gross provision for unearned premiums (112) (235) Less: change in provision for unearned premiums, reinsurers’ share 8 5 Change in provision for unearned premiums (104) (230) Net earned premiums 6,358 5,607 Net investment return 2 681 709 Other operating income 4 104 113 Total income 7,143 6,429 Expenses Gross claims incurred (4,205) (4,044) Less: claims recoveries from reinsurers 63 387 Net claims and benefits 3 (4,142) (3,657) Underwriting and policy acquisition costs (1,925) (1,776) Unwind of discount (92) (81) Other operating expenses 4 (117) (119) Total expenses (6,276) (5,633) Results of operating activities 867 796 Finance costs 4 (108) (104) Profit/(loss) on disposal of subsidiaries 18 (22) Net share of loss after tax of associates 11 (18) – Profit before tax on continuing operations 759 670 Income tax expense 5 (173) (29) Profit for the year from continuing operations 586 641
Attributable to: Equity holders of the Parent Company 574 596 Minority interests 12 32 586 628
Consolidated statement of recognised income and expense for the year ended 31 December 2008
Exchange gains net of tax 326 140 Fair value losses net of tax (193) (67) Pension fund actuarial gains/(losses) net of tax 204 (16) Net gains recognised in equity 337 57 Profit for the year 586 628 Total recognised income for the year 923 685
Attributable to: Equity holders of the Parent Company 901 670 Minority interests 22 15 923 685
The financial statements were approved on 25 February 2009 by the Board of Directors and are signed on its behalf by: George Culmer Chief Financial Officer
The principal accounting policies applied in the preparation of the consolidated financial statements are set out below.
The results and financial position of those Group entities whose functional currency is not Sterling are translated into Sterling as follows: Assets and liabilities for each balance sheet presented are translated at the closing exchange rate at the date of that balance sheet Income and expenses for each income statement are translated at average exchange rates during each period All resulting exchange differences are recognised as a component of equity.
Financial assets A financial asset is initially recognised, on the date the Group commits to purchase the asset, at fair value plus, in the case of all financial assets not classified as at fair value through the income statement, transaction costs that are directly attributable to its acquisition. A financial asset is derecognised when the rights to receive cashflows from the investment have expired or have been transferred and when the Group has transferred substantially the risks and rewards of ownership of the asset.
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 The effectiveness of the hedge can be reliably measured For cashflow hedges, a forecast transaction that is the subject of the hedge must be highly probable and must present an exposure to variations in cashflows that could ultimately affect profit or loss The hedge is assessed on an ongoing basis and determined to have been highly effective.
An exchange with an existing lender of loan capital with substantially different terms is accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability. The terms are substantially different if the discounted present value of the cashflows under the new terms, including any fees paid net of any fees received and discounted using the original effective interest rate, is at least 10% different from the discounted present value of the remaining cashflows of the original financial liability. An exchange where the terms are not substantially different is accounted for as an exchange.
Deferred tax is provided in full using the liability method on temporary differences arising between the tax bases of assets and liabilities and the carrying amounts in the financial statements. However, if the deferred tax arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting, nor taxable profit or loss, it is not accounted for. Deferred tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred tax asset is realised or the related deferred tax liability is settled.
or more from the balance sheet date 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 claims outstanding being discounted, during the period necessary for the payment of such claims.
Reinsurance ceded Premiums payable in respect of reinsurance ceded are recognised in the period in which the reinsurance contract is entered into and include estimates where the amounts are not determined at the balance sheet date. Premiums are expensed over the period of the reinsurance contract, calculated principally on a daily pro rata basis.
Employee benefits Pension obligations Group companies operate various pension schemes. The schemes are generally funded through payments to trustee administered funds, determined by periodic actuarial calculations. The Group has both defined contribution and defined benefit schemes. A defined contribution scheme is a pension scheme under which the Group pays fixed contributions into a separate entity. A defined benefit scheme is a pension scheme that defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and salary.
Post retirement benefits (including pension schemes and post retirement health schemes) Contributions to defined contribution pension schemes are charged in the period in which the employment services qualifying for the benefit are provided. The Group has no further payment obligations once the contributions have been paid.
The expected returns on scheme assets are determined for each asset class, at the beginning of the period, as the expected investment returns on scheme assets over the entire life of the related obligations. All returns are net of investment expenses.
Share based payment The value of the 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. The value of liabilities in respect of cash settled share based payment transactions is based upon the fair value of the awards at the balance sheet date.
The Group’s consolidated balance sheet is not presented using current and non current classifications. However, the following balances are generally classified as current: cash and cash equivalents; deferred acquisition costs; and insurance and reinsurance debtors.
The Group first adopted IFRS 8 ‘Operating segments’ in its financial statements in 2007. IFRS 8 is mandatory for accounting periods beginning on or after 1 January 2009.
The revised standard will come into effect for the annual periods beginning on or after 1 January 2009, but early adoption is permitted. The revisions will result in changes to the presentation of the financial statements but are not expected to change the results or the earnings per share of the current period, the comparative period or earlier periods, and the Group’s financial position at the end of each such period.
In a business combination, the acquiring company must measure the non controlling interest at either fair value or as the non controlling interest’s proportionate share of the identifiable net assets. Currently only the second basis is permitted Costs incurred by the acquirer in connection with a business combination must be accounted for separately from the business combination. This will result in such costs being expensed and not being included in goodwill All consideration (including contingent consideration) transferred in a business combination is measured at fair value at the acquisition date. Changes in the value of contingent consideration are measured in accordance with the relevant accounting treatment under IFRS Pre-existing equity interests in an acquiree are remeasured to fair value at the date of, and immediately before, the business combination and any resulting gain or loss is recognised in the income statement.
Notified claims development, where notified claims to date for each year are extrapolated based upon observed development of earlier years and Expected loss ratios.
The pension assets and pension and post retirement liabilities are calculated in accordance with International Accounting Standard 19 (IAS 19). The assets, liabilities and income statement charge, calculated in accordance with IAS 19, are sensitive to the assumptions made from time to time, including inflation, interest rate, investment return and mortality. IAS 19 compares, at a given date, the current market value of a pension fund’s assets with its long term liabilities, which are calculated using a discount rate in line with yields on ‘AA’ rated bonds of suitable duration and currency. As such, the financial position of a pension fund on this basis is highly sensitive to changes in bond rates and will also be impacted by changes in equity markets.
Acquisitions and disposals The Group makes acquisitions and disposals of businesses as part of its normal operations. All acquisitions are made after due diligence, which will include, amongst other matters, assessment of the adequacy of claims reserves, assessment of the recoverability of reinsurance balances, inquiries with regard to outstanding litigation and inquiries of local regulators and taxation authorities. Consideration is also given to potential costs, risks and issues in relation to the integration of any proposed acquisitions with existing RSA operations. The Group will seek to receive the benefit of appropriate contractual representations and warranties in connection with any acquisition and, where necessary, additional indemnifications in relation to specific risks although there can be no guarantee that such protection will be adequate in all circumstances. The Group may also provide relevant representations, warranties and indemnities to counterparties on any disposal. While such representations, warranties and indemnities are essential components of many contractual relationships, they do not represent the underlying purpose for the transaction.
Our insurance investment portfolios are concentrated in listed securities with very low levels of exposure to assets without quoted market prices. We use model based analysis to verify asset values when market values are not readily available.
Rating environment The ability of the Group to write certain types of insurance business is dependent on the maintenance of the appropriate credit ratings from the rating agencies. The Group has the objective of maintaining single ‘A’ ratings. At the present time the ratings are ‘A’ (stable) from S&P upgraded from ‘A-’ in December 2007, ‘A-’ (positive outlook) from AM Best and ‘A2’ (stable) from Moody’s upgraded from ‘A3’ in December 2008. Any worsening in the ratings could have an adverse impact on the ability of the Group to write certain types of general insurance business.
Changes in foreign exchange rates may impact our results We publish our consolidated financial statements in Pounds Sterling. Therefore, fluctuations in exchange rates used to translate other currencies, particularly other European currencies and the US Dollar, into Pounds Sterling will impact our reported consolidated financial condition, results of operations and cashflows from period to period. These fluctuations in exchange rates will also impact the Pound Sterling value of our investments and the return on our investments.
Income and expenses for each income statement item are translated at average exchange rates. Balance sheet assets and liabilities are translated at the closing exchange rates at the balance sheet date.
Regulatory environment The legal, regulatory and accounting environment is subject to significant change in many of the jurisdictions in which we operate, including developments in response to changes in the economic and political environment. We continue to monitor the developments and react accordingly.
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.
As set out in the corporate governance report, the Group’s Board of Directors (the ‘Board’) defines the risk appetite of the organisation.
Underwriting limits are in place to enforce appropriate risk selection criteria. For example, the Group has the right not to renew individual policies, it can impose deductibles and it has the right to reject the payment of a fraudulent claim. In certain territories, legislation imposes a minimum amount for which employers can be liable for claims for compensation from employees injured at work. These liabilities are usually insured under an employers’ liability (or similar) insurance policy; all policies issued by the Group comply with minimum statutory requirements.
In addition, to the extent that legal decisions in any of the jurisdictions in which the Group operates worldwide may increase court awards, and that the impact may be applied prospectively or retrospectively, claims reserves may prove insufficient to cover actual losses, LAE or future policy benefits. In such an event, or where it has been previously estimated that no liability would apply, the Group would add to its reserves and incur a charge to earnings. Such insufficiencies could have a material adverse effect on the Group’s future consolidated financial condition, financial results and cashflows.
In addition to local reinsurance arrangements, the Group reinsures a portion of the risks underwritten to control exposure to losses, to reduce volatility and protect capital. The Group’s reinsurance strategy is to purchase reinsurance in the most effective manner from reinsurers who meet its security standards.
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, through the setting and imposition of Group policies, procedures and limits. In defining its risk 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 insurance operations credit risks) and credit risks incurred for the purposes of generating a return (e.g. invested assets credit risk).
Debt securities 8,253 1,495 1,461 303 79 50 11,641 Other financial assets 59 7 2 1 3 88 160 Short term investments 1 – 5 – – – 6 Reinsurers’ share of insurance contract liabilities 71 495 762 175 50 184 1,737 Insurance and reinsurance debtors 1 26 45 74 31 6 2,414 2,596 Derivative assets – – 118 – – – 118 Other debtors – – – – – 357 357 Cash and cash equivalents 282 781 313 29 1 208 1,614
The overall credit risk to the Group is deemed to be low as the cover could be cancelled if payment were not received on a timely basis.
The Group’s largest reinsurance exposures to active reinsurance groups are Munich Re, SEB Group and Swiss Re. At 31 December 2008 the reinsurance asset recoverable from these groups does not exceed 3% of the Group’s total financial assets. Stress tests are regularly performed on the Group’s reinsurance assets and the limits are set such that in a catastrophic event, the exposure to a single reinsurer is estimated not to exceed 1% 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 2008 the largest pool (by premium volume) was 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 2008.
Financial assets that are past due but not impaired Financial Carrying Impairment Neither assets that value in the losses charged past due Up to three Three to six Six months to Greater than have been balance to the income nor impaired months months one year one year impaired sheet statement £m £m £m £m £m £m £m £m
Debt securities 11,641 – – – – 1 11,642 18 Other financial assets 160 – – – – – 160 – Short term investments 6 – – – – – 6 – Reinsurers’ share of insurance contract liabilities 1,737 – – – – 22 1,759 (3)
Derivative assets 118 – – – – – 118 – Other debtors 357 10 5 1 14 – 387 – Cash and cash equivalents 1,614 – – – – – 1,614 –
The Group is permitted to sell or repledge collateral held in the event of default by the owner, the fair value of which has been noted above at £1,329m. The terms and conditions of the collateral held are market standard. The assets held as collateral are readily convertible into cash.
At 31 December 2008, the Group had entered into short term sale and repurchase agreements for UK government securities (repos). The Group continues to recognise the debt securities on the balance sheet as the Group remains exposed to the risks and rewards of ownership. The carrying value of these debt securities recognised on the balance sheet is £297m (2007: £295m) and the carrying value of the associated liabilities is £297m (2007: £295m).
Certain of the Group’s equities and debt securities that are held at fair value are unlisted (2008: £656m; 2007: £577m). These primarily comprise cash instruments which are highly liquid and redeemable at short notice at carrying value. The amount also includes a number of other unlisted investments which are valued either by reference to industry pricing sources or model based calculations.
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 86.
Property price risk The Group’s portfolio of properties is subject to property price risk arising from changes in the market value of properties. Thus if the value of property falls so will the fair value of the portfolio as set out in the sensitivity analysis on page 86.
A number of the Group’s property holdings are Group occupied and therefore are reported within property and equipment. The Group’s investment in investment property is recorded as such and these investments are held as part of an efficient portfolio management strategy.
Foreign currency exchange risk The Group operates in 33 countries. Accordingly, its net assets are subject to foreign currency exchange rate movements. The Group’s primary foreign currency exposures are to the Danish Kroner, Canadian Dollar, Swedish Krona and the Euro. If the value of Sterling strengthens then the value of non Sterling net assets will decline when translated into Sterling and consolidated.
At 31 December 2008, the Group’s total shareholders’ equity, analysed by currency is: Sterling Danish Kroner Canadian $ Swedish Krona Euro Other Total £m £m £m £m £m £m £m
Movement in shareholders’ equity at 31 December 2008 (2) 3 (26) 32 (39) 48 Movement in shareholders’ equity at 31 December 2007 (15) 19 (38) 47 (15) 18
At 31 December 2008 there were derivative contracts in place to protect the value of the UK and European equity portfolios of the Group. These provided limited protection against declines in market levels whilst also capping participation in any appreciation of the market. In total, this strategy covered an underlying equity value up to approximately £572m. If UK and European equity markets decreased by 15%, the impact of these derivatives as of 31 December 2008, would be to decrease the impact of the decline by £32m (2007: £47m).
At 31 December 2008 the Group held forward foreign exchange contracts that are designated as hedging instruments to reduce structural foreign exchange risk. The derivatives are included in the table above. Further information on designated hedges can be found in note 28.
Interest rate markets:2 Impact on fixed interest securities of increase in interest rates of 100bps – – (290) (264) Impact on loan capital of increase in interest rates of 100bps3 (3) – – – Decrease of equity markets:4 Direct impact on equities of a 15% fall in equity markets (50) – (91) (223) Mitigating impact arising from derivatives held 32 47 – – Property markets:4 Decrease of property markets of 15% (55) (64) (28) (44)
2. The sensitivity of the fixed interest securities of the Group has been modelled by reference to a reasonable approximation of the average interest rate sensitivity of the investments held within each of the portfolios.
Maturity periods or contractual repricing The following table summarises the contractual repricing or maturity dates (whichever is earlier) for financial liabilities that are subject to fixed and variable interest rates. Insurance liabilities are also presented and are analysed by remaining duration.
As at 31 December 2008 Balance Greater sheet Less than One to Two to Three to Four to Five to than carrying one year two years three years four years five years ten years ten years Total value* £m £m £m £m £m £m £m £m £m
Interest on perpetual bonds and notes 97 65 65 65 65 146 16 519 * Balance sheet carrying value differs to the totals in the above tables as the balance sheet totals are on a discounted basis.
To provide protection against material events or shocks, the Group would normally expect to hold sufficient capital to maintain significant economic and regulatory surpluses.
Economic capital Economic capital is the Group’s preferred measure of capital sufficiency. It is the Group’s own assessment of the amount of capital it needs to hold to meet its obligations given the Group’s risk appetite. Assets and liabilities are valued on an economic basis providing the most realistic representation of the Group’s financial condition.
The economic capital analysis compares the economic value of the Group’s assets with the total resources required in a range of adverse scenarios, calibrated to a defined risk tolerance consistent with the Group’s ‘A’ rating which is in line with target. The economic capital surplus is the amount by which the economic assets exceed the total resources required. The total resources required is the amount of assets the Group needs today to meet its liabilities under the defined risk tolerance. The Group defines the economic capital required as the difference between the total resource requirement and the accounting value of liabilities. At 31 December 2008, the Group’s surplus economic capital was approximately £1.8bn (2007: £2.2bn).
The Group uses the following key measures to assess the performance of its operating segments: Net written premiums Underwriting result Combined operating ratio (COR).
Major components of underwriting result are net earned premiums, other operating income, net claims and benefits and underwriting and policy acquisition costs.
Notes to the financial statements continued 1. Operating segments continued Segment revenue and results Year ended 31 December 2008
Combined operating ratio (%) 97.6 91.2 96.4 – 94.5 Other segment items included in the income statement: Investment income 325 259 38 32 654 Interest expense – (8) (8) (10) (26)
Net written premiums 2,688 2,513 615 21 5,837 Underwriting result 65 206 18 (11) 278
Segment assets and capital expenditure Year ended 31 December 2008 Emerging Central Total UK International Markets functions Group £m £m £m £m £m
Total assets of continuing operations 8,911 11,007 2,049 897 22,864 Non current and disposal group assets held for sale 3 Total assets 22,867
Capital expenditure: Property and equipment 36 31 5 2 74 Goodwill 12 13 – – 25 Intangible assets 50 22 – – 72
Investment in associates – 4 101 – 105 Total assets of continuing operations 8,716 8,981 1,575 1,213 20,485 Non current and disposal group assets held for sale 108 Total assets 20,593
UK 2,711 2,688 385 306 Scandinavia 1,602 1,379 435 463 Canada 884 703 164 157 Other Europe 512 431 59 31 Other 753 636 498 617 6,462 5,837 1,541 1,574
Other investments: Loans secured by mortgages 1 1 (1) 1 – – – – – 2 Other loans 4 5 – – – – – – 4 5 Other 36 31 (2) (4) – (8) – – 34 19 Deposits, cash and cash equivalents 57 83 3 1 1 – – – 61 84 Derivatives 12 15 82 8 59 (3) – – 153 20 Net investment return 652 593 150 174 (60) (55) (61) (3) 681 709
The net investment return arising on assets categorised as at fair value through the income statement includes the net return arising on derivatives and assets designated as fair value through the income statement.
Unrealised capital gains and losses recognised directly in equity for available for sale assets are as follows: Net realised (gains)/ Net unrealised losses transferred Impairments transferred Net movement gains/(losses) to income statement to income statement recognised in equity 3. Net claims and benefits
Engineering inspection fees 54 41 Other income 50 73 Net losses on derivatives – (1) Other operating income 104 113
Interest expense on loan capital 88 90 Other loan interest 20 14 Finance costs 108 104
Details of directors’ remuneration and pension benefits, including that of the highest paid director (Andy Haste), are included in the directors’ emoluments. Details of directors’ interests in the Parent Company are shown in the directors’ emoluments and interests.
Notes to the financial statements continued 4. Profit before tax continued Employee information Staff costs for all employees comprise: Wages and salaries 717 657 Social security costs 89 74 Pension costs 91 43 Share based payments to directors and employees 25 19
The average number of employees of the continuing operations during the year was as follows: 2008 2007 Number Number
Discontinued operations The loss before tax from discontinued operations includes the following: Reorganisation expenses – 1 Amortisation and impairment of intangible assets – 1
Staff costs for employees of discontinued operations comprise: Wages and salaries – 5 Social security costs – 1 Pension costs – 1 – 7
Tax at the UK rate of 28.5% (2007: 30%) 216 201 Tax effect of: Income/gains not taxable (28) (26) Expenses not deductible for tax purposes 11 10 Tax losses not recognised 1 – Release of tax held in respect of Security Fund/Safety Reserve – (103) Release of tax provided in respect of prior periods (14) (15) Different tax rates of subsidiaries operating in other jurisdictions (26) (32)
Income tax expense 173 29 6. Earnings per share attributable to the ordinary shareholders of the Parent Company The earnings per ordinary share is calculated by reference to the profit attributable to the ordinary shareholders and the weighted average of shares in issue during the year.
Earnings per share attributable to discontinued operations The loss for the year from discontinued operations is £nil (2007: £13m). The basic earnings per share from discontinued operations is nil (2007: (0.4)p) and the diluted earnings per share from discontinued operations is nil (2007: (0.4)p).
Ordinary dividend: Final paid in respect of prior year 4.53 4.12 147 123 Interim paid in respect of current year 2.73 2.48 90 79
At the Annual General Meeting (AGM) on 18 May 2009, a dividend in respect of 2008 of 4.98p per share amounting to a total dividend of £165m is to be proposed. The proposed dividend will be paid and accounted for in shareholders’ equity as an appropriation of retained earnings in the year ending 31 December 2009.
During the year, the provisional valuation of the 2007 acquisition of Thomson Jemmett Vogelzang in Canada was revised and a balance previously classified as other of £14m was transferred to goodwill, net of deferred tax of £4m. The increase in goodwill is £10m. Comparative information has not been adjusted as the impact is not material.
Amortisation expense of £56m (2007: £38m) has been charged to underwriting and policy acquisition costs.
Additions of software development comprise £13m (2007: £17m) of external software and £57m (2007: £34m) of internally developed software.
No impairments have been recognised during the year, or in prior years.
Notes to the financial statements continued 9. Property and equipment Group occupied property – land and buildings Other Total £m £m £m
Cost/valuation At 1 January 2008 293 347 640 Additions 9 65 74 Disposal of subsidiaries (92) – (92) Disposals – (22) (22) Revaluation adjustment (53) – (53) Exchange adjustment 30 37 67 At 31 December 2008 187 427 614 Accumulated depreciation At 1 January 2008 – 258 258 Depreciation charge 3 32 35 Depreciation on disposals – (11) (11) Revaluation adjustment (3) – (3) Exchange adjustment – 20 20
Accumulated impairment At 1 January 2008 – 5 5 Exchange adjustment – 1 1 At 31 December 2008 – 6 6 Net book amount at 31 December 2008 187 122 309
Revaluation adjustment 17 – 17 Exchange adjustment 17 14 31 Transfer to investment property (10) – (10) Transfer to non current and disposal group assets held for sale (13) – (13) At 31 December 2007 293 347 640 Accumulated depreciation At 1 January 2007 – 227 227 Depreciation charge 4 28 32 Depreciation on disposals – (5) (5) Revaluation adjustment (4) – (4) Exchange adjustment – 8 8 At 31 December 2007 – 258 258 Accumulated impairment At 1 January 2007 – 6 6 Exchange adjustment – (1) (1) At 31 December 2007 – 5 5 Net book amount at 31 December 2007 293 84 377
The carrying amount of Group occupied property that would have been recognised had the assets been carried under the cost model at 31 December 2008 is £160m (2007: £189m).
Intouch Insurance Group BV Netherlands 50.0% Caunce O’Hara & Company Limited United Kingdom 30.0% Royal Sundaram Alliance Insurance Company Limited India 26.0% Huestis Insurance & Associates Limited Canada 25.0% H&R Insurance Limited Canada 25.0% Syn Mun Kong Public Limited Company Thailand 20.0%
Syn Mun Kong Public Limited Company is listed on the Stock Exchange of Thailand. The fair value of the Group’s holding at 31 December was £5m.
Equity securities 940 1,487 Debt securities 11,642 9,581 Other financial assets 160 151 Short term investments 6 121 Total financial assets – available for sale 12,748 11,340
Over 98% of financial assets are valued using their quoted market prices in active markets. The Group does not hold significant financial assets that are not valued using quoted market prices.
To be settled within 12 months 734 723 To be settled after 12 months 1,025 1,149
Insurance debtors comprise: Due from policyholders 1,218 1,086 Due from intermediaries 1,411 1,254 Total insurance debtors 2,629 2,340 Reinsurance debtors 261 239 Total insurance and reinsurance debtors 2,890 2,579 15. Deferred acquisition costs
Deferred acquisition costs at 1 January 542 453 Exchange adjustment 53 20 Acquisition costs deferred during the year 793 766 Amortisation charged during the year (728) (705) Credit to income statement in the year 65 61 Acquisition of subsidiaries – 8 Other (7) – Deferred acquisition costs at 31 December 653 542
Treasury shares utilised – – 19 – – – – (19) – – – Changes in shareholders’ interests in subsidiaries – – – – 11 – (8) (371) (368) (248) (616) Depreciation transfer – – – – (2) – – 2 – – –
The total nominal value of ordinary shares issued during the year was £20m (2007: £74m).
The Royal & SunAlliance ESOP Trust holds ordinary shares in the Parent Company, which may subsequently be transferred to employees (other than the executive directors). At 31 December 2008 the Trust held 7,976,673 ordinary shares (2007: 15,102,896) in the Parent Company with a nominal value of £2m (2007: £4m) and a mid market value, based on the market value of the Parent Company’s shares at the close of business on 31 December 2008 as shown in the Official List of the London Stock Exchange, of £11m (2007: £22m).
The Royal & SunAlliance ESOP Trust No 2 holds ordinary shares in the Parent Company, which may subsequently be transferred to employees including executive directors. At 31 December 2008 the Trust held 3,919,975 ordinary shares (2007: 4,938,894) in the Parent Company with a nominal value of £1m (2007: £1m) and a mid market value, based on the market value of the Parent Company’s shares at the close of business on 31 December 2008 as shown in the Official List of the London Stock Exchange, of £5m (2007: £7m).
Provided a resolution of the Board exists, and in priority to any payment of dividend to other shareholders (other than any dividend not exceeding 0.1p per share), holders of preference shares are entitled to a cumulative preferential dividend of 7.375% per annum, payable out of the profits available for distribution, to be distributed in half yearly instalments and the shares are not redeemable. Preference shareholders have no further right to participate in the profits of the Parent Company. In addition, preference shares do not confer: Any right to participate in any offer by way of rights or otherwise to subscribe for additional shares in the Parent Company (except where required by law) Any rights of conversion Any right to participate in any issue of bonus shares.
No shareholder is, unless the directors otherwise determine, entitled to attend or vote either personally or by proxy at any general meeting if: Any call or any sum presently payable by him to the Parent Company in respect of such share remains unpaid or The shareholder has failed to comply with a notice under section 793 of the Companies Act 2006 and is in default for a period of 14 days from the date of service of such notice.
The directors can require a shareholder to provide evidence that shares held by such shareholder are not held by or on behalf of a US Holder (as defined in the Articles of Association). The directors may require a US Holder to sell its shares to a non US resident, failing which the Parent Company may effect a sale of such shares. The directors may refuse to register a transfer by a US Holder where it is made to a US resident.
The aggregate fair value of the dated loan capital, subordinated Sterling perpetual guaranteed bonds, and subordinated guaranteed perpetual notes at 31 December 2008 is £1,079m (2007: £1,234m).
Notes to the financial statements continued 20. Insurance contract liabilities continued Provision for losses and loss adjustment expenses The following changes have occurred in the provision for losses and loss adjustment expenses during the year: Provision for losses and loss adjustment expenses at 1 January 10,344 9,821 Claims losses and expenses incurred 4,205 4,044 Total claims payments made in the year, net of recoveries (4,747) (4,145) Gross portfolio transfers, acquisitions and disposals (12) 204 Exchange adjustment 1,362 421 Other movements 68 57 Transfer to non current and disposal group assets held for sale – (58) Provision for losses and loss adjustment expenses at 31 December 11,220 10,344
Claims development tables The tables below present changes in the historical provision for losses and loss adjustment expenses that were established in 2001 and the provision for losses and loss adjustment expenses arising in each subsequent accident year. The tables are presented at current year cumulative average exchange rates and have been adjusted for operations that have been disposed of.
The estimated provision for ultimate incurred losses changes as more information becomes known about the actual losses for which the initial provisions were set up and as the rate of exchange changes. The 2008 redundancy/(deficiency) represents the claims development of earlier accident years in the current accounting period.
Estimate of cumulative claims At end of accident year 9,457 3,229 3,168 2,639 2,790 2,464 2,802 2,557 One year later 10,029 2,993 3,001 2,427 2,710 2,488 2,819 Two years later 10,230 3,077 2,889 2,253 2,613 2,406 Three years later 10,553 3,047 2,778 2,179 2,498 Four years later 10,882 2,976 2,702 2,107 Five years later 11,349 2,944 2,650 Six years later 11,213 2,912 Seven years later 11,005 Claims paid One year later 3,084 1,290 1,175 900 1,197 1,014 1,311 Two years later 1,554 460 351 299 349 376 Three years later 1,268 310 240 207 199 Four years later 789 205 174 158 Five years later 522 111 116 Six years later 407 88 Seven years later 359 Cumulative claims paid 7,983 2,464 2,056 1,564 1,745 1,390 1,311 2008 redundancy/(deficiency) 208 32 52 72 115 82 (17) 544 Reconciliation to the balance sheet Current year provision before discounting 3,022 448 594 543 753 1,016 1,508 2,557 10,441 Exchange adjustment to closing rates 999 Discounting (717) Annuities 497 Present value recognised in the balance sheet 11,220
Estimate of cumulative claims At end of accident year 7,380 2,534 2,314 2,139 2,321 2,332 2,399 2,343 One year later 7,660 2,479 2,317 2,014 2,178 2,300 2,394 Two years later 7,788 2,481 2,235 1,836 2,098 2,221 Three years later 8,181 2,462 2,129 1,768 2,030 Four years later 8,229 2,382 2,072 1,712 Five years later 8,699 2,353 2,027 Six years later 8,637 2,322 Seven years later 8,552 Claims paid One year later 2,372 1,036 835 675 887 929 1,068 Two years later 1,213 347 286 247 280 332 Three years later 1,063 254 200 178 161 Four years later 557 166 104 134 Five years later 395 90 88 Six years later 259 72 Seven years later 254 Cumulative claims paid 6,113 1,965 1,513 1,234 1,328 1,261 1,068 2008 redundancy 85 31 45 56 68 79 5 369 Reconciliation to the balance sheet Current year provision before discounting 2,439 357 514 478 702 960 1,326 2,343 9,119 Exchange adjustment to closing rates 835 Discounting (671) Annuities 437 Present value recognised in the balance sheet 9,720
22. Borrowings The Group’s borrowings of £300m (2007: £303m) primarily relate to loans from credit institutions under a repurchase agreement. Further information is contained in the risk management section.
At 31 December 2008 total unsecured loans from credit institutions under committed credit facilities of £455m (2007: £500m) were available to the Group. There were no amounts outstanding at 31 December 2008 (2007: £nil). The facility expires in 2013.
To be settled within 12 months 27 13 124 15 To be settled after 12 months 13 6 91 77
(Charge)/credit to the income statement for the year – (48) 31 3 103 49 138 (Charge)/credit to equity for the year (2) 9 - 24 – (7) 24 Net liability on acquisition/disposal of subsidiaries – – 1 1 – (15) (13)
Effect of change in tax rates - income statement – – (3) (1) – 5 1
(Charge)/credit to the income statement for the year – (19) (48) 14 – 120 67 (Charge)/credit to equity for the year (2) (83) – 37 – 11 (37) Net liability on acquisition/disposal of subsidiaries – – – – – 8 8
The aggregate current tax relating to items that were credited to equity is £57m (2007: £3m).
Provisions at 1 January 2008 37 189 Exchange adjustment – 3 Credited 7 29
Deposits received from reinsurers 76 64 Derivative trading liabilities 146 62 Other creditors 480 614 Accruals and deferred income 341 347 Total other liabilities 1,043 1,087
For the two main UK defined benefit schemes, the level of contributions in 2008 were 23% and 22% of pensionable salaries (2007: 23% and 22%). Additional contributions totalling £38m (2007: £86m) were made to the schemes, in accordance with the plan to reduce their funding deficits. Expected contributions to pension and post retirement benefit schemes for the year ending 31 December 2009 are approximately £71m, including a further £33m of additional contributions.
Gains on curtailment – – – (4) Total (included in staff costs) 40 12 52 9
Present value of funded obligations 4,229 232 4,461 5,012 Present value of unfunded obligations 4 71 75 74 Present value of obligations 4,233 303 4,536 5,086
Total assets in the schemes 4,805 237 5,042 5,244 Surplus/(deficit) on continuing operations 572 (66) 506 158
The following is a reconciliation of the Group’s retirement benefit obligations: Retirement benefit obligations at 1 January 5,086 4,838 Current service costs 48 52 Past service costs 23 12 Interest costs 280 243 Contributions by scheme participants 2 2 Actuarial (gain)/loss on obligations (700) 117 Gain on curtailments – (4) Benefits paid (242) (226) Acquisition of subsidiary 2 13 Exchange adjustment 37 39 Retirement benefit obligations at 31 December 4,536 5,086
Expected return on schemes’ assets The weighted average expected return on schemes’ assets across the Group for 2008 was 6% (2007: 6%). The expected return on schemes’ assets are determined for each asset class by considering both market conditions at the opening balance sheet date and any expectations for longer term changes in current returns. All returns are net of investment expenses.
Mortality rate The mortality assumptions are set following investigations of the main schemes’ recent experience by the schemes’ actuaries for the funding valuations. The mortality assumptions adopted for the main UK schemes used the PMA92 and PFA92 mortality tables for males and females respectively, with age ratings to reflect the schemes’ recent experience compared with that expected under these tables.
Commutation Each of the UK defined benefit pension schemes has changed its rules to allow for increased commutation following ‘A day’ in April 2006. The commutation factors are broadly cost neutral (i.e. when valued on the IAS 19 basis, the amount of cash taken is approximately equal to the value of the pension being given up). For this reason there is no change made to previous practice whereby the accounting valuation makes no allowance for commutations.
Post retirement medical benefits The valuation of liabilities for post retirement liabilities in Canada assumes 7% decreasing to 5% in 2017 (2007: 7% decreasing to 5% in 2017).
Sensitivity analysis The discount rate, the assumed inflation rate and the mortality assumptions all have a significant effect on the IAS 19 accounting valuation. A 0.1% increase in the discount rate would reduce the defined benefit obligations in the UK by £68m. A 0.1% increase in the inflation rate assumption would increase the defined benefit obligations in the UK by £59m. An increase of one year in life expectancy would increase the defined benefit obligations by approximately £124m.
Aggregate of the current service cost and interest components of net periodic post employment medical costs 0.5 0.4 0.4 0.3 Accumulated post employment benefit obligation for medical costs 3.5 3.9 2.8 3.1 27. Share based compensation The Group has four types of share based payment plans which are settled in the form of ordinary shares: the Executive Share Option Scheme; the Sharesave Plan; the Share Matching Plan; and the Long Term Incentive Plan. Dilution levels for all schemes are held strictly within Association of British Insurers limits.
Executive Share Option Scheme The Group operates an Executive Share Option Scheme, which provides options to purchase ordinary shares to officers and other key employees at prices not less than the fair value of the ordinary shares at the date of grant.
The following share options under the Executive Share Option Scheme are outstanding or exercisable at 31 December: Options outstanding
Notes to the financial statements continued 27. Share based compensation continued Options exercisable
Sharesave Plan Under the Group’s Sharesave Plan (savings related) eligible employees can receive options to purchase ordinary shares at a price equal to 80% of the fair value of the ordinary shares on the date of grant. All options vest either three or five years from the grant date and expire six months after vesting. The number of shares available for purchase from the plan by each participant is limited to the whole number of shares purchasable from the aggregate value of the individual’s savings contract upon maturity. An individual’s maximum monthly contribution to all current savings contracts is £250.
Additional information with respect to the Sharesave Plan at 31 December is as follows: Weighted average Weighted average Number of shares exercise price* Number of shares exercise price*
The performance conditions in respect of awards under the Share Matching Plan are described in the footnote to the long term incentive schemes table (audited part) on page 60. Under the plan, Deferred Share awards granted are held in trust for three years and are normally forfeited upon an employee leaving the Group. No further performance conditions apply.
Outstanding Deferred Share awards at 31 December 926,431 2,992,113 Potential Matching Share awards 2,412,825 7,326,649 Total potential share awards outstanding at 31 December 3,339,256 10,318,762
The structure of the plan allows for a number of different types of awards to be made. Voluntary Deferred Shares are purchased by participants from net bonus payable (limited to a maximum value of 33% of net bonus); in addition, for senior executives, the Remuneration Committee may defer a portion of an individual’s bonus (limited to 33% of that bonus) into an award over shares referred to for the purpose of the plan as Compulsory Deferred Shares. Voluntary Deferred Shares are held in trust for three years. Compulsory Deferred Shares are normally forfeited on an employee leaving the Group. No further performance conditions apply. The Remuneration Committee may make a conditional award of shares on a ‘matched’ basis to Voluntary and Compulsory Deferred Shares (‘Matching Shares’) up to a maximum of 2.5:1 and these are normally forfeited on an employee leaving the Group.
Awards of Performance Shares and Matching Shares related to Compulsory Deferred Shares are subject to a performance condition consisting of a combination of a return on equity target and a total shareholder return target (with performance measured by comparison against other European insurance companies) over a single three year performance period. Matching Shares related to Voluntary Deferred Shares are subject only to the return on equity performance condition. Restricted Shares are not subject to performance conditions. All awards vest on the third anniversary of the date of grant to the extent that the performance conditions have been met. Performance Shares and Restricted Shares are normally forfeited on an employee leaving the Group.
Notes to the financial statements continued 27. Share based compensation continued
Share awards outstanding at 31 December 11,828,733 2,343,040 5,140,097 15,137,344 34,449,214 Potential Matching Shares awards – 10,148,444 12,850,187 – 22,998,631 Total potential share awards outstanding at 31 December 11,828,733 12,491,484 17,990,284 15,137,344 57,447,845
Potential Matching Shares awards – 5,932,206 7,757,355 – 13,689,561 Total potential share awards outstanding 31 December 8,063,261 7,304,639 10,860,311 9,274,148 35,502,359
Under the Long Term Incentive Plan, the weighted average estimated fair value of each Restricted Share award granted by the Parent Company in 2008 was 116.68p (2007: 140.68p). The weighted average estimated fair value of each Voluntary Deferred Share award was £nil (2007: £nil) and the weighted average estimated fair value of each potential associated Matching Share was 136.50p (2007: 164.00p). The weighted average estimated fair value of each Compulsory Deferred Share award was 136.50p (2007: 164.00p) and the weighted average estimated fair value of each potential associated Matching Share was 91.40p (2007: 113.50p). The weighted average estimated fair value of each Performance Share award granted was 92.03p (2007: 112.07p). The total fair value of the awards granted under the plan in 2008 was £24m (2007: £24m).
The Group designates certain forward exchange contracts as hedging instruments against the net investment in designated subsidiaries to reduce further the foreign currency exchange risk exposure. On designation, the interest element is separated from the forward exchange rate and is excluded from the hedge relationship. Effectiveness of the hedge is then measured using the spot rate, which is also the exchange rate used when measuring net investment in the designated subsidiaries. The fair value of the hedging instruments at 31 December 2008 is a liability of £74m (2007: £26m). The hedge ineffectiveness recognised in the income statement during 2008 is £nil (2007: £nil).
United Kingdom Royal Insurance Holdings plc 1 Holding company Royal & Sun Alliance Insurance plc General insurance British Aviation Insurance Company Limited (57.1%) General insurance The Globe Insurance Company Limited General insurance The Marine Insurance Company Limited General insurance Royal International Insurance Holdings Limited Holding company Royal & Sun Alliance Reinsurance Limited General insurance Sun Alliance and London Insurance plc General insurance Sun Insurance Office Limited General insurance Argentina Royal & Sun Alliance Seguros (Argentina) SA General insurance Bahrain Royal & Sun Alliance Insurance (Middle East) Limited E.C. (50.01%) General insurance Brazil Royal & Sun Alliance Seguros (Brasil) SA General insurance Canada Roins Financial Services Limited Holding company Quebec Assurance Company General insurance The Johnson Corporation Holding company Royal & Sun Alliance Insurance Company of Canada General insurance Western Assurance Company General insurance Canadian Northern Shield Insurance Company General insurance Chile Royal & Sun Alliance Seguros (Chile) SA (99.4%) General insurance China Sun Alliance Insurance (China) Limited General insurance Colombia Royal & Sun Alliance Seguros (Colombia) SA (86.7%) General insurance Denmark Codan A/S Holding company Codan Forsikring A/S General insurance Guernsey Insurance Corporation of the Channel Islands Limited General insurance Isle of Man Tower Insurance Company Limited General insurance Mexico Royal & Sun Alliance Seguros (Mexico) SA de C.V. General insurance Netherlands RSA Overseas (Netherlands) BV Holding company RSA Overseas Holdings BV Holding company Netherlands Antilles Royal & Sun Alliance Insurance (Antilles) NV (51.0%) General insurance Norway Duborgh Skadeforsikring AS Insurance brokerage White Label Holding AS Group Holding company Republic of Ireland RSA Insurance Ireland Limited General insurance EGI Holdings Limited Holding company Sweden Trygg-Hansa Försäkrings AB, Publikt General insurance Uruguay Royal & Sun Alliance Seguros (Uruguay) SA General insurance
3. Some subsidiaries have been omitted from this statement to avoid providing particulars of excessive length but none materially affects the results or assets of the Group.
Intangible assets (excluding goodwill) 3 Other assets 3 Cash and cash equivalents 1 Other liabilities (4) Net assets 3 Cash consideration including acquisition costs 26 Deferred consideration 2 Goodwill on acquisitions 25
If the acquisitions had occurred on 1 January 2008, Group net written premiums for the year would have increased by £1m and the Group’s profit after tax would have increased by £nil. The total profit after tax of the acquired entities since the acquisition dates included in the Group’s profit for the period is £1m.
The carrying value of assets and liabilities disposed of were as follows: £m
Salaries and other short term employee benefits 5 4 Bonus awards 4 3 Pension benefits 1 1 Share based awards 6 4
As at 31 December 2008, there was an interest free loan of £5,000 (2007: £nil) outstanding to a member of the key management team under standard terms of the Group’s UK Car Ownership Scheme, which is open to all UK managers within a qualifying salary band.
Investments in associates In 2007 there was an amount owing to Intouch Insurance Group BV of £25m. This was included within liabilities in the balance sheet and was payable as a capital injection. There were no amounts outstanding as at 31 December 2008.
Notes to the financial statements continued 33. Commitments Capital commitments The Group’s significant capital commitments in respect of property and equipment and intangible assets are detailed in the table below: Property and equipment 5 27 Intangible assets 15 18
Bank loan guarantees In Canada, the Group guarantees outstanding loan repayments in the event of bank loan default by broker subsidiaries and special relationship brokers. The bank loan guarantees amount in total to £11m (2007: £8m) and have a term of up to 10 years. It is not anticipated that any of the brokers will default, and full recourse is available on any default.
Operating lease commitments where the Group is the lessee The future aggregate minimum lease payments under non cancellable operating leases are as follows: Land and buildings Other
One year or less 65 58 2 2 Between one and five years 214 192 3 2 After five years 111 134 – –
34. Discontinued operations and non current and disposal group assets and liabilities held for sale Discontinued operations Losses related to discontinued operations were £nil during 2008 (2007: £13m).
An analysis of the result of discontinued operations is as follows: Total income – 26 Total expenses – (26) Loss recognised on completion/writedown – (19) Loss before tax of discontinued operations – (19) Tax on loss on disposal and writedown – 6 Loss for the year from discontinued operations – (13)
We have audited the Parent Company financial statements of RSA Insurance Group plc for the year ended 31 December 2008 which comprise the Parent Company balance sheet, statement of changes in equity of the Parent Company, Parent Company cashflow statement and the related notes 1 to 10. These Parent Company financial statements have been prepared under the accounting policies set out therein.
This report is made solely to the Parent Company’s members, as a body, in accordance with section 235 of the Companies Act 1985. Our audit work has been undertaken so that we might state to the Parent Company’s members those matters we are required to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Parent Company and the Parent Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of directors and auditors The directors’ responsibilities for preparing the Annual Report and the Parent Company financial statements in accordance with applicable law and International Financial Reporting Standards (IFRS) as adopted by the European Union are set out in the directors’ report.
We report to you our opinion as to whether the Parent Company financial statements give a true and fair view and whether the Parent Company financial statements have been properly prepared in accordance with the Companies Act 1985. We also report to you whether in our opinion the information given in the directors’ report is consistent with the Parent Company financial statements. The information given in the directors’ report includes that specific information presented in the financial review, the Group CEO’s business review, the regional business reviews and in the estimation techniques, risks, uncertainties and contingencies that is cross referred from the business review section of the directors’ report.
Opinion In our opinion: The Parent Company financial statements give a true and fair view, in accordance with IFRS as adopted by the European Union as applied in accordance with the provisions of the Companies Act 1985, of the state of the Parent Company’s affairs as at 31 December 2008 The Parent Company financial statements have been properly prepared in accordance with the Companies Act 1985 The information given in the directors’ report is consistent with the Parent Company financial statements.
Amounts owed by subsidiaries 9 1,961 1,273 Current tax assets 6 4 26 Deferred tax assets 6 25 21 Other debtors and other assets 3 2 4
Ordinary Ordinary Capital share share Preference Revaluation redemption Retained Total capital premium shares reserves reserve earnings equity £m £m £m £m £m £m £m
Profit for the year – – – – – 82 82 Dividends – paid (note 7) – – – – – (211) (211) Issued by scrip 19 81 – – – – 100
Parent Company cashflow statement for the year ended 31 December 2008
Changes in the fair value of the investments in subsidiaries are recognised directly in equity in the statement of changes in equity. Where there is a decline in the fair value of a directly owned subsidiary below cost, and there is objective evidence that the investment is impaired, the cumulative loss that has been recognised in equity is removed from equity and recognised in the income statement.
The balance at 31 December comprises: Investment in subsidiaries 4,445 5,208 Loans to subsidiaries 379 379
The directors believe that the methodology used supports the inclusion of the investments in subsidiaries on the balance sheet, at the fair values ascribed to them. The market value of the Company’s ordinary shares at 31 December 2008 was 138.10p. A movement of 1% in the share price would have an impact of £46m on the fair value.
To be settled within 12 months 4 26 – – To be settled after 12 months – – 5 – 4 26 5 –
At the balance sheet date, the Company has unused tax losses of £7m (2007: £7m) available for offset against future profits. No deferred tax asset has been recognised in respect of the tax losses of £7m (2007: £7m) due to the unpredictability of future profit streams. The losses may be carried forward indefinitely.
The aggregate current tax relating to items that are credited to equity is £2m (2007: £4m).
Notes to the separate financial statements continued 9. Related party transactions RSA Insurance Group plc (incorporated in Great Britain and registered in England and Wales) is the ultimate Parent Company of the RSA group of companies.
The following transactions were carried out with related parties: Provision of services and benefits RSA Insurance Group plc provides services and benefits to its subsidiary companies operating within the UK and overseas as follows: Provision of technical support in relation to risk management, information technology and reinsurance services. Services are charged for annually on a cost plus basis, allowing for a margin of 5% (2007: 5%) Issue of share options and share awards to employees of subsidiaries. Costs are charged for annually based on the underlying value of the awards granted calculated in accordance with the guidance set out within IFRS 2.
As at 31 December 2008, there was an interest free loan of £5,000 (2007: £nil) outstanding to a member of the key management team under the standard terms of the Group’s UK Car Ownership Scheme, which is open to all UK managers within a qualifying salary band.
Other transactions Year end balances with related parties are set out below: Receivable from related parties: Receivable from subsidiaries, interest bearing loans 1,595 995 Receivable from subsidiaries, non interest bearing 366 278 Total receivable from related parties 1,961 1,273 Payable to related parties: Payable to subsidiaries, interest bearing loans 345 131 Payable to subsidiaries, non interest bearing 91 101 Total payable to related parties 436 232
Additional loans to subsidiaries of £379m (2007: £379m) as disclosed within note 2 have been made. Of this, £294m (2007: £294m) and £78m (2007: £78m) are subordinated loans on which interest is charged at 8.5% and 6.701% respectively with the remaining loan balance interest free with no specified repayment date.
Royal & Sun Alliance Insurance plc (RSAI), a subsidiary of the Company, has provided guarantees to the Company’s creditors for amounts arising from its loan capital agreements (as set out in note 19 to the consolidated financial statements) and for amounts arising from its committed credit facilities (as set out in note 22 to the consolidated financial statements). The guarantees relating to the loan capital agreements are subordinated to all other creditors of RSAI.
Registered Office and Group Corporate Centre 9th Floor, One Plantation Place, 30 Fenchurch Street, London EC3M 3BD. Telephone: +44 (0)20 7111 7000. Registered in England and Wales No. 2339826.
Please quote the company reference number 0059 and your shareholder account number (on your share certificate and dividend tax vouchers) when contacting or corresponding with Equiniti. (Calls are charged at 8p per minute from a BT landline. Other telephone provider costs may vary.)
Annual General Meeting Ordinary shareholders are invited to attend the Company’s Annual General Meeting (AGM), which will be held at The Queen Elizabeth II Conference Centre, Broad Sanctuary, Westminster, London SW1P 3EE at 11.00am on 18 May 2009. Ordinary shareholders who are unable to attend the AGM to ask a question in person are invited to send the Chairman an email via the Company’s website or to write to the Chairman at the Registered Office address above.
Share ownership RSA is listed on the London Stock Exchange under the code RSA. The average total daily trading volume during 2008 was approximately 18m ordinary shares. The opening market price of an ordinary share on 2 January 2008 was 148.5p and closing market price on 31 December 2008 was 138.1p. The highest daily closing price of an ordinary share was 165.8p on 19 September 2008 and lowest daily closing price was 116.3p on 20 October 2008. Further details of the ordinary and preference shares are found in note 18 on pages 103 to 104.
Tips on protecting your shares Keep any documentation that contains your shareholder reference number in a safe place and destroy any documentation which you no longer need by shredding it Inform Equiniti promptly when you change your address Be aware of dividend payment dates and contact the registrars if you do not receive your dividend cheque, or better still, make arrangements to have the dividend paid directly into your bank account and Consider holding your shares electronically in a CREST account via a nominee.
Amalgamation of accounts Shareholders who receive duplicate sets of Company mailings owing to multiple accounts in their name should write to Equiniti to request that their account be amalgamated.
ShareGift Shareholders with a small number of shares, the value of which makes it uneconomic to sell them, may wish to consider donating them to charity through ShareGift, a registered charity administered by The Orr Mackintosh Foundation, registered charity number 1052686. The relevant share transfer form can be obtained from Equiniti. Further details can be obtained from www.sharegift.org or by calling +44 (0)20 7930 3737.
Disabled shareholders RSA is committed to providing a quality service to all of its shareholders. An induction loop is installed at the AGM venue. Please contact the Company Secretary’s department at the registered office, detailed on page 131, if you require particular assistance.
Announcement of the full year results for 2008, the ordinary final dividend for 2008 and the first preference dividend for 2009
Ex dividend date for the ordinary final dividend for 2008 and the first preference dividend for 2009
Deadline for the receipt of scrip dividend mandates by Equiniti in relation to the ordinary final dividend for 2008