A leading Commercial Lines and a top five Personal Lines insurer in the UK
Leading insurer in Argentina and a leading Marine insurer in Brazil.
Corporate governance 36 Board of Directors 38 Executive team 40 Directors’ and corporate governance report 55 Directors’ Remuneration report
We cover Down House where Charles Darwin wrote On the Origin of Species.
1996 Sun Alliance Group merges with Royal Insurance Holdings, to become Royal & SunAlliance Insurance Group plc.
We take part in the reconstruction of the Italian city of L’Aquila following it’s earthquake.
Record year for natural catastrophes. RSA’s exposures minimised through prudent use of reinsurance.
We manage the business conservatively ensuring prudent reserving and a low risk approach to our investment portfolio to minimise volatility in earnings and maximise shareholder returns.
We will be disciplined over capital allocation, embedding new measures into the Group to support robust portfolio management decisions.
We distribute products through intermediaries under the RSA brand. Our Direct offering is Johnson
We have a multi-channel distribution model, selling our products through call centres, intermediaries and affinity partners.
In the UK, we are a leading Commercial insurer and a top 5 Personal lines insurer
In Ireland, we operate as RSA through intermediaries and as 123.ie in the Direct market
Our main focus is on Motor, Affinity, Large and Complex risks, Small and Medium Enterprises (SME), and Marine
We have consistently retained close to of our business over the last five years
Our business starts with our customers. Across the world we employ a wide range of distribution strategies tailored to meet the needs of local markets. Many of our markets are dominated by insurance brokers with whom we have built long term relationships based on trust and transparency. We have also developed direct distribution businesses where customers purchase policies over the phone, or increasingly online. We trade through distribution partnerships with retailers, employers and other affinity groups across the world.
Many of our customers have been with us for a long time. Whilst most of our products are short term by their nature, we want our relationship with our customers to develop over many years. We aim to delight our customers with our service to them and ensure that they have every reason to renew their policy each year. Our track record is excellent with customer retention a little under 80% every year for the last five years.
These risks range from a pet insurance policy in the UK all the way to a wind farm in South America. With this understanding, we seek to offer an attractive price to the customer, competitive in the market but which ensures that we can deliver returns to our shareholders.
We reserve prudently, ensuring that we retain reserves which will comfortably cover the likely costs of claims from a policy. This means we are able to release reserves from time to time. This has delivered a consistent track record of positive prior year development into our profits. We expect this to be a consistent feature of our profits in years to come.
Our business is about understanding risk. Inherent within this understanding is the knowledge of those risks which are outside our appetite. When this is the case for insurance risk we seek to manage risk through our selective use of reinsurance. In 2012, we passed £1bn of premiums to reinsurers ensuring that our shareholders are not overly exposed to any single area of insurance risk. Over the years this prudent approach has had material benefits for shareholders and has meant that, despite natural disasters and extreme weather in the locations in which we operate, we have been able to maintain a consistent underwriting margin.
The UK suffered serious flooding in June and July. During these floods we mobilised our Emergency Response Vehicle ensuring that local communities had access to claims handlers “on the ground” and that we could personally visit over 90% of flooded properties within a few days of the flood. This helped our customers return to a normal life as quickly as possible and also helped manage our claims spend.
The delay between receiving premiums and paying claims means that we have a stock of assets which we can invest. We take a very prudent approach to our investment management, seeking to deliver a predictable level of investment income with minimal volatility. We do not seek to invest in high risk or illiquid assets which could restrict our ability to pay claims.
Our £14.3bn asset portfolio (including cash) is invested in a broad range of predominantly sovereign debt and high quality corporate bonds. We keep a portion of our portfolio in cash and have minimal exposure to equities and property. In 2012 this portfolio yielded investment returns of £515m.
We aim to reward shareholders by delivering returns on equity consistently above our cost of equity and through the payment of a sustainable dividend.
8 Chairman’s Statement 10 Group Chief Executive’s review 14 Financial review 18 Scandinavia business review 20 Canada business review 22 UK and Western Europe business review 24 Emerging Markets business review 26 Risk review 30 Corporate responsibility
I am delighted to have been appointed as Chairman of RSA, a business which remains true to its purpose and committed to the principles its founders established three centuries ago.
Today, as a global business operating in 32 countries around the world, we continue to offer our customers the protection they need to grow their businesses and lead their lives.
Appropriate regulation and controls are important, but they come at a cost, which ultimately falls on the consumer and we need it to be both appropriate and proportionate.
Western economies continue to struggle with slow economic growth and ongoing austerity measures. In these times, the need for effective risk management by individuals and companies is as great as ever, creating ongoing opportunities for insurers like RSA.
I have been very impressed by the response of RSA employees on the front line whenever and wherever our customers have needed their support. A determination to help people recover from trauma and business interruptions runs through our operations. All insurers must prove their value by managing risk in good times but above all by the nature and speed of their response in difficult times. The effectiveness of our claims process demonstrates our commitment to the individuals, businesses and communities we protect.
Notwithstanding the challenges that exist, we see significant opportunities for RSA. We are already a long way into the process of reshaping our portfolio in the UK and remediation in Italy which we expect to deliver tangible results in 2013. We have excellent market positions in Canada, Scandinavia and Ireland which will continue to perform in 2013. In addition, we are faced with a wealth of opportunities to deliver growth in premiums and earnings from our Emerging Markets businesses.
The team responsible for delivering the Group strategy has seen some changes during the last year. My predecessor as chairman, John Napier, stepped down on 31 December 2012 after a decade in office. RSA was transformed during this time and I would like to pay particular tribute to John for all he did to help achieve this. The Company is significantly stronger because of his efforts.
We have excellent market positions in many parts of the world. We are doing exactly what is necessary to position ourselves for the next stage of our journey, as we build on our growth ambitions overseas and our long-term success story in our mature markets.
The Board has taken the decision to recommend rebasing the dividend, reflecting the expectation of a prolonged low bond yield environment and greater opportunities to develop and grow the business outside the UK. The proposal is to reduce dividend payments by 33% in 2013, therefore we anticipate recommending a similar change to the interim dividend. This is the correct and prudent long-term decision for the business and will enable the Group to realise its medium-term growth opportunities.
2012 RESULTS In 2012, net written premiums rose by 5% to £8.4bn, and the underwriting result was unchanged at £375m. The combined operating ratio was 95.4% (2011: 94.9%). The investment result was down 11%.
We have also taken action to exit or rationalise those markets where our performance has fallen short of expectations. During the year we closed our business in the Czech Republic and announced the sale of our business in the Dutch Caribbean.
The reshaping of our UK business and the remediation of our Italian business are on track, but more remains to be done. The plans we have in place are the right ones and we will be pushing hard to deliver on these and ensure all parts of the business make the contribution they should to our overall performance.
All regions have worked hard to put the customer at the heart of everything we do. The Think!Customer programme in Scandinavia has had noted success and we are ensuring relevant lessons are learned across the organisation.
Looking ahead, I am confident about what we can achieve and how we can ensure the business continues to thrive.
OUR STRATEGY I am confident in our ability to deliver sustained outperformance in our local markets and generate continued profitable growth. We have built a diversified general insurance business with strong technical capabilities, a track record of delivering operational efficiencies and a justified reputation for the quality of our people. We have a strong, experienced management team which provides continuity and determination to build on our track record of success.
Can we differentiate ourselves, either through a strong niche positioning or through leveraging capabilities from across RSA?
LEVERAGE OUR GLOBAL SPECIALTY CAPABILITIES One of the main sources of competitive advantage for RSA is our strong technical capability, particularly in specialty lines. Over the years we have recruited high quality technical specialists and have invested in ‘best-in-class’ training and development. We have a reputation for disciplined, high quality underwriting and claims management.
We have also used our internal Economic Capital model for a number of years as a key complement to traditional regulatory measures of solvency and financial strength and have also been using it to measure the return on capital allocated for each business. We will be increasingly using it in the future as a core element of our Group and business strategy process to test investment and portfolio management decisions and to evaluate business performance. As previously, where I see underperforming businesses or lines of business with no viable routes to outperformance we will take decisive action.
OUTLOOK AND FINANCIAL TARGETS We are excited by the prospects for the business. We expect to continue to see good growth in net written premiums in many parts of the business. In Emerging Markets we see opportunities to grow our franchises in Latin America, Asia, the Middle East and Central and Eastern Europe both organically and inorganically. Through organic growth, we expect to increase the size of our Emerging Markets business, including our associates, by 2015 to £2.2bn of net written premiums, creating operational leverage which we expect to deliver an improving expense ratio with a consequent improvement in the combined ratio.
In the UK, we expect underlying premium growth in our chosen segments to be broadly offset by reductions in less profitable business lines. This will lead to improving combined ratios in the UK over the next three years. Italy is on track to be at break even during 2013 and Ireland will continue to grow premiums and underwriting profit.
Overall we expect to achieve a combined ratio of better than 95% in 2013 and return on equity of 10%-12%.
RSA’S PEOPLE One of our core strengths remains our people. Staff engagement and effective recruitment, retention and reward strategies will remain critical to our future success.
During 2012 Richard Houghton took up his position as Group Chief Financial Officer while I further strengthened my executive team with the appointment of Caroline Ramsay as Group Chief Auditor.
When added together, our businesses create a compelling story for investors in RSA. I’m confident in our growth prospects. The actions we are taking will continue to grow premiums and drive improvements in the combined ratio which, together, will lead to good earnings growth. I’m looking forward to the opportunities ahead of us. We will take the Company from strength to strength.
OPERATING RESULT The operating result of £684m (2011: £727m) was down 6% primarily due to reduced investment income driven by lower yields. The result was also impacted by adverse weather in the UK and Italian earthquakes in the first half.
The current year result again benefited from continued rate and management actions of around £200m, which is ahead of claims inflation, of around £150m. Large losses represented around 7 points of the loss ratio, in line with the prior year, and included the Italian earthquake losses in the first half. Weather accounted for around 2 points of the loss ratio, broadly in line with 2011 including the UK floods and severe winter weather in the first half.
“I am confident that we can deliver continued premium growth together with improving underwriting profitability”
Investment income of £515m was down by 11% as our fixed income investments continue to mature and are reinvested at lower yields. On a like-for-like basis, the reduction is about 7% after adjusting for last year’s one-off property income of around £25m. The average underlying book yield on the fixed income portfolio was 3.6% compared to 3.9% during 2011. Reinvestment rates in the Group’s main bond portfolios at 31 December 2012 were around 150bps lower than the underlying portfolio yield.
Other operating activities Other operating activities of £122m were 8% lower than last year and included central costs, investment expenses and the ongoing investment in our associate in India and our direct operations in Central and Eastern Europe.
Tax The tax charge was £128m and represents an effective rate of 27%.
Profit after tax Profit after tax was down by 18% to £351m and the underlying return on average equity was 10.1% (2011: 11.6%), with the movement on 2011 predominantly reflecting the lower investment result.
The fixed interest portfolio is concentrated on high quality short dated assets, with 98% of the bond portfolio investment grade, and 69% rated AA or above. The bond holdings are well diversified, with 75% invested in currencies other than Sterling, and 64% invested in non government bonds (31 December 2011: 60%).
* In 2012 the consolidated management income statement was restated to exclude realised and unrealised gains from the operating result. These are now included in Other movements.
In 2013, we will continue to follow our high quality, low risk strategy. Given current portfolio disposition and market levels further increases in bond duration and non government bond holdings are likely to be modest. We will, however, continue to seek opportunities to enhance yield within our low risk framework and would anticipate income of around £470m in 2013. We expect the fall in investment income to be less severe in subsequent years.
Our Economic Capital surplus remains strong. When calibrated to a probability of insolvency over one year consistent with the expected Solvency II calibration of 1 in 200 years, our ECA surplus was £1.2bn (31 December 2011: £1.2bn). When calibrated to Standard & Poor’s long-term A rated bond default curve, equivalent to a probability of insolvency over one year of 1 in 1,250, our ECA surplus was £0.7bn at 31 December 2012 (31 December 2011: £0.8bn).
The movement in the year of the latter measure reflects the decline in risk free yields and the impact of goodwill from acquisitions which have been largely offset by capital generated, the impact of the proposed new dividend policy and improved modelling of our assets in run off.
The overseas pension deficit has deteriorated by £21m over the same period to a deficit of £96m principally due to a fall in the discount rate on the Canadian pension scheme reflecting the AA corporate bond yield in Canada.
The final dividend, together with the interim dividend of 3.41p (2011: 3.34p) paid on 23 November 2012, will make the total distribution for the year 7.31p (2010: 9.16p).
SUMMARY Despite the challenging macro-economic environment and some natural losses from weather and earthquakes, 2012 was a good year for the Group. We are in a robust financial position and well placed to execute our strategy. Market conditions are expected to again be difficult in 2013, with investment yields remaining at historical lows and subdued economic growth in some of our markets. Despite this, the Group expects to deliver good premium growth, a COR of better than 95%, investment income of around £470m and return on equity of 10-12%.
STRATEGY Our Scandinavian business has been a key driver of the Group’s profitability in recent years. Going forward, we expect to continue to deliver a strong underwriting result. We will protect our leading positions in areas such as Motor, Personal Accident and Renewable Energy while improving profitability in Denmark and Norway. Scandinavia also plans to fully capitalise on the opportunities in Specialty and with global brokers that arise from being the only scale player in the region with a global presence.
Reflecting this, the strategic priorities set by the management team include: Increase growth in each of our businesses and strengthen profitability, with a particular focus on Care, Personal Accident and Specialty; Improve the customer experience. Driving improvements to our processes and communication will enable us to retain our existing customers and improve our customer proposition to target new ones; Improve operational efficiency. We are investing in new policy administration and claims systems and online capabilities that will make it easier for customers to deal with us. This will also allow us to simplify the business and further optimise our expense base; Invest in our people. We will measure and improve our overall people engagement. We will also invest in leadership and technical training for our people.
SWEDEN Our Swedish business continues to deliver a strong result with 3% growth at constant exchange (flat as reported). At the same time we managed to improve our already strong current year underwriting result by 5%. These results are driven by our Personal lines products – Motor & Personal Accident, but we are also seeing a significant improvement within our Commercial lines products – particularly in Liability.
MARKET CONDITIONS Throughout 2012 trading conditions remained challenging in Scandinavia – especially in Denmark and Sweden. However, the Scandinavian insurance market remains stable and attractive.
We are focused on profitability and cost reduction, and are continuing to deliver strong profitability and with good top line momentum in our target growth areas.
Underwriting result (£m) CUSTOMER We are committed to embedding our Think!Customer strategy and a customer mindset in all parts of the business.
A key focus of our strategy is to understand the customer’s needs and requirements and adapt our service and propositions to meet their expectations. We have refreshed the content of customer letters, our online sales flow has been improved, and the phone systems in our call centres have been updated to improve our customers’ experience. Another example of our customer focus is the alignment of the Corporate Responsibility agenda with claims prevention activities such as free SMS alerts about extreme weather and have formed strategic partnerships with the providers of security alarms and drainage contractors.
We are seeing positive results in our customer surveys as well as improved retention rates.
PEOPLE Staff engagement is important to the success of our business. In 2012, we continued to invest in a wide range of technical, leadership and change management training for our staff and we have had great involvement in activities such as ‘customer’ and ‘health’ weeks.
Our staff engagement survey showed a significant improvement again this year, and the Scandinavian business now has a very strong engagement score.
Personal lines growth of 3% at constant exchange (down 1% as reported), driven by Household, Personal Accident and Danish Motor
We are Canada’s third largest general insurer, and with our latest acquisition, L’Union Canadienne, the insurer with the broadest national Personal and Commercial proposition
STRATEGY In Canada, our strategy is to deliver sustainable, profitable growth: Maintaining leading positions in segments where we have strong technical knowledge and expertise; Extracting value from strategic acquisitions that provide us with scale in desirable geographic and specialty markets; Delivering differentiated propositions and targeted solutions to our broker partners and customers; and
2012 OVERVIEW In 2012, our Canadian business continued to perform strongly through a combination of acquisitions and organic growth despite challenging market conditions.
Commercial lines Net written premiums grew by 11% (at both reported and constant exchange) to £524m as we continue to extract value from the GCAN acquisition, with significant new business growth within the Large Commercial & Specialty division, specifically property, despite continued soft market conditions.
New business growth in Ontario and Western regions also added to the year’s result, as did solid retention across Motor and our Equipment Breakdown offering.
We continue to see positive results from our small-business e-trading platform launched in 2011, with robust new business growth and significantly improved response times for our broker partners.
In terms of underwriting result, Commercial lines delivered another strong performance with an underwriting profit of £55m (2011: £42m) and a COR of 88.2% (2011: 89.8%) driven primarily by Large Commercial & Specialty.
Personal lines Net written premiums grew 7% at constant exchange (8% as reported) to £1,090m driven by strong growth across both Johnson and Personal Broker. Personal lines delivered a COR of 96.1% (2011: 92.3%) and an underwriting result of £43m (2011: £74m), including the identification and resolution of adverse development in bodily injury and accident benefits reserves in the pre-reform Johnson Ontario motor book.
Personal Broker Premiums grew by 9% at constant exchange (10% as reported), largely driven by our expansion into Quebec and growth in the Ontario and Western regions of our property portfolio.
Johnson Growth of 5% at constant exchange (6% as reported) to £587m, was due largely to strong performances in the Atlantic and Western regions, the completion of two acquisitions, and the addition of 23 new affinity partners during the year.
CUSTOMER We saw excellent growth with global brokers in 2012, and the launch of our recognition programme for top national brokers has gained traction in securing volume. At Johnson, we continue to make strategic investments to influence our customer and eBusiness strategies, building on an already exceptional customer service platform.
TECHNICAL EXCELLENCE In 2012, we launched the Canadian Technical Academy to ensure we have consistent technical capabilities across the business to sustain profitable growth.
We continue to leverage our technical expertise across Large Commercial & Specialty to deliver targeted segmentspecific solutions to our clients.
OUTLOOK 2012 was another strong year for us in Canada. With the completion of L’Union Canadienne we solidified our position as the third largest insurer in Canada and diversified our geographic footprint. Successfully integrating and driving value from this acquisition will be a priority in 2013, as is fully leveraging the competitive advantage of our multi-channel distribution strategy. We are confident of delivering another year of strong growth and sustained profitability in 2013.
NWP growth of 8% to £1.6bn at constant exchange (9% as reported)
Commercial lines NWP growth of 11% (at both reported and constant exchange) as we continued to extract value from our GCAN acquisition in 2011
UK Commercial Net written premiums rose by 6% to £1.7bn, with strong growth of 9% in Marine offset by targeted reductions in areas where we could not achieve the right levels of profitability. Growth of 5% in Motor reflects the phasing of a large three year contract and excluding this contract, premiums reduced by 12% with exits underway in Risk Solutions Motor, Motor Trade and the sale of Fyfe, a specialist motor trade intermediary business, which will further reduce premiums in 2013.
“We have made good progress in 2012, growing strongly in areas where we can achieve sustained profitability. As we continue to take action to remediate key portfolios we expect to deliver improved profit”
Italy We have had a challenging time in Italy with difficult market conditions. As we have focused on remediation we have reduced net written premiums by 18% to £200m at constant exchange (down 23% as reported), with targeted reductions in Motor and cancellation of contracts with underperforming agents. An underwriting loss of £51m was an improvement on 2011 (£63m), and was achieved despite the two earthquakes in May and severe weather. We expect to break even during 2013.
MARKET CONDITIONS The UK, Italy and Ireland are some of the Group’s most competitive markets, with significant economic pressures on consumers and a tough business environment. Price comparison sites grew in Pet, Home and Motor in the UK, with new entrants during 2012. Commercial lines and Motor are challenging across the markets with the soft pricing environment continuing.
CUSTOMER Our customers are at the heart of everything we do, and with one of the wettest years on record in the UK, they have relied on us more than ever. Over 36,000 weather claims were received in 2012. In the aftermath of a number of floods, we deployed our Emergency Response Vehicle providing support for our customers and the local community on occasions when they needed us most. Where the circumstances were appropriate, innovative drying techniques were deployed enabling our customers to move back into their homes only 20 days after the flood waters receded.
OUTLOOK During 2012 we have taken strong management actions to remediate portfolios which are underperforming. We have focused on the areas we said we would, delivering an improvement to the underlying result. Growth has been achieved in those areas where we believe we can achieve sustained profitability.
MORE TH>N named as Pet insurance provider of the year for 3rd year running.
Net written premiums reduced by 3% due to actions to achieve profit over volume in Personal Motor
Growth in strategic areas; 3% in Household and 18% in Pet
NWP decline of 18% at constant exchange as we reduce exposure in Personal Motor
Excluding the impact of two earthquakes in May, losses were significantly reduced in 2012 and we expect to breakeven during 2013.
Emerging Markets operates across 20 countries in Latin America, Asia, the Middle East and Central and Eastern Europe
In 2012 we have taken further actions to implement our strategy.
We are redeploying capital with the sale of our subsidiary in the Dutch Caribbean and our withdrawal from the Czech market.
Throughout the year we have continued to maintain underwriting discipline despite intense competition. Where necessary we have taken strong pricing action to achieve our target returns and we have maintained a tight grip on expenses. Our underwriting result of £33m (2011: £3m) reflects a strong performance in all three regions and an improvement in our expense ratio of 1.2%. The COR of 96.9% (2011: 98.7%) reflects the improved underwriting result.
Central and Eastern Europe Premiums were up by 9% to £224m at constant exchange (2% as reported). Growth continued in the Baltics during 2012 and our Direct businesses in Poland and Russia once again delivered strong top line growth of 13% at constant exchange (5% as reported).
PEOPLE Talented and engaged people are the key to our success. We were recognised in Gallup’s database of companies as achieving world class engagement in 2012. We also received a number of external awards including ‘Great Place to Work’ awards in Latin America (Chile (14th), Colombia (5th), Brazil (44th) and LATAM (14th)), our Lithuanian business received 7th place in ‘Best Employer Award 2012’ in Central and Eastern Europe and Mexico achieved a Top Companies award (14th place).
We remain committed to international mobility to give our developing talent the opportunity to gain experience in other markets and support the accelerated deployment of capability from developed markets. This can take the form of shortterm secondments as well as longer-term transfers. We currently have 18 staff assignments outside of their home country across Emerging Markets.
On claims, we have benefited from procurement initiatives, claims file reviews and salvage processes. Investment in technical training continued with senior underwriters participating in advanced technical training programmes and underwriting networks with their counterparts from across the RSA Group.
We will continue to invest in our chosen markets and remain committed to achieving our net written premium target of around £2.2bn by the end of 2015.
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.
RISK MANAGEMENT We manage risk to minimise losses and take opportunities to invest appropriately in profitable growth.
GROUP RISK APPETITE The Group risk appetite is set and monitored at a Group, regional and business level, is reviewed annually, approved by the Board Risk Committee and signed off at the Group Board. It sets business volumes for certain higher risk insurance classes, stipulates loss retention limits, reinsurance protection, targets for credit rating and solvency margins.
Development and maintenance of a Risk Management System within which the Group policies and minimum standards are set
During the year we have maintained our focus on risk management, strengthening and developing our processes, controls and capabilities across the Group through the following activities: Organisation and Culture
Risk management in the Group strengthened by the appointment of a Group Chief Risk Officer to the Executive Committee
A continued evolution of our Risk Management System to ensure compliance with Solvency II regulatory environment.
Extended Stress and Scenario Testing programme across all EEA legal entities, enabling the Group to identify potential risks and their impact, calibrate risk appetite, help to validate the Internal Model
Delivery of an Emerging Risk profile to the Board Risk Committee that included key themes such as: – Eurozone Crisis – Slow down of global growth engines – Changing attitudes of regulators to harmonisation of financial services regulation.
Strong culture Board set ‘tone from the top’ of open communication and engagement
REINSURANCE RISK Our reinsurance buying and management expertise has allowed us to manage our insurance exposure and losses such as those arising from natural catastrophes during 2011 and 2012.
OPERATIONAL RISK We have completed various Group-wide assessments to strengthen our operations.
Pricing, acceptance and management of risks arising from our contracts with customers
Portfolio classification that tracks trends and performance of individual insurance portfolios
Scenario modelling that is appropriate for the size and complexity of our portfolios
Scenario analyses to assess operational events that have occurred elsewhere and potential exposure to the Group
Requirements to maintain a minimum level of cash or highly liquid assets
Inability to charge adequate rates places downward pressure on operating results.
Action taken to mitigate falling yields include increasing holdings in non government bonds, property exposures and bond duration
Underwriters are licensed only to write risks within specified limits based on their own experience
Diversified portfolio providing exposure to markets at different levels of development and insurance cycle
Our CR programme is designed to address the environmental, social and governance issues considered most relevant to our industry. During its first seven years it has supported the sustainable growth of our business, engaged our employees, minimised our environmental impacts and made a positive contribution to the communities in which we operate. The programme has been recognised by a number of external bodies: in 2012, we retained ‘Platinum’ status in Business in the Community’s annual CR index, remained ranked as ‘Prime’ by Oekom and in the Carbon Disclosure Project (CDP), FTSE4Good and Dow Jones Sustainability Indices.
We also benchmarked our current progress to understand better our strengths and weaknesses, assessed socio-economic and environmental trends and how they could impact on our business and carried out an extensive stakeholder-engagement exercise.
We are committed to managing our business in a responsible and ethical manner
Governance Our CR programme is underpinned by a robust internal governance structure and policy framework. Ultimate responsibility rests with our Group Chief Executive, and in 2012, we introduced a Group CR Committee and Sub-Committee Working Groups to ensure accountability and delivery across business lines and regions, supported by our internal CR functions. Our CR policies also form part of our broader risk and governance framework. Every region is required to report any breaches on a quarterly basis, with compliance reviewed by the Group Executive Committee, Group Board and internal risk function.
In the UK our activity focused on our ‘Fit to Drive’ campaign. This aims to raise awareness of the dangers of driving with poor vision as well as the importance of having regular eye tests and calls for changes to the way drivers’ eyesight is tested.
We commissioned Deloitte to produce a cost-benefit analysis of our proposals and launched the findings at an event in the Houses of Parliament. Our research found that road crashes caused by poor driver vision cost an estimated £33 million a year and result in nearly 2,900 casualties. In comparison, our recommended approach is estimated to generate net savings to the UK economy after one year, increasing to £14.4 million by year ten. As part of the campaign we also held a series of free eye-health screening sessions for employees in offices throughout the country. We will continue to promote this important road-safety issue in 2013.
Our child road-safety education programme in the UK reached more than 40 primary schools (5,000+ children) nominated by our employees. In early 2012, we extended the programme to schools in Bahrain and Singapore.
Community Investment Our community strategy remains focused on the issues that are important to our stakeholders. We seek to make a positive contribution to society and our local communities through our products and services as well as through our charitable activities. These include financial contributions, gifts in kind and the support of our people. RSA employees from all over the Group are actively involved in fundraising and volunteering to address issues relating to financial inclusion, unemployment, poverty, education, crime reduction and health.
A total of 1,651 (2011: 5,200) volunteers contributed 7,776 hours (2011: 17,000) of time to local charities. We donated £1.6m (2011: £2.6m) through corporate donations to our charitable partners and our employees raised £0.15m (2011: £0.25m) for their chosen charities. Volunteering and charitable donations were lower in 2012 than previous years as a result of a change in the way we define volunteering and fundraising hours. In addition, 2011 saw a spike in activity co-ordinated around an Arctic Challenge programme.
In Latin America, staff made donations of time, cash and gifts in kind to orphanages and schools as well as helping build accommodation for the homeless. Activity in Italy included fundraising and volunteering in the aftermath of the earthquake in Emilia to support the community affected.
In the UK we work with partners to address youth unemployment and employability. We have a long-standing relationship with Careers Academies UK, which works with schools, colleges and business to raise the aspirations of 16 to 19-year-olds. Since 2008, over 100 RSA employees have become ‘Partners in Business’, volunteering to mentor students. More UK employees will begin their work with students in early 2013.
Risks and Opportunities Our long-term international partnership with WWF continues to help integrate environmental considerations into our business. In 2012, we undertook research with WWF into how changing sea ice distributions could affect shipping routes and present new risks to the sensitive environment within the Arctic Circle and commissioned research into global environmental systemic risks.
In Denmark, we work with existing suppliers to help our customers save energy and reduce CO
Greenhouse gas emissions for RSA Insurance Group for 2012 (Tonnes of CO
Geographical breakdown of greenhouse gas emissions for 2012 (Tonnes of CO
emissions relative to the value of our net written premiums by 2020 (based on 2006 levels).
We continue to monitor environmental data across the Group in order to meet reduction targets. In 2012, we focused on consolidating more local office data into the Group collection process. Combined with working with our third party suppliers to improve the accuracy of the data provided, we have noted an increase in our waste production. We remain committed to monitoring, targeting and reducing all our impacts across the Group.
Our Supply Chain We work closely with our business partners and intermediaries to grow a successful business while reducing our collective environmental and social impact. In the UK, we asked a number of our suppliers about their management of CR issues and engaged in active dialogue to improve standards. We also held our second supplier workshop to discuss our approach to CR and what we expect from them. Our UK business is actively working to minimise energy consumption in our claims supply chain through investigating new technologies and changing processes. In Scandinavia, we refreshed our supplier codes of conduct, ensuring strong action on environmental and social issues.
In 2012, we worked with WWF and Mercer to understand how environmental, social and corporate governance issues are or can be integrated into fixed-income investment pricing and assessment. This research will be shared with our investment team and pension-fund trustees.
For further information on Corporate Responsibility, please email corporate. responsibility@gcc.rsagroup.com or to see the full Corporate Responsibility Report, visit www.rsagroup.com.
L’Union Canadienne acquisition In October 2012 we completed the acquisition of L’Union Canadienne (UC), Quebec’s third largest intermediated Personal lines insurer. The addition of UC builds on RSA’s 160 year presence in the province of Quebec, positioning RSA as a top five insurer in that province in addition to solidifying its position as the third largest P&C insurer in Canada. As the second largest private insurance market in Canada, and the most profitable P&C market in the country, Quebec presents significant opportunities for us to grow our business. UC comprises around 70% Personal lines business with a strong focus on Motor.
Executive Director in October 2011. Alastair retired from KPMG in March 2011. In the last 20 years of his 36 year career with the firm, in the UK and overseas, he led their financial services team in Scotland with a primary focus on insurance and investment management.
Director since January 2007. Previous roles include 17 years with the National Westminster
Lanschot, a Dutch private banking and asset management firm, Chairman of the Monitoring
& Company, with roles including Co-leader of the Global Marketing and Sales Practice and
Supermarkets plc, Senior Independent Director of Rexam plc, Director of Shoppers Drug Mart
The Centre for Advanced Human Resources at Cornell University Advisory Board, IMD
Non-Executive Director of Pendragon plc and Consultant to Ernst & Young LLP.
Rowan was appointed to the position of President & CEO of RSA Canada in
Canadian Board of Directors. He is also a member of the Group Executive
Finance and has worked in a variety of roles across the Group. In 2006 she was appointed as Human Resources Director for the Emerging Markets Region. In 2008, she was promoted to UK Human Resources
Director. Prior to working at RSA, Vanessa was HR Director – Global Retail at Lego and before that Head of HR for Gap, the international clothing retailer.
Executive Directors whose biographies are on pages 36 to 37 and the following senior executives:
David spent two years consulting to blue chip and government organisations.
retail business. Before joining RSA, Mike worked in the energy, telecoms and retail sectors, beginning his career at WH Smith
Emerging Markets in 2006 and the business has since more than doubled in size. He has over 20 years’ senior management experience in the financial services sector including three years at AXA and ten years at GE Capital, including work in Asia and
Caroline has been with the Group since 2007. She was appointed Group Chief
Director and UK Finance Director. Prior to joining RSA, Caroline held a number of finance roles at Aviva and spent 12 years at KPMG.
Zurich Financial Services where senior underwriting roles included three years as Global Chief Underwriting Officer for General Insurance. Tim has also held senior management roles at AIG and
Provisions of the UK Corporate Governance Code (the Code) with the exception that the former Chairman did not review and agree training and development needs with each Director. It is the intention that each
Director will agree their training requirements with the Chairman in 2013.
Further explanation on how the Main Principles in the Code have been applied is set out below and in the Directors’ Remuneration Report and Group Audit Committee Report as applicable.
The Code is available on the Financial Reporting Council’s website www.frc.org.uk.
The Board is responsible for organising and directing the affairs of the Company in a manner that is most likely to promote its success for the benefit of its members as a whole. Its role is to provide entrepreneurial leadership of the Company within a framework of prudent and effective controls.
There is a schedule of matters reserved for the Board which includes: Strategy and management of the Company, including formal approval of the Group’s overall risk appetite
Financial reporting and controls, including approval of financial statements, interim dividends and recommending final dividends to shareholders
Determining the remuneration policy for the Executive Directors, the Chairman, Group General Counsel and Group Company
Approving the changes to the Board which took place during the year, including the selection of a new Chairman
In addition to the schedule of matters reserved for the Board, each of its Committees, Group Audit, Group Remuneration, Group
Nomination, Board Risk and Group Investment, has written terms of reference defining their role and the authority delegated to them.
Committee Report on pages 52 to 54 and the Directors’ Remuneration
on all material business matters. The Board has a standing agenda of items that are regularly considered which is continually refreshed to include any topical matters that arise.
Board informed of their opinions and observations. When considering matters such as the approval of financial statements and large operational contracts, the Board may delegate authority to a
Committee membership details are set out on pages 36 and 37 and are incorporated into this report by reference. Details of the Directors’ service contracts and terms of appointment, together with their interests in the
Directors and senior management. The Group Nomination Committee is responsible for reviewing the balance of skills, experience, independence and knowledge required by the Board and the senior leadership needs of the Group and makes recommendations to the
Non-Executive Directors are initially appointed for a three year term with an expectation that they will continue for at least a further three year term.
Leading the Board in reviewing the recommended strategic operating plans and budgets
Recommending strategy and objectives to the Board, ensuring implementation in line with agreed business plans and budgets
Reporting to the Board on the executive management of the Company
Assessing risk issues, making recommendations in relation to risk appetite and reporting on risk exposure on a regular basis to the Board
Being available to shareholders if they have concerns which have not been resolved or are not appropriate to be dealt with through contact with the Chairman, Group Chief Executive or other
Chairing the Group Nomination Committee when it is considering the matter of succession for the Chairman of the Board
The Board reviews the membership of its Committees on a regular basis to ensure they remain appropriate. Further details on changes to Board
Further details of appointments to the Board are contained in the report of the Group Nomination Committee below.
The Board considers all the Company’s Non-Executive Directors to be independent in character and judgement. Collectively they contribute to an effective Board with a strong mix of skills and business experience, with each Director contributing significant weight to business decisions.
The Chairman’s letter of appointment anticipates an expected time commitment involving attendance at all Board meetings, the AGM and
Board Committee meetings which the Chairman chairs or of which he is a member, as well as being required from time to time to attend meetings with major shareholders, employees and professional advisers. It is anticipated that this will require a minimum time commitment of two days per week. In addition, the Chairman has agreed as part of his induction, to commit at least fifteen additional business days during which he will meet senior management and visit operations across the Group.
Martin Scicluna, who was appointed as a Director and Chairman with effect from 1 January 2013, is also Chairman of Great Portland Estates plc and is a Non-Executive Director and Chair of the Audit Committee of Lloyds Banking Group plc. The Board is satisfied that these commitments are not a constraint on the Chairman’s ability to carry out his duties. During 2012, the former Chairman John Napier was also
Chairman of Aegis Group plc and the Board was satisfied that his other commitments did not interfere with the performance of his role.
On appointment to the Board and any Committees, Directors undertake an induction programme and receive a broad range of information about the Company which is appropriate to their existing knowledge and experience. This includes information on the
Board procedures, governance matters and Directors’ responsibilities, along with a series of meetings with members of the Board and
To keep them informed of matters which are material to the Group,
The Group General Counsel and Group Company Secretary is responsible for assisting the Chairman with arranging induction and professional development for the Directors and for bringing all governance matters to the attention of the Board. The Directors have access to the services and advice of the Group General Counsel and
In late 2011 and early 2012, there was an internal review of Board performance, starting with an evaluation of the Committees and concluding with that of the Board. The Board review commenced in
December 2011 and was concluded in January 2012. Further reviews of the Board Committees took place between November 2012 and
January 2013. In light of the impending retirement of John Napier as
The Board evaluation for 2012, which concluded in February 2013, was conducted by way of a structured questionnaire. The questionnaire considered the balance of skills, experience, independence and knowledge of the Company represented on the Board, how the Board works together as a unit, its diversity and the effectiveness of the Board as a whole. The evaluation of individual Directors considered whether each Director contributed effectively and continued to demonstrate commitment to the role. Priorities identified by the evaluation for focus in 2013 included a commitment to increasing the diversity of the Board and ensuring appropriate use is made of the Non-Executive Directors’
skills both inside and outside formal meetings, along with support for tailored training programmes. The evaluation confirmed each Director continues to be an effective member of the Board.
Remuneration Committee also conducted evaluations of their performance during 2012. Further details of each of these reviews can be found in the relevant Committee reports.
In 2013, the Board intends to carry out an external evaluation of its performance as recommended by the Code.
Remuneration Committee are set out on pages 52 to 54 and 55 to 71 respectively.
“The Committee is authorised to advise on risk management issues and recommend the Group framework of risk limits and risk appetite to the Board. During 2012 the Committee has reviewed the Group’s material risks in the context of the overall risk strategy and appetite of the Group. The scope of the Committee’s remit includes existing and emerging risks facing the Group in relation to market, credit, liquidity, insurance and operational risk. The Committee is assisted in discharging its responsibilities by the risk function and regional risk committees”
Notes: 1. George Culmer resigned from the Committee with effect from 14 May 2012.
Group Chief Executive and Group CFO. In addition, the Group Chief
BRC agendas may include greater focus on specific risk disciplines or individual insurance portfolios as considered appropriate through pre-meeting discussions between the BRC Chairman and the
Group’s risk profile, identify potential mitigation strategies for such events and act as a validation tool for both the Group’s capital modelling process and its risk appetite.
The BRC has continued to evaluate the impact of scenarios such as a
Euro sovereign debt default and the collapse of the Euro from a Group perspective. In 2012 the programme was extended across our 14
Credit, Market, Strategic and a single Reverse Stress Test. The results demonstrated the Group’s resilience on both an absolute and relative basis to the scenarios considered. The results also allowed for the identification of potential additional management actions that could be taken to protect customers, shareholders and operations.
Group, the BRC monitors emerging risks that could threaten the Group’s position of competitive advantage or successful delivery of strategy to ensure that plans are put in place where possible to mitigate such risks.
Solvency II Steering Committee on the Group’s preparation for the implementation of Solvency II and its impact on the business. Solvency II
is a fundamental overhaul of the regulatory capital adequacy regime for insurers and reinsurers within the EU. The deadline for compliance with
The minutes of the regional risk committees are provided to the BRC
Notes: 1. George Culmer resigned from the Committee with effect from 14 May 2012, before the first meeting of the year.
Chairman, Martin Scicluna, was appointed to the Committee with effect from 8 February 2013 and with effect from 1 March 2013 Jos
The Committee is authorised by the Board to manage all aspects of investment policy and strategy for the Group and provide oversight of the operation of the Group’s investment portfolios within established strategy and risk frameworks. The terms of reference set out the authority of the Committee to carry out its duties. The Committee reviewed its terms of reference during the year and these are available on the Company’s website at www.rsagroup.com.
Strategic themes relating to cash, bonds, equities and alternative yield assets were discussed during 2012, together with options for the Group to enhance its income in an environment of historically low interest rates and bond yields, whilst retaining the high quality and low risk nature of the portfolios. Details of the Group’s investment activities are contained in the Financial Review on pages 14 to 17.
To keep under review the capabilities required by the Board and the leadership needs of the Group
To manage the process of identifying potential Board appointees, seeking advice from external advisers as appropriate for recommending candidates for assessment by the Board as a whole
Directors, with the exception of both the former Chairman and the current Chairman who were independent on appointment.
The terms of reference set out the authority of the Committee to carry out its duties. The Committee reviewed its terms of reference during the year and these are available on the Company’s website, www.rsagroup.com.
During the year, MWM Consulting Limited, an external search agency specialising in the recruitment of Directors, was engaged to assist the
Company. A description of the role and the capabilities required for each appointment were provided to the agency. Reports on potential appointees were provided to the Committee members who, after careful consideration, made a recommendation to the Board. MWM
Consulting Limited is independent and has no other relationship with the Company.
Board the appointment of Richard Houghton as an Executive Director and Group CFO, Hugh Mitchell as a Non-Executive Director and
Chairman of the Group Remuneration Committee and Martin Scicluna as a Non-Executive Director and Chairman of the Company. All candidates were considered to complement the existing skills, experience and knowledge on the Board, with sufficient time to dedicate to the role.
Full details of the activities and duties of the Group Remuneration
The Board attaches considerable importance to its relationships and communication with shareholders. Senior management meet principal institutional shareholders on a regular basis and Non-Executive
Relations team on the views of institutional shareholders. Presentations and meetings are conducted in compliance with the Company’s Inside
The table above shows the holdings of major shareholders notified to the Company in accordance with the Disclosure and Transparency
Presentations are given on the Company’s performance and activities during the year and the financial results of the Company prior to the formal business of the meeting. All Directors are requested to attend the AGM. The Chairman and each Board Committee chairman make themselves available to take questions from ordinary shareholders at the AGM.
At any general meeting, every ordinary shareholder present shall have one vote on a show of hands and on a poll, every ordinary shareholder present in person or by proxy shall have one vote for each share of which he is the holder. Each resolution will be put to a poll at the AGM in 2013.
The results of the vote on each resolution will be announced to the
Legal & General Group plc 136,295,990 3.99 Direct and Indirect 136,295,990 3.99 Direct and Indirect
Standard Life Investments Ltd 152,266,879 4.42 Direct and Indirect 152,266,879 4.42 Direct and Indirect redemption or purchase of shares), or in such other circumstances as the Board shall determine. In any of these situations the preference shareholders may only vote on the relevant resolution and not on all the business of the general meeting.
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 32 countries and provides general insurance products and services in around 140 countries.
Throughout this Annual Report, the Business Review on pages 8 to 33 and the Directors’ and Corporate Governance Report on pages 40 to 54, the Board seeks to present a balanced and clear assessment of the Group’s activities, position and prospects. Each of those sections is incorporated by reference into the Directors’ and Corporate
in this area. Information on the diversity of the Group’s workforce can be found in the Corporate Responsibility Report. The 2013
Corporate Responsibility Report will be published in May 2013 and will be available on the Company’s website, www.rsagroup.com.
The Group is committed to fostering a constructive relationship with recognised independent trade unions, ensuring a regular and open dialogue on business issues and early consultation on changes affecting the workforce. In the UK, Unite is formally recognised through a partnership agreement which covers collective consultation and bargaining on behalf of non-management employees. The Management
Association (TMA) represents managerial employees under a separate consultative agreement. In Scandinavia, the Group has formal meeting forums with the national unions, where the Group informs and negotiates changes affecting the workforce. Within the Group’s CNS
The Group continues to focus on the training and development of employees in order to ensure they can deliver high levels of leadership, performance and customer satisfaction. The Group believes it can create competitive advantage by building and maintaining a high performance culture.
Team who are actively involved in the programme and sponsor projects.
The Fast Track programme is aimed at growing emerging leadership talent (employees who are in their second or third role after graduating) who have already demonstrated high performance and leadership ability. The programme is structured to equip the Group’s future leaders with the commercial understanding and leadership capabilities they will need to thrive; exposing them to global networking opportunities, in-depth self-analysis and performance coaching to encourage rapid career development.
In addition to significant investment in development programmes, the Group has robust talent and performance management processes in place to ensure that continual focus on the development of people and acquisition of talent in order to ensure the future proofing of the business. The Group Chief Executive and Executive Team actively manage senior group succession plans and prepare and develop leaders for future roles. In terms of performance management, every employee works with their line manager to create individual performance goals and a personal development plan for the year, which is supported by a journal to review and measure progress.
In 2011, in response to customer and partner demand, the Group created a Global eBusiness Centre of Excellence. This team, having invested in additional capacity and capability, is now delivering market leading online capabilities across the Group. This approach has allowed the Group to start standardising and leveraging our eBusiness proposition globally; for example, a preferred website analytics tool is now deployed in 22 of our worldwide businesses and the skills to design and build market leading websites are now retained in-house. The team works across all 32 countries and in 2012 delivered over 70 eBusiness projects in conjunction with local businesses. To ensure continued capability build and the sharing of skills and expertise, there is a digital training academy to further develop our eBusiness community.
Underpinning all of these development opportunities is the Group’s online ‘Learning Zone’ that was introduced in 2010 and offers a broad range of training and development options. ‘Learning Zone’ is available in 13 languages, across 28 countries and is now accessible to over 22,000 employees worldwide. There are over 2,000 learning resources available as well as thousands of e-books and audio books that can be downloaded to a computer, mobile device or Kindle. To further encourage global collaboration, learning and sharing of ideas, use is made of Webex, Webinar and ‘Connect’ forums.
Group has amongst the highest participation of any client Gallup works with and in 2012, saw its highest participation ever, with 94% of employees completing the survey.
of those eligible to join the plan participate in it, contributing an average of £73.97 per month.
The Group also encourages employees and their families to acquire products at a discounted rate. The Staff Saver Scheme in the UK
Section 417 of the Companies Act 2006 requires the Directors to present a business review in this report. The information that fulfils this requirement can be found on pages 8 to 33, and is incorporated by reference into this report.
Report to include a management report. The information that fulfils this requirement can be found in the Business Review on pages 8 to 33 and the Directors’ and Corporate Governance Report on pages 40 to 54.
The Directors recommend a final dividend of 3.90p per ordinary share to be paid on 24 May 2013 to holders of ordinary shares on the register at the close of business on 5 April 2013, subject to ordinary shareholder approval. This, together with the interim dividend of 3.41p per ordinary share, will make a total dividend for the year of 7.31p per ordinary share.
The preference dividend at the rate of 3.6875% for the period from 1 October 2012 to 31 March 2013 will be paid on 2 April 2013 to holders of preference shares on the register at the close of business on 1 March 2013.
Details of the Company’s share capital, together with details of the movements in the Company’s issued share capital during the year are shown in note 18. The Company has two classes of shares: ordinary shares of 27.5p each and preference shares of £1 each. Each ordinary share carries the right to one vote at general meetings of the Company and no right to fixed income. The rights attaching to the preference shares are detailed in note 18. As at 31 December 2012, the ordinary shares and the preference shares represented 96.6 % and 3.4 %
respectively of the total issued share capital. Directors are still limited as to the number of shares they can allot (save in respect of employee share schemes). The current authority allows Directors to allot securities up to a nominal amount of £323,795,833 and renewal of the
Directors’ authority to allot shares will be sought at the 2013 AGM.
During 2012, the Directors exercised their authority to allot in respect of employee share schemes and the scrip dividend scheme.
The Company operates three employee benefit trusts to hold ordinary shares in the Company which are used to satisfy grants under the
Group’s share incentive schemes and Capita Trustees Limited is the current Trustee of each trust. In addition, a Share Incentive Plan
Alliance ESOP Trust No. 3, the Trustee may have regard to the financial interests of the beneficiaries in exercising its voting rights over the
The Company does not consider that it, or any of its subsidiaries, has any contractual or other arrangements that are essential to the business of the Group that are required to be disclosed pursuant to section 417 of the Companies Act 2006.
In the event of a change of control, agreements may require consideration to determine the impact of any change of control clauses and the Company will take appropriate action to mitigate any risk arising from these events should they occur.
Under the Company’s £500m five year senior committed debt facility, if a change of control occurs, if the majority of lenders require, the facility can be cancelled with immediate effect and all outstanding loans, together with accrued interest, become due and payable.
Group Company Secretary when a conflict of interest arises and the
Articles, the Board may authorise any conflict of interest. Any Director who has declared a conflict shall not count towards the quorum or vote on any resolution to authorise the conflict of interest and, at the Board’s discretion, may be excluded from any meeting at which the conflict is under consideration. Where a conflict of interest is authorised, the
Board may impose such restrictions on the conflicted Director as they deem appropriate, such as excluding the Director from receipt of information or discussions.
None of the Directors had any interest in any other contract with the
Company or any of its subsidiaries during 2012, save as disclosed in the
The Board confirms that it has reviewed the schedule of Directors’
The Company’s Articles may be amended by special resolution of the
The Articles restrict the borrowings of the Company so that the aggregate amount, for the time being, remaining borrowed by the
have the benefit of insurance which provides suitable cover in respect of legal actions brought against them.
In addition, the Company has indemnified the Directors of SAL Pension
“This report sets out the membership and responsibilities of the Group Audit Committee and its key activities in 2012. As in previous years, the Committee has reviewed the Group’s financial reporting, internal control and risk management systems and the independence and effectiveness of the external auditor. In order to assist the Committee in discharging its responsibilities, regular reports are received from the Group CFO, the Disclosure Committee, the Group Chief Actuary, regional audit or management control committees, the external auditor, the Group Chief Auditor and Regulatory Risk & Compliance. The Committee, on behalf of the Board, also led the tender process for the appointment of a new external auditor for 2013, following the impending appointment of Deloitte LLP to undertake additional consultancy work in Scandinavia on our behalf. The Committee has recommended to the Board that KPMG LLP be appointed as the external auditor, which the Board has accepted for submission to shareholders”
Notes: 1. Alastair Barbour became Chairman of the Committee on 1 June 2012.
2. Edward Lea resigned as Chairman of the Committee on 1 June 2012 and continues to serve as a Committee member.
As requested by the UK Corporate Governance Code, the Board is satisfied that all of the members have recent and relevant financial experience. The Group Chief Executive, Group CFO, Group General
The outcomes of meetings are reported to the Board and the
Board receives the minutes of all the GAC meetings. The GAC has unrestricted access to Company documents and information, as well as to employees of the Company and external professional advisers.
Regular reports are received and reviewed by the GAC from the
Disclosure Committee and regional audit or management control committees and in relation to the Financial Control Framework and
Enterprise Risk Management. The GAC members meet privately at the start of each scheduled meeting to discuss issues to be raised with management in the meeting. The GAC holds regular meetings with the
Group Chief Auditor, the Group Head of Regulatory Risk & Compliance and the external auditor without any other members of management being present to allow issues to be raised.
To assist the GAC with carrying out its duties, responsibility for identifying and considering disclosure matters in connection with the preparation of all market releases containing material financial information has been
The evaluation of the GAC, which was conducted by way of a structured questionnaire, included consideration of the composition of the Committee, the number and length of meetings held, the time management of the Committee, the information received by the
Committee and its timeliness and the effectiveness of the Committee’s reviews of specific areas. The evaluation further considered the effectiveness of the Group Internal Audit function, the relationship with the external auditor and with the Board Risk Committee (BRC).
During 2012 the GAC, on behalf of the Board, followed with interest, the progress of the Financial Services Bill through Parliament. Meetings were held with representatives of both the Prudential and Conduct Business
Units established by the FSA in anticipation of their legal separation into two regulatory authorities in April 2013. The GAC also paid close attention to developing EU regulation, in particular Solvency II.
Board and executive management as a part of their ‘close and continuous’ programme.
Deloitte LLP was appointed as the Group’s external auditor in 2007.
The GAC evaluates the tenure of Deloitte LLP annually and is not restricted by any contractual obligations in its choice of auditor. The audit engagement partner responsible for the 2012 audit was assigned in 2012.
The GAC has developed and embedded a policy and procedures to govern the provision of audit and non-audit services provided by the auditor and its associates. A description of the policy and procedures is available on the Company’s website at www.rsagroup.com. During the year Deloitte LLP was engaged as an adviser on a number of occasions.
In order to maintain their independence, such appointments are only made in accordance with the policy. This provides that the external auditor should not carry out work where the output or recommendations are then subject to review and reliance upon by the firm as external auditor. Work may be given to the external auditor where it is closely allied with the audit function or it is advantageous to the Group to use its external auditor in view of its knowledge and experience of the Group. This could include accounting advice, regulatory returns, tax advice or due diligence work. All non-audit work over £100,000 must be approved in advance by the Group CFO and all non-audit work over £250,000 must be approved in advance by the GAC Chairman on recommendation from the Group CFO. With reference to the procedures, the GAC is satisfied that there are no matters that would compromise the independence of the external auditor or affect the performance of its statutory duties. Details of fees paid to Deloitte LLP during 2012 for audit and non-audit work are disclosed in the auditor remuneration table in note 4. There is no limitation of liability in the terms of appointment of Deloitte LLP
During the year, the GAC performed a review of the effectiveness, objectivity and independence of the external auditor. The review included an assessment of the audit firm, the audit partner and audit teams, and was conducted by means of a questionnaire, completed by members of senior management and members of the Group’s finance team and the GAC. The questionnaire sought opinions on the importance of certain criteria and the performance of the external auditor against those criteria. The GAC has concluded that during the year Deloitte LLP provided a service that was robust and fit for purpose.
However, following the impending appointment of Deloitte LLP to undertake additional consultancy work in Scandinavia, the Board and
Deloitte LLP felt it appropriate that they resign as the Company’s external auditor. Rigorous safeguards have been put in place to ensure the continued independence of Deloitte LLP for the 2012 audit process.
The Financial Control Framework aims to deliver a consistent approach to finance related controls across the Group that is ‘fit for purpose’ for all regions, embedding a control culture that strengthens the Group’s finance environment by ensuring that the Group’s financial processes are managed effectively in order to mitigate the associated risks. This is done by documenting and testing the way that core elements of the business operate, providing a high degree of transparency around the Group’s financial control environment. The Group has people, procedures and tools embedded in the business to maintain and streamline the control environment and to provide ongoing reporting and assurance. Quarterly reports were presented to the GAC on the assessment and testing of controls and which included notification of any control deficiencies or breaches in the period and action 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 auditor based upon its 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 & Compliance. The Board, through the BRC, considers reports from risk specialists across the Group and reviews
Key features of the current internal control systems of the Group include internal audit, the corporate governance framework, dialogue with institutional shareholders, constructive use of the AGM and the areas described in the Accountability section in this report.
INDEX TO THE REPORT: 55 to 56 Letter from the Group Remuneration Committee Chairman 57 to 58 Section 1 – Group Remuneration Committee: purpose, members, attendees, advisers, meetings held in 2012 and key decisions taken 59 to 61 Section 2 – Remuneration Strategy and Policy
Material Matters: Fixed Pay (base salary, pension and other benefits) and Variable Pay (annual bonus plan and long-term incentive plan), total remuneration, shareholding levels and share plan dilution levels 65 to 66 Section 5 – Non-Executive Directors 66 Section 6 – Additional Disclosure: Historical Total
Shareholder Return Performance 67 to 71 Section 7 – Audited Information: Directors’ Emoluments,
Martin Scicluna has noted in his opening statement on page 8, RSA has reported good growth and financial performance across its businesses, despite the year’s poor weather. The Group has delivered a Combined
The Committee reviewed Executive Directors’ salaries and has agreed increases ranging from 2%-3% of salary, reflecting RSA’s pay policy noted on page 60.
Shareholders were supportive of the Directors’ Remuneration Report put to them at the 2012 AGM for the 2011 financial year. The Report received a positive vote of 93.6%.
In the 2011 Remuneration Report, the Committee indicated its intention to conduct a wide-ranging review of RSA’s remuneration arrangements during 2012. This review has concluded and a series of changes are now underway to further shape and improve the structure and detail of executive remuneration. Some of these changes have been implemented, while others will be determined over the next 12 months for adoption in 2014, pending any formal shareholder approval that may be required. This phased approach takes account of my recent appointment and gives our new Chairman an opportunity to input into the future remuneration framework. It also enables these further changes to fully take account of wider evolving legislation and best practice on executive remuneration ahead of the required shareholder vote on remuneration policy at the 2014 AGM.
In 2011, the Committee reduced the maximum bonus that could be earned by Executive Directors from 180% of salary to 160% of salary; this quantum level remains market aligned and will continue for 2013.
As part of this review of the long-term incentive plan structure, the
The Committee has considered the application of clawback terms within RSA’s incentives and has agreed that these should form a part of both the bonus and LTIP. Deferred awards arising from the 2013 financial year and/or unvested awards granted in 2013 will be subject to forfeiture or reduction under certain circumstances. The policy is noted in more detail on page 65.
Governance Code. It outlines the remuneration policies and individual remuneration details of the Executive Directors and Non-Executive
To have regard to any concerns raised by the Board on the implications of the remuneration policy for risk and risk management
To provide a draft of the Remuneration Report to be included in the
Risk Committee for review in respect of risk and risk management
(to the extent not reviewed by the Board as a whole).
Directors and also, for 2012 the Group Chairman, who are called upon to exercise independent judgement on the setting and management of executive remuneration. The members of the Committee in 2012 are detailed in the table below, alongside the number of meetings they attended. The maximum number of meetings that each Director could attend during the year is noted in brackets.
Notes: 1. Mr Maxwell was Chairman of the Group Remuneration Committee until 27 September 2012; his membership of the Committee ceased after this date.
2. Mr Mitchell was appointed as Chairman of the Group Remuneration Committee on 27 September 2012.
Following John Napier’s retirement from the Board on 31 December 2012, the Board agreed that his successor, Martin Scicluna, is not required to be a member of the Group Remuneration Committee.
This decision was taken to reflect that the Committee’s collective knowledge and expertise has been further strengthened following the appointment to it of Jos Streppel and Hugh Mitchell. However,
Several executives attend Committee meetings by invitation to advise on Group strategy, performance, HR and remuneration policies and practices. However, none of these attendees have a right to be present and they leave the meeting if their own remuneration is being discussed.
Conduct. PwC provides wide-ranging advice and consultancy services across RSA globally on matters including reinsurance, IT, internal audit, corporate social responsibility, direct and indirect tax and governance.
The Committee received legal advice in the year from Linklaters and
During the year, the Committee reflected on feedback arising from the 2011 evaluation. Members’ knowledge was kept up to date through a series of meetings convened with external advisers as part of the wider remuneration review, while the Committee’s terms of reference were revised. An evaluation was conducted of the Committee in December 2012 and it considered matters such as its composition, advisers, meeting schedule and remuneration policy. Members identified future challenges arising from the macro economic environment, rapidly changing corporate governance and legislative landscapes, and the need to balance executives’ and shareholders’ interests.
Summary of the Group Remuneration Committee meetings held in 2012 Meeting Regular items Additional items
Impact of the organisation restructure on the remuneration of the CEOs for Canada, Scandinavia and UK & Western Europe
March Review of the Directors’ base salaries and approval of increases for 1st April 2012
April Approval of the terms of the LTIP cycle 2012-2014 and directors’ associated conditional share awards
LTIP awards in November 2012 for non-Board employees who had joined the Group after the main grant date
December Performance update on the annual bonus plan 2012 and LTIP cycles for 2010, 2011 and 2012
Summary of the LTIP awards made during 2012 and an update on dilution levels
Outputs of the remuneration review, which included the bonus design and performance targets for 2013, and revisions to the LTIP for the 2013 grant cycle
The Committee reviews the remuneration policy at least annually and any material changes to it are communicated to major shareholders and the corporate governance bodies in advance of implementation.
‘at risk’. The chart below shows how the composition of their remuneration package changes using the face value award levels for 2013 and three different performance scenarios: below threshold
Reviewed annually with consideration of: market positioning, internal pay relativities, salary budgets, inflation and affordability
Benchmarked referencing the market median sourced from two peer groups of listed international insurers and FTSE listed companies of comparable market capitalisation to RSA, excluding banks and ‘heavy’ industries
Judgement is applied to ensure that pay decisions are not purely data-driven and recognise the impact of increases on other elements of remuneration.
Benefits include non-contributory pension plan membership or cash allowance, company car or cash allowance, private medical cover, life assurance, discounts on certain insurance products, and participation in Sharesave and Sharebuild
Supports RSA’s short-term objectives. Targets are directly linked to RSA’s operational plan and reflect RSA’s priority to create shareholder value through sustained growth and profitability, based on its risk profiles.
Deferral into shares creates shareholder alignment and acts as a retention mechanism.
Overall bonus opportunity is set at a level to be market competitive.
Awards subject to deferral arising from the 2013 annual bonus plan can also be forfeited or reduced prior to their release according to
Performance metrics chosen to give shareholder alignment and support business strategy
Leaver treatment Ensures fair treatment for departing executives while avoiding payment for failure.
At the Committee’s discretion good leavers (normally including such circumstances as retirement, death, disability, and redundancy) may be eligible for an annual bonus for the proportion of the bonus year served
Employer pension contributions for Executive Directors are: – Simon Lee: 25% of salary
Up to 50% of the Executive Directors’ bonus is deferred into RSA shares 70% of the bonus is based on financial targets. For 2013, measures for Executive
Directors are: Group underlying Return on Equity (ROE) and, also for Adrian
Brown, the Combined Operating Ratio for the UK & Western Europe division 30% of the bonus is based on scorecard metrics including operational goals, customer satisfaction/retention, employee engagement and regulatory compliance/risk objectives.
For 2013 Net Written Premium has been removed as a performance measure and
Normal maximum of 150% of salary annually (250% of salary in exceptional circumstances)
A maximum of two matching shares are granted for each share deferred from the 2012 bonus award
For conditional LTIP awards to be granted in 2013: – 70% Group underlying Return on Equity (ROE)
(22.5% compound over three years) or exceeds the TSR of the highest performing company in the index
A straight line calculation is applied for performance realised between the threshold and maximum targets
The TSR comparator group for 2013 comprises: ACE, Admiral, Allianz, Amlin,
The ROE target range for 2013 has been revised and further context for this revision is provided in the shareholder letter on pages 55 to 56
The TSR comparator group has been refined to ensure alignment with RSA’s insurance lines and geographies
As noted above, a new clawback policy has also been introduced for 2013, noted on page 65.
Generally, in the event of termination and in all cases of termination on performance grounds, the Committee’s policy would be to seek and apply mitigation and payments may be made on a phased basis.
Executive appointment and may retain any remuneration arising from performing such a role. Simon Lee is a member of the Board of the
portfolio; to reflect this increase in responsibilities, his salary was adjusted from £430,000 to £475,000 on 1 January 2012. George
Culmer did not receive a salary increase in 2012, as he had tendered his resignation before the salary review process had commenced.
The Executive Directors’ earnings for 2012 are further noted on page 67. The salaries taking effect from 1 April 2013 are as follows: Director Annual base salary Percentage change
Pension Plan (a defined contribution plan) on a non-contributory basis when joining the Company. RSA closed its UK final salary pension scheme to new entrants on 1 April 2002 and current members of this scheme accrue benefits against pensionable earnings capped at £75,000, with Stakeholder Pension Plan membership being given for earnings above this cap. Pension plan membership is offered to employees across the Group according to local country practice.
Executives are only permitted to receive a cash allowance fully in lieu of pension plan participation if they are at or approaching either
Adrian Brown member of the Stakeholder Pension Plan until January 2012 and received an employer contribution of 11% of base salary and a taxable cash supplement of 6.5% of base salary; a taxable cash supplement of 17.5% of base salary was paid from February 2012 onwards.
In addition, they can participate in RSA’s all-employee share plans –
Sharesave and Sharebuild – and details of their share interests in these plans to 31 December 2012 are noted in the tables on pages 69 and 71.
Executive Directors were also invited to defer a further 33% of their net cash bonus into shares on a voluntary basis. All three Executive
Directors elected to make the maximum voluntary deferral. All deferred shares are held in trust for three years. Further matching shares may be awarded against these through the LTIP, which is described in more detail in this report.
George Culmer did not receive a bonus award for 2012 following his resignation from the Group.
The bonuses awarded to Simon Lee and Richard Houghton reflect the financial performance delivered across the Group, as well as their own leadership and operational goals. Adrian Brown’s bonus award was weighted towards the performance of the UK & Western Europe division for which he is accountable, along with a proportion for the
2. 2012: £480,000. Mr Houghton did not receive a bonus award for 2011.
Under the 2009-2011 plan cycle, Executive Directors could be awarded performance shares up to 150% of salary and receive up to 2.5 matching shares for each share deferred through the 2008 annual bonus plan. The 2010 and 2011 cycles operate in the same way as described for the 2009 cycle.
Committee and independently verified. The results of this are set out in the table below.
The proportion of awards that vested as a consequence of this performance is given in the table below. The actual number of shares that vested and lapsed for Simon Lee and Adrian Brown is detailed in the table on page 70.
The performance and matching share awards granted in 2012 will vest in 2015, subject to the satisfaction of the plan’s performance conditions as follows: • Average Group underlying ROE of 10%-16% over the 2012-2014 financial years • Relative TSR between median and upper quintile within a peer group of: Aegon, Allianz, Aviva, AXA, Baloise, Generali, Legal & General, Munich Re,
3. Total remuneration The Committee welcomes greater transparency in the reporting of Directors’ remuneration. As the revised reporting regulations have yet to come into force, the table below discloses the total remuneration of the Executive Directors serving as at 31 December 2012 as contained in the audited section of this report, in addition to the face value of the compulsory deferred shares to be granted for 2012 performance.
The Committee will review the clawback policy annually and will report to shareholders in the event it is invoked.
2. The valuation is against the mid market closing price of an RSA ordinary share as at 31 December 2012 of £1.257.
RSA monitors its dilution levels on a regular basis to ensure that they remain within the headroom limits set by the Association of British
Insurers (ABI). As at 31 December 2012, the dilution levels were as follows: ABI limit RSA dilution %
Martin Scicluna was appointed as Chairman on 1 January 2013 for an initial fixed term of three years, although this can be extended by agreement from the Board or terminated by the giving of at least three months’ notice by either party. Under the terms of his appointment letter, Mr Scicluna receives an annual fee of £400,000 and does not qualify for any other benefits or incentives. His fee will not be reviewed until January 2016.
Historical TSR performance of the value of a hypothetical £100 holding over five years (based on spot values)
Non-Executive Directors do not have service agreements but are issued with an appointment letter. All Non-Executive Directors are subject to a three-year period of appointment, which may be terminated by either party giving not less than one month’s notice to the other. The table below shows when the Non-Executive Directors’
The graph below is included in the report of the Committee as a requirement of Schedule 8 to The Large and Medium-sized Companies and Group (Accounts and Reports) Regulations 2008.
performance relative to the indices is shown over the five years from 31 December 2007 to 31 December 2012. 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. Data was provided by Datastream.
Deloitte LLP has audited the following items, as stipulated by law: The table of Directors’ emoluments and associated footnotes on page 67 and the disclosure of the items comprising benefits in kind
The table of disclosure of Directors’ share options and share awards on pages 69 to 71 and associated footnotes.
Companies and Groups (Accounts and Reports) Regulations 2008 is shown in note 4 of the Financial Statements.
Remuneration for the year ended 31 December 2012 was as follows: Base salary and fees
4. George Culmer resigned as a Director with effect from 14 May 2012. Accordingly the table above shows his salary, allowances and benefits for the period 1 January 2012 to 14 May 2012.
6. Simon Lee’s allowances include 25% of basic salary as a retirement allowance, paid monthly. During 2012, the amount paid to him was £200k. He also received travel, car benefits and medical and accidental death cover benefits worth £34k.
7. Alastair Barbour chaired the Group Audit Committee with effect from 1 April 2012. There was a period of overlap with Edward Lea during which time a handover was undertaken resulting in both Directors receiving the additional Chairman’s fee.
8. Hugh Mitchell was appointed as a Director on 26 September 2012 and as Chairman of the Group Remuneration Committee on 27 September 2012. Accordingly, the table above shows the fees paid for the period 26 September 2012 until 31 December 2012.
9. John Napier retired as a Director and Chairman on 31 December 2012. He received an annual fee of £400k per annum and was entitled to receive an accommodation allowance of £33k gross per annum. Additionally, he claimed business travel expenses of £1k in the year. John Napier was paid £116,500 in lieu of his three-month notice period and the balance of six months’ accommodation allowance for the outstanding commitment of the lease.
Non-Executive Directors are not entitled to any pension benefits. No Executive Directors were members of the Group defined benefit scheme in the year. The Company contributions paid in respect of Executive Directors who are members of Group defined contribution schemes, were as follows: Company contributions paid in
Notes: 1. The contributions disclosed in the table above relate to the period to 31 January 2012 at which date Adrian Brown opted out of the defined contribution scheme.
2. The contributions for George Culmer for 2012 relate to the period from 1 January 2012 to 14 May 2012 when he left the Company.
Notes: 1. The Executive Directors each had a beneficial interest as at 31 December 2012 in Voluntarily Invested Deferred Shares of 27.5p each held under the LTIP and in the Partnership,
Dividend and Matching Shares under Sharebuild which are not included in the above table. These are disclosed on pages 70 and 71.
3. Richard Houghton and Hugh Mitchell were appointed to the Board on 12 June 2012 and 26 September 2012 respectively. Accordingly, the table above shows shares held by them on the date of their respective appointments and not 1 January 2012.
The 1999 ESOS expired in 2009 although a number of options remain outstanding in accordance with the rules of the scheme. The relevant performance conditions were achieved in respect of all options granted between those dates.
shareholdings and options to subscribe for shares are recorded in the Group’s Register of Directors’ Interests which is open to inspection by shareholders at the AGM and at the Company’s registered office during standard business hours.
2. The official closing middle market price at its highest during the year was 127.9p per share and at its lowest was 97.65p per share. On the last dealing day of the year it was 125.7p per share.
Notes: 1. The market price of ordinary shares on 11 May and 15 June 2012, the dates on which LTIP interests were granted during the year, were 103.7p and 102.3p respectively.
3. The performance conditions relating to the Matching Shares granted in the year are as noted on page 61 of this Report and are noted in prior years’ reports relating to grants made 4. Performance conditions relating to awards of Performance Shares are the same as those relating to Compulsory Deferred Matching Shares for the relevant year of grant, and are noted on page 61 of this Report in relation to grants made in 2012.
5. The date by which qualifying conditions for LTIP awards must be met is as follows: 2010 awards by 31 December 2012, 2011 awards by 31 December 2013 and 2012 awards by 6. In respect of the awards made to Adrian Brown and Simon Lee, the market price on the date of grant of awards (6 April 2009) was 121.2p, the market price on the date of vesting of awards (6 April 2012) was 104.3p. For awards made in 2009, the ROE performance condition was partially met at a result of 11.5% and the relative TSR performance condition was not met.
Notes 1. The interests of Adrian Brown and Simon Lee each increased by 198 ordinary shares on 7 January 2013 and a further 192 ordinary shares on 7 February 2013 following the purchase of Partnership Shares and the awards of Matching Shares on those dates.
Italian Earthquakes The Emilia Romagna region in the north of Italy was struck by two earthquakes in May 2012, both with a magnitude of 6. These were the strongest recorded earthquakes in the region in over 500 years. A number of historical and cultural buildings were damaged and the region is also the heartland of Italy’s manufacturing sector. Our response was focused on our customers and intermediaries, and within 24 hours, we had appointed loss adjusters to some of the largest and most important property claims, and set up a dedicated claims handling team.
75 Independent auditor’s report to the members of RSA Insurance Group plc 76 Consolidated income statement 77 Consolidated statement of comprehensive income 77 Consolidated statement of changes in equity 78 Consolidated statement of financial position 79 Consolidated statement of cashflows 80 Significant accounting policies 88 Estimation techniques, risks, uncertainties and contingencies 92 Risk management 103 Notes to the financial statements 137 Independent auditor’s report to the members of RSA Insurance Group plc 138 Parent Company statement of comprehensive income 138 Parent Company statement of changes in equity 139 Parent Company statement of financial position 140 Parent Company statement of cashflows 141 Notes to the separate financial statements
Company law requires the Directors to prepare such financial statements for each financial year. Under that law the Directors are required to prepare group financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and Article 4 of the IAS Regulation and have also chosen to prepare the Parent Company financial statements under IFRS as adopted by the European Union. Under company law the Directors must not approve the accounts unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements,
International Accounting Standard 1 requires that Directors: Properly select and apply accounting policies
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006.
They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The business review on pages 8 to 33, 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
Insurance Group plc for the year ended 31 December 2012 which comprise the consolidated Income Statement, the consolidated
This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006.
As explained more fully in the Directors’ Responsibilities Statement, the directors are responsible for the preparation of the group financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the consolidated financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s
In our opinion the information given in the Directors’ Report for the financial year for which the group financial statements are prepared is consistent with the consolidated financial statements.
Less: change in provision for unearned premiums, reinsurers’ share 2 (9)
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME for the year ended 31 December 2012
Effect of exchange rate changes on cash and cash equivalents (29) (25)
Cash and cash equivalents at end of the year 16 1,329 1,258
Subsidiaries are entities over which the Group has the power to govern the financial and operating policies so as to obtain benefits from their activities, generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases.
There are no new IFRS or interpretations of IFRS that have become effective during 2012 and that have a significant impact on the
The Group exercises judgement in selecting each Group accounting policy. The accounting policies of the Group are selected by the
(including unrealised investment gains), the financial asset is designated as at fair value through the income statement
The Group accounting policy is to recognise actuarial gains and losses arising from the recognition and funding of the Group’s pension obligations in the statement of comprehensive income during the period in which they arise. This policy has been adopted as it provides the most relevant basis of recognition of such gains and losses.
Where the carrying amount is more than the recoverable amount, an impairment is recognised in the income statement.
Expenditure that increases the future economic benefits arising from computer software in excess of its standard of performance assessed immediately before the expenditure was made is recognised as an intangible asset.
The Group’s shares of its associates’ post acquisition profits or losses are recognised in the income statement and its share of post acquisition movements in reserves is recognised in the statement of comprehensive income. The cumulative post acquisition movements are adjusted in the carrying amount of the investment. When the
Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency).
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 statement of financial position presented are translated at closing exchange rates at the end of the period
Investment property is recorded at fair value, measured by independent professionally qualified valuers who hold a recognised and relevant professional qualification and have recent experience in the location and category of the investment property being valued.
Valuations are carried out on an annual basis or more frequently.
For interim periods internal valuations are made by reference to current market conditions. Unrealised gains and unrealised losses or changes thereof are recognised in net investment return.
Investment property, comprising freehold and leasehold land and buildings, is held for long-term rental yields and is not occupied by the Group.
If the market for a financial asset is not active, the Group establishes fair value by using valuation techniques. These include the use of recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cashflow analysis and option pricing models
For cash, loans and receivables, commercial paper, other assets, liabilities and accruals, carrying amounts approximate to fair values
Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices)
Investment income is recognised in the income statement. Dividends on equity investments are recognised on the date at which the investment is priced ‘ex dividend’. Interest income is recognised using the effective interest method. Unrealised gains and losses on available for sale investments are recognised directly in equity, except for impairment losses and foreign exchange gains and losses on monetary items (which are recognised in the income statement).
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
for unearned premiums (net of deferred acquisition costs). The unexpired risk provision is assessed in aggregate for business classes which, in the opinion of the Directors, are managed together.
is recognised to reflect the amount estimated to be recoverable under the reinsurance contracts in respect of the provisions for losses and loss adjustment expenses reported under insurance contract liabilities. The amount recoverable from reinsurers is initially valued on the same basis as the underlying provisions for losses and loss adjustment expenses. The amount recoverable is reduced when there is an event arising after the initial recognition that provides objective evidence that the Group may not receive all amounts due under the reinsurance contract and the event has a reliably measurable impact on the expected amount that will be recovered from the reinsurer.
Annuities purchased by the Group to make payments under structured settlement arrangements are accounted for as reinsurance ceded if the Group remains liable for the settlement in the event of default by the annuity provider. Any gain or loss arising on the purchase of an annuity is recognised in the income statement at the date of purchase.
Subsequently, loan capital is measured at amortised cost using the effective interest rate method.
Premiums written are accounted for in the period in which the contract is entered into and include estimates where the amounts are not determined at the end of the reporting period. Premiums written exclude taxes and duties levied on premiums and directly related expenses, e.g. commissions. Premiums are earned as revenue over the period of the contract and are calculated principally on a daily pro rata basis.
The provisions for losses and loss adjustment expenses, whether reported or not, comprise the estimated cost of claims incurred but not settled at the end of the reporting period. It includes related expenses and a deduction for the expected value of salvage and other recoveries. The provision is determined using the best information available of claims settlement patterns, forecast inflation and settlement of claims. The provisions for losses and loss adjustment expenses relating to long-term permanent disability claims in the UK,
The provisions for losses and loss adjustment expenses, and related reinsurance recoveries, are discounted where there is a particularly long period from incident to claims settlement or when nominal interest rates are high and where there exists a suitable claims payment pattern from which to calculate the discount. In defining those claims with a long period from incident to claims settlement, those categories of claims where the average period of settlement is six years or more has been used as a guide. The discount rate used is based upon an investment return expected to be earned by assets, which are appropriate in magnitude and nature to cover the provisions for losses and loss adjustment expenses being discounted, during the period necessary for the payment of such claims.
Differences between the estimated cost and subsequent settlement of claims are recognised in the income statement in the year in which they are settled or in which the provisions for losses and loss adjustment expenses are re-estimated.
The cost of providing additional benefits that vest on their introduction are recognised immediately.
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.
Rental income from operating leases is recognised on a straight line basis over the term of the lease. Payments made under operating leases are charged on a straight line basis over the term of the lease.
Operating segments are identified on the basis of the regional structure of the Group. Internal reports about these segments are regularly reviewed by the Board of Directors (determined to be the chief operating decision maker) to assess their performance and to allocate capital and resources.
Assets are classified as held for sale if their carrying amount is to be recovered principally through a sale transaction, that are highly probable to be completed within one year from the date of classification, rather than through continuing use. Such assets are measured at the lower of carrying amount and fair value less costs to sell and are classified separately from other assets in the statement of financial position. Assets and liabilities of a disposal group are not netted. In the period where a non current asset or disposal group is recognised for the first time, the statement of financial position for the comparative prior period presented is not restated.
For those individual schemes in deficit, the resulting net liabilities are recognised in the statement of financial position in provisions.
For those individual schemes in surplus, an asset is recognised in the statement of financial position in other debtors and other assets to the extent that the Group can realise an economic benefit, in the form of a refund or a reduction in future contributions, at some point during the life of the scheme or when the scheme liabilities are settled.
The presentation of items already disclosed in the consolidated statement of comprehensive income will be rearranged in accordance with the revised standard. The application of this revised IFRS will have no impact on either the total financial results of the Group or the financial position of the Group.
The Group will also adopt IFRS 13 ‘Fair Value Measurement’ at 1 January 2013 (issued by the IASB in May 2011). The standard sets out a framework for measuring fair value and the associated disclosures, whenever fair value is used under IFRSs. The adoption of IFRS 13 will have no impact on either the total financial results or the financial position of the Group.
There are a number of other changes to IFRSs that become mandatory in 2013 but which have no significant impact on the financial statements of the Group.
There are a number of new IFRSs and revised IFRSs that have been issued and which are mandatory after 2013. These include new IFRSs dealing with consolidated financial statements, joint arrangements and disclosures of interests in other entities. It is expected that none of these changes will have a significant impact on the financial statements of the Group.
Group’s normal operating cycle of one year. All other assets and liabilities are classified as non current.
The Group’s statement of financial position is not presented using current and non current classifications. However, the following balances are generally classified as current: cash and cash equivalents and insurance and reinsurance debtors.
The Group will apply a revised version of IAS 19 ‘Employee Benefits’
Unvested past service costs are no longer deferred and recognised over the future vesting period. Instead all past service costs will be recognised at the earlier of when the amendment/
curtailment occurs or when the entity recognises related restructuring or termination costs.
The impact of the revised standard on the results reported at 31 December 2012 is provided in note 26.
In addition to the inherent uncertainty of having to make provision for future events, there is also considerable uncertainty as regards the eventual outcome of the claims that have occurred by the end of the reporting period but remain unsettled. This includes claims that may have occurred but have not yet been notified to the
Company and those that are not yet apparent to the insured.
As a consequence of this uncertainty, the insurance company needs to apply sophisticated estimation techniques to determine the appropriate provisions.
Claims and unexpired risks provisions are determined based upon previous claims experience, knowledge of events and the terms and conditions of the relevant policies and on interpretation of circumstances. Particularly relevant is experience with similar cases and historical claims payment trends. The approach also includes the consideration of the development of loss payment trends, the potential longer-term significance of large events, the levels of unpaid claims, legislative changes, judicial decisions and economic, political and regulatory conditions.
Large claims impacting each relevant business class are generally assessed separately, being measured either at the face value of the loss adjusters’ estimates or projected separately in order to allow for the future development of large claims.
A separate estimate is made of the amounts that will be recoverable from reinsurers based upon the gross provisions and having due regard to collectability.
Corporate Centre. In addition, for major classes where the risks and uncertainties inherent in the provisions are greatest, regular and ad hoc detailed reviews are undertaken by advisers who are able to draw upon their specialist expertise and a broader knowledge of current industry trends in claims development. As an example, the Group’s exposure to asbestos and environmental pollution is examined on this basis. The results of these reviews are considered when establishing the appropriate levels of provisions for losses and loss adjustment expenses and unexpired periods of risk.
Following the identification and notification of an insured loss, there may still be uncertainty as to the magnitude and timing of the settlement of the claim. There are many factors that will determine the level of uncertainty such as inflation, inconsistent judicial interpretations and court judgments that broaden policy coverage beyond the intent of the original insurance, legislative changes and claims handling procedures.
The geographic and insurance risk diversity within the Group’s portfolio of issued insurance policies mean it is not possible to predict whether material development will occur and, if it does occur, the location and the timing of such an occurrence.
The sections below identify a number of specific risks relating to asbestos and environmental claims. There may be other classes of risk which could develop in the future and that could have a material impact on the Group’s financial position.
Consequently, traditional techniques for estimating provisions for losses and loss adjustment expenses cannot wholly be relied upon and the Group employs specialised techniques to determine provisions using the extensive knowledge of both internal asbestos and environmental pollution experts and external legal and professional advisors.
Emerging court decisions and the possibility of retrospective legislative changes increasing or decreasing insurer liability
Developments pertaining to the Group’s ability to recover reinsurance for claims of this nature
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 Group 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 these processes and any 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.
The Group is exposed to market risk and credit risk on its invested assets. Market risk includes the risk of potential losses from adverse movements in market rates and prices including interest rates, equity prices, property prices and foreign exchange rates. The
Group’s exposure to market risks is controlled by the setting of investment limits in line with the Group’s risk appetite. From time to time the Group also makes use of derivative financial instruments to reduce exposure to adverse fluctuations in foreign exchange rates and equity markets. The Group has strict controls over the use of derivative instruments.
Credit risk includes the non performance of contractual payment obligations on invested assets and adverse changes in the credit worthiness of invested assets including exposures to issuers or counterparties for bonds, equities, deposits and derivatives. Limits are set at both a portfolio and counterparty level based on likelihood of default to manage the Group’s overall credit profile and specific concentrations within risk appetite. The Group’s insurance investment portfolios are concentrated in listed securities with very low levels of exposure to assets without quoted market prices. The
Group uses model based analysis to verify asset values when market values are not readily available.
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
Pounds Sterling. Therefore, fluctuations in exchange rates used to translate other currencies, particularly other European currencies and the Canadian Dollar, into Pounds Sterling will impact the reported consolidated financial position, results of operations and cashflows from period to period. These fluctuations in exchange rates will also impact the Pound Sterling value of, and the return on, the Group’s investments.
As an insurance company, the Group is fundamentally concerned with the management of risks. This note summarises the key risks to the
The Group employs a comprehensive Risk Management System to identify, measure, manage, monitor and report the risks arising as a result of operating the business. The Risk Management System includes a comprehensive suite of risk policies, procedures, measurement, reporting and monitoring techniques and a series of stress tests and scenario analyses to ensure that the Group’s risk exposures are managed appropriately.
The Group’s insurance activities are primarily concerned with the pricing, acceptance and management of risks from its customers. In accepting risks the Group is committing to the payment of claims and therefore these risks must be understood and controlled. Disciplined underwriting, encompassing risk assessment, risk management, pricing and exposure control is critical to the Group’s success.
Pricing for the Group’s products is generally based upon historical claims frequencies and claims severity averages, adjusted for inflation and modelled catastrophes trended forward to recognise anticipated changes in claims patterns. While claims remain the Group’s principal cost, the Group also makes allowance in the pricing procedures for acquisition expenses, administration expenses, investment income, the cost of reinsurance and for a profit loading that adequately covers the cost of the capital the Group exposes to risk.
on losses that have already occurred. The Group establishes reserves for reported losses and LAE, as well as for incurred but not yet reported (IBNR) losses and unallocated loss adjustment expenses (ULAE). Loss reserve estimates are based on known facts and on interpretation of circumstances including the Group’s experience with similar cases and historical claims payment trends. The Group also considers the development of loss payment trends, levels of unpaid claims, judicial decisions and economic conditions.
The Group has a Group Reserving Committee consisting of the Group Chief Executive, Group Chief Financial Officer, Group Underwriting and Claims Director, Group Chief Actuary and Group Chief Risk Officer. A similar committee has been established in each of the Group’s major operating segments. The Group Reserving Committee monitors the decisions and judgements made by the business units as to the level of reserves recommended and makes the final decision on the reserves to be included within the consolidated financial statements
(‘Management Best Estimate’). In making its judgement, the Group Reserving Committee’s aim is that, over the longer term, reserves should be more likely to run off favourably than adversely. However, there can be no assurance that reserves will not develop adversely and exceed the Management Best Estimate. In making its judgement of the Management Best Estimate of reserves to include in the consolidated financial statements, the Group Reserving Committee adopts the following approach: The Group’s actuaries provide an indication of ultimate losses together with an assessment of risks and possible favourable or adverse developments that may not have been fully reflected in calculating these indications. At the end of 2012 these risks and developments include: the possibility of future legislative change having retrospective effect on open claims; changes in claims settlement procedures potentially leading to future claims payment patterns differing from historical experience; the possibility of new types of claim, such as disease claims, emerging from business written several years ago; general uncertainty in the claims environment; the emergence of latent exposures such as asbestos; the outcome of litigation on claims received; failure to recover reinsurance and unanticipated changes in claims inflation
Consideration is also made of the views of internal peer reviewers of the reserves and of other parties including actuaries, legal counsel, risk directors, underwriters and claims managers
In forming its collective judgement, the Committee considers this information as a whole.
In the ordinary course of its insurance activities, the Group is routinely involved in legal or arbitration proceedings with respect to liabilities, which are the subject of policy claims. However, as insurance industry practices and legal, judicial, social and other environmental conditions change, unexpected and unintended issues related to claims and coverage may emerge. These issues can have a negative effect on the
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 position, financial results and cashflows.
The Group is exposed to both multiple insured losses and losses arising out of a single occurrence, for example a natural peril event such as a hurricane, flood or earthquake.
The Group uses financial analysis models to assess the risk and reward effects of different reinsurance structures and prices. A strategic review was undertaken during 2012, the result of which is to improve the financial performance of the Group through rebalancing retention levels whilst continuing to protect capital and manage volatility.
All of the Group’s operations are required to purchase reinsurance within agreed local reinsurance appetite parameters. The Group
Credit rating relating to financial assets that are neither past due nor impaired Total of financial assets that are neither past due nor impaired £m
The overall credit risk to the Group is deemed to be low as the cover could be cancelled if payment were not received on time.
Group standards are set such that reinsurers that have a financial strength rating of less than ‘A-’ with Standard & Poor’s, or a comparable rating, are removed from the Group’s authorised list of approved reinsurers unless the Group’s internal review discovers exceptional circumstances in favour of the reinsurer. Collateral is taken to mitigate exposures, where appropriate, to acceptable levels or the size or credit quality of the exposure. At 31 December 2012 the Group held collateral against £89m (2011: £115m) of reinsurers’ share of insurance contract liabilities.
The Group regularly monitors its aggregate exposures by reinsurer group against predetermined reinsurer group limits, in accordance with the methodology agreed by the BRC. The Group’s largest reinsurance exposures to active reinsurance groups are Swiss Re, Munich Re, and
assets. Stress tests are performed by reinsurer counterparty and the limits are set such that in a catastrophic event, the exposure to a single reinsurer is estimated not to exceed 3% of the Group’s total financial assets. Certain of the Group’s subsidiaries are members of government mandated pools in various parts of the world. As of 31 December 2012 the largest pool (by premium volume) is Pool Re operated by the UK Government to provide terrorism cover.
There are no material financial assets that would have been past due or impaired had the terms not been renegotiated.
Local operations are responsible for assessing and monitoring the creditworthiness of their counterparties (e.g. brokers and policyholders).
Local credit committees are responsible for ensuring these exposures are within the risk appetite of the local operations. Exposure monitoring and reporting is embedded throughout the organisation with aggregate credit positions reported and monitored at Group level.
The Group Investment Committee (GIC), on behalf of the Group Board, is responsible for reviewing and approving the investment strategy for the Group’s investment portfolios. It provides approval for all major changes of the Group’s investment strategy and, in particular, approves any substantive changes to the balance of the Group’s funds between the major asset classes. Importantly the GIC also approves the terms of reference of the Group’s main operational investment committee, the Group Asset Management Committee (GAMC). The
Thus if interest rates fall, the fair value of the portfolio would tend to rise and vice versa as set out in the sensitivity analysis on page 99.
The Group sets appropriate risk limits to ensure that no significant concentrations to individual companies arise. The Group takes a long-term view in selecting shares and looks to build value over a sustained period of time rather than churning the portfolio looking for short-term gains from its equity holdings.
The Group’s investment in investment property is recorded as such and these investments are held as part of an efficient portfolio management strategy.
The Group operates in 32 countries. Accordingly, its net assets are subject to foreign exchange rate movements. The Group’s primary foreign currency exposures are to the Danish Krone, Euro, Canadian Dollar and the Swedish Krona. If the value of Sterling strengthens then the value of non Sterling net assets will decline when translated into Sterling and consolidated.
Structural currency risk – by investing in overseas subsidiaries and operating an international insurance group.
At 31 December 2012, the Group’s total shareholders’ equity analysed by currency is: Pounds
Movement in shareholders’ equity at 31 December 2011 (62) 75 (68) 83 (52) 63
The Group considers the aggregate exposures when reviewing its hedging strategy.
Apart from the impact on derivative financial instruments covered below, the changes arise from retranslation of foreign subsidiaries’ net asset positions from their functional currencies into Pounds Sterling, with movements being taken through the translation reserve. These movements in exchange rates therefore have no impact on profit.
At 31 December 2012 there are derivative contracts in place to protect the value of the UK, Canadian, European, and US equity portfolios of the Group. These provide limited protection against declines in market levels whilst also capping participation in any appreciation of the market. In total, this strategy covers an underlying equity value up to approximately £348m (2011: £477m). If UK, Canadian, European and
At 31 December 2012 the Group holds currency forward contracts and foreign exchange options 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.
The Group uses a number of sensitivity or stress test-based risk management tools to understand the impact of the above risks on earnings and capital in both normal and stressed conditions. These stress tests combine deterministic shocks, analysis of historical scenarios and stochastic modelling using the internal capital model to inform the Group’s decision making and planning process and also for identification and management of risks within the business units.
Impact on fixed interest securities of increase in interest rates of 100bps3 – – (446) (393)
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. The effect of movement in interest rates is reflected as a one time rise of 100bps on 1 January 2013 and 1 January 2012.
3. The impact on the fair value of the loan capital is a decrease of £55m (2011: £75m).
4. The effect of movements in equity and property markets is reflected as a one time decrease of worldwide equity and property markets on 1 January 2013 and 1 January 2012 which results in a 15% decline in the value of the Group’s assets in these investment categories.
Undiscounted interest payments are calculated based on underlying fixed interest (as detailed in note 19). Year end exchange rates have been used for interest projections on loans in foreign currencies.
The maintenance of a strong capital position is critical to the Group’s ability to conduct business.
The Group maintains sufficient capital, which comprises shareholders’ equity and subordinated loan capital, to meet its plan and objectives.
This represents sufficient surpluses for both regulatory and economic capital, as well as sufficient capital to support the Group’s aim of maintaining single ‘A’ ratings.
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 position.
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 2012, the Group’s surplus economic capital calibrated to Standard & Poor’s long-term A rated bond default curve was approximately £0.7bn (2011: £0.8bn). When calibrated to a risk tolerance of insolvency of 1 in 200 per annum the ECA surplus was £1.2m (31 December 2011: £1.2bn).
The position was adversely impacted in the year by falling yields and increased acquisitions offset by an improvement in expected future retained profits.
The economic capital model is used to support, inform and improve the Group’s decision making across the Group. It is used to determine the Group’s optimum capital structure, its investment strategy, its reinsurance programme and to determine the pricing and target returns for each portfolio. The economic capital model is also used for the Group’s Individual Capital Assessment (ICA). The only adjustment made is to use the FSA’s required calibration.
For the Group’s senior regulated insurance company, Royal & SunAlliance Insurance plc, the capital position continues to be reported under
As at 31 December 2012 the Group has an IGD surplus of approximately £1.2bn (2011: £1.3bn). Whilst the IGD surplus remains strong it has experienced a small decrease in the year with retained earnings being offset by increases in both capital requirements resulting from higher business volumes and increased goodwill and intangible assets. The coverage ratio stood at 1.9 times at 31 December 2012 (2011: 2.0 times).
The Group received its latest Individual Capital Guidance (based on its ICA submission) from the FSA in late 2011 and at the request of the FSA remains confidential. The ICA is a forward looking, economic assessment of the capital requirements of the Group based on its assessment of the risks to which it is exposed. The models used to determine the ICA have been integrated into the Group’s business processes and are used to enhance the management of the Group.
Executive and the Board of Directors. Each of the CEOs is also a member of the Group Executive Committee. Scandinavia, Canada and
Prior to this date, the businesses in Scandinavia, Canada, Ireland and Italy had been reported together as the International region.
As described in the Risk Management section of the notes to the financial statements sufficient net assets are maintained by each of the
Group’s subsidiaries to satisfy local regulatory and internal risk based capital requirements. In addition the Group monitors the Group’s total capital position at all times. Assets and liabilities are reviewed by the chief operating decision maker at the Group level, and as such are not presented at the operating segment level.
Other segment items included in the income statement: Year ended 31 December 2011 (restated)
Net movement recognised in equity £m £m £m £m £m £m £m £m 3. NET CLAIMS AND BENEFITS
The following items have been included in arriving at the profit before tax on operations: Other operating income £m £m
The operating lease payments recognised as an expense during the year are £71m (2011: £70m). The Group has no significant lease agreements that include contingent rent.
Fees payable to the Company’s auditor and its associates for other services: The audit of the Company’s subsidiaries 4.5 4.6
Other services include fees payable to the Company’s auditor in respect of consultancy services relating to business transformation processes and regulatory development projects.
Details of Directors’ remuneration and pension benefits and details of Directors’ interests in the Parent Company are shown in the remuneration report.
UK & Western Europe includes staff employed in Group Corporate Centre.
UK corporation tax is calculated at 24.5% (2011: 26.5%) of the estimated assessable profit for the year. Since the Group operates around the world, it is subject to income taxes in many different jurisdictions. Taxation for jurisdictions other than the UK is calculated at the rates prevailing in those jurisdictions. Of the above taxation attributable to the Group £8m (2011: £(8)m) relates to UK corporation tax and £120m (2011: £194m) to overseas taxation.
Tax at the UK rate of 24.5% (2011: 26.5%) 117 163
Income tax expense 128 186 6. EARNINGS PER SHARE ATTRIBUTABLE TO THE ORDINARY SHAREHOLDERS OF THE PARENT COMPANY
Basic earnings per share are calculated by dividing the profit attributable to the ordinary shareholders of the Parent Company by the weighted average number of ordinary shares in issue during the period, excluding ordinary shares purchased by various share trusts and held as own shares.
Profit attributable to the shareholders of the Parent Company 344 426
Weighted average number of ordinary shares in issue (thousands) 3,534,577 3,511,180
Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. The Parent Company has share options and contingently issuable shares as categories of dilutive potential ordinary shares.
The calculation is performed for the dilutive potential ordinary shares to determine the number of shares that could have been issued at fair value (determined as the average annual market share price of the Parent Company’s shares) based on the monetary value of the subscription rights attached to outstanding dilutive potential ordinary shares. The number of shares calculated as above is compared with the number of shares that would have been issued assuming the exercise of the dilutive potential ordinary shares.
(except for a nominal amount) which reduced the total dividend paid by less than £1m (2011: less than £1m).
Amortisation expense of £82m (2011: £67m) has been charged to underwriting and policy acquisition costs with the remainder recognised in other operating expenses.
Software impairment charges of £12m (2011: £2m) have been charged to underwriting and policy acquisition costs during the year, which includes a charge of £10m arising from the integration of operational systems in Scandinavia.
Goodwill is allocated to the Group’s cash generating units (CGUs) which operate in the following segments: £m £m
No goodwill impairment charges have been recognised within other operating expenses during 2012 (2011: £71m).
A number of other assumptions and estimates are involved in the application of a cashflow model to forecast operating cashflows, premium volumes, expenses and working capital requirements. Forecasts of future cashflows are based on the best estimates of future premiums, operating expenses and taxes using historical trends, general geographical market conditions, industry trends and forecasts and other available information. These assumptions are subject to review by management. The cashflow forecasts are adjusted by appropriate discount rates.
The Group occupied property was revalued on 31 December 2012 by independent valuers.
Depreciation expenses of £35m (2011: £34m) have been charged to underwriting costs and policy acquisition costs.
The carrying amount of Group occupied property that would have been recognised had the assets been carried under the cost model at 31 December 2012 is £140m (2011: £136m).
Investment property consists of £340m (2011: £362m) freehold and long leasehold buildings.
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 2012 is £28m (2011: £18m).
Summarised below are the assets, liabilities, revenue and profit and loss of the companies above. 2012 £m £m
The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into Levels 1 to 3 based on the degree to which the fair value is observable, as explained more fully in Significant Accounting Policies: | RSA | Annual Report and Accounts 2012114
Derivative liabilities: At fair value through the income statement – 42 – 42
A reconciliation of Level 3 fair value measurements of financial assets is shown in the table below. There are no Level 3 financial liabilities.
Of the total gains/(losses) for the period recognised in the income statement (shown in the reconciliation above), losses of £9m (2011: £14m)
relate to assets held at the end of the reporting period.
Reinsurers’ share of provisions for losses and loss adjustment expenses 1,650 1,771
Reinsurers’ share of provisions for losses and loss adjustment expenses at 1 January 1,771 2,353
To be settled after 12 months 134 137 16. CASH AND CASH EQUIVALENTS
The interest bearing financial assets included in cash and cash equivalents had an effective interest rate of 1.17% (2011: 1.14%) and had an average maturity of 34 days (2011: 33 days).
Exchange (losses)/gains net of tax (5) (61) – (66) (4) (70)
Pension fund actuarial (losses)/gains net of tax – – (161) (161) – (161)
Exchange (losses)/gains net of tax (5) (56) (10) (71) 1 (70)
Total comprehensive income/(expense) for the year 21 (56) 353 318 2 320 18. SHARE CAPITAL
Issued in respect of employee share options and employee share awards 18,409,921 4 3
Full information on the rights attaching to shares is in the Parent Company’s Articles of Association which are available on the Company’s website.
At 31 December 2012, the total number of options over ordinary shares outstanding under the Group employee share option plans is 51,342,336 (2011: 58,299,174) and the total number of potential shares outstanding under the long-term incentive plan and under the
Sharebuild plan is 71,975,051 ordinary shares (2011: 66,653,576 ordinary shares). Further information on the employee share schemes is provided in note 27 and in the Directors’ Remuneration Report within the corporate governance section.
The rate of interest payable on the Yankee Bonds is 8.95%.
The subordinated guaranteed perpetual bonds have a nominal value of £375m and the rate of interest payable is 6.701% of the nominal value. The Group has the option to repay the bonds on specific dates starting 12 July 2017. If the bonds are not repaid, from that date, the interest rate payable would be LIBOR plus 2.51%.
Provision for unearned premiums (gross of acquisition costs) at 31 December 4,790 4,514
Provisions for losses and loss adjustment expenses at 1 January 11,097 11,694
Total claims payments made in the year, net of salvage and other recoveries (6,010) (6,448)
At end of accident year 10,456 3,375 2,849 2,982 2,661 3,031 2,929 2,804 3,792 3,425 3,437
At end of accident year 8,057 2,443 2,280 2,445 2,471 2,569 2,627 2,518 2,666 2,936 3,078
The Articles of Association of the Group defines a cap on borrowing limits. This cap is not being amended at the 2013 AGM.
At 31 December 2012 the cap on borrowing limits is £4,484m (2011: £4,708m) of which £1,636m (2011: £1,638m) had been utilised.
The following are the major deferred tax assets and liabilities recognised by the Group and their movements during the year: Reclassification of debt £m
(Charge)/credit to the income statement for the year – (28) (10) 13 42 17
Net credit arising on acquisition/disposal of subsidiaries and other transfers – – 1 – (10) (9)
Available for sale financial assets 23 (18) (44) 19 (21) 1
Fair value gains and losses 23 (18) (44) 17 (21) (1)
Pension fund actuarial gains and losses – – 48 10 48 10
The aggregate current and deferred tax relating to items that are (charged)/credited directly to equity is £(2)m (2011: £(3)m).
Deferred tax assets of £241m (2011: £199m), which are in excess of profits arising from the reversal of existing taxable temporary differences and that relate to tax jurisdictions in which the Group has suffered a loss in either the current or preceding period, have been recognised on the basis that future taxable profits will be available against which these can be utilised. The evidence for the future taxable profits is a forecast consistent with the three year operational plans prepared by the relevant businesses, which are subject to internal review and challenge. Where relevant, the forecast includes extrapolations of the operational plans using assumptions consistent with those used in the plans.
Other provisions includes £28m (2011: £29m) held relating to vacant property leases, dilapidations and refurbishments, the costs relating to which will be borne across the period over which the leases expire, which is up to 20 years. Other provisions also include Motor Insurance
Bureau levy provisions of £18m (2011: £21m) and deferred consideration of £9m (2011: £17m) in respect of acquisitions.
In 2003 a subsidiary of the Group wrote an Adverse Development Cover (ADC) contract with its former US subsidiary. The liabilities arising under the ADC contract comprise an insurance component and a deposit component. The liability arising under the insurance component represents the timing risk on the settlement of those liabilities. The financial liability arising under the deposit component is offset by the value of funds held in a trust fund whose trust deed only permits the trust fund assets to be used to settle amounts due under the ADC. The value of the funds held in trust at 31 December 2011 was £0.1bn and the value of the liability of the deposit component was £0.1bn. The deposit component of the liability was fully paid during 2012.
Contributions of £13m (2011: £14m) were paid to this scheme during 2012 and are included in the costs shown above. The latest information regarding the funding of this scheme is taken from the interim report for the first half of 2012, when the scheme funding rate
The major defined benefit pension schemes are located in the UK. The assets of these schemes are held mainly in separate trustee administered funds.
Accrual rates were reduced; the retirement age was increased; revaluation was subject to a cap of 2.5%; a cap was applied to the salary used for the defined benefit schemes and the schemes contracted back in to the State scheme. Employees were entitled to join the Stakeholder
Net pension and post retirement (deficit)/surplus at 31 December (207) (140)
Excluding the pension liabilities covered by the insurance arrangement the assets and liabilities committed to the arrangement, the value of scheme assets and the residual scheme obligations are as follows: UK
Present value of obligations not covered by insurance arrangement 4,437 511 4,948 4,492
Total assets in the schemes (excluding those used to fund insurance arrangement) 4,292 382 4,674 4,303
assets are determined for each asset class by considering both market conditions at the beginning of the reporting period and any expectations for longer term changes in current returns. All returns are net of investment expenses.
The mortality assumptions are set following investigations of the main schemes’ recent experience by the schemes’ actuaries for the funding valuations. At the funding valuation in March 2009, the mortality assumptions adopted for the main UK schemes used the SAPS
Reductions in future mortality rates are allowed for by using 80% (males) and 60% (females) of the long cohort improvements. The weighted average assumptions imply that a current pensioner aged 60 has an expected future lifetime of 27.6 (2011: 27.5) years (males) and 28.2 (2011: 28.1)
The discount rate, the assumed inflation rate and the mortality assumptions all have a significant effect on the IAS 19 accounting valuation.
Impact of adoption of the revised IAS 19 in the 2013 financial statements
The Group has four types of share based payment plans which are settled in the form of ordinary shares: the Long-Term Incentive Plan
(LTIP), the Sharesave Plan (SAYE), the Sharebuild Plan and the Executive Share Option Scheme (ESOS). Dilution levels for all schemes are held strictly within Association of British Insurers limits. Further information on the LTIP scheme is included below and information on the other share schemes can be found in the remuneration report.
The total employment cost recorded in the income statement for all plans is £6m in 2012 (2011: £9m).
The Long-Term Incentive Plan (LTIP) for Executive Directors and other selected executives was adopted following approval obtained at the 2006 AGM. Awards have been made each year since 2006 following shareholder approval.
Shares awards are normally forfeited on an employee leaving the Group. No further performance conditions apply. The Remuneration
Further information on the LTIP can be found in the remuneration report within the corporate governance section. Further disclosures in respect of the SAYE and Sharebuild schemes have not been made on the grounds that the schemes are immaterial to the Group.
The fair value of the hedging instruments at 31 December 2012 are a liability of £6m (2011: £12m) and an asset of £14m (2011: £14m). The hedge ineffectiveness recognised in the income statement during 2012 is £nil (2011: £nil).
El Comercio Compañía de Seguros a Prima Fija SA (96.7%) General insurance
Notes: 1. This note only lists principal subsidiaries in the Group to avoid providing particulars of excessive length. None of the subsidiaries omitted from this note materially affects the results or assets of the Group.
3. Except where indicated all of the subsidiaries listed are wholly owned within the Group. In all cases the proportion of voting power held equals the proportion of ownership interest.
4. The general insurance business of The Globe Insurance Company Limited was legally transferred to Royal & Sun Alliance Insurance plc and The Marine Insurance
5. The general insurance business of Royal International Insurance Holdings Limited was legally transferred to Royal & Sun Alliance Insurance plc and The Marine Insurance
The fair values of liabilities assumed comprise insurance contract liabilities of £108m and other liabilities of £35m. The total cash consideration paid was £47m and goodwill of £39m arose on this acquisition.
On 1 October 2012, the Group acquired 100% of the share capital of L’Union Canadienne, Compagnie D’Assurances. The fair values of identifiable assets acquired comprise investments of £151m, intangible assets (excluding goodwill) of £32m, other assets of £78m and cash and cash equivalents of £4m. The fair values of liabilities assumed comprise insurance contract liabilities of £160m and other liabilities of £22m. The total cash consideration paid was £96m and goodwill of £13m arose on this acquisition.
If the acquisitions had occurred on 1 January 2012, the contribution to the Group’s net written premiums and fee income for the year would have been £264m and the contribution to the Group’s profit after tax for the year would have been £5m. The total net written premiums and fee income of the acquired businesses since the acquisition dates included in the Group’s net written premiums for the year is £85m.
The total profit after tax of the acquired businesses since the acquisition dates included in the Group’s profit for the year is £1m.
The goodwill recognised on the acquisition of L’Union Canadienne, Compagnie D’Assurances arises primarily from the premium paid to significantly expand the Group’s presence in the Quebec region and to enhance the Group’s Canadian proposition in both Personal and
Commercial lines. Goodwill arising on the acquisitions in Argentina and Canada is further derived from the value of the workforces acquired and the significant synergies from reinsurance, capital and expense savings on integration into the Group.
the Parent Company Statement of Comprehensive Income, the Parent Company Statement of Changes in Equity, the Parent Company Statement of Financial Position, the Parent Company Statement of Cashflows and the related notes 1 to 11. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.
This report is made solely to the Parent Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006.
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Parent Company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
In our opinion the Parent Company financial statements: give a true and fair view of the state of the Parent Company’s affairs as at 31 December 2012; have been properly prepared in accordance with IFRSs as adopted by the European Union; and have been prepared in accordance with the requirements of the Companies Act 2006.
We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or the Parent Company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns; or certain disclosures of directors’ remuneration specified by law are not made; or we have not received all the information and explanations we require for our audit.
We have reported separately on the consolidated financial statements of RSA Insurance Group plc for the year ended 31 December 2012.
PARENT COMPANY STATEMENT OF CHANGES IN EQUITY for the year ended 31 December 2012
Fair value losses net of tax – – – (797) – – (797)
Loss for the year net of tax – – – – – (81) (81)
Dividends – paid (note 7) – – – – – (336) (336)
PARENT COMPANY STATEMENT OF COMPREHENSIVE INCOME for the year ended 31 December 2012
Cash and cash equivalents at beginning of the year 8 3
Cash and cash equivalents at end of the year 3 8
PARENT COMPANY STATEMENT OF CASHFLOWS for the year ended 31 December 2012
These separate financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union.
In accordance with section 408 of the Companies Act 2006, the Company’s income statement and related notes have not been presented in these separate financial statements.
The investments in subsidiaries are recognised in the statement of financial position at fair value measured in accordance with the
The Directors believe that the methodology used supports the inclusion of the investments in subsidiaries in the statement of financial position, at the fair values ascribed to them. The market value of the Company’s ordinary shares at 31 December 2012 was 125.7p.
A movement of 1% in the share price would have an impact of £45m on the fair value.
Full details of the share capital of the Company are set out in note 18 to the consolidated financial statements.
Full details of the loan capital of the Company are set out in note 19 to the consolidated financial statements.
Deferred tax assets at 1 January 2011 12 11 2 25
Deferred tax assets at 1 January 2012 11 8 3 22
Credit to the income statement for the year 2 – 1 3
Deferred tax assets at 31 December 2012 12 6 4 22
Within other temporary differences, there is £10m (2011: £9m) in respect of deferred tax reliefs.
Payable to related parties: Payable to subsidiaries, interest bearing loans 976 888
at three months LIBOR plus 0.6% and £270m (2011: £270m) at three months LIBOR plus 2.0%.
Loans to subsidiaries of £1,004m (2011: £864m) as disclosed within note 2 have been made. Of this, £319m (2011: £294m), £81m
Brazil Marine In Brazil we have a leading Marine business. We are the market leader in Inland
The Company’s share register is maintained by Equiniti Limited. Any administrative enquiries relating to shareholdings, such as dividend payment instructions or a change of address, should be notified to
Telephone lines are open from 8.30am to 5.30pm Monday to Friday.
Holders of RSA ordinary shares are invited to attend the Company’s
Annual General Meeting (AGM), which will be held at 200 Aldersgate,
Information on how to manage your shareholding can be found at If you do not find the information you require, you can send your enquiry via secure email from these pages. You will be asked to complete a form providing your name, address and shareholder reference number. If you require an email response, you will need to provide your email address.
Receiving the Company’s communications electronically allows the Company to communicate with its shareholders in a more environmentally friendly, cost effective and timely manner.
You can elect to receive email notifications of shareholder communications by registering at www.shareview.co.uk where you can also set up a bank mandate to receive dividends directly to your bank account and submit proxy votes for shareholder meetings. Shareholders may elect to receive a printed copy of the
The Company offer a Scrip Dividend Scheme to shareholders giving them the opportunity to use their final and interim dividend payments to increase their holding in the Company without incurring dealing costs or stamp duty. Shareholders wishing to receive a scrip dividend instead of a cash dividend should contact
Equiniti for details or visit the shareholder services area of the
Stocktrade also offer a telephone dealing service. Commission is currently 0.5% on amounts up to £10,000 and 0.2% on the excess thereafter, all of which are subject to a minimum charge of £17.50.
It is required by law that our shareholder register is available for public inspection. We are unable to control the use of information obtained by persons inspecting the register. Shareholders are advised to be wary of any unsolicited advice, offers to buy shares at a discount, or offers of free reports about the Company. Details of any share dealing facilities that the Company endorses will be included in Company mailings or on our website. If you receive any unsolicited advice, make sure you get the correct name of the person and organisation and check that they are appropriately authorised by the FSA by visiting www.fsa.gov.uk/fsaregister.
More information on protecting your investment can be found at www.fsa.gov.uk/consumerinformation/stay_safe.
Keep any documentation that contains your shareholder reference number in a safe place and destroy any documentation you no longer require by shredding it
Consider holding your shares electronically in a CREST account via a nominee.
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
Deadline for the receipt of scrip dividend mandates by Equiniti in relation to the ordinary final dividend for 2012.
Announcement of the scrip dividend price for the ordinary interim dividend for 2013.
Deadline for the receipt of scrip dividend mandates by Equiniti in relation to the ordinary interim dividend for 2013.
Can also refer to the largest amount of insurance or reinsurance available in the marketplace.
Claims Handling Expenses The administrative cost of processing a claim (salary costs, costs of running claims centres, etc. and allocated shares of the costs of head office units). Not the cost of the claim itself.
Reserve established by the Group to reflect the estimated cost of claims payments and related expenses that we estimate we will ultimately be required to pay.
Total premium written or processed in the period, irrespective of whether it has been paid.
A reserve for accidents or incidents that have occurred but which have not yet been reported to us.
IGD Capital Requirement Insurance Groups Directive capital is the capital the Group is required to hold based on standard calculations defined by the FSA under the EU Solvency 1 directive.
Insurance Result This is a measure of how well we have done, including both our underwriting result and investment performance.
The total claims cost incurred in the period less any share to be paid by reinsurers. It includes both claims payments and movements in claims reserves in the period.
Net Written Premium is premium written or processed in the period, irrespective of whether it has been paid, less the amount paid out in reinsurance premiums.
Operating Profit The profit generated by the ordinary activities of the Group including both insurance and investment activity.
Rate The price of a unit of insurance based on a standard risk for one year. Actual premium charged to the customer may differ from the rate due to individual risk characteristics and marketing discounts.
Scrip Dividend Where shareholders choose to receive the dividend in the form of additional shares rather than cash.
Underwriting Result This is a measure of how well the Group has done excluding its investment performance and is calculated as: NEP – Claims (including Claims Handling Expenses) – Expenses (including commissions).
Unearned Premium The portion of a premium that relates to future periods, for which protection has not yet been provided, irrespective of whether the premium has been paid or not.
Group’s plans and its current goals and expectations relating to its future financial condition, performance, results, strategic initiatives and objectives. Generally, words such as “may”,
“seek”, “continue” or similar expressions, identify forward-looking statements. These forward-looking statements are not guarantees of future performance. By their nature, all forward-looking statements involve risk and uncertainty because they relate to future events and circumstances which are beyond the Group’s control, including amongst other things, UK domestic and global economic business conditions, market-related risks such as fluctuations in interest rates and exchange rates, the policies and actions of regulatory authorities (including changes related to capital and solvency requirements), the impact of competition, inflation, deflation, the timing impact and other uncertainties of future acquisitions or combinations within relevant industries, as well as the impact of tax and other legislation or regulations in the jurisdictions in which the Group and its affiliates operate. As a result, the Group’s actual future financial condition, performance and results may differ materially from the plans, goals and expectations set forth in the
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