Latin america We are the number 1 in chile, and the largest private insurer in uruguay no.1
Brazil We are a leading Marine insurer leading ireland We are a leading provider of Household insurance, covering one in every five Irish homes leading teChniCaL expertise and experienCe worLdwide
Countries where RSA has operations and of�ces Countries where RSA has network partners
scandinavia We are the 3rd largest insurer in denmark and sweden through codan and trygg-Hansa respectively india We were the 3rd fastest growing general insurer in the market in 2009 3rd largest 3rd fastest uK We are the 2nd largest commercial and the 4th largest personal insurer 2nd largest
Baltics We are the number 1 general insurer across the Baltics no.1
We HaVe a dIVersIFIed portFolIo oF BusInesses WItH attractIVe MarKet posItIons and reMaIn coMMItted to drIVInG top and BottoM lIne GroWtH.
as We enter our 300tH Year, We are conFIdent oF our aBIlItY to contInue to delIVer eXcellent results.
Corporate governanCe 43 directors’ report 47 corporate governance 53 remuneration report finanCiaL stateMents 67 responsibility statement 68 Independent auditors’ report to the members of rsa Insurance Group plc 69 consolidated income statement 70 consolidated statement of comprehensive income 70 consolidated statement of changes in equity 71 consolidated statement of financial position 72 consolidated statement of cashflows 73 significant accounting policies 82 estimation techniques, risks, uncertainties and contingencies 85 risk management 96 notes to the financial statements 134 Independent auditors’ report to the members of rsa Insurance Group plc 135 parent company statement of comprehensive income 135 parent company statement of changes in equity 136 parent company statement of financial position 137 parent company statement of cashflows 138 notes to the separate financial statements other inforMation 142 shareholder information 144 Financial calendar
Visit www.rsagroup.com for more information. this annual report and accounts contains ‘forward-looking statements’ with respect to certain of the Group’s plans and its current goals and expectations relating to its future financial condition, performance, results, strategic initiatives and objectives. For further details, reference should be made to the ‘important disclaimer’ on the inside back cover. pages 6 to 41 constitute the business review of rsa and are incorporated by reference into the directors’ report set out on pages 43 to 46. the directors’ report has been drawn up and presented in accordance with and in reliance upon applicable english company law and the liabilities of the directors in connection with that report shall be subject to the limitations and restrictions provided by such law.
We are canada’s fifth largest general insurer and the largest marine insurer. through Johnson, our leading direct business, we are the second largest Affinity writer.
in ireland, we distribute via brokers and are a leading provider of household insurance, covering one in every five irish homes.
our italian business is focused primarily in the north of the country, distributing products through a network of non-tied agents and brokers.
We operate in eight countries across Asia and the middle east. in Asia, our focus is primarily on commercial lines through hubs in hong Kong, Singapore and china. in india, we operate through our associate Royal Sundaram. We are a leading international insurer in the middle east and recently became the number one in oman.
We are the number one general insurer across the Baltics and the leading direct motor insurer in poland, the czech Republic and Russia.
A LeAdInG MArIne InSurer In tHe uK StronG conStructIon & enGIneerInG FrAncHISe uK eMerGInG MArKetS
the trading environment in 2009 was very challenging. our strategy continued to have two major themes, firstly focusing on: excellence in our core technical • competencies of underwriting and pricing improving the effectiveness of our • operations and standards of service, and ensuring that we run a sustainable business • through the economic cycle.
despite the challenges of the 2009 markets your company has performed strongly. in summary we have achieved: A 4% increase in net written premiums• A combined operating ratio (coR) of 94.6%• An operating result of £777m, and• maintained a strong balance sheet and • robust capital position.
2009 has also seen a number of government policy and regulatory changes and a significant number of advisory reports and initiatives related to board processes and effectiveness. there have been tensions between the more specific needs of problem sectors like banks and those of the insurance sector. Attempts to deliver a ‘one size fits all’ approach are inappropriate.
‘i Am pleASed With ouR 2009 ReSultS, And AS We celeBRAte ouR 300 YeAR AnniVeRSARY in 2010, i RemAin confident of AnotheR excellent peRfoRmAnce.’
there has also been a lot of comment and discussion and draft recommendations on changes to plc boards, the current combined code of governance and related matters. many recommendations seem not to analyse what the real differences between effective and non-effective boards are. the greater underlying issue was that too much faith was placed in global competition as an effective regulator in itself. in these circumstances the average citizen has a right to feel that he has been let down and is now paying the consequences.
finally, i would like to take this opportunity to thank my Board colleagues for their diligence, challenge, contribution and support.
| rSA | Annual Report and Accounts 200906 2009 was a good year for the group in challenging conditions. We delivered another strong performance and have driven the group forward through targeted organic growth and acquisitions in emerging markets and international. We’ve continued to take the right action on rate and expenses and delivered a positive underwriting result in all regions. our capital position remains strong.
driving the group forward through targeted • growth and acquisitions continued action on rate • on track to meet uK cost savings target • maintaining tight operational grip and strong • financial management Strong capital and financial position •
Significant de-risking of pension schemes, and • delivering sustainable profitable performance. •
the operating result was £777m, while profit before tax of £554m was after the expected reorganisation costs for the uK cost reduction programme announced in february 2009.
the underlying return on opening equity was 12.7%, down from 18.5%, with the movement on the prior year due to the expected lower investment returns and the impact of foreign exchange on opening assets. the underlying return on average equity was 13.4%
in personal lines, we delivered good growth in Swedish personal Accident, increasing premiums by 8%. We continued to push rate across all lines of business and retention remained strong at 81%. in norway, we increased premiums by over 25%, driven by
‘2009 WAS A good YeAR foR the gRoup in chAllenging conditionS. We hAVe deliVeRed AnotheR StRong peRfoRmAnce. AS We moVe into 2010, economic unceRtAintieS RemAin, hoWeVeR, We continue to puSh hARd foR pRofitABle gRoWth.’
Andy Haste group ceo growth in Affinity and our agent network. in denmark, bancassurance again performed well and premiums increased by 10%.
We drove a significant increase in the underwriting result, up by over 25% to £242m, and the coR was 86.2% due to personal motor, personal Accident and marine. this was an excellent result and was well ahead of the assumptions used at the time of the codan minority buyout in 2007.
in commercial, we built on our expertise in Risk Solutions, increasing premiums by 28% and we also saw 4% growth in mid-market. in personal lines, Johnson again delivered another excellent performance with premiums increasing by 8% and retention of 90%.
the underwriting result increased by 11% to £63m and the coR was 93.5%. these are great results against the backdrop of severe weather conditions and significant industry losses.
in other europe, premiums increased by 9% to £559m (down 2% at constant exchange), with a coR of 105%. in ireland, premium growth of 5% at constant exchange was driven by rate, significant new Affinity wins and the benefit of prior year acquisitions. the coR of 91% was a tremendous result and was after a £10m charge for the november floods, and reflected our early action on rate, our disciplined approach to underwriting and our prudent reinsurance programme.
on 25 June, we will be hosting ‘rSA day’ as part of our 300 year birthday celebrations. employees across the Group will participate in fundraising and volunteering activities focusing on three key areas – climate, community and crime reduction – in support of our cr strategy, to increase employee engagement, build pride and demonstrate rSA’s contribution to society.
personal lines premiums were flat on 2008, with lower household premiums offset by 5% growth in motor, driven by growth in Broker panels and Affinity. pet also performed well and premiums increased by 17%.
in commercial, premiums decreased by 5%, with the impact of the downturn mitigated by our actions on targeted growth and rate. growth in european Risk Solutions of 47% and in marine of 21% has offset capacity withdrawals in commercial motor and property.
We continued to take action on rate, achieving renewal increases in commercial of 6% in motor, 3% in property and 8% in liability.
We also continued to push rate on motor new business and achieved double digit increases in personal lines.
on costs, we achieved run rate savings of £64m and we will deliver the full £70m by the end of the first quarter, ahead of our mid 2010 target. this has been achieved at a cost of £75m, against the expected £80m for the complete programme. on headcount, we have already achieved the planned reduction of 1,200 announced in february 2009.
eMerGInG MArKetS in emerging markets, premiums increased by 13% to £833m (2% at constant exchange). including associates, total premiums were £954m.
in latin America, the top line increased by 2%, driven by good growth in Affinity where we signed 13 new deals, including citibank in colombia, claro in Argentina and Santander in mexico.
We also continue to benefit from our low risk investment strategy, with 87% of the total investment portfolio invested in high quality fixed income and cash assets. 99% of the bond portfolio is investment grade and the bond holdings are well diversified, with 73% invested in currencies other than Sterling and 54% invested in non government bonds.
We have a track record, built over many years, of de-risking our defined benefit pension schemes. in July 2009, we announced that we had protected around one third of the uK schemes’ liabilities against longevity, interest rate and inflation risk. this was achieved at no additional cost to the group. in 2010 we have continued to take action in both ireland and the uK to further protect the group’s results by reducing volatility in the pension schemes.
At our half Year results we talked about how declining economic activity was leading to a reduction in exposures and premiums. mortgage lending and car sales were down, therefore new business was lower. Wage rolls were shrinking, so liability risk decreased. Businesses were selling less, so they needed less business interruption cover and with less cargo being shipped, marine exposures were lower.
As we move into 2010, the group is well placed, with a strong financial position and a clear strategy. We remain confident of our ability to deliver sustainable profitable performance.
over the last year, we also made great progress on employee engagement, with a 5% improvement across the group, which is considered significant. 92% of employees participated in our employee Survey and we will continue to use the insights to generate ideas and clear action plans to make further improvements across our business.
corPorAte reSPonSIbILIty We are committed to ‘doing the Right thing’, both as individuals and as a company and continue to support three key communitybased themes: road safety, social inclusion and the environment.
product innovation is key to our success and with the reinsurer munich Re, we launched insurance4renewable, a global service that offers standard and customised insurance products and services for renewable energy products in developing countries.
our progress in 2009 was recognised by goldman Sachs who named RSA as one of the top five global insurers in their gS: Sustain report, an upgrade from Bronze to Silver in the dow Jones Sustainability index, moving from ‘gold’ to ‘platinum’ in the times top 100 companies and winning the corpcomms Best corporate Responsibility Strategy award.
this growth will continue to be supported by acquisitions. Since 2003, we have completed and integrated around 30 transactions and the pipeline remains strong.
on 27 february 2010, an earthquake measuring 8.8 on the Richter scale hit chile, causing large scale damage. We mobilised our crisis response team and are supporting our local teams with group specialists on the ground. We are thankful to report that all our staff are safe and the majority of our network was up and running within hours, despite a lack of power in some branch offices.
We will also continue to take action to mitigate the impact on the investment result of lower interest rates. in 2010, we expect investment income to be around £540m and as it stands today, we expect total gains to be in line with 2009 levels.
the shape of the portfolio is deliberate: our geographic balance gives us • exposure to markets at different points in the cycle and different stages of development, and it allows us to shift capacity to • where we are able to generate the best returns.
organic growth is supported by targeted acquisitions. We have successfully executed and integrated around 30 acquisitions since 2003.
We have a culture of underwriting discipline which is supported by a strong governance framework.
to ensure we take the right risks at the right price, we have a clearly defined risk appetite and have exited volatile lines.
We have strong underwriting controls, with every one of our underwriters licensed to write only business for which they have the relevant experience.
StronG FInAncIAL MAnAGeMent the sustainability of our earnings continues to be underpinned by our strong financial management.
We maintain a conservative reinsurance programme to minimise volatility in earnings from large losses and catastrophe events.
our financial position remains strong and we have taken action to further de-risk our pension schemes, thereby reducing their volatility and impact on the group’s balance sheet.
We supported this organic growth with eight acquisitions during 2009, the largest being the remaining 50% of intouch, our direct associate in poland, the czech Republic and Russia.
in the first two months of 2010, we have announced two acquisitions, with Sveland in Sweden strengthening our bancassurance platform and Al Ahlia in oman creating the largest insurer by nWp in the market.
We target profitable growth in each of our markets and shift • capacity to regions which offer the best returns our strong customer focus and targeted propositions help us to • maximise retention our focus on customer differentiation for our partners and their • customers is driving growth in our Affinity business, and We continue to make selective acquisitions in each of our markets • and have also benefitted from expanding distribution.
Annual Report and Accounts 2009 | rSA | 13 our strong portfolio allows us to actively shift capacity to where • we can achieve the best returns We have a tightly controlled risk appetite and have exited more • volatile lines of business We are committed to underwriting discipline and taking the right • action on rate our conservative reinsurance policy reduces the potential volatility • of the earnings stream We have prudent reserving policies, and• We maintain a high quality investment portfolio and a strong • balance sheet.
oPerAtInG reSuLt oF £777m in 2009, the group delivered another strong performance in what were challenging economic and market conditions.
the underwriting Result increased by 1% to £386m, driven by our action on rate and expenses. our continued commitment to underwriting discipline is demonstrated by the excellent coR of 94.6%
As expected, the investment result of £523m was impacted by falling yields, however we continue to take measured action to enhance returns.
on costs, in the uK we have achieved run rate savings of £64m and expect to complete the full programme of £70m of savings in the first quarter of 2010, ahead of schedule.
We also continue to make good progress towards our additional £25m cost savings target for Scandinavia announced in may 2008.
We continue to drive operational excellence and deliver on our • expense savings targets through our investment in our technical Academy we remain the • employer of choice for those wishing to pursue a technical career We have established an award winning marketing Academy to • further strengthen our sales capability, and We have instilled a strong performance culture and over 90% of • our employees have their pay linked to their performance.
International, our largest region, consists of leading positions in the attractive markets of Scandinavia, Canada and Ireland and a niche business in Italy.
Our geographic spread and segmented approach enable us to target growth in profitable segments where our technical expertise gives us competitive advantage. The ability to share best practice quickly and easily across the businesses provides a strong platform for growth and driving operational efficiencies.
Customer focus continues to be central to our propositions and we are optimising customer reach through Intermediary, Affinity and Direct channels.
In Commercial, net written premiums were in line with 2008 at £725m (down 7% at constant exchange). This reflects continued strong growth in Norway, particularly in Property and Motor, 30% growth in Renewable Energy in Denmark and the benefit of foreign exchange offset by capacity withdrawal and exposure reduction as a result of the economic downturn.
cAnAdA In Canada, RSA is one of the fastest growing and most profitable insurers and has doubled in size over the last five years. In 2009, we delivered another strong performance with net written premiums up by 15% to £1,021m
(5% at constant exchange). The underwriting result is up by 11% to £63m, with a COR of 93.5% (2008: 92.9%) despite severe weather.
Commercial net written premiums increased by 12% to £243m (2% at constant exchange), reflecting strong growth in our Risk Solutions business and rate, offsetting the withdrawal of capacity in those sectors most impacted by the downturn.
The COR for Other Europe was 105% (2008: 97.1%) with Ireland achieving a very strong 91%, which included a £10m charge for the November floods.
MARKet conditionS In Scandinavia, we continue to achieve single digit rate increases across most lines. The economies are currently forecast to return to growth in 2010 and the market remains attractive.
In Canada, the economy has weathered the global downturn well and we have continued to push mid-single digit rate across Personal lines and low single digit rate increases in Commercial.
outlooK We have built a track record of delivering strong top and bottom line performance. Although economic conditions will continue to present some challenges in 2010, particularly in Commercial, we are sticking to our strategy of increasing rates where required. In Italy, we expect to see our actions on the business start to impact the underwriting result. With our ongoing actions on expenses and our strong portfolio, we are confident that we will continue to deliver mid-single digit premium growth and strong profitability in 2010.
thiS PARt oF the woRld iS well Known FoR itS RuinS oF PASt civiliSAtionS. we helPed BRing it BAcK to liFe.
Living just 60 miles (100km) northeast of Rome, the residents of L’Aquila take great pride in the continuation of their traditions and way of life. It hasn’t always been easy for them as earthquakes mark the history of the town which sits on a hillside in the middle of a narrow valley.
There hadn’t been a serious tremor for well over 50 years, when in the early hours of 6 April 2009, while people slept in their beds, a powerful earthquake struck.
The community urgently needed medical treatment, but the local hospital had been badly damaged by aftershocks and had closed. We sent a team of 20 claims specialists, engineers and lawyers to help. Their brief was simple, to get the hospital up and running again as quickly as possible. Important medical documents that were buried were recovered and we made an advance payment of €5 million to aid the process. In May 2009 the hospital opened its doors to patients again.
we insured the construction of the confederation Bridge in canada, which is the longest bridge in the world crossing ice-covered water.
Key StRAtegieS The UK remains one of our toughest markets. We are maintaining our strategy of targeting profitable growth, taking the right action on rate and withdrawing capacity from product lines where we cannot achieve target returns, such as Professional Indemnity and Construction, which have been particularly impacted by the economic downturn.
In Commercial we are focused on segments where we see profitable growth opportunities such as Marine and Risk Solutions, which provides risk management solutions for large businesses worldwide.
PRogReSS AgAinSt Key StRAtegieS We have delivered a good result despite challenging economic conditions. We have taken a conscious decision to focus on those target segments where we can achieve profitable growth and hold the overall top line flat.
Net written premiums were stable at £2.6bn as we continued to take the right action on rate and overall retention remains strong at around 80%. The underwriting result of £75m (2008: £99m) and COR of 98% demonstrate our ability to continue to deliver sustainable profitable performance.
To support growth in Specialty lines, and following the opening of a new office in Madrid in February 2009, we now have a presence in six European countries. We have invested in capability, recruiting a number of experienced underwriters and country managers and supported the business with a dedicated marketing campaign.
We introduced Broker Promise giving selected brokers direct access to decision makers. This facilitates rapid decision making and enables brokers to better understand our risk selection criteria. Although this is in its early stages, the results are promising, with a 35% increase in new business from the targeted brokers.
Across all lines, we have continued to take the right action on rate and achieved renewal rate increases of 8% in Liability, 3% in Property and 6% in Motor. This action is reflected in the COR for Commercial of 98.5%.
PeRSonAl In Personal, premiums were in line with 2008 at £1.1bn. Household premiums were adversely impacted by the reduction in mortgage origination yet, despite the reduction in new car sales, Motor grew by 5% driven by strong growth in Broker Panels and new Affinity deals.
MORE TH>N® net written premiums were £472m, 2% down on 2008. However, Pet again grew strongly, with premiums up by 17%. We continue to build MORE TH>N® through our ‘We Do More’ advertising campaign and new propositions such as ‘Premier’ for mid-net worth customers and an iphone application to assist car claims.
In Affinity, we signed two new deals with HomeServe and the West Browmich Building Society and retained four existing partnerships.
Action on exPenSeS We are on track to deliver the £70m of savings announced in February 2009 ahead of schedule and expect to complete this programme in the first quarter of 2010. We have already achieved the target headcount reduction of 1,200 and generated £64m of annualised savings. We remain confident of achieving our target expense ratio (excluding commissions) of around 14% by the end of 2012.
outlooK Our disciplined approach in the UK, targeting profitable growth, taking the right action on rate and selectively withdrawing capacity will continue in 2010.
‘THE UK HAS AGAIN DELIVERED A GOOD PERFORMANCE IN CHALLENGING ECONOMIC CONDITIONS. LOOKING AHEAD, WITH THE ACTIONS WE HAVE TAKEN TO REFOCUS AND REORGANISE THE BUSINESS, WE ARE WELL PLACED AND WE ExPECT THE TOP LINE TO MOVE TO POSITIVE TERRITORy.’
he MAKeS the PRoduction line Run liKe clocKwoRK. without ouR helP it would hAve StoPPed FoR good.
Sun insurance company started in causey’s coffee house, which was in St Paul’s churchyard, london.
Our organic strategy is supported by targeted acquisitions which bring us scale or enhanced technical capability in a market segment.
For Large and Complex risks, we are further developing our hub and spokes model, through which regional centres of excellence support operations in meeting customer needs that they could not service in isolation. This has significant cost advantage over employing technical experts in all locations.
Affinity continues to represent a significant growth opportunity, where we leverage our partners’ distribution to efficiently access large scale customer bases. We work with utilities, retailers and banks to offer simple, low cost products such as Personal Accident to customers who often have not previously been able to purchase appropriate insurance cover.
Latin America increased premiums by 8% (2% at constant exchange), driven by good growth in Brazil, Colombia and Uruguay. To support our SME strategy, we have recruited around one thousand Small and Medium brokers across the region.
In India, our associate continues to perform strongly, with premiums up 18% to £86m,
In Central and Eastern Europe, premiums are down by 6% (16% at constant exchange). As expected, the Baltics were particularly impacted by the economic downturn, with Latvia and Lithuania worst affected, however, we have maintained our market leading position.
One of the opportunities created by the credit crunch was the acquisition of the remaining 50% of Intouch across Poland, the Czech Republic and Russia, earlier than anticipated and at a good price. These are exciting markets and our focus on direct Motor through call centres and the Web is proving successful as Intouch continues to grow. These operations have benefitted from strong support from MORE TH>N® to upgrade Motor pricing capability. We have also appointed a new Technical Director in Poland from our Canadian business to drive further operational improvements in Motor underwriting and claims.
We continued to build our Affinity capability and reputation across Emerging Markets and signed 33 new deals in the year. 13 of these deals were in Latin America including Citibank in Colombia, Claro in Argentina and Santander in Mexico with a further 17 deals across the Baltics.
MARKet conditionS Short term conditions remain challenging, especially in the Baltics and, in response to the economic downturn, we have taken a number of actions to protect profitability including: Reducing headcount by around 600 across • Asia and the Middle East and Central and Eastern Europe Taking strong action on rating, and • Selectively withdrawing capacity where • we cannot achieve target returns.
Emerging Markets have huge potential, as insurance penetration remains lower and, over the longer term, GDP growth will be higher than in more mature markets. Although short term conditions remain challenging, over time, Emerging Markets will return to double digit growth and we will continue to invest in the region.
he hAS 96 houRS to tRAnSPoRt liFe-SAving PhARMAceuticAlS AcRoSS continentS. we enSuRe theRe ARe no eMeRgencieS en Route.
The temperature-sensitive pharmaceuticals he carries are allowed a maximum of 96 hours for transit. He drives this cargo thousands of miles across some of the world’s most difficult terrain, sometimes even through war zones.
If he is delayed, or the storage temperature deviates, even just a few degrees, the entire consignment could be scrapped at a significant cost.
The team immediately carried out a forensic examination looking at all aspects of the process, from production through to delivery. We advised on everything, from route planning and packaging to transportation methods and third-party contracts.
we had a presence in india from 1852 until nationalisation, re-opening for business in 2000.
*2005 included a one-off benefit for profit on changes in pension scheme design
ReSultS oveRview 2009 was a good year for the Group in challenging conditions and we have again delivered a strong result with management actions on targeted growth, rate and expenses offsetting the impact of the economic downturn.
Our balance sheet and capital position remain strong and our commitment to tight operational and financial management underpins this result.
net wRitten PReMiuMS Net written premiums are up by 4% to £6.7bn (down 1% at constant exchange). This reflects the impact of the downturn offset by our actions on rate, targeted growth and the benefit of acquisitions and foreign exchange.
oPeRAting ReSult The operating result is £777m (2008: £867), with the marginal increase in the underwriting result offset by the expected reduction in investment income.
The Group continues to maintain its prudent reserving policy. Reserves remain very significantly to the right side of best estimate,
george culmer Chief Financial Officer and we would expect positive prior year development to continue to be a significant feature of the underwriting result.
On investment income, the average underlying yield is 3.9%, with a 1.1% return on cash assets and 4.2% on the remainder of the portfolio.
In terms of 2010, as it stands today, we would expect full year investment income to be around £540m and we currently expect total gains to be around 2009 levels.
otheR ActivitieS Other Activities are £132m and comprise central expenses, which are in line with the prior year, investment expenses and the ongoing investments in our associate in India and direct operations in Central and Eastern Europe.
otheR MoveMentS Other movements comprises interest and other costs of £141m, up from £126m primarily due to the issue of the Sterling bond in May. Reorganisation costs relate to the cost reduction programme in the UK, announced in February 2009. To date we have achieved £64m of run rate savings at a cost of £75m, against the expected cost of £80m for the full programme. We anticipate completing the full programme of £70m of cost savings in the first quarter of 2010, ahead of schedule.
The setting up of our Irish reinsurance company remains on track and we are currently awaiting regulatory approval.
PRoFit AFteR tAx Profit after tax is £419m and the underlying return on opening equity is 12.7%, with the movement on 2008 due to expected lower investment income and the impact of foreign exchange on opening assets. The underlying return on average equity is 13.4% compared to 16.4% in 2008.
The government bond portfolio is high quality, with the vast majority rated AAA. Our exposure to Greece, Ireland, Italy, Portugal and Spain is £268m, less than 2% of the total portfolio. Of this exposure, around £180m is held to back the liabilities of our operations in Ireland and Italy.
We continue to take action to offset the fall in yields, including the selective purchase of high quality non government bonds as well as a measured increase in equity and property holdings. At the year end, non government bonds comprised 54% of the portfolio, compared with 48% at the start of the year, while equities and property were 7% and 3% respectively. We’ve also taken action to reduce cash balances across the Group and these are down by around £600m in the year.
On capital, our regulatory surplus remains at £1.7bn, with coverage a very strong 2.4 times the requirement. The Group also continues to hold a significant economic capital surplus of around £1.8bn.
RAting AgencieS S&P, Moody’s Investor Service and AM Best provide insurance financial strength ratings for the Group and its principal subsidiaries. The Group is currently rated A stable outlook by S&P, A2 stable outlook by Moody’s and A (Excellent) by AM Best.
On assumptions, in line with decreasing corporate bond yields, the discount rate has been reduced from 6.2% to 5.8% and we have also increased our inflation assumption and moved to the long cohort on mortality.
We continue to take action to de-risk our pension schemes and in 2009, we were the first company in Ireland to move from a final salary to a career average earnings scheme.
In February 2010, we made further significant changes to our UK defined benefit schemes.
We welcome the increased focus on good risk management and the more risk based approach to solvency calculations, although, along with the rest of Europe, we are concerned about the level of prudence within the proposed calibrations for the standard formula calculations. We are lobbying hard and engaging directly with industry groups and regulators.
We are also at the forefront of implementation. We start with a very strong capital management and modelling capability and we are one of only four companies working with the FSA on the pilot approval process for internal models.
gRouP RiSK Policy StAteMentS Group risk policy statements set out the minimum standards to be maintained by the Group’s operations to manage risks in a way that is consistent with the risk appetite. Business managers are responsible for complying with Group and local risk policies and for managing risk by taking mitigating actions where appropriate. The Board Risk Committee’s role includes consideration of risk mitigation.
RiSK cAtegoRieS Risk elements are viewed under headings that broadly correspond to those used in the Financial Services Authority’s Prudential Sourcebook for Insurers (INSPRU) and Senior Management Arrangements, Systems and Controls (SySC). Additional information is provided in the Risk Management section on page 85. Some of the key current practices and tools for each risk category are set out below.
Claims development and reserving levels are closely monitored. Each region’s Reserving Committee determines a recommended level of outstanding claims reserves in accordance with the Group reserving policy. The Group Reserving Committee assesses the appropriateness of these recommendations and determines the level of aggregate outstanding claims reserves to be carried by the Group.
PRoceSSeS We undertook an extensive exercise to review and document the Group’s Governance Structure and Control Framework, which confirmed the existing strong level of governance and control.
We undertook a comprehensive stress and scenario testing exercise (covering reverse stress tests) to better understand our risk profile and improve our control environment.
In addition to our strong focus on technical and file reviews, we strengthened our focus on underwriting referrals to ensure that we write the right risks at the appropriate price.
A series of key risk indicators are used to assess and manage operational risk, whilst data collected on actual operational risk incidents and ‘near misses’ captures past experiences. The use of scenario analyses enables assessment of whether operational events that have occurred elsewhere could manifest themselves within the Group.
Market risk arises from the Group’s investment portfolios. The Group Asset Management Committee oversees the Group’s investment strategy under the oversight of the Investment
Committee and operating within risk limits set by the Board Risk Committee.
RegulAtoRy RiSK The Group operates in a number of geographical locations with diverse regulatory requirements. Internationally, the regulatory environment has become more complex and demanding. The Group continues to respond to these developments through its arrangements for regulatory compliance and by ensuring that it maintains open and cooperative relationships with its regulators.
Solvency ii SteeRing coMMittee gRouP ReSeRving coMMittee gRouP executive coMMittee gRouP ASSet MAnAgeMent coMMittee gRouP RiSK, inveStMentS & tReASuRy coMMittee icA & cAPitAl AllocAtion
Impact on investment portfolio • and investment income due to lower interest rates and investment market volatility.
Diverse portfolio provides exposure to markets at different stages • of development and at different points in the insurance cycle Group has limited exposure to economically triggered contracts • KPI dashboard developed, enabling early corrective action, e.g. • change in terms and conditions, rate and capacity withdrawal Maintain focus on underwriting discipline and targeted • profitable growth, and Continue to take action on rate and expenses.•
Catastrophic losses arising • from insurance event(s) Increasing frequency and • severity of large losses, and Deterioration in long tail • reserves.
Underwriting strategy set centrally using risk aggregation models • to ensure risks written are well diversified and within risk appetite Portfolio reviews monitor underwriting performance• Emerging trends in large losses, frequency and severity are • investigated and corrective action taken Conservative reinsurance programmes limits net losses, and • Conservative reserving policy ensures claims reserves are set with • the aim that, over the longer term, they will be more likely than not to result in positive prior year development.
CORPORATE RESPONSIBILITy REMAINS FUNDAMENTAL TO THE WAy RSA CONDUCTS ITS BUSINESS. DURING 2009 WE LAUNCHED A NEW PARTNERSHIP WITH WWF FOCUSING ON THE RISKS OF ENVIRONMENTAL CHANGE.
Environmental, social and governance (ESG) risks are actively monitored and reviewed regularly by the Board. In 2009, the main risks identified included the forthcoming UK Carbon Reduction Commitment legislation, environmental impacts of shipping and flood risk in the UK. We set environmental improvement targets at a country level and as a Group achieved 74% of 2009 targets. We recently set a challenging target to achieve a reduction in CO2 of 40% by 2020 against our 2006 levels.
Further information on our approach, governance and policies can be found at: www.rsagroup.com/rsa/pages/responsibility cR SuPPoRtS ouR StRAtegy Our commitment to ‘Doing the Right Thing’ is not isolated from but underpins our business strategy. We incorporate the activities discussed below into our strategic priorities. For example, our work on flood mapping helps us identify the appropriate price for the risk accepted, driving sustainable earnings, whilst also allowing us to prioritise our claims approach. The development of our renewable energy products has been a key factor in delivering targeted profitable growth and establishing RSA as a leading renewables insurer globally and the work we do on environmental management to reduce travel, paper consumption and energy and water
Flooding remains a key issue for RSA. The impact of increased frequency or intensity of rain has a direct impact on our customers. With increased pressure on flood defence budgets, insurers need to find environmentally sensitive and cost effective solutions. Together with WWF we are restoring an urban river in London. Slowing down the river, re-creating the natural meander and creating a floodplain demonstrates a cost-effective, natural solution.
As one of the largest Marine insurers, we are acutely aware of increasing pressures on fishing, shipping and resource extraction and we are working to improve sustainability. In Canada, we are establishing marine protection areas to help safeguard the long-term future of our fishing industry and in Scandinavia, we are collaborating with governments to better manage commercial use of the Baltic Sea.
Governments are placing an increased focus on renewable energy to combat climate change. As a leading insurer of this risk, our Global Renewables business is uniquely placed to help the transition to a low carbon economy. In China, we will be working with WWF and a range of stakeholders to develop renewable energy usage and energy efficiency.
Customer service is of critical importance to us and we introduced our Customer Satisfaction Monitoring system in the UK to help us better understand customer attitudes and feelings. We received over 18,000 responses for our MORE TH>N® business and as a result we will be focusing on making the improvements prioritised by our customers.
We remain committed to clear and open communication with our customers and to resolving any complaints promptly. Independent analysis shows our success in improving our performance, with the 2009 survey by the Association of British Insurers which awarded RSA 97 out of 109, the highest score of all general insurers.
BuSineSS PARtneRS We work closely with our business partners and intermediaries to grow a successful business while reducing our collective environmental and social impact. During 2009, in the UK we asked 90% of our suppliers about their management of CR issues and engaged in active dialogue to improve standards.
Broker satisfaction is also important and, in Trygg-Hansa in Sweden, we received top ratings in an independent survey of brokers’ perceptions of insurance companies and their products. We scored highly for service and personal contact and 73% of Trygg-Hansa’s brokers said they are satisfied, securing the company as one of the leading general insurers.
Net tonnes CO2 per £m NWP 4.7 4.7 14.1 * Group carbon dioxide equivalent emissions (tonnes).
ev iew on 25 June, we will be hosting ‘RSA day’ as part of our 300 year birthday celebrations in support of our cR strategy to further encourage volunteering and fundraising around the group.
Annual Report and Accounts 2009 | RSA | 35 eMPloyeeS A sustainable business needs to attract, develop and reward talented people, as well as making them accountable for their actions.
We continue to focus on developing employees at all levels through our major initiatives: Our Technical Academy now has over • 10,000 members across the Group and provides immediate access to more than 300 online training solutions as well as planning tools and career maps Our Marketing Academy was the winner of • the ‘Insurance Times Training Programme of the year 2009’ and has, to date, rolled out its Foundation Programme to more than 150 RSA marketeers from over 12 countries The Executive Development Programme • is entering its sixth year, bringing together leaders from across the Group to work collaboratively on critical strategic issues, and Our Graduate and FastTrack programmes • provided structured support and career paths for 42 new starters and high potential individuals in 2009.
Across RSA, staff at all levels participate in local volunteer weeks donating funds, volunteering and helping causes they care about. 10,123 employees volunteered during working hours up from 7,250 in 2008. In 2009, we donated over £2.7 million in charitable donations (2008: £2.2 million), with over 21,195 volunteer hours donated.
As an insurer, we are at the forefront of technology to help manage and minimise risk for our customers from extreme weather. Over the last year, we utilised our flood risk mapping tool to detect customers most likely to be affected during the Cockermouth and Keswick floods, ensuring our claims teams contacted them as a priority.
We focus on three areas that are important to our customers and where we feel we can achieve most through our skills and experience: Our operations in the UK, Ireland and Group Corporate Centre remain carbon neutral. All offsetting of equivalent emissions is made in renewable energy projects certified to the Voluntary Carbon Standard.
ReSPonSiBle inveStMent The bulk of our UK equity assets continue to be managed by F&C Asset Management. F&C has one of the largest Governance and Sustainable Investment teams in Europe, enabling it to follow a policy of active engagement across its portfolios on environmental, social and governance issues. Last year F&C engaged with 94 companies on a wide range of issues from climate change to labour standards in our portfolios.
In 2008, the city government took steps to address the pollution problem. It now bans around 320,000 cars from the road during smog alerts. The problem for people like Anna is knowing whether her car is one of the banned ones on any given day. Simple tasks, like taking the children to school, become much more complicated. And she risks a heavy fine for ignoring the ban.
We brought together our smartest thinkers to come up with a proactive solution to alleviate the issue. The answer was simplicity itself: RSA recommended, created and now broadcasts a SMS service during smog alerts to warn drivers if their car is banned the following day.
FRoM leFt to Right: 1. Andy hASte gRouP chieF executive Andy joined the Board as Group Chief Executive in April 2003 and is on the Investment Committee and Board Risk Committee. Andy has been a member of the Board of the Association of British Insurers since 2003. Andy’s previous roles include Chief Executive of AxA Sun Life plc, Director of AxA UK plc (life and pensions), President and Chief Executive Officer of Global Consumer Finance Europe at GE Capital UK, Western Europe and Eastern Europe (financial services) and President of National Westminster Bank’s US Consumer Credit Business (retail banking). He was appointed a Non-Executive Director of ITV plc (media) in August 2008.
4. AdRiAn BRown chieF executive, uK Adrian Brown was appointed Chief Executive of the UK in September 2008. Adrian is a qualified management accountant and has been with the RSA Group since 1989. He was previously the UK Chief Operating Officer with responsibility for Claims, Sales and Service, IT and Change across Personal and Commercial lines, and prior to that was UK Director of Personal lines and led the launch of MORE TH>N®.
8. geoRge culMeR chieF FinAnciAl oFFiceR George joined the Board as Chief Financial Officer in May 2004 and is a member of the Investment Committee and the Board Risk Committee, which he chaired until June 2009. He was previously Head of Capital Management at Zurich Financial Services (insurance) and Chief Financial Officer of its UK operation. Before that George spent ten years with Prudential.
10. SiMon lee chieF executive, inteRnAtionAl Simon was appointed as an Executive Director in January 2007 having been Chief Executive of International since April 2003. He is Chairman of the Codan Group and Trygg-Hansa and is a Director of RSA Canada. He spent 17 years with the National Westminster Group as Chief Executive, Natwest Offshore and Head of US Retail Banking.
3. geoRge culMeR Age 47. George joined the Board as Chief Financial Officer in May 2004 and is a member of the Investment Committee, the Group Executive Team and the Board Risk Committee, which he chaired until June 2009. He was previously Head of Capital Management at Zurich Financial Services (insurance) and Chief Financial Officer of its UK operation. Before that George spent ten years with Prudential.
Annual Report and Accounts 2009 | RSA | 41 6. SiMon lee Age 48. Simon was appointed as an Executive Director in January 2007 having been Chief Executive of International since April 2003 and is a member of the Group Executive Team. He is Chairman of the Codan Group and of Trygg-Hansa and is a Director of RSA Canada. Previously he spent 17 years with the National Westminster Group, in the UK and US, including time as Chief Executive, Natwest Offshore and Head of US Retail Banking.
7. MAlcoM le MAy Age 52. Malcolm joined the Group as a Non-Executive Director in March 2004 and is Chairman of the Investment Committee, joined the Board Risk Committee in June 2009 and is a member of the Remuneration and Nomination Committees. He is also a Non-Executive Director of Pendragon plc (general retailers) and Chief Executive of Matrix Corporate Capital LLP. Malcolm’s previous roles include Deputy Chief Executive of Morley Fund Management (Investment Fund Manager) and Deputy CEO of INGBarings (finance).
The Directors of RSA Insurance Group plc (RSA) present their report and the audited financial statements of the Company for the year ended 31 December 2009.
The business review has been prepared to the best of the Directors’ knowledge in order to provide the Company’s shareholders with a fair review of the development and performance of the Company and the Group as a whole, together with a description of the principal risks and uncertainties which may affect the Group. It may not be relied upon for any other purpose.
The preferential dividend at the rate of 3.6875% for the period from 1 October 2009 to 31 March 2010 will be paid on 1 April 2010 to holders of preference shares on the register at the close of business on 5 March 2010.
Our accelerated career programme, FastTrack, has continued in all regions. There have been a total of 114 participants since the programme began in 2006 with 27 individuals from 13 different countries joining the programme in 2009.
We have seen improvements in a number of key result areas in our global employee survey. In 2009 our focus was again on employee engagement and was the second year that Gallup supported us in measuring employee engagement using the Gallup Q12© questions. With an overall response rate of 92%, an increase of 6% on 2008, we achieved a fundamental shift in engagement across all regions with a third of our teams being judged by Gallup as world class. We are the only sizeable European client of Gallup to achieve a fundamental shift in engagement this year.
Our policy is to encourage employee share ownership. Employees from 17 of the 34 countries in which RSA operates are invited to participate in our Sharesave scheme and the overall takeup by eligible employees is 47%. This year we also launched an HM Revenue & Customs approved share incentive plan, Sharebuild, in the UK with 24% of eligible employees choosing to participate. Further details on the Group’s share schemes can be found in the remuneration report on pages 53 to 66.
Employees are kept well informed of the overall performance and objectives of the Group. Communications are regularly provided by email, intranet articles and staff publications. Key messages from our biannual Group Leaders Conferences are disseminated to teams by local management.
environmental programme Details of our environmental programme can be found in the corporate responsibilty report on pages 33 to 37 and on our website at www.rsagroup.com.
The Company’s outstanding indebtedness to trade creditors on 31 December 2009 amounted to £2.7m corresponding to 14 days’ payment when averaged over the year.
share capital On 18 May 2009 the authorised share capital of the Company was increased by ordinary resolution from £1,468,750,000 to £1,881,250,000 by the creation of 1,500,000,000 ordinary shares of 27.5p each ranking pari passu in all respects with the existing ordinary shares of 27.5p each in the capital of the Company.
During the year 28,969,400 ordinary shares of 27.5p each were issued in satisfaction of the exercise of employee share options for a total consideration of £11,460,043 and 61,767,996 ordinary shares of 27.5p each were issued under the Company’s scrip dividend scheme for a total consideration of £76,540,441.
The Company can increase its share capital and authorise the Directors to allot further securities by ordinary resolution. As at 31 December 2009, the Directors had authority to allot securities up to a nominal amount of £305,350,938.
employee Benefit trusts The Company operates three employee benefit trusts to hold ordinary shares in RSA which are used to satisfy exercises under the Group’s share incentive schemes. These trusts are the Royal & SunAlliance ESOP Trust, the Royal & SunAlliance ESOP Trust No. 2 and the Royal & SunAlliance ESOP Trust No. 3 (the ‘Trusts’). In each case, the Trustee is Lloyds TSB Offshore Trust Company Limited. In respect of any shares held in the Trusts, the Trustee may vote in respect of those shares, but has no obligation to do so. In respect of the Royal & SunAlliance ESOP Trust No. 3, the Trustee may have regard to the financial interests of the beneficiaries in exercising its voting rights over the Company’s shares.
Directors The names of the Directors, together with biographical details are set out on pages 40 and 41 and are incorporated into this report by reference.
Details of the Directors’ service contracts and terms of appointment, together with their interests in the Company’s shares are shown in the remuneration report on pages 53 to 66 and are incorporated into this report by reference.
Since 12 July 2006, the Company has granted an indemnity to each of the Directors pursuant to the power conferred by Article 144. The indemnities granted constitute qualifying third party indemnity provisions (as defined by section 234 of the Companies Act 2006). The Board of Directors (the ‘Board’) believes that it promotes the success of the Company to provide this indemnity to its Directors in order to ensure that the Group attracts and retains high calibre Directors through competitive terms of employment in line with market standards.
Directors and officers of the Company and its subsidiaries also have the benefit of insurance which provides suitable cover in respect of legal actions brought against them.
None of the Directors had any interest in any other contract with the Company or any of its subsidiaries during 2009 save that a number of Directors have taken out personal lines insurance with the Group.
related party transactions Related party transactions are set out in note 32 on page 131.
charitable and political contributions The Company and its subsidiaries worldwide made charitable donations of £2,789,725 during the year, of which £1,454,012 related to donations made to UK based charities. In 2009, the largest charitable donation was to WWF-UK at a total of £840,000, being the first payment in respect of a 3 year global partnership. The partnership focuses on conservation and research projects in the UK, Canada, Scandinavia and China concentrating on environmental change and links to insurance.
going concern In considering the appropriateness of the going concern basis, the Board has reviewed the Group’s ongoing financial commitments for the next 12 months and beyond. The Board’s review included consideration of the Group’s underwriting plans, strong regulatory capital surplus, diverse insurance risk profile, considerable undrawn financing facilities and highly liquid investment portfolio. As a result of this review the Directors have satisfied themselves that it is appropriate to prepare these financial statements on a going concern basis.
Annual Report and Accounts 2009 | rsa | 47 corporate governance
compliance with the combined code Throughout 2009 the Group has complied with the Principles and Provisions of the Combined Code except that the Group has not appointed a senior independent director. The Non-Executive Directors formally consider each year whether a senior independent director is required and remain of the view that the appointment of a senior independent director is not appropriate at this time but will have regard to the various recommendations currently under discussion made in the Walker Review and FRC Review of the Combined Code. All Non-Executive Directors are encouraged to communicate directly with Executive Directors and senior management outside formal meetings and an active dialogue is maintained by the Board.
The Board continues to operate the procedures adopted following the introduction of the statutory directors’ duty to avoid conflicts of interest and these procedures have operated effectively during the year. Under the Articles the Board may authorise any conflict of interest. The conflicted Director 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 interests 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. Under the procedure adopted by the Board each Director is required to notify the General Counsel and Group Company Secretary when a conflict of interest arises and the Board also reviews Directors’ conflicts of interest annually.
Total number of meetings in the year 1 12 7 5 8 5 2 1
Simon Lee 10 *Chairman of the Board or Board Committee. Noel Harwerth succeeded George Culmer as Chairman of the Board Risk Committee with effect from 3 June 2009.
At all times during the year, at least half of the Board, excluding the Chairman, comprised non-executive directors. All Non-Executive Directors have been determined by the Board to be independent. The Chairman meets regularly with the Non-Executive Directors both individually and collectively without the Executive Directors being present. The Chairman is currently Non-Executive Chairman and acting interim Chief Executive of Aegis Group plc pending an appointment to that position. The Chairman met the independence criteria of the Combined Code on his appointment in 2003 and continues to meet the criteria set out in the Combined Code. Andy Haste was appointed as a Non-Executive Director of ITV plc in 2008 at which time ITV plc was a constituent of the FTSE 100. ITV plc is currently a member of the FTSE 250. No other Executive Director served on the board of a FTSE 100 company during the year.
appointments to the Board The Board considers the leadership needs and succession planning of the Board when making decisions on new appointments. The Board also ensures that succession planning processes and plans are in place with regard to senior appointments both below and at Board level. When appointing new Directors, regard is given to the size of the Board; balance of Executive and NonExecutive Directors; the skills and experience already represented; likely future retirements; and those appointments to the Board which would be desirable going forward.
Development and training for the Directors is an ongoing process which includes briefings on legislative and regulatory changes and on corporate governance issues. Directors also receive regular presentations about the Company’s operations and there are regular discussions on strategy, customer marketing, employee engagement and environmental, social and governance matters. Opportunity is also created for Non-Executive Directors to make informal visits to different parts of the Group and to meet with local management.
performance evaluation In 2009 the Board undertook an annual evaluation of its performance to assess how well the Board, its Committees and the Directors were performing. The review included the use of a comprehensive questionnaire. Responses from the questionnaire were collated and subsequently discussed by the Board and they have concluded that the Board was operating well. Following the 2009 review the Board have continued to improve agenda management for Board meetings to ensure that adequate time is made for the debate and exchange of ideas to support effective decision making.
The Chairman has recommended that an external review of the Board be carried out in 2010 in accordance with current best practice.
chairman and chief executive officer The roles of the Chairman and the Group CEO are separate, with responsibilities clearly divided between them. This separation of responsibilities is formalised in role statements which have been reviewed and approved by the Board.
Financial reporting The Directors are required to ensure that adequate accounting records are maintained so as to disclose at any time, and with reasonable accuracy, the financial position of the Group. They are also responsible for taking reasonable steps to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.
The Directors must present financial statements for each financial year, in accordance with applicable law, accounting standards and regulations, which give a true and fair view of the state of affairs of the assets, liabilities, financial position and the profit or loss and cash flows for the Company and the Group as a whole for that period. Financial statements for the Group are prepared in accordance with International Financial Reporting Standards (IFRS), the Companies Acts 1985 and 2006, the Listing Rules of the UK Listing Authority and Article 4 of the IAS Regulations.
In preparing such financial statements the Directors are required to: Select suitable accounting policies and apply them on a consistent • basis using reasonable and prudent judgement State whether or not applicable accounting standards have been • followed and explain any material departures State whether the Group financial statements have been • prepared in accordance with IFRS and Use the going concern basis unless it is inappropriate to do so.•
the Fsa The Board is also responsible to the Financial Services Authority (FSA) for ensuring compliance with the Group’s UK regulatory obligations. The Board attaches great importance to its regulatory responsibilities and is committed to dealing with the regulator in an open, cooperative and transparent manner. In the second half of 2009 the FSA conducted an ARROW Risk Review of both the Group and UK operations. This included a review of the Company’s Individual Capital Assessment and of Treating Customers Fairly. During 2009 the FSA also conducted private meetings with several members of the Board and executive management as a part of their ‘close and continuous’ programme.
At any general meeting every shareholder present shall have one vote on a show of hands, and on a poll every shareholder present in person or by proxy shall have one vote for each share of which he is the holder. Each resolution was put to a poll at the AGM in 2009. Voting at the AGM is conducted electronically, with the results being announced to the London Stock Exchange and on the Company’s website.
The Committee is comprised of Non-Executive Directors, all of whom are deemed to be independent and the Combined Code requirement for at least one Committee member to have recent and relevant financial experience is met. Details of the members of the GAC and their attendance at GAC meetings are shown in the table on page 47. The General Counsel and Group Company Secretary acts as the Secretary to the GAC. The Group CEO, Chief Financial Officer (CFO), Group Chief Auditor, Group Operations & Risk Director, Group Head of Regulatory Risk and Compliance and a representative of the external auditor are regular attendees by invitation and the GAC holds regular meetings with the Group Chief Auditor and the external auditor without any members of management being present. The Chairman and other members of executive management are also invited to attend from time to time. The outcomes of meetings are reported to the Board and the Board receives the minutes of all the GAC meetings.
The GAC annually reviews the Group’s Whistleblowing Policy and is satisfied that the policy meets the criteria set out in the Combined Code. This policy deals with employees who wish to raise serious concerns in good faith, and who either do not feel comfortable raising the matter with local management or are not satisfied with the local management response. They can raise their concerns with the Group Chief Auditor, who will either investigate or arrange for an investigation of the matter. Employees are offered such safeguards and support as may be necessary to protect their personal integrity and, where possible, identity.
The GAC is satisfied that, during 2009, it has received sufficient, reliable, and timely information from management to enable it to fulfil its responsibilities.
Accordingly, the GAC recommended to the Board that a resolution be put to the 2010 AGM for the reappointment of Deloitte as external auditor and the Board has accepted this recommendation.
internal audit The Group has an internal audit function, whose activities and effectiveness are monitored and reviewed by the GAC. The GAC is responsible for ensuring that adequate access to information and resource is given to the Group Chief Auditor and for approving the appointment to, and removal of the holder from, that position.
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 their audit work. The GAC also receives reports on the adequacy of the Group’s arrangements for ensuring regulatory compliance from the Group Head of Regulatory Risk and Compliance. The Board, through the Board Risk Committee, considers reports from risk specialists to the Group, and reviews Group level risk management information.
The Board considers that the current reporting framework delivers sufficient information to monitor the systems of internal control and to review their effectiveness as required by the Combined Code. The Board therefore considers that an ongoing process for identifying, evaluating and managing the significant risks faced by the Group has been in place during 2009 and up to the date of approval of the Annual Report and Accounts. This process is regularly reviewed by the Board and accords with the Turnbull Guidance on the Combined Code.
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 explained below.
Board risk committee (Brc) Chaired by Noel Harwerth, the BRC’s principal duties are as follows: To recommend the Group framework of risk limits and risk • appetite to the Board for approval To approve the Reinsurance Framework, risk profile and • aggregate exposure limit recommended by the Group Reinsurance Credit Committee To approve the quantum of ICA/ECA capital required as recommended • by the ICA and Capital Allocation Steering Group including a review of the overall assumptions, results and key changes To review the proposed strategic direction and guidance for • Solvency II compliance and make recommendations to the Board To review the proposed risk management and regulatory • compliance strategies of the Group and recommend their approval to the Board To ensure that the material risks facing the Group have been • identified and that appropriate arrangements are in place to manage and mitigate those risks effectively To ensure the risk profile and mitigating actions address issues • relating to the Group’s control environment To review and challenge risk information received from the • Group’s risk functions to ensure that the Group is not exceeding the risk appetite set by the Board To present a profile of the Group’s key risks and associated • controls to the Board at least annually To review the draft of the remuneration report to be included in • the Company’s Annual Report and Accounts (to the extent not reviewed by the Board as a whole) and report any views on any implications of the Group’s remuneration policies for risk and risk management to the Board.
The regional Risk Committees for each of the UK, Emerging Markets and International regions provide regular reports to the BRC.
Noel Harwerth and Malcolm Le May joined the Committee with effect from 3 June 2009 with Noel Harwerth succeeding George Culmer as Chairman of the Committee at that date. Other members of executive management are regular attendees together with the regional risk directors.
investment committee The Investment Committee is chaired by Malcolm Le May and comprises all of the Non-Executive Directors, the Group CEO and the CFO. The Committee met twice during 2009. The Committee assists the Board in setting the Group’s investment strategy and monitors the execution of that strategy and the Group’s investment performance. In addition to his reports to the Investment Committee, the Group Investments Director also attended a Board meeting and provided update papers to the Board during 2009.
Delegated authorities The Group operates a Delegated Authority Framework which specifies how executive authority is delegated from the Board to the Group CEO and on to other executives in the Group. Individual executive licences set out specific limits of authority in terms of entering into financial, underwriting and other business commitments. Each executive is responsible for ensuring a similar process of delegation is in place within his or her area of responsibility.
Further detail on risk management are set out on pages 30 to 32.
The following report by the Remuneration Committee has been approved by the Board for submission to the shareholders at the 2010 AGM.
Deloitte have audited the following items stipulated in law for their review: The table of Directors’ emoluments and associated footnotes on page • 61 and the disclosure of the items comprising benefits in kind The tables of defined benefit and defined contribution pensions on • page 62 and associated footnotes The table of disclosure of Directors’ share options and share awards • on pages 63 to 66 and associated footnotes.
principal duties of the remuneration committee The Committee is a formal Committee of the Board and is accountable to shareholders through its annual remuneration report, which is voted on at the AGM, and remains committed to reflecting the best interests of shareholders and to the pursuit of best practice in remuneration policy.
The Committee’s principal duties are as follows: The determination of the terms and conditions and remuneration • of the Chairman of the Board and the Executive Directors Overseeing the operation of the Company’s share based long term • incentive schemes, including approving the value and timing of awards and overseeing the operation of performance conditions Consideration of, and advice to the Board on, the Group’s broader • remuneration policy in relation to senior executives reporting to the Group CEO (the ‘Executive Team’) 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 • Company’s Annual Report and Accounts to members of the Board Risk Committee for review in respect of risk and risk management (to the extent not reviewed by the Board as a whole).
The Committee Chairman presents a formal report of the Committee to the Board following each meeting of the Remuneration Committee. The Committee presents a summary of its principal activities to shareholders through this report, and the Committee Chairman attends the AGM to answer questions from shareholders on the activities of the Committee and its remuneration policies.
The Committee’s responsibilities are set out in its terms of reference which are available to shareholders on request and on our website at www.rsagroup.com. The Committee welcomes ongoing dialogue with shareholders on remuneration policy.
Members of the Committee have no personal financial interest, other than as shareholders, in the Committee’s decisions and they have no conflict of interest arising from cross directorships. Fees for serving as a Committee member and chairing Committees of the Board are described in the Non-Executive Directors’ section of this report on page 60.
advisors to the remuneration committee In developing remuneration strategy during the year, the Committee obtained its principal advice from Towers Perrin LLP, who were appointed by the Committee. In addition to providing independent advice to the Committee, Towers Perrin LLP provides broad reward and pensions advice to the Company. Towers Perrin LLP merged with Watson Wyatt in January 2010 and will continue to provide advice to the Committee as Towers Watson in 2010.
The terms of engagement for the remuneration consultants are available to shareholders on request and on our website at www.rsagroup.com.
activities of the remuneration committee The continuing focus of the Committee is the maintenance of a strong link between performance and reward. It is the Committee’s view that the interests of shareholders are best served by ensuring a remuneration structure which has a significant element of performance related pay, and reinforces the culture of high performance and accountability that applies at all levels throughout the Group, without undue risk.
| rsa | Annual Report and Accounts 200954 remuneration report continueD
Performance Shares subject • to stretching performance conditions Matching Shares awarded • linked to Deferred Shares, also subject to performance conditions Annual awards that may vest • after three years Non pensionable•
Maximum opportunity of • 180% of base salary One third of the annual • bonus received is to be in the form of compulsory Deferred Shares under the LTIP Executive Team members • are expected to defer an additional element of their cash bonus so that the total deferral is 50% of the bonus paid Annual• Non pensionable•
To reflect the market value of the role and the skills and experience of the individual
Defined benefit scheme or • defined contribution scheme, and/or cash allowance in lieu of pension contributions
Reviewed annually, changes • effective from 1 April Benchmarked against • equivalent roles in similar companies and with reference to the sustained performance of the executive
At its meeting in February 2009, the Committee approved the 2008 remuneration report, agreed changes to variable pay policies for Executive Directors, reviewed proposals for new share plans, and reviewed the proposed annual objectives and performance goals for Executive Directors in 2009. In March 2009, the Committee reviewed the base salaries of the Executive Directors, determined the outcome of annual bonuses for 2008 in the light of actual performance against agreed goals and objectives, reviewed a forecast of share usage for Long Term Incentive Plan (LTIP) awards in 2009 and approved the grant of LTIP awards in April 2009. When the Committee met in July 2009 it approved LTIP awards to be granted in September 2009 and approved the grant of awards under the RSA Sharesave Plan (‘Sharesave’) and RSA Share Incentive Plan (‘Sharebuild’) for 2009. In September 2009 the Committee reviewed the Walker Report and FSA guidelines including risk management processes in relation to executive remuneration. The Committee reviewed remuneration arrangements to ensure that the potential amount of remuneration and the stretch in performance targets do not implicitly encourage excessive risk taking. We are satisfied that our current arrangements do not do this. The Committee also undertook a review of high potential executives and managers below Executive Committee level including Executive and Non-Executive succession planning and associated processes. At the December 2009 meeting the Committee reviewed TSR performance over the year and approved the share usage for Sharesave and Sharebuild.
Base salary policy: Base salary is set with reference to equivalent roles in similar companies and the sustained performance of the executive.
2009 pay review In 2009, base salaries were primarily reviewed on the basis of market movements and individual performance. The Committee analysed the remuneration details of a comparator group comprising UK and international financial services companies and awarded salary increases with reference to the median position for equivalent roles in that group.
The 2009 salary review process resulted in the following increases, effective from 1 April 2009: Position Increase Base salary
2010 pay review As at 1 April 2010, no increase in base salary will be awarded to Executive Directors or members of the Executive Team.
The following table sets out the base salaries of UK based executives below Board level on a banded basis as at 31 December 2009. No such executive received a base salary in excess of £371,000.
The financial targets that applied to the annual performance bonus in 2009 for Andy Haste and George Culmer were a combination of targets relating to the overall Group COR result and the COR results of the regional operating businesses. The financial targets for Simon Lee’s annual performance bonus were weighted towards the International business while also retaining a target for the Group COR result as a whole.
share based long term incentive awards policy: to provide annual share awards to executives to ensure alignment with shareholder interests solely through the ltip. except in exceptional circumstances, no other discretionary share plan will be used to make awards.
Deferred shares As described in the annual performance bonus section on page 56, Executive Directors, members of the Executive Team and the Top 100 may be granted Deferred Share awards as part of the annual bonus. These Deferred Shares may not be withdrawn and will normally vest three years from the date of grant subject to continued employment with the Group.
Matching Shares will vest after three years subject to the performance condition (see below) and provided the individual remains in employment with the Group (other than in exceptional circumstances such as death or retirement at normal retirement age).
performance conditions The Committee will determine the performance condition for each grant of Performance Shares and Matching Shares, with performance measured over a single period of three years with no provision to retest. In 2010 grants of Performance Shares and Matching Shares related to compulsory Deferred Shares will be subject to a performance condition consisting of a combination of ROE and TSR targets.
As in 2009, ROE will be given greater prominence than relative TSR, to underline our commitment to improving the returns that we generate on our balance sheet. The vesting of 70% of the LTIP awards will be based on ROE performance and 30% on relative TSR performance (with the exception of Matching Shares attaching to voluntary Deferred Shares, the vesting of which will remain dependent solely on the ROE performance condition).
30% of the shares comprising the award will vest according to TSR performance against a comparator group of UK and international financial services companies. Below median performance, no part of the award subject to the TSR performance condition will vest. At median performance, 25% of the award will vest. At upper quintile (top 20%), 100% of the award will vest. Vesting will be on a straight line basis in between.
The TSR comparator group will consist of the following companies: Comparator companies
During 2009, Alleanza was taken over by Generali. The Committee resolved to remove Alleanza from the comparator group for the purpose of measuring TSR performance for awards made in 2007, 2008 and 2009. The Committee reviews, on an ongoing basis, the composition of the comparator group and will consider adding companies for future awards in the event that the number of constituent companies drops below an acceptable level.
The Group’s TSR will be independently calculated and verified by the Committee for the purposes of awards made in 2010 under the LTIP.
Dilution Dilution levels for all schemes are held strictly within the Association of British Insurers (ABI) limits (10% over ten years for all schemes and 5% for discretionary schemes). The dilution levels compared to ABI limits as at 31 December 2009 were: ABI limit RSA dilution 10% over ten years for all share schemes 6.04%
pension provision and other benefits policy: reasonable provision in line with arrangements made in similar companies will be made to allow executives to plan effectively for their retirement.
Additionally, George Culmer receives a taxable cash allowance of 15% of base salary, in order to bring his overall pension provision closer to the market median.
external directorships Where appropriate, the Group encourages Directors and other senior managers to accept, subject to the approval of the Chairman and the Group CEO, an invitation to join the board of another company in a non-executive capacity, recognising the value of such wider experience. In these circumstances, they are permitted to retain any remuneration from the non-executive appointment. For Executive Directors and other members of the Executive Team, external appointments are limited to one.
| rsa | Annual Report and Accounts 200960 remuneration report continueD
Additional fee for sitting on one or more Committees in a capacity other than Chairman 5,000
The appointment may be terminated by the Chairman on three months’ notice to the Company.
Non-Executive Directors do not have service contracts but each has a letter of appointment. The letters of appointment all request a period of one month’s notice should the Non-Executive Director wish to resign.
historical tsr performance The graph below is included in the report of the Committee as a requirement of Schedule 8 of The Large and Medium Sized Companies and Group (Accounts and Reports) Regulations 2008.
The graph shows the TSR of the Group with reference to the FTSE World Europe Non Life Insurance Index and the FTSE 100 Index. The FTSE World Europe Non Life Insurance Index comprises the range of European insurance businesses which most closely match our competitor group, and the TSR comparator group selected for awards under the LTIP. The FTSE 100 Index comprises the 100 most highly capitalised companies of the UK market. TSR performance relative to the indices is shown over the five years from 31 December 2004 to 31 December 2009.
Malcolm Le May 60 – – 60 58 notes: 1. The total figure includes all allowances chargeable to UK Income Tax.
2. 2009 bonuses were calculated as described in the remuneration report on page 56. In 2009 a maximum cash bonus of 180% of salary was achievable. 3. George Culmer received an annual performance bonus of £597,514 in respect of performance year 2009. His allowances include 15% of base salary as a retirement allowance, paid monthly. During 2009 the amount paid was £82,000. He also received car benefits and additional taxable travel benefits worth £30,000 and medical benefits worth £1,000. 4. Andy Haste received an annual performance bonus of £1,025,384 in respect of performance year 2009. His allowances include an age related percentage of base salary as a retirement allowance, paid monthly. During 2009 the allowance was 33% and the amount paid was £309,000. He also received car benefits and additional taxable travel benefits worth £42,000 and medical and life assurance benefits worth £9,000.
6. Johanna Waterous’ fee for 2009 was adjusted to include an increase of £5,000 p.a. for her membership of more than one Committee, backdated to 20 May 2008. 7. Termination payments were paid to Bridget McIntyre (former UK CEO) in 2009. As disclosed in the 2008 remuneration report, these payments were made in monthly instalments as approved by the Remuneration Committee in 2009. No further payments are due.
notes: 1. The difference in transfer values reflects the difference between the two transfer values calculated using relevant information on the respective dates and is not necessarily the actuarial increase of the underlying pension. 2. The figures set out in the table above provide information as required by Regulation 11 and Schedule 8 to the Large and Medium Sized Companies and Group (Accounts and Reports)
Johanna Waterous 36,761 notes: 1. In addition to the interests shown above, the Directors indicated, in common with the employees, had a beneficial interest as at 31 December 2009 in 2,859,431 (2008: 3,919,975) ordinary shares of 27.5p each held in the Royal & SunAlliance ESOP Trust No 2.
2. The Directors had a beneficial interest as at 31 December 2009 in the voluntary Deferred Shares of 27.5p each held under the LTIP which are not included in the above table. 3. As at 24 February 2010 the interests in ordinary shares of the Non-Executive Directors remained unchanged. The interests of Andy Haste, George Culmer and Simon Lee under the Sharebuild plan increased to 610 shares each following monthly purchases under that plan.
Options granted following the AGM in May 2003 are exercisable as, at the end of the period of three business years starting with the business year in which the options were granted, the Group achieved a return on capital (ROC) of at least 6% per annum (after inflation and excluding items of an exceptional nature which in the view of the Committee do not reflect the underlying performance of the business) when averaged over the period. Options granted between September 1998 and May 2003 were also subject to a performance condition that the Group must achieve a ROC of at least 6% when averaged over a consecutive three year period. This performance condition was achieved in respect of all options granted between those dates.
Unexpired options held during 2009 in respect of the ordinary shares of the Company as a result of executive and Sharesave share option schemes are shown below. All options were granted for nil consideration.
Scheme number of options at 1 January number of options at 31 December
Annual Report and Accounts 2009 | rsa | 65 sharebuild Sharebuild (an HM Revenue & Customs approved Share Incentive Plan) was adopted by shareholders at the 2009 AGM and launched in August 2009 with the first Partnership Shares purchased in December 2009. Sharebuild is available to all UK based employees employed at 30 June each year. In 2009 one Matching Share was allotted and held in trust for every one Partnership Share acquired with participants’ contributions. The Directors’ interests in Sharebuild at 31 December 2009 are below: Partnership Shares acquired
long term incentive schemes (audited part) Long term incentive scheme interests held during 2009 in respect of the ordinary shares of the Company are as follows: share matching plan
Share awards held at 1 January share awards granted during the year share awards vested during the year 6,7 share awards held at 31 December
4. Performance conditions relating to awards of Performance Shares are the same as those relating to compulsory Deferred Shares for the relevant year as described above. 5. The above table shows the date by which qualifying conditions for awards made on 6 April 2009 must be fulfilled. For awards made on 12 June 2006, all performance conditions were met in full and the awards vested in full during the year. For awards made on 16 April 2007, the date by which qualifying conditions must be fulfilled has been adjusted to 8 March 2010. For awards made on 9 April 2008, the date by which qualifying conditions must be fulfilled is 9 April 2011.
John maxwell Chairman of the Remuneration Committee, on behalf of the Board
Fin a n c ia l sta t em en t s
Annual Report and Accounts 2009 | rsa | 67 responsiBility statement
Respective responsibilities of directors and auditors As explained more fully in the responsibility statement, the directors are responsible for the preparation of the consolidated financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit 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 (APB’s) Ethical Standards for Auditors.
Scope of the audit of the financial statements 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 Group’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.
opinion of financial statements In our opinion the consolidated financial statements: Give a true and fair view of the state of the Group’s affairs as at • 31 December 2009 and of its profit for the year then ended Have been properly prepared in accordance with IFRS as adopted • by the European Union Have been prepared in accordance with the requirements of the • Companies Act 2006 and Article 4 of the IAS Regulation.
Net share of loss after tax of associates 11 (18) (18)
Treasury shares utilised – – 28 – – – – (28) – – –
Annual Report and Accounts 2009 | RSA | 71 conSolIdAted StAtement of fInAncIAl poSItIon as at 31 december 2009
The financial statements were approved on 24 February 2010 by the Board of Directors and are signed on its behalf by: George culmer Chief Financial Officer
Cash and cash equivalents at beginning of the year 1,614 1,538
consolidated financial statements The consolidated financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU). The consolidated financial statements are prepared under the historical cost convention as modified by the revaluation of available for sale financial assets, investment property, Group occupied property and financial assets and financial liabilities held for trading (which include all derivative contracts).
changes in presentation and comparative information The Group has adopted the revised version of IAS 1 (2007) ‘Presentation of Financial Statements’, which is mandatory for accounting periods beginning on or after 1 January 2009. The revised standard changes certain aspects of the presentation of financial statements and its effects are as follows: To introduce a new primary statement, the statement of changes • in equity, which was previously a note to the accounts To rename the primary statements• To introduce a new disclosure, of the amount of income tax relating • to each component of other comprehensive income.
Selection of accounting policies The Group exercises judgement in selecting each Group accounting policy. The accounting policies of the Group are selected by the directors to present financial statements that they consider provide the most relevant information. For certain accounting policies there are different accounting treatments that could be adopted, each of which would be in compliance with IFRS and would have a significant influence upon the basis on which the financial statements are presented. The bases of selection of the accounting policies for the accounting for financial assets and for the recognition of actuarial gains and losses related to pension obligations are set out below: The Group designates financial assets that are held as investments • on the basis on which the investment return is managed and the performance is evaluated internally. Where the investment return is managed on the basis of the periodic cashflows arising from the investment, a financial asset is designated as an available for sale financial asset with unrealised gains recognised in the statement of comprehensive income. Where the investment return is managed on the basis of the total return on the investment (including unrealised investment gains), the financial asset is designated as at fair value through the income statement 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.
translation of foreign currencies 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 Income and expenses for each income statement are translated at • average exchange rates during each period All resulting exchange differences are recognised as a component • of equity.
Goodwill and other intangible assets Goodwill, being the difference between the cost of a business acquisition and the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities acquired, is initially capitalised in the statement of financial position at cost and is subsequently recognised at cost less accumulated impairment losses. The cost of the acquisition is the amount of cash paid and the fair value of other purchase consideration given together with associated expenses. Goodwill is allocated to cash generating units for the purpose of impairment testing. Goodwill is subject to an impairment review at least annually. An impairment review is also carried out whenever there is an indication that goodwill or other intangible assets are impaired. Where the carrying amount is more than the recoverable amount, an impairment is recognised in the income statement.
When calculating the goodwill arising on an acquisition, claims provisions are discounted to present value. Immediately following the acquisition, the claims provisions are valued at full nominal value. This increase in liabilities is matched by the recognition of an intangible asset arising from acquired claims provisions, representing the present value of future investment income implicit in the claims discount. The intangible asset is amortised over the expected run off period and is tested in the context of the liability adequacy test of insurance liabilities where the balances of intangible assets associated with insurance contracts is deducted from the carrying amount of the insurance liabilities. The run off period is normally between five and 11 years.
Land is not depreciated. Depreciation on all other items is calculated on the straight line method to write down the cost of such assets to their residual value over their estimated useful lives as follows: Group occupied buildings normally 30 years Fixtures and fittings 10 years Motor vehicles 4 years Equipment 3-5 years
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 and by internal valuers for interim periods, with reference to current market conditions. Related unrealised gains and unrealised losses or changes thereof are recognised in net investment return.
For securities whose fair values are readily determined and where there is objective evidence that such an asset is impaired, including for equity investments a significant or prolonged decline in the fair value below cost, the unrealised loss charged to equity is reclassified to the income statement.
derivative financial instruments Derivatives are recognised in the statement of financial position on a trade date basis and are carried at fair value. Derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument and the nature of the item being hedged. Where a derivative is not designated as a hedging instrument, changes in its fair value are recognised in the income statement.
hedging Transactions are classified as hedging transactions when the following conditions for hedge accounting are met: There is a formal designation and documentation of the hedging • relationship and the Group’s risk management objective and strategy for undertaking the hedge The hedge is expected to be highly effective in achieving offsetting • changes in fair value or cashflows attributable to the hedged risk, consistent with the originally documented risk management strategy for that particular hedging relationship The effectiveness of the hedge can be reliably measured• For cashflow hedges, a forecast transaction that is the subject of the • hedge must be highly probable and must present an exposure to variations in cashflows that could ultimately affect profit or loss The hedge is assessed on an ongoing basis and determined to have • been highly effective.
Insurance liabilities The provision for unearned premium represents the portion of the premiums written relating to periods of insurance coverage subsequent to the end of the reporting period.
At the end of each reporting period an assessment is made of whether the provisions for unearned premiums are adequate. A separate provision is made, based on information available at the end of the reporting period, for any estimated future underwriting losses relating to unexpired risks. The provision is calculated after taking into account future investment income that is expected to be earned from the assets backing the provisions for unearned premiums
Reinsurance ceded Premiums payable in respect of reinsurance ceded are recognised in the period in which the reinsurance contract is entered into and include estimates where the amounts are not determined at the end of the reporting period. Premiums are expensed over the period of the reinsurance contract, calculated principally on a daily pro rata basis.
cash and cash equivalents Cash and cash equivalents are short term, highly liquid investments that are subject to insignificant changes in value and are readily convertible into known amounts of cash. Cash equivalents comprise financial assets with less than three months’ maturity from the date of acquisition.
loan capital Loan capital comprises subordinated bonds which are initially measured at the consideration received less transaction costs. Subsequently, loan capital is measured at amortised cost using the effective interest rate method.
least 10% different from the discounted present value of the remaining cashflows of the original financial liability. An exchange where the terms are not substantially different is accounted for as an exchange.
taxation Taxation in the income statement is based on profits and income for the year as determined in accordance with the relevant tax legislation, together with adjustments to provisions for prior years. UK tax in respect of overseas subsidiaries and principal associated undertakings is recognised as an expense in the year in which the profits arise, except where the remittance of earnings can be controlled and it is probable that remittance will not take place in the foreseeable future, in which case UK tax is based on dividends received.
employee benefits pension obligations Group companies operate various pension schemes. The schemes are generally funded through payments to trustee administered funds, determined by periodic actuarial calculations. The Group has both defined contribution and defined benefit schemes. A defined contribution scheme is a pension scheme under which the Group pays fixed contributions into a separate entity. A defined benefit scheme is a pension scheme that defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and salary.
SIGnIfIcAnt AccountInG polIcIeS contInued services qualifying for the benefit are provided. The Group has no further payment obligations once the contributions have been paid.
The calculation of the present value of accrued benefits includes an actuarial assumption of future interest rates, which is used to discount the expected ultimate cost of providing the benefits. The discount rate is determined at the end of each reporting period by reference to current market yields on high quality corporate bonds identified to match the currency and estimated term of the obligations. The interest cost for the period is calculated by multiplying the discount rate determined at the start of the period by the defined benefit obligations during the period.
Actuarial gains and losses arise from changes to actuarial assumptions when revaluing future benefits and from actual experience in respect
The value recognised in the statement of financial position for each individual post retirement scheme is calculated as follows: The present value of defined benefit obligation of the scheme • at the end of the reporting period Minus any past service cost not yet recognised• Minus the fair value at the end of the reporting period of • the scheme assets out of which the obligations are to be settled directly.
provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is more likely than not that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated.
dividends to equity holders The final dividend is recognised as a liability when approved at the Annual General Meeting. The interim dividend is recognised when paid.
leases 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 Operating segments are identified on the basis of the regional structure of the Group. Internal reports about these segments are regularly reviewed by the Group Chief Executive Officer and by the Board of Directors to assess their performance and to allocate capital and resources.
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; deferred acquisition costs and insurance and reinsurance debtors.
All consideration (including contingent consideration) transferred in • a business combination is measured at fair value at the acquisition date. Changes in the value of contingent consideration are measured in accordance with the relevant accounting treatment under IFRS Pre-existing equity interests in an acquiree are remeasured to fair • value at the date of, and immediately before, the business combination and any resulting gain or loss is recognised in the income statement.
Introduction One of the purposes of insurance is to enable policyholders to protect themselves against uncertain future events. Insurance companies accept the transfer of uncertainty from policyholders and seek to add value through the aggregation and management of these risks.
estimation techniques Claims and unexpired risks provisions are determined based upon previous claims experience, knowledge of events and the terms and conditions of the relevant policies and on interpretation of circumstances. Particularly relevant is experience with similar cases and historical claims payment trends. The approach also includes the consideration of the development of loss payment trends, the potential longer term significance of large events, the levels of unpaid claims, legislative changes, judicial decisions and economic and political conditions.
The Group evaluates the concentration of exposures to individual and cumulative insurance risk and establishes its reinsurance policy to reduce such exposure to levels acceptable to the Group.
Factors contributing to this higher degree of uncertainty include: The long delay in reporting claims from the date of exposure • (for example, cases of mesothelioma can have a latent period of up to 40 years). This makes estimating the ultimate number of claims we will receive particularly difficult Issues of allocation of responsibility among potentially responsible • parties and insurers Emerging court decisions and the possibility of retrospective legislative • changes increasing or decreasing insurer liability The tendency for social trends and factors to influence court awards• Developments pertaining to the Group’s ability to recover reinsurance • for claims of this nature and For US liabilities from our London market business, developments in • the tactics of US plaintiff lawyers and court decisions and awards.
Acquisitions and disposals The Group makes acquisitions and disposals of businesses as part of its normal operations. All acquisitions are made after due diligence, which will include, amongst other matters, assessment of the adequacy of claims reserves, assessment of the recoverability of reinsurance balances, inquiries with regard to outstanding litigation and inquiries of local regulators and taxation authorities. Consideration is also given to potential costs, risks and issues in relation to the integration of any proposed acquisitions with existing RSA operations. The Group will seek to receive the benefit of appropriate contractual representations and warranties in connection with any acquisition and, where necessary, additional indemnifications in relation to specific risks although there can be no guarantee that 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.
These clauses are customary in such contracts and may from time to time lead to us receiving claims from counterparties.
business and is reliant upon those third parties being willing and able to perform their obligations in accordance with the terms and conditions of the contracts.
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.
Rating environment The ability of the Group to write certain types of insurance business is dependent on the maintenance of the appropriate credit ratings from the rating agencies. The Group has the objective of maintaining single ‘A’ ratings. At the present time the ratings are ‘A’ (stable outlook) from S&P, ‘A’ (stable outlook) from AM Best upgraded in February 2009 and ‘A2’ (stable outlook) from Moody’s upgraded from ‘A3’ in December 2008. Any worsening in the ratings could have an adverse impact on the ability of the Group to write certain types of general insurance business.
changes in foreign exchange rates may impact our results We publish our consolidated financial statements in Pounds Sterling. Therefore, fluctuations in exchange rates used to translate other currencies, particularly other European currencies and the US Dollar, into Pounds Sterling will impact our reported consolidated financial condition, results of operations and cashflows from period to period. These fluctuations in exchange rates will also impact the Pound Sterling value of our investments and the return on our investments.
Regulatory environment The legal, regulatory and accounting environment is subject to significant change in many of the jurisdictions in which we operate, including developments in response to changes in the economic and political environment and the recent financial crisis. We continue to monitor the developments and react accordingly.
As an insurance company, the Group is fundamentally concerned with the management of risks. This note summarises the key risks to the Group and the steps taken to manage them.
The components of insurance, reinsurance, operational, credit, market and liquidity risk management are addressed below: Insurance risk 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.
Reserves – an overview The Group establishes property and casualty loss reserves to account for the anticipated ultimate costs of all losses and related loss adjustment expenses (LAE) 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.
emerging and legal risks These are risks that have been identified as potentially affecting the Group but for which the extent of risk has not yet been identified. Existing or potential future risk exposures are investigated in a structured way, using internal and external resources, and actions to mitigate, contain or remove these risks are taken.
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 Group’s financial results by either extending coverage beyond its underwriting intent or by increasing the number and size of claims.
operational risk Operational risk is the risk of direct or indirect losses resulting from human factors, external events and inadequate or failed internal processes and systems. Operational risks are inherent in the Group’s operations and are typical of any large enterprise. Major sources of operational risk include operational process reliability, information security, outsourcing of operations, dependence on key suppliers, implementation of strategic change, integration of acquisitions, fraud, human error, customer service quality, inadequacy of business continuity arrangements, recruitment, training and retention of staff, and social and environmental impacts.
The Group manages operational risk using a range of techniques and tools to identify, monitor and mitigate its operational risk in accordance with Group’s risk appetite. These tools include Risk and Control Self Assessments, Key Risk Indicators (e.g. fraud and service indicators), Scenario Analyses and Loss Reporting. In addition the Group has developed a number of contingency plans including Incident Management and Business Continuity Plans. Quantitative analysis of operational risk exposures material to the Group is used to inform decisions on the overall amount of capital held and the adequacy of contingency arrangements.
Limits are set at both a portfolio and counterparty level based on likelihood of default, derived from the rating of the counterparty, to ensure that the Group’s overall credit profile and specific concentrations are managed and controlled within risk appetite. Financial assets are graded according to current credit ratings issued. AAA is the highest possible rating. Investment grade financial assets are classified within the range of AAA to BBB ratings. For invested assets, restrictions are placed on each of the Group’s investment managers as to the level of exposure to not rated securities.
credit rating relating to financial assets that are neither past due nor impaired total of financial assets that are neither past due nor impaired AAA AA A bbb <bbb not rated £m £m £m £m £m £m £m
Total of financial assets that are neither past due nor impaired AAA AA A BBB <BBB Not rated £m £m £m £m £m £m £m
Debt securities 8,253 1,495 1,461 303 79 50 11,641 Loans and receivables and short term investments 60 7 7 1 3 88 166 Reinsurers’ share of insurance contract liabilities 71 495 762 175 50 184 1,737 Insurance and reinsurance debtors1 26 45 74 31 6 2,414 2,596 Derivative assets – – 118 – – – 118 Other debtors – – – – – 357 357 Cash and cash equivalents 282 781 313 29 1 208 1,614
With the exception of AAA rated government debt securities, the largest aggregate credit exposure does not exceed 2% of the Group’s total financial assets.
The Group’s largest reinsurance exposures to active reinsurance groups are Munich Re, SEB Group and HDI. At 31 December 2009 the reinsurance asset recoverable from these groups does not exceed 3% of the Group’s total financial assets. Stress tests are performed on the Group’s reinsurance assets and the limits are set such that in a catastrophic event, the exposure to a single reinsurer is estimated not to exceed 2% 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 2009 the largest pool (by premium volume) is Pool Re operated by the UK Government to provide terrorism cover.
neither past due nor impaired £m financial assets that are past due but not impaired financial assets that have been impaired £m carrying value in the statement of financial position £m
Impairment losses charged to the income statement £m up to three months £m three to six months £m
Loans and receivables and short term investments 166 – – – – – 166 –
At 31 December 2009, the Group had pledged £1,035m (2008: £1,049m) of financial assets as collateral for liabilities or contingent liabilities and had accepted £1,008m (2008: £1,329m) collateral that could be sold or pledged. The nature of the assets pledged as collateral comprises government securities of £872m (2008: £893m), cash and cash equivalents of £82m (2008: £93m) and debt securities of £81m (2008: £63m). The terms and conditions of the collateral pledged are market standard in relation to letter of credit facilities.
At 31 December 2009, the Group had entered into short term sale and repurchase agreements for UK government securities (repos). The Group continues to recognise the debt securities in the statement of financial position as the Group remains exposed to the risks and rewards of ownership. The carrying value of these debt securities recognised in the statement of financial position is £294m (2008: £297m) and the carrying value of the associated liabilities is £294m (2008: £297m).
market risk The Group is exposed to the risk of potential losses from adverse movements in market rates and prices as follows: Interest rate risk• Equity price risk• Property price risk• Foreign currency exchange risk• Derivatives.•
equity price risk The Group’s portfolio of equity securities is subject to equity risk arising from changes in market price. Thus if the value of equities rise so will the fair value of its portfolio and vice versa as set out in the sensitivity analysis on page 92.
Annual Report and Accounts 2009 | RSA | 91 foreign currency exchange risk The Group operates in 34 countries. Accordingly, its net assets are subject to foreign currency exchange rate movements. The Group’s primary foreign currency exposures are to the Danish Krone, Canadian Dollar, Swedish Krona and the Euro. If the value of Sterling strengthens then the value of non Sterling net assets will decline when translated into Sterling and consolidated.
The Group incurs exposure to foreign currency exchange risk in two ways: Operational foreign currency exchange risk – by underwriting liabilities in currencies other than the currency of the primary environment in which • the business units operate (non functional currencies) Structural foreign currency exchange risk – by investing in overseas subsidiaries and operating an international insurance group.•
Apart from the impact on derivative financial instruments covered below, the changes arise from retranslation of foreign subsidiaries’ net assets positions from their functional currencies into Sterling, with movements being taken through the translation reserve. These movements in exchange rates therefore have no impact on profit.
Remaining life Fair value Notional principal amounts less than one year £m one to five years £m more than five years £m £m £m £m £m cross currency equity/index Asset 22 – – 22 118 see below see below
At 31 December 2009 the Group held forward foreign exchange contracts that are designated as hedging instruments to reduce structural foreign exchange risk. The derivatives are included in the table above. Further information on designated hedges can be found in note 28.
Impact on loan capital of increase in interest rates of 100bps3 – (3) – –
Direct impact on equities of a 15% fall in equity markets (13) (50) (135) (91)
3. The impact on the fair value of the loan capital is a decrease of £69m (2008: £32m). 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 2010 and 1 January 2009 which results in a 15% decline in the value of the Group’s assets in these investment categories. 5. This analysis has not considered the impact of the above market changes on the valuation of the Group’s insurance liabilities.
liquidity risk Liquidity risk is the risk that cash may not be available to pay obligations when due at a reasonable cost. The Group has no tolerance for liquidity risk and is committed to meeting all liabilities as they fall due. The investment risk limits set by the BRC ensure that the Group’s portfolio is kept in highly liquid marketable securities sufficient to meet its liabilities as they come due based on actuarial assessment. The limits are monitored at a Group level as part of the Group Risk exposure monitoring and BRC reporting process.
maturity periods or contractual repricing The following table summarises the contractual repricing or maturity dates (whichever is earlier) for financial liabilities that are subject to fixed and variable interest rates. Insurance liabilities are also presented and are analysed by remaining duration.
Provision for unearned premiums 3,305 408 71 20 17 14 3 3,838 3,838 Provision for losses and loss adjustment expenses 3,146 1,686 1,172 888 652 1,877 2,154 11,575 10,613 Direct insurance creditors 186 1 – – – – – 187 187 Reinsurance creditors 296 5 2 1 1 1 – 306 306 Borrowings 294 – – – – 1 – 295 295 Deposits received from reinsurers 10 – – – – – – 10 10 Derivative trading liabilities 61 – – – – 2 – 63 63
Interest on bonds and notes 112 112 112 112 112 268 13 841 * The carrying value in the statement of financial position is on a discounted basis.
Subordinated guaranteed US$ bonds – – – – – – 16 16 15
Subordinated guaranteed perpetual notes – – – – – 450 – 450 505
Undiscounted interest payments are calculated based on underlying fixed interest rates or prevailing market floating rates as applicable (as detailed in note 19). Year end exchange rates have been used for interest projections on loans in foreign currencies.
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 2009, the Group’s surplus economic capital was approximately £1.8bn (2008: £1.8bn).
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 ICA. The only adjustment made is to use the FSA’s required calibration.
As at 31 December 2009 the Group had an IGD surplus of approximately £1.7bn (2008: £1.7bn). IGD Surplus has remained constant, with retained earnings and fair value gains being offset by increases in pension liabilities and intangible assets. The coverage ratio stood at 2.4 times at 31 December 2009 (2008: 2.5 times).
The Group received its Individual Capital Guidance (based on its ICA submission) from the FSA in late 2009 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.
The Group is organised into three operating segments – International, Emerging Markets and the UK. The UK is the Group’s country of domicile and principal market (based on value of premium written in a single country). International comprises operations in Scandinavia, Canada, Ireland and Italy and Emerging Markets comprises the Group’s operations in Latin America, Asia and the Middle East and Central and Eastern Europe. All operations are engaged in providing personal and commercial general insurance services. Central functions include the Group’s internal reinsurance function and Group Corporate Centre.
The Group uses the following key measures to assess the performance of its operating segments: Net written premiums• Underwriting result• Combined operating ratio (COR).•
management basis The management basis reflects the way management monitor the business. Operating result on a management basis comprises the underwriting result, the investment result and other activities.
Segment revenue and results Year ended 31 December 2009 uk £m
International £m emerging markets £m central functions £m total Group £m
Total Group £m total assets of continuing operations 8,911 11,007 2,049 897 22,864
Capital expenditure: net written premiums and non current assets from major geographical regions
Total investment return £m £m £m £m £m £m £m £m £m £m
Net movement recognised in equity £m £m £m £m £m £m £m £m 3. net clAImS And benefItS
Engineering inspection fees are ancillary to the provision of engineering insurance cover.
Fees payable to Deloitte LLP and its associates for other services: The audit of the Company's subsidiaries, pursuant to legislation 3.4 3.1
Annual Report and Accounts 2009 | RSA | 101 directors’ emoluments The aggregate emoluments of the directors, including amounts received from subsidiaries, were as follows: Emoluments of executive directors 4,599 4,838
UK corporation tax is calculated at 28.0% (2008: 28.5%) 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 £(34)m (2008: £38m) relates to UK corporation tax and £169m (2008: £135m) to overseas taxation.
Tax at the UK rate of 28.0% (2008: 28.5%) 155 216
Income tax expense 135 173 6. eARnInGS peR ShARe AttRIbutAble to the oRdInARy ShAReholdeRS of the pARent compAny
basic Basic earnings per share is calculated by dividing the profit attributable to the ordinary shareholders of the Parent Company by the weighted average number of ordinary shares in issue during the period, excluding ordinary shares purchased by the ESOP Trusts and held as treasury shares.
Adjustments for share options and contingently issuable shares (thousands) 33,890 53,034
Weighted average number of ordinary shares for diluted earnings per share (thousands) 3,383,211 3,326,526 diluted earnings per share (p) 12.1 17.0 noteS to the fInAncIAl StAtementS contInued
Annual Report and Accounts 2009 | RSA | 103 7. dIvIdendS
Ordinary dividend: Final paid in respect of prior year 4.98 4.53 165 147
Software development £m other £m total £m cost At 1 January 2009 344 134 533 144 1,155 Additions and transfers 154 – 96 36 286 Disposals and transfers – – (11) – (11)
At 1 January 2009 – 112 242 57 411 Amortisation charge – 9 48 16 73 Amortisation on disposals – – (11) – (11)
net book amount at 31 december 2009 508 12 338 111 969
Amortisation expense of £48m (2008: £56m) has been charged to underwriting and policy acquisition costs and the balance is recognised in other operating expenses.
No material impairments have been recognised during the year, or in prior years.
Annual Report and Accounts 2009 | RSA | 105 9. pRopeRty And equIpment
Accumulated depreciation At 1 January 2009 – 299 299 Depreciation charge 2 32 34 Depreciation on disposals – (17) (17) Revaluation adjustment (2) – (2) Exchange adjustment – (2) (2)
The Group occupied property was revalued on 31 December 2009 by independent valuers.
The carrying amount of Group occupied property that would have been recognised had the assets been carried under the cost model at 31 December 2009 is £140m (2008: £160m).
Land and buildings: Freehold and long leasehold 390 363 total land and buildings 391 365
Summarised below are the assets, liabilities, revenue and profit and loss of the companies above. The comparatives below have not been restated following the acquisition of the controlling stake in Intouch Insurance Group BV in 2009, which was previously an associate.
Available for sale financial assets: Financial assets at fair value through the income statement: Derivative assets at fair value through the income statement – 22 – 22 118
Derivative liabilities: At fair value through the income statement – 54 – 54 72
Investments at fair value through income statement equity securities £m debt securities £m equity securities £m debt securities £m total £m
Of the total gains/(losses) for the period recognised in the income statement (shown in the reconciliation above), £nil relates to assets held at the end of the reporting period.
Annual Report and Accounts 2009 | RSA | 109 13. ReInSuReRS’ ShARe of InSuRAnce contRAct lIAbIlItIeS
Reinsurers’ share of provision for losses and loss adjustment expenses 1,494 1,500 total reinsurers’ share of insurance contract liabilities 1,795 1,759
Reinsurers’ share of provision for unearned premiums at 1 January 259 215
Reinsurers’ share of provision for losses and loss adjustment expenses at 1 January 1,500 1,657
Accrued interest and rent 203 193 total other debtors and other assets 752 1,477
Cash and cash equivalents (as reported within the statement of cashflows) 1,105 1,614
Less: cash and cash equivalents reported in assets held for sale (109) –
During the year 28,969,400 (2008: 24,707,235) ordinary shares were issued on the exercise of employee share options and awards for a cash consideration of £11m (2008: £19m). The Parent Company also issued 61,767,996 (2008: 51,770,891) ordinary shares during the year under the scrip scheme as approved by shareholders.
Authorised 5,750,000,000 ordinary shares of 27.5p each (2008: 4,250,000,000 ordinary shares of 27.5p each) 1,581 1,169 300,000,000 preference shares of £1 each (2008: 300,000,000 preference shares of £1 each) 300 300
The Royal & SunAlliance ESOP Trust holds ordinary shares in the Parent Company, which may subsequently be transferred to employees (other than the executive directors). At 31 December 2009 the Trust held 4,470,800 ordinary shares (2008: 7,976,673) in the Parent Company with a nominal value of £1m (2008: £2m) and a mid market value, based on the market value of the Parent Company’s shares at the close of business on 31 December 2009 as shown in the Official List of the London Stock Exchange, of £5m (2008: £11m).
The Royal & SunAlliance ESOP Trust No 2 holds ordinary shares in the Parent Company, which may subsequently be transferred to employees including executive directors. At 31 December 2009 the Trust held 2,859,431 ordinary shares (2008: 3,919,975) in the Parent Company with a nominal value of £1m (2008: £1m) and a mid market value, based on the market value of the Parent Company’s shares at the close of business on 31 December 2009 as shown in the Official List of the London Stock Exchange, of £3m (2008: £5m).
The Royal & SunAlliance ESOP Trust No 3 holds 2,963,136 ordinary shares (2008: 2,311,218) in the Parent Company at 31 December 2009 with a nominal value of £1m (2008: £1m) and a mid market value, based on the market value of the Parent Company’s shares at the close of business on 31 December 2009 as shown in the Official List of the London Stock Exchange, of £3m (2008: £3m). Of this, 2,819,097 shares are beneficially owned by Group employees as Voluntary Deferred Shares under the Long Term Incentive Plan. The remaining 144,039 ordinary shares may subsequently be transferred to employees, including executive directors, under one of the Group’s employee share plans.
Preference shareholders shall not have any right to receive notice of, attend, speak or vote at any general meeting of the Parent Company unless: The preferential dividend on such shares for the dividend payment period immediately prior to the issue of the notice is in arrears or if any arrears • of deficiency of dividend in respect of any preceding period has not been paid in full A resolution is proposed varying the rights attached to preference shares, for the winding up of the Parent Company or for a reduction of capital • in the Parent Company (in which case preference shareholders may only vote on such resolution) In such other circumstances as the directors may determine prior to the allotment of any preference shares.•
The Parent Company in general meeting may by ordinary resolution declare dividends, but no dividend shall exceed the amount recommended by the directors or permitted by law. The directors may also pay such interim dividends as they think fit and pay the fixed dividends payable on any shares of the Parent Company half yearly or otherwise on fixed dates. Subject to shareholder approval, the directors may allow shareholders to receive new ordinary shares in lieu of dividends paid in cash.
Provided a resolution of the Board exists, and in priority to any payment of dividend to other shareholders (other than any dividend not exceeding 0.1p per share), holders of preference shares are entitled to a cumulative preferential dividend of 7.375% per annum, payable out of the profits available for distribution, to be distributed in half yearly instalments and the shares are not redeemable. Preference shareholders have no further right to participate in the profits of the Parent Company. In addition, preference shares do not confer: Any right to participate in any offer by way of rights or otherwise to subscribe for additional shares in the Parent Company (except where required by law)• Any rights of conversion • Any right to participate in any issue of bonus shares.•
The directors may make calls on shareholders in respect of monies unpaid on their shares. If any call is not complied with the directors may serve a notice on such shareholder requiring him to pay the call together with any interest and expenses incurred by the Parent Company. Failure to comply with a notice may result in forfeiture of any share which is the subject of the notice (including any dividends declared and other monies payable in respect of the shares so forfeited).
The directors may refuse to register any transfer of any share which is not a fully paid up share provided that such refusal does not prevent dealing in the shares from taking place on an open and proper basis. The directors may likewise refuse to register any transfer in favour of more than four persons jointly.
Annual Report and Accounts 2009 | RSA | 113 19. loAn cApItAl £m £m
The subordinated guaranteed Euro bonds (€500m) were repaid on 15 October 2009. The interest rate on €200m of the Euro bonds was at a fixed rate of 6.875%. The interest rate on €300m of the Euro bonds was at a floating rate from the date of issue of EURIBOR plus 1.25%.
The subordinated guaranteed dated notes were issued on 20 May 2009 at a fixed rate of 9.375%. The nominal £500m bonds have a redemption date of 20 May 2039. The parent company has the option to repay the notes on specific dates from 20 May 2019. If the notes are not repaid on that date, the rate of interest would be reset at a rate of 8.475% plus the appropriate benchmark gilt yield for a further five year period.
The subordinated perpetual guaranteed 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%.
The aggregate fair value of total loan capital at 31 December 2009 is £1,400m (2008: £1,079m).
Provision for losses and loss adjustment expenses 10,613 11,220 total insurance contract liabilities 14,451 15,055 provision for unearned premiums The following changes have occurred in the provision for unearned premiums during the year: £m £m
Provision for losses and loss adjustment expenses at 1 January 11,220 10,344
Total claims payments made in the year, net of recoveries (5,294) (4,747)
provision for losses and loss adjustment expenses at 31 december 10,613 11,220
The top triangle of the tables presents the estimated provision for ultimate incurred losses and loss adjustment expenses at the end of each accident year as at the end of each reporting period.
Current year provision before discounting 2,788 340 531 402 556 784 1,153 1,437 2,750 10,741
The loss development tables above are presented on an undiscounted basis. Prior year development in 2009 showed favourable experience across all accident years and regions and totalled £342m, net of reinsurance. The total discounting at the end of 2009 is £687m representing an increase of £16m in the year. In Scandinavia certain long tail liabilities are settled by an annuity and the discounted value of these annuities is shown separately. At the year end the annuity reserves are £444m (2008: £437m).
Direct insurance creditors 187 224 total insurance and reinsurance liabilities 493 545 noteS to the fInAncIAl StAtementS contInued
The Articles of Association of the Group defines a cap on borrowing limits. This cap is not being amended at the 2010 AGM. At 31 December 2009 the cap on borrowing limits is £4,475m (2008: £5,243m) of which £1,635m (2008: £1,625m) had been utilised.
To be settled after 12 months 17 13 81 91 deferred tax £m £m
(Charge)/credit to other comprehensive income for the year – (83) – 37 10 (36)
(Charge)/credit to equity for the year (2) – – – 1 (1)
(Charge)/credit to the income statement for the year – (21) (9) 20 (6) (16) Credit/(charge) to other comprehensive income for the year – 269 – (13) (2) 254 Charge to equity for the year (2) – – – (3) (5) Net debit arising on acquisition/disposal of subsidiaries and
Available for sale financial assets (53) 12 (13) 37 (66) 49
total (charged)/credited to other comprehensive income (56) 55 254 (36) 198 19
The aggregate current and deferred tax relating to items that are (charged)/credited directly to equity is £(1)m (2008: £1m).
The Group does not recognise deferred tax on the unremitted earnings of overseas subsidiaries, as the Group is able to control the remittance of earnings to the UK and there is no intention to remit any such earnings to the UK in the foreseeable future if the remittance would trigger a material incremental UK tax liability. The temporary difference in respect of the retained earnings of overseas subsidiaries is £748m (2008: £1,410m). Temporary differences at 31 December 2009 are significantly reduced from the previous year as a result of the repatriation of funds during the year and a change to UK tax legislation which largely exempts from UK tax overseas dividends received on or after 1 July 2009.
Pensions and post retirement obligations 407 96 total provisions at 31 december 542 240
Of the above, £461m is due to be settled outside of 12 months (2008: £155m).
Reorganisation provisions comprise costs relating to reorganisations mainly within the UK business. These provisions primarily comprise severance and property costs and are part of an ongoing program to achieve business improvement and expense savings.
Other provisions includes £57m (2008: £60m) 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 includes Motor Insurance Bureau provision of £25m (2008: £23m).
Accruals and deferred income 392 341 total other liabilities 937 1,043
The insurance component is accounted for within insurance liabilities and the deposit component, offset by the value of the funds held in the trust account, is recognised under other liabilities.
During the year the Group entered into arrangements that insured 55% of the retirement obligations relating to pensions in payment in the two main UK schemes. The arrangements comprise of assets and interest rate swaps combined with an insurance contract that provide for the full payment of the pensions in return for the actual investment return on a segregated portfolio of assets held by the pension funds at the inception of the arrangement. The pension schemes continue to benefit from the assets held in the portfolio and retain the obligation to meet the insured pension obligations. The assets and pension obligations are therefore not derecognised in the financial statements and an asset (representing the recovery of the insured pension obligations) and a liability (to pay the investment return on the portfolio of assets to the insurer) are recognised.
For the two main UK defined benefit schemes, the level of contributions in 2009 were 23% and 22% of pensionable salaries (2008: 23% and 22%). Additional contributions totalling £45m (2008: £38m) were made to the schemes, in accordance with the plan to reduce their funding deficits. Expected contributions to pension and post retirement benefit schemes for the year ending 31 December 2010 are approximately £67m, including a further £31m of additional contributions.
Deferred tax in respect of net pension and post retirement liability/(asset) 106 (143)
The actuarial gains/(losses) recognised in equity are as follows: uk £m other £m total £m
Actual return on assets (below)/in excess of expectations (413) 24 (389) (413)
Including the pension liabilities covered by the insurance arrangement and the assets and liabilities committed to the arrangement, the value of scheme assets and the residual scheme obligations are as follows: uk £m other £m total £m
Present value of funded obligations fully covered by insurance arrangement 1,436 – 1,436 –
Acquisition of subsidiaries – 2 pension schemes’ assets at 31 december 4,810 5,042 noteS to the fInAncIAl StAtementS contInued
Present value of defined benefit obligation 5,178 4,536 5,086 4,838 5,439
Assumptions used in calculation of retirement benefit obligation: Annual rate of general inflation 3.3 2.8 2.1 2.0
mortality rate The mortality assumptions are set following investigations of the main schemes’ recent experience by the schemes’ actuaries for the funding valuations. In 2009 the mortality assumptions adopted for the main UK schemes used the SAPS Light Normal base table with percentage adjustments to reflect the schemes’ recent experience compared with that expected under these tables.
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 27.5 years (males) and 28.1 years (females) and a future pensioner aged 60 in 15 years time has a future expected lifetime from age 60 of 28.2 years (males) and 28.6 years (females).
In 2008 the mortality assumptions adopted for the main UK schemes used the PMA92 and PFA92 mortality tables for males and females respectively, with age ratings to reflect the schemes’ recent experience compared with that expected under these tables. Reductions in future mortality rates are allowed for using the ‘medium cohort’ projection and using the projected mortality rates applicable to calendar year 2014 for current pensioners and 2032 for future pensioners. The weighted average assumptions imply that a current pensioner aged 60 has an expected future lifetime of 25.8 years (males) and 27.0 years (females) and a future pensioner aged 60 in 15 years time has a future lifetime of 27.2 years (males) and 28.2 years (females).
The effect of an increase of one percentage point and the effect of a decrease of one percentage point in the assumed medical cost trend rates in Canada on the following is set out below: 1% increase 1% decrease £m £m £m £m
Aggregate of the current service cost and interest components of net periodic
Accumulated post employment benefit obligation for medical costs 5.4 3.5 4.3 2.8 27. ShARe bASed compenSAtIon
The Group has five types of share based payment plans which are settled in the form of ordinary shares: the Executive Share Option Scheme; the Sharesave Plan; the Share Matching Plan; the Long Term Incentive Plan and the Sharebuild Plan. Dilution levels for all schemes are held strictly within Association of British Insurers limits.
The total employment cost recorded in the income statement for all plans was £27m in 2009 (2008: £25m).
executive Share option Scheme The Group operates an Executive Share Option Scheme, which provides options to purchase ordinary shares to officers and other key employees at prices not less than the fair value of the ordinary shares at the date of grant.
Additional information with respect to the Executive Share Option Scheme at 31 December is as follows: number of shares weighted average exercise price*
The following share options under the Executive Share Option Scheme are outstanding and exercisable at 31 December: Range of exercise prices number of shares weighted average remaining contractual life
No awards have been granted since 2006. The weighted average share price on the dates the options were exercised in 2009 was 115.44p (2008: 147.57p).
Additional information with respect to the Sharesave Plan at 31 December is as follows: number of shares weighted average exercise price*
The following share options under the Sharesave Plan are outstanding as of 31 December: Range of exercise prices number of shares weighted average remaining contractual life
The following share options under the Sharesave Plan are exercisable as of 31 December: Range of exercise prices number of shares weighted average exercise price*
Fair values for the options granted under the Sharesave Plan were estimated as of the date of grant using the Black Scholes pricing model with the following weighted average assumptions: dividend yields of 6.0% (2008: 5.7%); expected volatilities of 37% (2008: 30%); ordinary share price of 123.50p (2008: 158.10p); risk free interest rates of 2.2% (2008: 4.3%); and expected terms equal to the vesting terms of three or five years. An estimate based on past experience is made of the number of forfeitures during the vesting period due to employees leaving the Group. The actual share price at 31 December 2009 was 120.60p (2008: 138.10p). The expected volatility is determined by reference to the actual volatility of the share price over the appropriate term ending on the grant date.
The performance conditions in respect of awards under the Share Matching Plan are described in the footnote to the long term incentive schemes table (audited part) on page 66. Under the plan, Deferred Share awards granted are held in trust for three years and are normally forfeited upon an employee leaving the Group. No further performance conditions apply.
Further information on the Share Matching Plan may be found in the footnote to the long term incentive scheme table (audited part) on page 66.
Outstanding and exercisable Deferred Share awards at 31 December 223,740 926,431
Further information on the Long Term Incentive Plan can be found in the remuneration report within the governance section in these annual report and accounts.
other share based payments Certain employees of the Group’s former US operation held entitlements under the Equity Incentive Scheme for US Employees prior to the disposal of the operation. On disposal of the US operation the options under the scheme became cash settled and the majority of the options vested. There are also other plans under which awards have been granted to certain employees in the form of cash settled share based awards. Under these plans, if the vesting conditions are satisfied, cash awards are made based upon the underlying performance of the Parent Company’s ordinary shares. Awards were made in 1999 and 2001 under old schemes and during 2004 and 2005 on terms that provide the same potential benefits as the Share Matching Plan. The liability in respect of these plans at 31 December 2009 was £1m (2008: £1m). The intrinsic value of awards that had vested at 31 December 2009 was £1m (2008: £1m).
Investments 42 Intangible assets (excluding goodwill) 45 Cash and cash equivalents 4 Other assets 45
If the acquisitions had occurred on 1 January 2009, Group net written premiums for the year would have increased by £38m and the Group’s profit after tax would have decreased by £13m. The total loss after tax of the acquired entities since the acquisition dates included in the Group’s profit for the period is £9m.
Fair value gains (including gain on disposal) on investments (42) (187)
Fair value (gains)/losses (including loss on disposal) on investment property (7) 95
The following transactions were carried out with related parties: key management compensation £m £m
Property and equipment 4 5 financial instrument commitments The Group has a number of guarantees and commitments.
bank loan guarantees In Canada, the Group guarantees outstanding loan repayments in the event of bank loan default by broker subsidiaries and special relationship brokers. The bank loan guarantees amount in total to £10m (2008: £11m) and have a term of up to 10 years. It is not anticipated that any of the brokers will default, and full recourse is available on any default.
Annual Report and Accounts 2009 | RSA | 133 34. ASSetS And lIAbIlItIeS held foR SAle
Respective responsibilities of directors and auditors As explained more fully in the responsibility statement, the directors are responsible for the preparation of the Parent Company financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit the Parent Company 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 (APB’s) Ethical Standards for Auditors.
opinion of financial statements 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 2009 and of its profit for the year then ended Have been properly prepared in accordance with IFRS as adopted by • the European Union Have been prepared in accordance with the requirements of the • Companies Act 2006.
matters on which we are required to report by exception 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 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.
Dividends – paid (note 7) – – – – – (246) (246)
Cash and cash equivalents 1 4 equity, reserves and liabilities equity and reserves total equity and reserves 4,518 5,001 liabilities
Net movement in amounts owed to/by subsidiaries 211 254 net cashflows from investing activities 208 252
Cash and cash equivalents at beginning of the year 4 1 cash and cash equivalents at end of the year 1 4
In accordance with section 408 of Companies Act 2006, the Company’s income statement and related notes have not been presented in these separate financial statements.
Other prepayments and accrued income 1 1 total other debtors and other assets 5 2 4. ShARe cApItAl
6. cuRRent And defeRRed tAx current tax Asset Liability £m £m £m £m
To be settled after 12 months – – 2 5 deferred tax assets Deferred tax for the current year is based on a rate of 28.0% (2008: 28.5%). The following are the major deferred tax assets recognised by the Company and movements during the year: Other temporary differences £m
deferred tax assets at 31 december 2009 7 14 2 23
At the end of the reporting period, the Company has unused tax losses of £nil (2008: £7m) available for offset against future profits. No deferred tax asset has been recognised in respect of the tax losses of £nil (2008: £7m) due to the unpredictability of future profit streams.
Full details of the dividends paid and proposed by the Company are set out in note 7 to the consolidated financial statements.
Annual Report and Accounts 2009 | RSA | 141 other transactions Year end balances with related parties are set out below: £m £m
Receivable from related parties: Receivable from subsidiaries, interest bearing loans 1,401 1,595
Receivable from subsidiaries, non interest bearing 394 366 total receivable from related parties 1,795 1,961
Additional loans to subsidiaries of £871m (2008: £379m) as disclosed within note 2 have been made. Of this, £294m (2008: £294m), £78m (2008: £78m) and £492m (2008: £nil) are subordinated loans on which interest is charged at 8.5%, 6.701% and 9.375% respectively with the remaining loan balance interest free with no specified repayment date.
Registered office and Group corporate centre 9th Floor, One Plantation Place, 30 Fenchurch Street, London EC3M 3BD. Telephone: +44 (0)20 7111 7000. Registered in England and Wales No. 2339826.
tips on protecting your shares Keep any documentation that contains your shareholder reference • number in a safe place and destroy any documentation which you no longer need by shredding it Inform Equiniti promptly when you change your address• Be aware of dividend payment dates and contact Equiniti if you do not • receive your dividend cheque, or better still, make arrangements to have the dividend paid directly into your bank account Consider holding your shares electronically in a CREST account via • a nominee.
disabled shareholders RSA is committed to providing a quality service to all of its shareholders. An induction loop is installed at the AGM venue. Please contact the Group Secretariat department at the Registered Office, detailed on page 129, if you require particular assistance.
Announcement of the scrip dividend price for the ordinary final dividend for 2009
Deadline for the receipt of scrip dividend mandates by Equiniti Limited in relation to the ordinary final dividend for 2009
Important disclaimer This document contains ‘forward-looking statements’ with respect to certain of the 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”, “could”, “will”, “expect”, “intend”, “estimate”, “anticipate”, “aim”, “outlook”, “believe”, “plan”, “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 and other 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 Group’s forward-looking statements. The Group undertakes no obligation to update any forward-looking statements, save in respect of any requirement under applicable law or regulation.