WELCOME TO OUR ANNUAL REPORT AND ACCOUNTS 2010. WITH A THREE HUNDRED YEAR HERITAGE, WE ARE A LEADING GENERAL INSURER OPERATING IN 34 COUNTRIES, PROVIDING PRODUCTS AND SERVICES IN OVER 130 COUNTRIES. WE HAVE A DIVERSIFIED PORTFOLIO OF BUSINESSES WITH STRONG POSITIONS IN ATTRACTIVE MARKETS AND REMAIN COMMITTED TO DELIVERING SUSTAINABLE PROFITABLE PERFORMANCE
Includes 3.5pts of worse than normal weather losses 15.3% excluding worse than normal weather losses
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 delivered strong top line growth, with International NWP up by 9%, the UK up by 11% and Emerging Markets beating its £1bn NWP target, with premiums close to £1.1bn including India
• Our capital position remains strong with an IGD surplus of £1.5bn
16 Our strategy 18 International business review 20 UK business review 22 Emerging Markets business review 24 Financial review 28 Risk review 32 Corporate responsibility
72 Directors’ responsibilities 73 Independent auditor’s report to the members of RSA Insurance Group plc 74 Consolidated income statement 75 Consolidated statement of comprehensive income 75 Consolidated statement of changes in equity 76 Consolidated statement of financial position 77 Consolidated statement of cashflows 78 Significant accounting policies 86 Estimation techniques, risks, uncertainties and contingencies 89 Risk management 99 Notes to the financial statements 138 Independent auditor’s report to the members of RSA Insurance Group plc 139 Parent Company statement of comprehensive income 139 Parent Company statement of changes in equity 140 Parent Company statement of financial position 141 Parent Company statement of cashflows 142 Notes to the separate financial statements
We insure the home of Captain James Cook, prior to the first of his legendary voyages
Our business began life in 1710 with the establishment of the
The principle that drove us to succeed then is the same one that drives us today: an unshakable belief that insurance should enable progress.
WE ARE A LEADING GENERAL INSURER OPERATING IN 34 COUNTRIES AND PROVIDING PRODUCTS AND SERVICES IN AROUND 130 COUNTRIES. WE HAVE A DIVERSIFIED PORTFOLIO OF BUSINESSES WITH STRONG POSITIONS IN ATTRACTIVE MARKETS
• 4th largest general insurer overall, up from number 10 in 2005
• Growing presence in Norway and a Marine business in Finland.
• Number 2 general insurer in Ireland, up from number 5 at the end of 2008
• Leading Marine and Commercial Property insurer and number 2 in Motor
• NWP growth of 3% driven by Personal lines, Commercial growth impacted by reduced exposures
• Acquired GCAN, a leading mid-market, large risk and specialty Commercial insurer.
• COR of 101.5% comprises an excellent 90.9% in Ireland and the reduced Motor losses in Italy.
• Pet continues to perform strongly. Tesco deal expected to generate around £100m of premiums in 2011
• Target of £1bn of NWP by the end of 2010 beaten
• Growth driven by Latin America and the consolidation of the Direct businesses in Poland, the Czech Republic and Russia
WE PROTECT PEOPLE AND BUSINESSES AGAINST THE RISKS THEY FACE IN THEIR DAILY LIVES. OUR GLOBAL NETWORK PROVIDES PROPERTY, CASUALTY, MOTOR AND HOUSEHOLD INSURANCE IN OVER 130 COUNTRIES WORLDWIDE
RISK SELECTION The Board defines the Group’s risk appetite which determines the geographies we operate in and the products we offer. Our underwriters are licensed to write products within this appetite and we regularly review each portfolio of risks to ensure they are performing well or implement corrective measures where required.
INTERMEDIARIES We work with both large and small brokers. Through our strategic partnerships with the global brokers we write complex international covers. We also work on a more intimate basis with our smaller brokers, supporting their development through direct marketing, training and support.
PEOPLE We have highly trained, technically competent people assessed annually against a licensing framework that ensures they are equipped to deal with customers’ claims.
DELIVERY We are committed to deliver timely settlements to our customers and claimants and through numerous initiatives across the Group we aim to continually improve the claims experience.
Our portfolio focus is on high quality bonds and cash, with measured holdings in equities and property. Within the framework of our strategy we have taken action to mitigate the impact of the low yield environment, including purchasing non government bonds which now form 53%
Going forward, we will continue to take action to enhance the yield of the funds including the continued purchase of high quality non government bonds if market conditions are appropriate and a modest extension in the duration of new bond purchases, to take advantage of the higher yield on offer on longer dated bonds.
April to June we: • Raised around £700,000, trebling the amount raised for charity in a normal year
• Volunteered 36,000 hours, 50% more than in a normal year
• Donated nearly 200,000 gifts including food, toys, clothes and even a car!
In terms of trading, 2010 proved to be very challenging with extreme events and adverse weather throughout, including the
Chilean earthquake, hurricanes and finally the very cold spell that affected Europe in
The UK, for instance, experienced its coldest December for 100 years. It was the widespread nature of the cold spell in Europe which was the largest single contributing factor to adverse weather costs for the full year of some £255m above the norm.
In financial terms, the adverse weather costs impacted our COR increasing it by around 3.5 points to 96.4%. A detailed statement to the market and shareholders was made on 20 January 2011 as soon as the extent of the weather losses could be accurately assessed.
minimised the impact on the operating profit which was resilient at £636m. This was well supported by strong year on year net revenue growth, as follows: • An overall increase in net written premiums, up 11% at reported rates
Group CEO’s review. The underlying operating results, which include a robust investment performance, again reflected our continued focus on profitable growth and control of costs. It also demonstrates the strategic strength and resilience of our portfolio of businesses and our commitment to sustainable profitability.
On external matters, the Board continues to actively and positively engage with regulators and government bodies. The new coalition government is reshaping regulatory responsibilities, particularly those of the
FSA. This has coincided with European based discussions on risk and capital matters embodied in what is known as the Solvency II
The debate on the question of the annual election of the Chairman and/or Boards has moved on with its incorporation in the UK
The Board has listened to a wide range of views and comment on this issue. It has also commissioned an external evaluation of your
(SID) Edward Lea, who is also Chairman of the Group Audit Committee. We will also expand the Board to ensure continuity of corporate knowledge and experience as we deal with expected retirements.
Finally, at the end of our 300th year I would like to make a special mention of all our staff. Firstly, for making such a magnificent effort in their volunteering and charitable work this year, secondly, for producing a strong underlying performance and thirdly, dealing efficiently and expeditiously with the other side of adverse claims, namely helping people who are beset with major unforeseen traumatic events. Our staff have coped very well in what has been a demanding year in the field. I would like to thank them on behalf of the Board and all its shareholders.
Ireland, Sweden, Denmark and Oman and the Tesco affinity deal in the UK
was strong, with adverse weather adding 3.5 points. The underwriting result was down 38% to £238m.
Acquisitions remained part of our strategy in 2010 and we completed 11 deals. Our bid for Aviva’s UK, Canadian and Irish general insurance businesses in the summer was a unique opportunity which would have made strategic sense and driven market consolidation. However, we respect the decision of Aviva not to pursue our offer and consider it a closed chapter. While we continue to consider opportunities as they arise, our focus in 2011 will be on extracting value from the deals we’ve done in 2010.
We remain committed to growing our business sustainably and profitably and we believe we’re well positioned to do that in 2011 and beyond.
The underwriting performance was excellent despite adverse weather in June and July, with the underwriting result up 27% to £80m and a COR of 92.8% mainly due to Motor and
Personal Motor, reducing an underwriting loss of £51m in 2009 to a loss of £19m in 2010. We expect Italy to be closer to breakeven in 2011 and return to underwriting profitability in 2012.
Ireland and we are taking the right action in Italy. We are confident that in 2011 the
International portfolio will deliver around 10% premium growth and another strong bottom line performance.
The UK delivered an excellent top line performance with premiums up by 11% to £2.9bn. Our strategy of targeting profitable growth, taking positive action on rate and selective capacity withdrawal in a competitive market remains unchanged.
More Th>n® Household grew by 10% thanks to rating action and Pet grew strongly again, with premiums up by 25% supported by the
On the bottom line, the UK had a disappointing year. The winter weather in November and
UK programme ahead of schedule achieving the targeted savings of £70m. This means we are well on track to meet an expense ratio of around 14% by the end of 2012.
In 2011, we expect the UK to deliver targeted growth and, assuming a return to a more normal level of weather losses, a much improved underwriting result.
Chile and Colombia through a combination of 21 new affinity deals, an expanded agent network and growth in Marine, Property and Motor.
Over the last year, we have continued to make great progress with employee engagement.
In terms of road safety, we support a variety of programmes in Chile, Lithuania, UAE,
RSA employees from all over the Group actively involved with poverty alleviation, education and crime reduction initiatives.
Emerging Markets returned to double digit growth in 2010 and we expect the same in 2011. Having beaten our goal of £1bn in premiums, we are setting a new target of doubling net written premiums to around £2.2bn by the end of 2015.
The Group maintains a strong financial position with a regulatory capital surplus of £1.5bn, representing 2.3 times the requirement.
rated AA or above. The bond holdings are well diversified, with 77% invested in currencies other than Sterling, and 53%
In 2010, we continued to invest in our people and our businesses.
Emerging Markets 2004 Net written premium £7.5bn 2010 Net written premium
Across Latin America, staff made donations to orphanages and helped build homes for the homeless. In the UK, employees helped to mentor teenagers aspiring to a career in business and launched a new youth-focused crime prevention scheme.
Finally, during 2010 we supported a number of environmental projects including planting trees and cleaning up polluted beaches in the
We also offi cially launched our partnership with WWF across the UK, Canada, Sweden,
Denmark and China a year ago. Focusing on the risks of environmental change, we have been supporting conservation projects relevant to our business, developing new products and engaging our employees and external stakeholders on the environment.
All of these severely impacted our customers, their homes, businesses and cars. While these events have been challenging, paying these claims and supporting our customers is what we are here to do.
We go into 2011 with confi dence. We have built a portfolio of high performing operations with strong positions in attractive markets and exciting potential.
We will continue to drive top line growth and expect to see: • Targeted growth and a much improved underwriting result in the UK
Markets premiums to around £2.2bn by the end of 2015 and will continue to focus the Group towards International and Emerging Markets.
Over the next fi ve years, we expect these two regions to represent around 70% of the Group.
Organic growth has continued to be supported by targeted acquisitions and in 2010, we have been more active than usual completing 11 deals.
We will deliver these targets while maintaining our tight management grip and underwriting discipline and we will continue to deliver sustainable profi table performance.
We remain confi dent of continuing to drive the Group forward and building on our success to date.
One claim was particularly important, a major shipyard through which relief supplies would need to be unloaded, so we sent loss adjustors to survey the area and a little over a week later paid around US$8m to enable reconstruction to begin so that shipyard staff could return to work to aid the relief effort.
Chile and were one of the first insurers to reach the disaster zone.
TO CONTINUE TO DELIVER SUSTAINABLE, PROFITABLE PERFORMANCE. THIS DRIVES OUR CULTURE, THE MARKETS WE OPERATE IN, THE PRODUCTS WE WRITE, OUR PRUDENT RESERVING AND REINSURANCE POLICIES AND OUR HIGH QUALITY INVESTMENT STRATEGY
We have a culture of underwriting discipline and technical excellence, supported by a strong governance framework.
We are committed to attracting and retaining the best technical people in the market.
Our financial position remains strong and the sustainability of our earnings continues to be underpinned by our strong financial management.
We only write business which is within the risk appetite defined by our Board.
In February 2010, claims experts from across the Group travelled to Chile to support the local team in dealing with the aftermath of the earthquake.
We hold regular in-depth portfolio and reserve reviews to ensure this strategy is being successfully executed.
We recently completed a £70m cost reduction programme in the UK ahead of schedule.
We invest in our people through our market leading Technical Academies and other development programmes.
Our reinsurance programme enables us to minimise volatility in earnings from large losses and catastrophe events. We consistently reserve to the right side of best estimate across all of our businesses.
Our geographical balance gives us exposure to markets at different points in the cycle and different stages of development.
80% Retention rate across the Group £2.2bn NWP by the end of 2015
Over 60% of premiums are generated by our International and Emerging
Markets to be around 70% of Group premiums within the next 5 years.
In Emerging Markets we have beaten our £1bn NWP target in 2010 and have set a new target of £2.2bn NWP
Our strong customer focus and targeted propositions help us to maximise retention and grow our business.
We have a portfolio of high performing businesses with strong market positions and exciting potential. In 2011 we expect to deliver: • Targeted growth in the UK
• We will maintain our tight management grip and underwriting discipline
(excluding commissions) in the UK of around 14% by the end of 2012.
• We will continue to push hard on rate while maintaining underwriting discipline and as it stands today, and assuming a return to more normal weather levels, we expect to achieve a COR of better than 95% in 2011
CanadaScandinavia * Movement in renewal rate for December 2010 v December 2009
RSA IS THE THIRD LARGEST GENERAL INSURER IN SWEDEN AND DENMARK, THE FOURTH LARGEST GENERAL INSURER IN CANADA AND THE SECOND LARGEST IN IRELAND
International comprises our businesses in the mature markets outside of the UK: Scandinavia,
Canada, Ireland and Italy. We continue to deliver sustainable profitable performance through the following overarching strategies: • Driving profitable growth through our
• Enhancing our technical expertise in underwriting and claims as well as delivering our rate and remediation plans
• Investing in our people, focusing on improving engagement levels and embedding our brand beliefs in our performance management.
International has delivered an excellent performance. Net written premiums of £3.5bn are up by 9% (5% at constant exchange) compared with 2009. Our
Personal Accident and Motor books have performed strongly and the integration of
RSA Canada had another outstanding year, with premium growth of 22% to £1,245m, an underwriting profit of £80m and a COR of 92.8%.
In Personal lines, it has been a very strong year with growth of 20% (7% at constant exchange)
In Commercial lines, despite a highly competitive marketplace, the business has grown by 29%
(15% at constant exchange) and delivered a strong underwriting result of £31m.
On 7 January 2011, we completed the acquisition of GCAN, a leading mid market, large risks and specialty insurer, which further strengthens our Commercial platform.
Other Europe has seen premiums grow by 1% in 2010 (5% at constant exchange)
Ireland has seen some of the most challenging economic conditions in Europe, yet despite this
Direct Indemnifi cation, but we are seeing progress following continued management action. Premiums are down by 1% (up 3%
In Scandinavia, 2010 has been tough particularly due to signifi cant adverse weather but we expect a solid economic recovery in 2011.
Canada experienced a relatively good 2010, with overall GDP growth of around 3%
“ 2010 was a tough year. But despite economic uncertainties and signifi cant weather events, International has once again delivered a strong performance.”
• Commercial lines NWP reduction of 1% impacted by reduced exposures
• An outstanding underwriting result of £254m, up by 5% and COR of 85.4% despite adverse weather
• Personal lines NWP growth of 20% driven by rate increases, strong retention and favourable foreign exchange
• An excellent underwriting result of £80m and COR of 92.8%
In summary, overall we expect International to deliver growth of around 10% in 2011 and continued excellent profi tability.
WE ARE THE UK’S LARGEST COMMERCIAL AND 4TH LARGEST PERSONAL INSURER WITH A REPUTATION FOR TECHNICAL EXCELLENCE
Marine where we see opportunities for profitable growth and SME, a segment in which we are underweight.
Across the business, we continue to target an expense ratio of around 14% by the end of 2012, which we believe is an appropriate level for our mix of business.
We have delivered an excellent top line performance with net written premiums of £2.9bn representing growth of 11% over 2009.
In terms of underwriting, the performance was disappointing. The loss of £95m (2009: profit of £75m) and the COR of 102.2%
Our disciplined strategy and focus were recognised in the Insurance Times Awards where we were named General Insurer of the Year.
In Commercial lines, premiums of £1,684m were up by 10% on last year. We have invested in the SME market, refreshing our
International Property portfolios, whilst we have reduced premiums in large Motor fleets.
We continue to focus on maintaining our underwriting discipline, only focusing on business where we can achieve our targeted returns and walking away from business when we cannot. We have also enhanced our Commercial pricing techniques using skills learned from our Personal lines business.
“ The UK has delivered an excellent top line performance in what have been challenging economic and industry conditions. Our continued focus and discipline drove an 11% growth in Net Written Premiums. Our COR of 102.2% was severely impacted by winter weather.”
injury and has also been impacted by Motor schemes which we have exited as we were unable to meet our target returns.
Reflecting the maturing aggregator market, we launched our first dedicated Motor product for price comparison sites ‘RSA
We are working with Tesco to provide pet insurance to their customers and during 2011, this relationship is expected to generate around £100m of premium.
• Underwriting loss of £95m disappointing, due to the impact of adverse weather.
• Commercial Motor grew by 19% and included the phasing of a three year contract, with underlying growth closer to 12%
• COR of 101.1% includes the impact of adverse weather and a £22m reserve strengthening in Commercial Motor.
TECHNICAL EXCELLENCE • Named General Insurer of the Year at the Insurance Times Awards
Additionally, the Personal Motor COR was impacted by a £3m reserve strengthening for bodily injury.
In 2011, market conditions look mixed reflecting continued macroeconomic uncertainties and the competitive nature of the market.
+13% * Reported * * Excluding large contract wins in 2009
EMERGING MARKETS OPERATES ACROSS 21 COUNTRIES WITH LEADING POSITIONS IN LATIN AMERICA, ASIA AND THE MIDDLE EAST AND CENTRAL AND EASTERN EUROPE
Emerging Markets remains committed to delivering profitable growth. We aim to achieve this through expanding distribution, ensuring disciplined underwriting and strong control whilst improving operational performance. We focus on markets where we can establish a meaningful presence, either in overall market share or in segments where we have a competitive advantage.
Enterprises (SME) and Affinity. In each of these areas we develop solutions which can be replicated across our regions effectively and efficiently.
Emerging Markets premium to be £1bn by the end of 2010 with total premiums including our
(down 21% at constant exchange), though excluding large contract wins in 2009 premiums are up by 10% (7% at constant exchange).
America for example grew premiums by 40% in 2010. In Motor, we continue to focus on pricing sophistication, and invested heavily in specialist pricing resources in 2010. In SME, we continue to focus on streamlining our processes and simplifying our products, making it more attractive for brokers and customers to deal with us. Affinity continues to be a key growth driver in Latin America, where we signed 21 new deals in 2010.
The COR is 98.7% and clearly demonstrates the benefit of our diversified portfolio. The underwriting result of £12m is impacted by the cost of the earthquake in Chile, where we are the market leader. I am immensely proud of the dedication and technical skill shown by our local team in Chile and the support provided across the whole Group in our response to the earthquake.
“ In a challenging year for many of our Emerging Market economies, we have delivered excellent growth and a robust result despite the Chilean Earthquake and adverse weather.”
Our result also reflects an abnormally tough year for weather. Hurricane Tomas in the Dutch
Conditions have been challenging in some of our key markets in 2010.
We have maintained underwriting discipline despite intense competition. Where necessary, we have taken strong pricing actions, withdrawn from segments where we cannot achieve our target returns and maintained a tight grip on expenses.
Against a backdrop of severe market contraction in the Baltics, we maintained our market leading position in 2010. Economic recovery in 2011 will be slow. Latvia was hit hardest by the downturn but is expected to stabilise in 2011. The outlook
ASIA AND THE MIDDLE EAST • Excluding one-off contracts in 2009
• India grew at 35% due to continued growth in the Motor market.
CENTRAL AND EASTERN EUROPE • Central and Eastern Europe grew by 15% following the consolidation of our Direct businesses in Poland, the Czech Republic and Russia, where NWP grew by 14% and we now insure more than 340,000 vehicles
Direct businesses in Poland, the Czech Republic and Russia continue to represent huge growth potential, and will drive growth in the Central and Eastern Europe region in 2011.
Prospects for the Asia and the Middle East region are more mixed. We expect growth in Asia to continue, driven by strong consumer demand in the larger economies. Conditions in the Middle
East will remain more challenging, particularly in the UAE. Large public sector investment programmes across the region are expected to drive growth in our Specialty business.
2010 was a challenging year for the industry, with extreme weather throughout the year and the Chilean earthquake in February. Despite these conditions, we delivered a strong top line performance with premium growth of 11%, and a robust underwriting result with a COR
(8% on constant exchange). This is an excellent top line performance and reflects the benefits of organic actions, acquisitions and foreign exchange.
and represents a robust performance in challenging industry conditions, with a current year underwriting loss of £29m (2009: profit of £100m) and a prior year profit of £267m
The Group continues to maintain its prudent reserving policy and reserves remain significantly to the right side of best estimate.
The investment result is £538m, with investment income of £569m and total gains of £63m both slightly ahead of guidance due to management actions and the benefit of foreign exchange. The discount unwind was £94m.
return on cash assets and 4.0% on the remainder of the portfolio.
Total gains of £63m predominantly include gains of £47m on sales of equities as we moved a measured proportion of the portfolio into higher-yielding equities and gains of £27m on property, partially offset by losses of £9m on the equity hedges.
In terms of 2011, as it stands today, we would expect full year investment income to be around £550m and total gains to be around £50m.
Reorganisation costs of £5m are the final instalment on the cost reduction programme in the UK announced in February 2009 and completed in the first quarter of 2010 ahead of schedule.
The tax charge is £119m and represents an effective rate of 25%.
Profit after tax is £355m and the underlying return on average equity is 9.9%, with the movement on 2009 reflecting the impact of the adverse weather and Chilean earthquake on the underwriting result and the expected lower level of investment income.
Excluding the worse than normal weather losses, the underlying return on average equity is 15.3%.
General Meeting to be held on 23 May 2011, that a final ordinary dividend of 5.70p (2009: 5.33p) per share be paid. This together with the interim dividend of 3.12p (2009: 2.92p) paid on 26 November 2010 will make the total distribution for the year 8.82p (2009: 8.25p), an increase of 7% compared with the prior year.
As reported at the half year, the increase in tax paid to £215m is primarily due to Canada, where tax is paid in monthly instalments which are based on the previous year’s profits, with a true-up at the start of the following year for the actual results. Our 2009 Canadian profits were significantly above 2008, resulting in a true-up payment of £40m in the first half of 2010.
Interest paid of £115m reflects a full year’s interest paid on the Sterling notes issued in May 2009.
Dividends paid are £50m higher than 2009 and reflect the increase in the 2009 final dividend and the lower take up in the scrip.
Corporate activity represents the completion of the sale of British Engine and acquisitions in International and Emerging Markets during 2010. The acquisition of GCAN did not complete until January 2011 and is not included.
The next call on any external financing is on the £450m subordinated guaranteed bonds in
The total value of the investment portfolio is £14.8bn, up 4% compared with 2009 due to foreign exchange and mark to market gains.
The overall portfolio remains high quality with 86% of the portfolio invested in fixed income and cash.
At the year end, non government bonds comprised 53% of bond holdings, while equities and property were 9% and 3%
The Group continues to hold a significant economic capital surplus, which is around £1.1bn at the end of 2010 compared with £1.8bn at the start of the year. £0.2bn of the reduction is due to the downward movement in the risk free yield curves and £0.4bn is due to the impact of goodwill and intangibles on acquisitions. Since the year end, there has been a pick up in risk free yields and at February 2011, the pro-forma economic capital surplus was £1.2bn as a result.
On Solvency II, we remain supporters of the principles but frustrated by the unnecessary complexity of the calculations and reporting requirements and we are concerned as to whether the ultimate benefits will be worth the effort. However, we continue to make good progress and remain at the forefront of implementation. Having completed the FSA’s pilot programme and had our pre-application qualifying criteria approved, we are now in the pre-application phase of the internal model approval process. We have also completed
The Group was upgraded to A positive outlook from A stable outlook by S&P in
We have also completed the triennial valuation and agreed funding for the next three years.
The annual contributions will not be materially different from current levels.
In what were challenging industry conditions, 2010 was a good year for the Group. Looking forward to 2011, we are confident of continuing to deliver premium growth and strong profitability.
We ensure risk is managed to reduce losses and ensure opportunities for profitable growth are taken.
The Group operates under a common framework through which risk management and control is embedded throughout the Group.
Executive management is responsible for implementing systems and controls that manage our risk exposures to the risk appetite.
There is a formal identification and escalation process for emerging risks.
The Group has ‘3 lines of defence’ for the oversight and management of risk as follows: 1st line – Management
• Setting strategy, performance measurement, establishment and maintenance of internal control and risk management in the business.
• Operating a formal risk management framework within which the Group policies and minimum standards are set
Group’s systems of internal control established by the first and second lines of defence.
Risk elements are viewed under headings that broadly correspond to those used in the Financial Services Authority’s Prudential
During the year we maintained our focus on risk management, strengthening and developing our processes, controls and capabilities through the following activities: • We continued to invest in our integrated Group wide governance, risk and compliance approach through which we manage and report our risks
• We further developed our rolling programme of comprehensive stress and scenario testing which reinforces our understanding of our risk profile and the effectiveness of our control environment
“ Our risk appetite clearly sets out which risks we are and are not prepared to take.”
• Requirements to maintain a minimum level of cash or highly liquid assets
INSURANCE RISK Our insurance risk strategy has enabled us to continue delivering strong insurance results.
REINSURANCE RISK Our reinsurance buying and management expertise has allowed us to manage our insurance exposure and losses such as those arising from the Chilean earthquake.
CREDIT, MARKET & LIQUIDITY RISK Our conservative approach to financial risks has helped support the business in a challenging climate.
REGULATORY RISK Our response to regulatory changes and compliance has helped safeguard our business and we remain at the forefront of UK firms in respect of our Solvency II application process.
• Contingency funding plans ensuring minimum levels are met even in stress conditions.
• Action taken to mitigate falling yields includes increased holding in non government bonds, and measured increase in higher-yielding equities, property and duration.
• Each portfolio has a rate plan which is regularly reviewed
• Actively shift capacity to where we see the best returns
• Underwriting strategy set to ensure risks written are well diversified and within risk appetite
• Inability to charge adequate rates places downward pressure on operating results.
The principles by which we operate our business and our brand beliefs underpin our commitment to our customers, staff and other stakeholders and our Corporate Responsibility
(CR) policies form an essential part of our broader risk and governance framework.
Our CR data, processes and external reporting are verified by external auditors
(GHG Protocol). We use a web-based environmental management system to help collect and analyse data across RSA.
CORPORATE RESPONSIBILITY REMAINS FUNDAMENTAL TO THE WAY RSA CONDUCTS ITS BUSINESS. DURING 2010 WE CELEBRATED OUR 300TH BIRTHDAY ENCOURAGING ALL EMPLOYEES TO VOLUNTEER OR FUNDRAISE FOR THEIR LOCAL COMMUNITIES
We recently set a challenging target to achieve a reduction in CO
The development of our renewable energy products has also been a key factor in delivering targeted profitable growth and establishing RSA as a leading renewables insurer globally. The work we do on environmental management to reduce travel,
As an insurer, we play a vital role in helping people and businesses recover when the worst happens. Helping get their lives back on track is our first priority. During the 2010 earthquake in Chile we helped our customers through our rapid claims response with over 32,000 claims reported in this terrible event.
Insurer of the Year award. The award was in recognition of our consistent performance and a major achievement in our 300th anniversary year.
We continue to support programmes in Chile, Lithuania, the UAE, Sweden, Denmark and the UK. In 2010, we launched a road safety education programme for children in the UK, encouraging our employees to nominate the school that their child attends.
1. Scope 1: All direct GHG emissions 2. Scope 2: Indirect GHG emissions from consumption of purchased electricity, heat or steam 3. Scope 3: Other indirect emissions
UK (including GCC) 7,904 16,093 7,317 1. Leak in Mexico caused a major increase in water consumption in 2009 issues and engaged in active dialogue to improve standards. In Scandinavia, we re-launched our supplier codes of conduct, ensuring strong action on environmental and social issues. In the UK, we also held our first supplier workshops to discuss our approach to CR and what we look for from suppliers.
The aim of the Academy is to develop product awareness and technical skills through accredited programmes.
We continue to focus on developing employees at all levels through our major initiatives. Our Graduate Programme was challenged to develop long term charitable initiatives which link to our business as well as tackling responsible business dilemmas.
We officially launched our partnership with WWF across the UK, Canada, Sweden,
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.
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 of our seas.
In Canada, we are establishing marine protection areas to help safeguard the long-term future of the fishing industry and in Scandinavia, we are collaborating with governments to better manage the commercial use of the Baltic Sea. In 2010, RSA joined a group of global marine industry leaders to launch the Sustainable Shipping Initiative which will focus on shaping regulations to improve safety and minimise the impact on the environment.
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 have been working with WWF
emissions relative to our net written premiums by 2020 (based on 2006 levels).
The bulk of our UK equity assets continue to be managed by F&C Asset Management.
While the seriousness of the problem is debated, there is no doubt that
Arctic communities across the globe are likely to face even greater threats from coastal erosion, flooding and violent storms in the future.
We recognised early on that, as a global company, we have a global responsibility to limit our impact on the environment.
Financial Offi cer in May 2004 and is a member of the Investment Committee, the Group
Committee, which he chaired until June 2009. Previous roles include Head of Capital
(insurance) and Chief Financial Offi cer of its UK operation. Before that George spent ten years with Prudential.
Committee in March 2003. He is a member of the Investment and Remuneration
Committees. John is currently the Chairman of Aegis Group plc (media) and was also interim Chief Executive of Aegis Group plc from December 2008 until May 2010. Previous roles include Chairman of Kelda Group plc
Exchange. He has previously been Chairman of Booker plc (cash and carry) and Managing
Director of ITV plc (media) in August 2008 and has been a member of the Board of the
Executive of International since April 2003 and is a member of the Group Executive
Westminster Group, in the UK and US, including time as Chief Executive, Natwest
Board Risk Committee as Chairman in June 2009 and is a member of the Group Audit and Investment Committees. Noel is also a Director of Logica plc (IT and outsourcing),
Winston Diamond Corporation (mining and retail) and Deputy Chairman of Sumitomo
Supermarkets plc in February 2010. She is also a Director of the RBG Kew Foundation, an Operating Partner of Duke Street LLP
Sandpiper CI. Previous roles include Chairman of Tate Enterprises and over 20 years with
Adrian Brown was appointed Chief Executive of the UK in September 2008. Adrian is a qualifi ed management accountant and has been with the RSA Group since 1989. He was previously the UK Chief Operating
UK Director of Personal lines and led the launch of MORE TH>N®.
Directors whose biographies are on page 38 and the following senior executives:
Previously she was Director of Marketing and Commercial Strategy at ITV plc and a member of the Executive Management Board,
Managing Director of AA Financial Services and has held senior commercial roles at
Director in June 2007. David spent 27 years with the Barclays Group, where senior roles included Chief Operating Offi cer for Corporate Banking and Group Chief
Group Executive Committee. He recently spent two years consulting to blue chip and government organisations and acting as an independent board member at the DTI
April 2003. He has over 20 years’ senior management experience in the fi nancial services sector including three years at AXA
This Report is structured in line with the headings in the 2008
Code) of Directors; Accountability and Audit; and Relations with Shareholders. Remuneration is covered in the separate
Throughout 2010 the Company has complied with the Principles and Provisions in section one of the Combined Code (available from www.frc.org.uk) with the exception that: • The Company did not have a Senior Independent Director during the year. The Board reviews the need for this appointment annually and believes that it is now appropriate for the Company to have a
• The Chairman and Non-Executive Directors have not met without the
Further explanation of how the main Principles in the Combined Code have been applied is set out below and in the Remuneration Report.
RSA’s governance structure aims to enable effective and efficient decision making with clear responsibilities and describes how the Company is directed and managed. As an insurer the Group is also preparing for the implementation of Solvency II in 2013 which will change the regulatory capital adequacy regime and governance within regulated insurance companies in EU countries. The Board has a schedule of matters reserved to it and each Board Committee has written terms of reference.
Role statements, policies, systems, procedures and controls are also in place and further details can be found under Accountability on page 46.
Assists the Board in discharging its responsibilities for the integrity of the financial statements, for the effectiveness of the systems of internal control and regulatory and financial risk management and for monitoring the effectiveness and objectivity of the internal and external auditors.
Board on the Group’s remuneration policy in relation to senior executives.
Oversees the operation of the Company’s share based long term incentive schemes including approving the value and timing of awards and the operation of performance conditions.
Company and the Group generally. Ensures that material risks are identified and mitigated.
The terms of reference for each Committee of the Board explaining their role and the authority delegated to them are available on the Company’s website www.rsagroup.com/rsa/pages/ir/governance/mgtcommittees. The matters reserved to the Board and terms of reference of each Committee are reviewed regularly.
• Set the Company’s Community and Charitable Policy and received reports on the Group’s corporate responsibility activities.
• Full day dedicated to strategy and regular updates during the year
Survey which indicated improved employee engagement across the Group up 0.22 to 4.21 (out of a maximum score of five)
Capability Framework which helps employees identify learning requirements for their current and future roles
• Received regular reports from Investor Relations on institutional shareholders’ views
• All Directors were available to talk with shareholders at the AGM in May
• Celebrated 300th anniversary with a charity drive culminating in RSA Day on 25 June. RSA Day will become an annual event.
The Board monitors achievement of the Company’s objectives through monthly Board reports which include updates from the Group Chief
The Board held 10 scheduled meetings during the year and six single purpose meetings which were unscheduled and called at short notice.
The Group CEO is responsible for the executive management of the
• Developing management succession plans and making recommendations for change as appropriate to the Board
• Representing the Company within the industry and with the business community, the City, UK Government, shareholders, potential investors and the public
• Liaising with the Chairman and keeping him informed on all material matters.
More than 50% of the Board, excluding the Chairman, comprises independent Non-Executive Directors. The Board believes that the size of the Board is appropriate and that no individual or small group of Directors can dominate the Board. Directors have access to the services and advice of the Company Secretary and in addition may take independent professional advice at the expense of the Company in the furtherance of their duties. All Non-Executive Directors
(including the Chairman) are subject to a three year rolling period of appointment in accordance with the Articles. Edward Lea, John
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 54 to 69 and are incorporated into this report by reference.
The roles of the Chairman and the Group CEO are separate, with responsibilities clearly divided between them and set out in role statements.
Chief Executive of that company until 1 May 2010. The Board is satisfied that the Chairman’s other commitments did not interfere with the performance of his role as Chairman as demonstrated by his availability for a number of unscheduled Board and Board Committee meetings during the year.
• Leading the Board in reviewing the recommended strategic operating plans and budgets
• Ensuring that appropriate and related objectives are established for the Group CEO
The attendance of Directors at meetings of the Board and at Board Committees of which they were members during the year is set out below: Board meetings
The Board considers the leadership needs and succession planning of the Board when making decisions on new appointments and 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; the balance of Executive and Non-Executive Directors; the skills and experience already represented; likely future retirements and those appointments to the Board which would be desirable going forward.
Director on 27 January 2011. With effect from 1 February 2011, Edward Lea and Johanna Waterous were appointed as members of the Nomination
The Directors and the Company (by ordinary resolution) may appoint a person who is willing to be a Director either to fill a casual vacancy or as an additional Director. A Director who is appointed by the Directors shall retire at the following AGM and will put himself forward to be elected by the ordinary shareholders. In accordance with the Articles and the Combined Code, the Directors submit themselves for reappointment at the first AGM after their appointment and for reelection every three years thereafter. Resolutions to reappoint
Directors at the AGM are subject to the approval of the Board, taking into account the recommendations of the Nomination Committee.
remove any Director before the expiration of his period of office.
On appointment to the Board, Directors undertake an induction programme and receive a range of information about the Company appropriate to their existing knowledge and experience. This includes background information on the Group and details of Board procedures, governance issues and Directors’ responsibilities and a series of meetings with members of the Board and executive management on the business and regulatory matters.
CFO, financial results, a Solvency II update and functional updates which are discussed at Board meetings. Development and training for the
understanding of the business and provide them with additional comfort that they have taken all the steps that they ought to have taken as Directors to fulfil their statutory duties to the Company and their responsibilities in preparing the Annual Report and Accounts and ensuring that the external auditor is aware of all relevant information.
Ireland and a Strategy, Marketing and Customer Conference. Edward Lea presented at a Group Internal Audit Conference and is due to visit the
In 2010 the Board undertook an evaluation of the performance of the
Board and its Committees, externally facilitated by MWM Consulting, to assess how well the Board, Committees and the Directors were performing. The review included a questionnaire and interviews with MWM Consulting followed by a Board meeting to discuss the issues raised. The discussion concluded that the Board is strong and effective and that there is a good relationship between the Executive and Non-Executive Directors with the Non-Executive Directors providing significant challenge to the Executive Directors. A number of recommendations were made and are being implemented.
• To coordinate and have oversight of the Company’s financial reporting process
The Committee is comprised of Non-Executive Directors, all of whom have recent and relevant financial experience. The Deputy
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 Company’s policy on whistle blowing provides a mechanism for employees to raise serious concerns in good faith, where they either do not feel comfortable raising the matter with local management or are not satisfied with the local management response. The GAC
• Reviewed all results announcements and the 2009 Annual Report and Accounts
• Approved significant non audit services provided by the external auditor
• Requested an independent assessment of the effectiveness of the internal audit function
• Reviewed risks facing the Group by risk type and region at each meeting
• Monitored the global economy and market conditions and the economic outlook during the year
audit work over £250,000 will be notified by the CFO to the GAC
Details of fees paid to Deloitte LLP during 2010 for audit and non audit work are disclosed in the auditor remuneration table in note 4 on page 104. There are no contractual obligations that restrict the Company’s choice of external auditor.
The GAC has reviewed the independence, effectiveness and objectivity of the external auditor in 2010 and concluded that Deloitte LLP provided a service that was robust and fit for purpose. Accordingly the GAC
(as defined in section 418(3) of the Companies Act 2006) of which the
GIA’s activities and effectiveness are monitored and reviewed by the GAC.
The GAC reviews and approves the annual Group Internal Audit Plan following presentations from the regional CEO’s and regional auditors.
In December 2010 the GAC approved a revised GIA mandate and three year strategy.
Internal Auditors. Overall the function was in the upper quartile of internal audit functions within financial services companies. The report had also concluded that there was a good relationship between the
The GAC is satisfied that, during 2010, it has received sufficient, reliable and timely information from management to enable it to fulfil its responsibilities.
Capital Assessment will be carried out by the FSA in 2011.
• To ensure that material risks have been identified and mitigated appropriately
• To review the Remuneration Report for any implications of the
This may include greater focus on specific risk disciplines or individual insurance portfolios as considered appropriate through pre meeting discussions between the BRC Chairman and the Group Risk Director.
The minutes of the regional Risk Committees established in the UK,
and the Regional Risk Directors regularly present to the BRC. In 2010
The performance of internal control systems is reviewed regularly by the GAC and the Board annually reviews the effectiveness of the
Group’s systems of internal control in order to safeguard the Group’s assets and shareholders’ investment. This system includes governance, financial controls, the risk management framework and the process to deliver regulatory and compliance requirements. The systems are designed to identify and mitigate, rather than eliminate, the potential risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material financial misstatement or loss. In February 2011 the GAC and the
Auditor and her team on the integrity of the control environment and also receives reports from the external auditor based upon its audit work. The GAC also receives reports on the adequacy of the Group’s arrangements for ensuring regulatory compliance from the Group Head of Regulatory Risk & Compliance. The Board, through the Board Risk
Committee, considers reports from risk specialists across the Group and reviews Group level risk management information.
Group quarterly to confirm the adequacy of controls and their compliance with Company policies, local laws, rules and regulations.
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 2010 and up to the date of approval of the Annual
resilience in relation to extreme but plausible events that could have a material impact on the Group. The aim is to enable management to understand the dynamics of the Group’s risk profile, identify potential mitigation strategies for such events and act as a validation tool for both the Group’s ICA process and its risk appetite.
(including insurance, operational and financial). The results have provided insights as to the robustness of the Group’s monitoring and contingency measures and has allowed for the identification of potential additional management actions that could be taken to protect RSA’s customers, shareholders and continuing operations.
In addition to monitoring risks that are already recognised as material to the Group the BRC instructed Group Risk during the year to analyse emerging risks that could threaten RSA’s position of competitive advantage or successful delivery of strategy to ensure that plans are put in place where possible to mitigate new risks. The emerging risks identified are viewed holistically and cover: • Legal and regulatory developments
A wide range of internal and external data was analysed to identify the appropriate risk areas, the potential impact to the Group and what action is being taken or planned to address each risk. External sources included the World Economic Forum, the CRO Forum and The Geneva
Association. Work has also been carried out to identify longer term risks which may have an impact over the next 10 to 20 year time frame.
The BRC is monitoring the Company’s progress on ensuring that appropriate policies and procedures are in place in order to comply with the requirements in the Bribery Act 2010 (the Act) which is expected to come into force in 2011. The Group has conducted a global assessment of the nature and extent of the risks relating to bribery that it faces and is designing and implementing proportionate systems and controls in response. A detailed training programme for all staff is being rolled out. Further, the Group’s Anti-Corruption Compliance Policy has been updated to reflect the Act and additional guidance is being produced for staff on gifts and hospitality, which will supplement existing materials.
The Financial Control Framework aims to deliver a consistent approach to finance related controls across the Group that is ‘fit for purpose’ for all regions, embedding a control culture that will strengthen the Group’s finance environment by ensuring that the Group’s financial processes are managed effectively in order to mitigate the associated risks. This is done by documenting and testing the way that core elements of the business work, providing a high degree of transparency around the Group’s financial control environment. The Group has people, procedures and tools embedded in the business to maintain and streamline the control environment and to provide ongoing reporting and assurance. Quarterly reports are presented to the GAC which include notification of any control deficiencies or breaches in the period and action taken.
The Group operates a Delegated Authority Framework which specifies how executive authority is delegated from the Board to the Group CEO
Group receive an executive licence setting out their 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.
The Board attaches considerable importance to its relationships and communication with shareholders and welcomes the introduction of the UK Stewardship Code in 2010. Senior management meet principal institutional shareholders on a regular basis and Non-Executive
Directors are available to meet with institutional shareholders as required. Executive Directors held 79 meetings with investors during 2010. The Board receives regular reports from the Investor Relations team on the views of institutional shareholders. Presentations and meetings are conducted in compliance with the Company’s Inside
(and preference shareholders when applicable) at least 20 working days before the meeting and is available at www.rsagroup.com/rsa/pages/ir/
The Group CEO presents on the Company’s performance and activities during the year and the CFO presents the financial results of the Company prior to the formal business of the meeting.
Separate resolutions are proposed on each substantive issue, including a resolution to adopt the Annual Report and Accounts. In accordance with provisions in the Articles any form of proxy sent by the Company to shareholders in relation to any general meeting must be delivered to the Company, whether in written form or in electronic form, not less than 48 hours before the time for holding the meeting excluding non business days (or, in the case of a poll taken otherwise than at or on the same day as the meeting, not less than 24 hours before the time appointed for the taking of the poll).
The Group is committed to fostering a constructive dialogue with recognised independent trade unions, ensuring a regular and open dialogue on business issues and early consultation on changes affecting the workforce. In the UK, Unite is formally recognised through a partnership agreement which covers collective consultation and bargaining on behalf of non management employees. The Management
Lloyds Banking Group plc* 174,418,517 5.06 Direct & Indirect 174,418,517 5.06 Direct & Indirect
Schroders plc 170,851,201 4.95 Direct & Indirect 170,851,201 4.95 Direct & Indirect
Standard Life Investments 152,266,879 4.42 Direct & Indirect 152,266,879 4.42 Direct & Indirect
Legal & General Group plc 136,295,990 3.99 Direct & Indirect 136,295,990 3.99 Direct & Indirect
The Group continues to focus on the development of employees in order to ensure they can deliver high levels of performance. RSA
The Technical Academy aims to continually enhance the technical capability of RSA’s Underwriting, Claims and Actuarial community by providing training programmes, identifying talent, ensuring there are structured career pathways for technical staff, developing global best practice and standards and supporting and recognising the attainment of technical skills and qualifications.
Group and enables identification of current and future critical gaps, roles, capabilities and talent pipeline so the Group can focus its development and recruitment appropriately. Core and functional capabilities have been identified for all roles along with target levels for each capability as appropriate for each role. Employees can self assess their current capabilities against the targets set for their role or other roles that they may be interested in across the Group and tailor their development plan accordingly.
Each year we run a global employee survey using the Gallup Q12 questions. 2010 has seen further improvements in the results with an increase of 0.22 to 4.21 (out of a maximum score of five) putting the Group at the 70th percentile in the Gallup database. In particular, the response to the question ‘The mission and purpose of my company makes me feel that my job is important’ increased by 0.23.
RSA encourages employee share ownership through all employee share plans. Employees from 22 of the 34 countries in which RSA operates are invited to participate in Sharesave (SAYE) and the overall take up by eligible employees is 47%. Sharebuild has now been running for a full year in the UK and 31% of eligible employees participate. Further details on the Group’s share schemes can be found in the Remuneration
RSA also encourages employees to participate in discount schemes for employees and their families. The Staff Saver Scheme in the
The Group actively encourages employees to become involved in supporting their local communities. Further details are provided in the Corporate Responsibility Report on pages 32 to 35.
The Company is the holding company of the RSA Insurance Group plc group of companies whose principal activity is the transaction of personal and commercial general insurance business. The Group operates in 34 countries and provides general insurance products and services in over 130 countries.
knowledge in order to provide the Company’s shareholders with a fair review of the development and performance of the Company and the
Report to include a management report. The information that fulfils this requirement can be found in the Business Review on pages 4 to 35 and the Directors’ Report on pages 42 to 53.
On 7 January 2011 the Group acquired Glenstone Capital Inc and its subsidiary, GCAN Insurance Company, in Canada. This transaction makes RSA the fourth largest insurer in Canada. Further details are provided in note 30 on page 134.
The preferential dividend at the rate of 3.6875% for the period from 1 October 2010 to 31 March 2011 will be paid on 1 April 2011 to holders of preference shares on the register at the close of business on 4 March 2011.
AGM. During 2010 the Directors exercised their authority to allot in respect of employee share schemes and the scrip dividend scheme.
The Company operates four employee benefit trusts to hold ordinary shares in RSA which are used to satisfy exercises under the Group’s share incentive schemes and Capita Trustees Limited is the current Trustee of each trust. The Trustee may vote in respect of any shares held in the Trusts but has no obligation to do so and, 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.
Related party transactions are set out in note 32 on pages 135 to 136.
The Company does not consider that it, or any of its subsidiaries, has any contractual or other arrangements that are essential to the success of the Group that is required to be disclosed pursuant to section 417 of the Companies Act 2006.
The Company and its subsidiaries worldwide made charitable donations of £2.4m (2009: £2.8m) during the year, of which £1.2m (2009: £1.5m)
conflicts of interest during the year and that the procedure in place operated effectively in 2010.
The Company’s Articles may be amended by special resolution of the Company’s ordinary shareholders. New Articles were adopted at the 2010 AGM and are available on the Group’s website at www.rsagroup.com/rsa/pages/ir/governance/articles
The Directors restrict the borrowings of the Company so that the aggregate amount, for the time being, remaining borrowed by the
Article 140 of the Articles provides that, among other things and insofar as permitted by law, the Company may indemnify its Directors against any liability and may purchase and maintain insurance against any liability.
The 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.
In addition the Company has indemnified the Directors of SAL Pension
The Directors’ responsibility statement appears on page 72 and is incorporated by reference into this Report.
Deloitte LLP have audited the following items stipulated in law for their review: • The table of Directors’ emoluments and associated footnotes on page 65 and the disclosure of the items comprising benefits in kind
In constitution and operation the Committee complies fully with the Combined Code as described in the Directors’ and Corporate
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. It 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
To have regard to any concerns raised by the Board on the implications of the remuneration policy for risk and risk management.
(TSR) performance conditions applying to awards under the LTIP made in 2007, and approval of the vesting of those awards
• Review of the annual objectives and performance goals for each Executive Director.
• The Committee exercised discretion relating to the timing of the vesting of the 2007 LTIP awards to allow employees the opportunity to receive any vested awards in the 2009 – 2010 tax year.
FEBRUARY • Determining the outcome of annual bonuses for 2009 in the light of actual performance against agreed goals and objectives for each Executive Director.
MARCH • Determining the outcome of annual bonuses for 2009 in the light of actual performance against agreed goals and objectives for members of the Executive Team
SEPTEMBER • Review of the level of take up under Sharesave and Sharebuild and approval of the level of awards to be granted under those plans
• Review of share usage following the grant of awards under the LTIP in September 2010.
Andy Haste Group CEO Attends by invitation to provide advice on Group strategy and performance
Orlagh Hunt Group Human Resources Director Attends by invitation as an executive responsible for advising on remuneration policy
None of the attendees are present as of right and do not attend when their own remuneration is discussed. Malcolm Le May was also a member of the Board Risk Committee during the year. As a result, decision making on remuneration matters is consistent with the Group’s risk profile, with risk being properly taken into account.
In developing remuneration strategy during the year, the Committee obtained its principal advice from Towers Watson, who were appointed by the Committee. In addition to providing independent advice to the Committee, Towers Watson provides broad reward and pensions advice to the Company.
The Committee’s remuneration policy is consistent with the high performance culture across the Group. The key principles which underpin the remuneration policy are that: • Total remuneration is set at a level which enables the recruitment, retention and motivation of high quality executive talent
• There is a strong and visible link between remuneration and performance
• Executive remuneration and shareholder interests are strongly aligned. This is reflected in the design of the LTIP which provides a co-investment opportunity
• The observation of existing share ownership guidelines further enhances the alignment of Executive Directors with those of shareholders interests
• Incentive arrangements are leveraged so that only exceptional performance attracts the highest levels of award
• A balance of short and long term performance is used, incorporating measures of financial performance, profitable growth, delivery of shareholder value and a robust assessment of personal contribution
• Where relevant, there is consideration of environmental, governance and social risks when determining remuneration for Executive Directors and senior managers to ensure that positive and appropriate behaviours are reinforced.
Pension provision and other benefits Reasonable provision in line with arrangements made in similar companies will be made to allow executives to plan effectively for their eventual retirement.
Remuneration for Executive Directors in 2011 will consist of the four principal elements described in the table above, of which only base salary is pensionable: Remuneration Purpose Delivery Detail
Base salary To reflect the market value of the role and the skills, experience and performance of the individual
• 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
• Financial targets are measured against key financial measures for Group and business areas
• Matching Shares awarded linked to Deferred Shares, also subject to performance conditions
• Defined benefit scheme or defined contribution scheme, and/or cash allowance in lieu of pension contributions.
To enable the Group to compete for the most talented executives, the Committee relates base salary levels to the median level for equivalent roles in similar companies facing similar levels of complexity and challenge in the UK and internationally. In the UK, the comparator group most frequently used is a selected group of financial services companies within the FTSE 100. The Committee also has regard to levels of base pay within European and international companies.
The Committee is alert to market concerns surrounding base pay increases and closely monitors basic pay (and total remuneration) for Executive
The review of base salaries for Executive Directors in 2010 indicated that there had been little, if any, movement in the level of base salaries paid to Executive Directors. The Executive Directors requested that the Remuneration Committee did not consider increasing base salaries in 2010, and the Committee approved that request.
The current base salaries paid to each Executive Director are: Position Base salary
The following table sets out the base salaries of UK based executives below Board level on a banded basis as at 31 December 2010. No such executive received a base salary in excess of £415,000.
Bonuses paid to Executive Directors in respect of the performance year 2010 are included in the table of Directors’ emoluments on page 65.
The Committee is satisfied that the bonus payments made in respect of 2010 are appropriate given the COR and NWP results across the
Matching Shares may vest subject to the performance conditions described on pages 60 and 61 of this Report.
For the purposes of the charts above, the bonus value is based on the cash bonus plus the fair value of the compulsory Deferred Shares. The LTIP
Prior to the approval of the LTIP, two long term share incentive plans were in place: • The 2004 Share Matching Plan, which was designed to operate for two years. The final awards under this plan were made in 2005
Committee at the appropriate time. To date no grants have been made under the new ESOS.
The primary long term incentive is the LTIP, the key features of which (and associated policies) are summarised in the sections below. Awards under the LTIP will be funded through a combination of new issues and shares purchased in the market.
Participants may receive a conditional award of shares with the grant level and performance condition determined by the Committee prior to each grant (Performance Shares). Executive Directors, members of the Executive Team and the Top 100 will be eligible for awards of Performance Shares.
As described in the annual performance bonus section on page 58 Executive Directors, members of the Executive Team and the Top 100 may be granted deferred share awards as part of the annual bonus (compulsory Deferred Shares). 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.
For awards made in 2010, the TSR performance scale is: Company’s TSR performance Proportion of this part of the award vesting
The TSR comparator group consists of the following companies: TSR comparator group
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 TSR condition is independently calculated and verified by the Committee for each award that vests.
Strengthened share ownership guidelines were introduced in 2004 for Executive Directors and members of the Executive Team.
The Group CEO is required to maintain a minimum shareholding in the Company equivalent to 200% of base salary. The other Executive
Notes: *Assuming share price of 125.2p (the closing middle market price on the last dealing day of the year).
Andy Haste is a member of the SAL Pension Scheme (SAL), a contributory defined benefit occupational pension scheme. In 2010 the Group restructured the provision of defined benefit pensions for all UK based employees. From 1 March 2010 Andy Haste’s benefit accrual was reduced from 1/60th to 1/80th and was calculated with reference to a capped salary of £75,000. Benefit accrued under the RSA Stakeholder Plan (a defined contribution plan) in respect of base salary from £75,000 up to the previous salary cap (£123,600 for the tax year commencing 6 April 2009).
Participation in the RSA Stakeholder Plan will generate employer contributions worth 15% of base salary, subject to an employee contribution of 5% of base salary. In addition to his benefits within SAL and the RSA Stakeholder Plan, Andy Haste receives an age related taxable cash allowance to enable him to make his own provision for retirement above the cap. In 2011 he will be paid an allowance of 38% of base salary for this purpose.
George Culmer is a member of the RSA Stakeholder Plan. In 2011, as in 2010, he will receive employer contributions worth 15% of base salary, subject to an employee contribution of 5% of base salary up to the HM Revenue and Customs annual allowance as applicable. Additionally,
In addition, the Executive Directors participate in a number of benefits available to other senior managers including life assurance at the rate of four times base salary together with a spouse/dependant annuity, sickness and ill health early retirement benefits and private medical insurance.
The Committee’s policy on service contracts is that they should be subject to a maximum notice period of one year. Generally, in the event of termination and in all cases of termination on performance grounds, the Committee’s policy would be to seek and apply mitigation. None of the
Executive Directors have current terms in their service contracts which allow them additional rights or payment in the event of a reconstruction or amalgamation of the Group.
Andy Haste’s service contract expires under normal circumstances in January 2024. The service contracts for George Culmer and Simon Lee terminate under normal circumstances in October 2024 and March 2023 respectively.
Group CEO, an invitation to join the Board of another company in a non-executive capacity, recognising the value of such wider experience.
Under the Company’s Articles, the remuneration paid to Non-Executive Directors is determined by the Board, within limits set by shareholders.
Board for 2010 was £400,000 per year and is subject to annual review by the Committee. As with Executive Directors, the Chairman requested that his fee was not increased in 2010. The appointment may be terminated by the Chairman on three months’ notice to the Company.
Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10
The graph below is included in the report of the Committee as a requirement of Schedule 8 to The Large and Medium-Sized Companies and Group (Accounts and Reports) Regulations 2008.
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 2005 to 31 December 2010.
Remuneration for the year ended 31 December 2010 was as follows: Base salary and fees
2. 2010 bonuses were calculated as described on pages 58 and 59 of this Report and are shown in the table above. In 2010 a maximum cash bonus of 120% of salary was achievable.
3. George Culmer’s allowances include 15% of base salary as a retirement allowance, paid monthly. During 2010 the amount paid was £83k. He also received car benefits and additional taxable travel benefits worth £27k and medical benefits worth £1k.
6. John Napier is entitled to receive an accommodation allowance with effect from 1 October 2010 of £33k (gross) per annum.
The 1999 ESOS is an executive share option scheme under which options were granted with an exercise price equal to the fair value of the shares at the date of grant. Any outstanding options expire ten years from the date of grant. No grants have been made under the 1999 ESOS since 2006 and the 1999 ESOS expired in 2009 although a number of options remain outstanding.
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.
Sharesave (an HM Revenue & Customs approved Save as You Earn Plan) is operated in 22 countries. Employees make monthly savings for a period of either three or five years and are granted an option to buy ordinary shares in the Company at the end of the savings period.
The purchase price is set at the date employees are invited to join Sharesave and is discounted to the market value.
None of the terms or conditions of any of the existing options over shares of the Group were varied during the year. Full details of all Directors’
The Directors’ interests in Sharebuild at 31 December 2010 are below: Sharebuild
3. Matching Shares are capable of vesting in respect of a maximum of 2.5 times the number of Deferred Shares awarded, subject to the achievement of performance conditions over a three year period. For grants awarded in 2009 and 2010, 30% of the Matching Shares relating to compulsory Deferred Shares are subject to TSR performance relative to other companies specified by the Remuneration Committee. For grants awarded in 2007 and 2008, 50% of the Matching Shares relating to compulsory Deferred Shares are subject to
TSR performance relative to other companies specified by the Remuneration Committee and for awards granted in 2009 this was 30%. Full vesting will only occur at upper quintile performance; at median performance 25% of the Matching Shares will vest. Vesting will be on a straight line basis in between. The remaining balance of the Matching Shares relating to compulsory Deferred Shares (and all of the Matching Shares relating to voluntary Deferred Shares) are subject to a ROE performance condition. If underlying ROE over three years commencing in the year of grant is below 10% (12% for awards granted in 2008), no part of the award subject to ROE performance will vest. If underlying ROE over three years is 10%
(12% for awards granted in 2008), 25% of the award will vest. If underlying average annual ROE over three years is 16% or higher (18% for awards granted in 2008), 100% of the awards will vest. Vesting will be on a straight line basis in between. For the purpose of establishing the number of Matching Shares relating to voluntary Deferred Shares that may be awarded, the gross value of that part of the annual bonus payment that a participant elects to voluntarily defer is used.
4. Performance conditions relating to awards of Performance Shares are the same as those relating to compulsory Deferred Matching Shares for the relevant year of grant as described above.
In the years that followed this success we developed our reputation as worldwide experts in insuring renewables. And we’re not the only ones still active in offshore wind energy, the turbines at Vindeby are too.
Financial Reporting Standards (IFRS) as adopted by the European Union and Article 4 of the IAS Regulation and have also chosen to prepare the Parent Company financial statements under IFRS as adopted by the
• Present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information
The Directors are responsible for keeping proper accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
We confirm to the best of our knowledge: • The financial statements on pages 74 to 137, prepared in accordance with International Financial Reporting Standards as adopted by the
• The risk review section on pages 28 to 31, which is incorporated into the Directors’ report, includes a description of the principal risks and uncertainties faced by the Group.
Union. We have also audited the information in the remuneration report that is described as having been audited.
This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006.
Our audit work has been undertaken so that we might state to the
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
In our opinion: • The part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006
• The information given in the Directors’ report for the financial year for which the financial statements are prepared is consistent with the Group financial statements.
We have nothing to report in respect of the following: Under the Companies Act 2006 we are required to report to you if, in our opinion: • The part of the Directors’ remuneration report described as having been audited is not in agreement with the accounting records and returns or
Under the Listing Rules we are required to review: • The Directors’ statement contained within the Directors’
• The part of the corporate governance statement relating to the Company’s compliance with the nine provisions of the
We have reported separately on the Parent Company financial statements of RSA Insurance Group plc for the year ended
Other reserve transfers – – – – (32) – – 32 – – –
Notes: The 2009 figures have been restated for a change in the presentation of deferred acquisition costs. Further information can be found in Significant accounting policies.
Investments in subsidiaries (net of cash disposed of) 30 (74) –
Effect of exchange rate changes on cash and cash equivalents 20 (49)
Cash and cash equivalents at end of the year 16 1,314 1,105
Except where otherwise stated, all figures included in the consolidated financial statements are presented in millions of Pounds Sterling, shown as ‘£m’, rounded to the nearest million.
The Group has adopted the revised version of IFRS 3 (2008) ‘Business
• The relevant proportion of total comprehensive income is attributed to a non controlling interest even if this results in the non controlling interest having a deficit balance
• Costs incurred by the acquirer in connection with a business combination must be accounted for separately from the business combination. This results in such costs being expensed and not being included in goodwill (as was the case under the old accounting policy)
Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement.
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.
When calculating the goodwill arising on an acquisition, provisions for losses and loss adjustment expenses are discounted to present value.
Immediately following the acquisition, the provisions for losses and loss adjustment expenses are valued at full nominal value except where discounted. This increase in liabilities is matched by the recognition of an intangible asset arising from acquired provisions for losses and loss adjustment expenses, representing the present value of future investment income implicit in the claims discount.
Increases in the carrying amount arising on the revaluation of Group occupied property are credited to revaluation reserves in equity.
Decreases that offset the previous increases of the same asset are charged against revaluation surplus directly in equity; other decreases are charged to the income statement. Each year the difference between depreciation based on the fair value of the asset charged to the income statement and depreciation based on the asset’s original cost is transferred from revaluation surplus to retained earnings.
Investment property, comprising freehold and leasehold land and buildings, is held for long term rental yields and is not occupied by the Group.
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.
The Group designates investments in equity and debt securities in accordance with its investment strategy on the basis on which the investment return is managed and 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. Where the investment return is managed on the basis of the total return on the investment
Expenditure that increases the future economic benefits arising from computer software in excess of its standard of performance assessed immediately before the expenditure was made, is recognised as an intangible asset.
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
• If the market for a financial asset is not active, the Group establishes fair value by using valuation techniques. These include the use of recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cashflow analysis and option pricing models
• For cash, loans and receivables, commercial paper, other assets, liabilities and accruals, carrying amounts approximate to fair values
• For notes, bonds, loans payable and loan capital, fair values are determined by reference to quoted market prices or estimated using discounted cashflow calculations based upon prevailing market rates.
Level 1, 2 or 3 based on the degree to which fair value is observable: • Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities
Investment income is recognised in the income statement. Dividends on equity investments are recognised on the date at which the investment is priced ‘ex dividend’. Interest income is recognised using the effective interest method. Unrealised gains and losses on available for sale investments are recognised directly in equity, except for impairment losses and foreign exchange gains and losses on monetary items (which are recognised in the income statement). On derecognition of an investment classified as available for sale, the cumulative gain or loss previously recognised in equity is recognised in the income statement.
Transactions are classified as hedging transactions when the following conditions for hedge accounting are met: • There is a formal designation and documentation of the hedging relationship and the Group’s risk management objective and strategy for undertaking the hedge
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 (net of deferred acquisition costs).
The amount recoverable is reduced when there is an event arising after the initial recognition that provides objective evidence that the Group may not receive all amounts due under the reinsurance contract and the event has a reliably measurable impact on the expected amount that will be recovered from the reinsurer.
Annuities purchased by the Group to make payments under structured settlement arrangements are accounted for as reinsurance ceded if the
The provisions for losses and loss adjustment expenses whether reported or not, comprise the estimated cost of claims incurred but not settled at the end of the reporting period. It includes related expenses and a deduction for the expected value of salvage and other recoveries.
The provision is determined using the best information available of claims settlement patterns, forecast inflation and settlement of claims.
The provisions for losses and loss adjustment expenses relating to long term permanent disability claims in the UK, Canada and Scandinavia are also determined using recognised actuarial methods.
In defining those claims with a long period from incident to claims settlement, those categories of claims where the average period of settlement is six years or more from the end of the reporting period has been used as a guide. The discount rate used is based upon an investment return expected to be earned by assets, which are appropriate in magnitude and nature to cover the provisions for losses and loss adjustment expenses being discounted, during the period necessary for the payment of such claims.
Contributions to defined contribution pension schemes are charged in the income statement in the period in which the employment services qualifying for the benefit are provided. The Group has no further payment obligations once the contributions have been paid.
• The past service cost for additional benefits granted in the current or earlier periods
The present value of defined benefit obligations and the present value of additional benefits accruing during the period are calculated using the
Additionally, any previously unrecognised past service costs related to these liabilities are recognised in the gains or losses on settlement and curtailment.
An exchange with an existing lender of loan capital with substantially different terms is accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability.
The terms are substantially different if the discounted present value of the cashflows under the new terms, including any fees paid net of any fees received and discounted using the original effective interest rate, is at least 10% different from the discounted present value of the remaining cashflows of the original financial liability. An exchange where the terms are not substantially different is accounted for as an exchange.
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.
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.
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.
Discontinued operations are presented on the face of the income statement as a single amount comprising the total of the net profit or loss of discontinued operations and the after tax gain or loss recognised on the sale or the measurement to fair value less costs to sell of the net assets constituting the discontinued operations.
In the period where an operation is presented for the first time as discontinued, the income statement for the comparative prior period presented is restated to present that operation as discontinued.
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
It is not possible to assess the impact the changes will have on future periods as in addition to the factors above, these will be impacted by future market conditions and management actions.
In addition to the above, the IASB has issued the following interpretations of, and revisions to, existing standards that are not expected to have a material impact on the Group’s financial statements: • Amendment to IAS 32 ‘Financial Instruments: Presentation
Assets are classified as current when expected to be realised within the Group’s normal operating cycle of one year. Liabilities are classified as current when expected to be settled within the Group’s normal operating cycle of one year. All other assets and liabilities are classified as non current.
Board (IASB) but which are not yet mandatory for adoption and have yet to be adopted in the Group financial statements are listed below: On 12 November 2009 the IASB issued IFRS 9 ‘Financial Instruments’.
This standard represents the completion of the first part of a multipart project to replace IAS 39 ‘Financial Instruments: Recognition and Measurement’. The new standard reduces the complexity by replacing the many different rules in IAS 39. The key features for the new standard are as follows: • A business model test is applied first in determining whether a financial asset is eligible for amortised cost measurement.
The business model objective is based on holding financial assets in order to collect contractual cashflows rather than realising cashflows from the sale of the financial assets
• In order to be eligible for amortised cost measurement an asset must have contractual cashflow characteristics representing principal and interest
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.
Where possible, the Group adopts multiple techniques to estimate the required level of provisions. This assists in giving greater understanding of the trends inherent in the data being projected.
The Group’s estimates of losses and loss expenses are reached after a review of several commonly accepted actuarial projection methodologies and a number of different bases to determine these provisions. These include methods based upon the following: • The development of previously settled claims, where payments to date are extrapolated for each prior year
The provisions for losses and loss adjustment expenses are subject to close scrutiny both within the Group’s business units and at Group
The pension assets and pension and post retirement liabilities are calculated in accordance with International Accounting Standard 19
(IAS 19). The assets, liabilities and income statement charge, calculated in accordance with IAS 19, are sensitive to the assumptions made from time to time, including inflation, interest rate, investment return and mortality. IAS 19 compares, at a given date, the current market value of a pension fund’s assets with its long term liabilities, which are calculated using a discount rate in line with yields on ‘AA’ rated bonds of suitable duration and currency. As such, the financial position of a pension fund on this basis is highly sensitive to changes in bond rates and will also be impacted by changes in equity markets.
• Uncertainty as to the extent of policy coverage and limits applicable
• Uncertainty as to the amount of insured loss suffered by a policyholder as a result of the event occurring
There may be significant reporting lags between the occurrence of the insured event and the time it is actually reported to the
(for example, cases of mesothelioma can have a latent period of up to 40 years). This makes estimating the ultimate number of claims the Group will receive particularly difficult
• Developments pertaining to the Group’s ability to recover reinsurance for claims of this nature
• For US liabilities from the Group’s London market business, developments in the tactics of US plaintiff lawyers and court decisions and awards.
Legislative changes may affect the Group’s liability in respect of unsettled claims in the use of predetermined factors used by courts to calculate compensation claims. For example, in the UK, standard formulae are used as an actuarial measure by the courts to assess lump sum damages awards for future losses (typically loss of earnings arising from personal injuries and fatal accidents). The calibration of these standard formulae can be updated by the UK Government and the Lord Chancellor is currently reviewing the discount rate to be applied in determining the appropriate settlements. A reduction in the prescribed discount rate would increase the value of future claims settlements.
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
A worsening in the ratings could have an adverse impact on the ability of the Group to write certain types of general insurance business.
Group takes into account a variety of factors, including credit rating.
Therefore, fluctuations in exchange rates used to translate other currencies, particularly other European currencies and the Canadian
The Group enters into joint ventures, outsourcing contracts and distribution arrangements with third parties in the normal course of its 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.
Directors do not believe that any current mediation, arbitration, regulatory, governmental or sectoral inquiries and investigations and pending or threatened litigation or dispute will have a material adverse effect on the Group’s financial position, although there can be no assurance that losses or financial penalties resulting from any current mediation, arbitration, regulatory, governmental or sectoral inquiries and investigations and pending or threatened litigation or dispute will not materially affect the Group’s financial position or cashflows for any period.
The Group is exposed to disputes on, and defects in, contracts with its reinsurers and the possibility of default by its reinsurers. The Group is also exposed to the credit risk assumed in fronting arrangements and to potential reinsurance capacity constraints. In selecting the reinsurers with whom the Group conducts business, its strategy is to seek reinsurers with the best combination of financial strength, price and capacity. The Group Corporate Centre publishes internally a list of authorised reinsurers who pass the Group’s selection process and which its operations may use for new transactions.
The Group monitors the financial strength of its reinsurers, including those to whom risks are no longer ceded. Allowance is made in the financial position for non recoverability due to reinsurer default by requiring operations to provide, in line with Group standards, having regard to companies on the Group’s ‘Watch List’. The ‘Watch List’ is the list of companies whom the Directors believe will not be able to pay amounts due to the Group in full.
The Group is exposed to market risk and credit risk on its invested assets.
Market risk includes the risk of potential losses from adverse movements in market rates and prices including interest rates, equity prices, property prices and foreign exchange rates. The Group’s exposure to market risks is controlled by the setting of investment limits in line with the Group’s risk appetite. From time to time the Group also makes use of derivative financial instruments to reduce exposure to adverse fluctuations in foreign exchange rates and equity markets. The Group has strict controls over the use of derivative instruments.
The Group employs a comprehensive risk management framework to identify, assess, manage and monitor the risks arising as a result of operating the business. The framework includes a comprehensive suite of risk policies, procedures, measurement, reporting and monitoring techniques and a series of stress tests and scenario analyses to ensure that the Group’s risk exposures are managed appropriately.
The Group manages its financial assets within a framework that has been developed to seek to ensure the ability to meet its obligations under insurance contracts. A key principle behind this process is to hold assets of sufficient credit quality and currency that provide a broad match against the liabilities arising from insurance contracts.
The Group manages these risks through its underwriting strategy, adequate reinsurance arrangements and proactive claims handling.
Pricing for property and casualty products is generally based upon historical claims frequencies and claims severity averages, adjusted for inflation and trended forward to recognise anticipated changes in claims patterns. While claims remain the Group’s principal cost, the Group also makes allowance in the pricing procedures for acquisition expenses, administration expenses, investment income, the cost of reinsurance and for a profit loading that adequately covers the cost of the capital the Group exposes to risk.
Reinsurance arrangements in place include excess, stop loss and catastrophe coverage. The effect of such reinsurance arrangements is that the
Group should not suffer total net insurance losses beyond the Group’s risk appetite in any one year.
The Group uses a variety of statistical techniques and a number of different bases to set reserves, depending on the business unit and line of business in question. The Group’s reserving managers consider claims developments separately for each line of business and subdivide certain lines of business by major claim types or sub classifications of business. Large claims impacting each relevant account are also generally assessed separately, either being reserved at the face value of the loss adjusters’ estimates or projected separately in order to allow for the future development of large claims.
Claims Director and Group Chief Actuary. A similar committee has been established in each of the Group’s major operating segments. The Group
Reserving Committee monitors the decisions and judgments made by the business units as to the level of reserves recommended and makes the final decision on the reserves to be included within the consolidated financial statements (‘Management Best Estimate’). In making its judgment, the Group
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.
The Group employs proprietary exposure measurement systems to assess these risks. In some markets, particularly in the UK, the Group has in addition developed its own expertise in catastrophe modelling that is used in conjunction with outside consultants. The accurate estimation of the potential expected maximum loss for a catastrophe is critical and is the primary factor considered in designing the Group’s catastrophe reinsurance programme.
All of the Group’s operations are required to purchase reinsurance within agreed local reinsurance appetite parameters. The Group Corporate
Corporate Centre also checks to see that total Group exposures are within the limits set out above and also are consistent with the required risk based capital. As a result the Group may decide to purchase further catastrophe coverage at the Group level.
Committee (BRC) is responsible for ensuring that the Board approved Group credit risk appetite is not exceeded, through the setting and imposition of Group policies, procedures and limits. In defining its risk appetite for credit risk the Group looks at exposures at both an aggregate and business unit level distinguishing between credit risks incurred as a result of offsetting insurance risks or operating in the insurance market
(e.g. reinsurance credit risks and insurance operations credit risks) and credit risks incurred for the purposes of generating a return (e.g. invested assets credit risk).
The following table provides information regarding the aggregated credit risk exposure for financial assets of the Group as at 31 December 2010.
The Group is exposed to concentrations of risk with individual reinsurers, due to the nature of the reinsurance market and the restricted range of reinsurers that have acceptable credit ratings. Reinsurance counterparties are subject to a rigorous internal assessment process on an ongoing basis to ensure that their creditworthiness continues to be satisfactory and the potential impact from reinsurer default is measured regularly and managed accordingly. The Group Reinsurance Credit Committee oversees the management of these risks. Group standards are set such that reinsurers that have a financial strength rating of less than ‘A-’ with Standard & Poor’s, or a comparable rating, are removed from the Group’s authorised list unless the Group’s internal review discovers exceptional circumstances in favour of the reinsurer. Collateral is taken to mitigate exposures, where appropriate, to acceptable levels or the size or credit quality of the exposure. At 31 December 2010 the Group held collateral against £116m (2009: £93m) of reinsurers’ share of insurance contract liabilities.
The Group’s largest reinsurance exposures to active reinsurance groups are Lloyd’s of London, Munich Re, and HDI-Gerling. At 31 December 2010 the reinsurance asset recoverable from these groups does not exceed 4% of the Group’s total financial assets. Stress tests are performed on the
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.
The following table provides information regarding the carrying value of financial assets that have been impaired and the ageing of financial assets that are past due but not impaired as at 31 December 2010.
Regional operations are responsible for assessing and monitoring the creditworthiness of their counterparties (e.g. brokers and policyholders).
The Group’s investments comprise a broad range of financial investments issued principally in the UK, Canada and Scandinavia.
At 31 December 2010, the Group had pledged £935m (2009: £1,035m) of financial assets as collateral for liabilities or contingent liabilities and had accepted £1,094m (2009: £1,008m) collateral that could be sold or pledged. The nature of the assets pledged as collateral comprises government securities of £794m (2009: £872m), cash and cash equivalents of £67m (2009: £82m) and debt securities of £74m (2009: £81m). The terms and conditions of the collateral pledged are market standard in relation to letter of credit facilities.
At 31 December 2010, the Group had entered into short term sale and repurchase agreements for UK government securities. The Group continues to recognise the debt securities in the statement of financial position as the Group remains exposed to the risks and rewards of ownership. The carrying value of these debt securities recognised in the statement of financial position is £294m (2009: £294m) and the carrying value of the associated liabilities is £294m (2009: £294m).
The Group is exposed to the risk of potential losses from adverse movements in market rates and prices as follows: • Interest rate risk
Group’s investment portfolios. It provides approval for all major changes of the Group’s investment strategy and, in particular, approves any substantive changes to the balance of the Group’s funds between the major asset classes. Importantly the GIC also approves the terms of reference of the Group’s main operational investment committee, the Group Asset Management Committee (GAMC). The BRC issues GAMC with investment risk limits.
The Group sets appropriate risk limits to ensure that no significant concentrations to individual companies arise. The Group takes a long term view in selecting shares and looks to build value over a sustained period of time rather than churning the portfolio looking for short term gains from its equity holdings.
The Group’s portfolio of properties is subject to property price risk arising from changes in the market value of properties. Thus if the value of property falls so will the fair value of the portfolio as set out in the sensitivity analysis on page 96.
At 31 December 2010, the Group’s total shareholders’ equity analysed by currency is: Sterling £m
Shareholders’ equity is stated after taking account of the effect of forward foreign exchange contracts. On this basis, a 10% change in Sterling against Danish Krone/Euro, Canadian Dollar or Swedish Krona would have the following impact on shareholders’ equity: strengthening in Sterling against
Movement in shareholders’ equity at 31 December 2009 (82) 99 (31) 38 (24) 29
The Group may use derivative financial instruments for the purpose of reducing its exposure to adverse fluctuations in interest rates, foreign exchange rates and equity price risk. The Group does not use derivatives to leverage its exposure to markets and does not hold or issue derivative financial instruments for speculative purposes. Forward contracts are used to reduce the risk of adverse currency movements on certain forecast future cash transactions and for structural hedging. The policy on use of derivatives is approved by the BRC.
At 31 December 2010 there were derivative contracts in place to protect the value of the UK, Canadian and European equity portfolios of the
Group. These provided limited protection against declines in market levels whilst also capping participation in any appreciation of the market.
The Group uses a number of sensitivity or stress test based risk management tools to understand the impact on earnings and capital in both normal and stressed conditions. These stress tests combine deterministic shocks, analysis of historical scenarios and stochastic modelling using the Individual Capital Assessment (ICA) models to inform the Group’s decision making and planning process and also for identification and management of risks within the business units.
Direct impact on equities of a 15% fall in equity markets (3) (13) (193) (135)
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 contract liabilities are also presented and are analysed by remaining duration.
Deposits received from reinsurers 10 – – – – – – 10 10
The maintenance of a strong capital position of the Group is critical to its ability to conduct business.
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
The Group remains fully compliant with both the FSA’s risk based ICA methodology and Solvency I, which is used to calculate the Insurance
The Group received its latest Individual Capital Guidance (based on its ICA submission) from the FSA in late 2009 and at the request of the FSA
The Group is organised into three operating segments, the UK, International and Emerging Markets, and Central functions. The UK is the Group’s country of domicile and one of its principal markets. International comprises operations in Scandinavia, Canada, Ireland and Italy. 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
The Group uses the following key measures to assess the performance of its operating segments: • Net written premiums
Major components of underwriting result are net earned premiums, other operating income, net claims incurred, acquisition costs and other underwriting costs.
A summary of the gross investment income, net realised and net unrealised gains/(losses) included in the income statement is given below.
Net movement recognised in equity £m £m £m £m £m £m £m £m
The operating lease payments recognised as an expense during the year were £64m (2009: £60m). The Group has no significant lease agreements that include contingent rents.
Fees payable to Deloitte LLP and its associates for other services: The audit of the Company's subsidiaries, pursuant to legislation 4.5 3.4
The earnings per ordinary share is calculated by reference to the profit attributable to the ordinary shareholders and the weighted average of shares in issue during the year.
Profit attributable to the ordinary shareholders of the Parent Company 346 418
Weighted average number of ordinary shares for diluted earnings per share (thousands) 3,463,744 3,383,211
Ordinary dividend: Final paid in respect of prior year 5.33 4.98 182 165
Interim paid in respect of current year 3.12 2.92 108 99
No material impairments have been recognised during the year, or in the prior year.
Amortisation expense of £52m (2009: £48m) has been charged to underwriting and policy acquisition costs and the balance is recognised in other operating expenses.
Additions of software development comprise £8m (2009: £3m) of external software and £119m (2009: £93m) of internally developed software.
The Group occupied property was revalued on 31 December 2010 by independent valuers.
Depreciation expenses of £37m (2009: £34m) have been charged to other underwriting costs.
At fair value through the income statement – 54 – 54
Of the total gains/(losses) for the period recognised in the income statement (shown in the reconciliation above), losses of £4m (2009: £nil) relate to assets held at the end of the reporting period.
Reinsurers’ share of provision for unearned premiums at 1 January 301 259
Reinsurers’ share of provisions for losses and loss adjustment expenses at 31 December 2,353 1,494
Cash and cash equivalents and bank overdrafts (as reported within the Consolidated Statement of Cashflows) 1,314 1,105
Exchange gains/(losses) net of tax 1 (105) – (104) (4) (108)
Fair value gains net of tax 184 – – 184 – 184
Pension fund actuarial losses net of tax – – (691) (691) – (691)
Companies Act 2006, the Company does not have authorised share capital.
Issued and fully paid 3,495,950,877 ordinary shares of 27.5p each (2009: 3,420,173,187 ordinary shares of 27.5p each) 962 941 125,000,000 preference shares of £1 each (2009: 125,000,000 preference shares of £1 each) 125 125
The Royal & Sun Alliance ESOP Trust holds ordinary shares in the Parent Company, which may subsequently be transferred to employees
(other than the Executive Directors). At 31 December 2010 the Trust held 2,707,723 ordinary shares (2009: 4,470,800) in the Parent Company with a nominal value of £1m (2009: £1m) and a mid market value of £3m (2009: £5m), based on the mid market closing value of the Company’s shares on 31 December 2010.
The Royal & Sun Alliance ESOP Trust No 2 holds ordinary shares in the Parent Company, which may subsequently be transferred to employees including Executive Directors. At 31 December 2010 the Trust held 2,343,679 ordinary shares (2009: 2,859,431) in the Parent Company with a nominal value of £1m (2009: £1m) and a mid market value of £3m (2009: £3m), based on the mid market closing value of the Company’s shares on 31 December 2010.
The Royal & Sun Alliance ESOP Trust No 3 holds 3,336,230 ordinary shares (2009: 2,963,136) in the Parent Company at 31 December 2010 with a nominal value of £1m (2009: £1m) and a mid market value of £4m (2009: £3m), based on the mid market closing value of the Company’s shares on 31 December 2010. Of this, 3,238,297 ordinary shares (2009: 2,819,097) are beneficially owned by Group employees as Voluntary Deferred
• Any right to participate in any issue of bonus shares.
Company, to receive out of the surplus assets of the Parent Company any arrears and accruals of the dividend together with the greater of the price at which the gross yield on each preference share is equal to the mean gross yield on 3.5% War Loan or such Government Stock as may be agreed (but not exceeding twice the nominal amount of the preference share) and the nominal amount of the share together with any premium paid on issue.
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 Parent Company shall be entitled to sell any share of a shareholder if no cheque, warrant or order sent by the Parent Company in respect of the share in question has been cashed and no communication has been received by the Parent Company from the shareholder for a period of 12 years.
• The shareholder has failed to comply with a notice under section 793 of the Companies Act 2006 and is in default for a period of 14 days from the date of service of such notice.
The subordinated guaranteed US$ bonds (‘Yankee Bonds’) have a nominal value of $24m and a redemption date of 15 October 2029.
The aggregate fair value of total loan capital at 31 December 2010 is £1,375m (2009: £1,400m).
Provision for unearned premiums (gross of acquisition costs) at 1 January 3,838 3,835
The total value of provisions for losses and loss adjustment expenses less related reinsurance recoveries before discounting is £10,001m
Claims on certain classes of business (excluding annuities) have been discounted as follows: Discount rate
The tables below present changes in the historical provisions for losses and loss adjustment expenses that were established in 2001 and the provisions for losses and loss adjustment expenses arising in each subsequent accident year. The tables are presented at current year average exchange rates on an undiscounted basis and have been adjusted for operations that have been disposed of.
The lower (paid) triangle of the tables presents the amounts paid against those provisions in each subsequent accounting period.
The estimated provisions for ultimate incurred losses changes as more information becomes known about the actual losses for which the initial provisions were set up and as the rate of exchange changes. The 2010 redundancy of £335m represents the claims development of earlier accident years in the current accounting period, net of reinsurance, made up of favourable experience of £366m from 2008 and earlier accident years across all regions offset by £31m adverse development from 2009. There was another strong contribution from International, particularly Swedish
Personal lines and Motor and General Liability in Canada, while in the UK, positive run off is primarily driven by Commercial Property, Liability and Legacy. The adverse development of £31m in the 2009 accident year includes the £25m reserve strengthening for bodily injury in the UK, of which £22m relates to Commercial Motor, the action taken to exit a number of unprofitable UK Motor schemes and continued remediation in
Italy. The total discounting at the end of 2010, net of reinsurance, is £660m representing a decrease of £27m in the year. In the UK and 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, net of reinsurance, are £575m (2009: £444m).
Consolidated claims development table gross of reinsurance prior £m £m £m £m £m £m £m £m £m £m
At end of accident year 9,771 3,445 3,407 2,877 3,018 2,682 3,060 2,953 2,823 3,823
Consolidated claims development table net of reinsurance prior £m £m £m £m £m £m £m £m £m £m
At 31 December 2010 total unsecured loans from credit institutions under committed credit facilities of £455m (2009: £455m) are available to the
Group. There are no amounts outstanding at 31 December 2010 (2009: £nil). The facility expires in 2013.
The Articles of Association of the Group defines a cap on borrowing limits. This cap is not being amended at the 2011 AGM. At 31 December 2010 the cap on borrowing limits is £4,675m (2009: £4,475m) of which £1,638m (2009: £1,635m) had been utilised.
Credit /(charge)to other comprehensive income for the year – 269 – (13) (2) 254
Pension fund actuarial gains and losses – – (26) 269 (26) 269
available for offset against future profits. A deferred tax asset of £109m (2009: £41m) has been recognised in respect of losses and unused tax credits. In addition, the Group recognised £69m (2009: £64m) in respect of other deferred tax reliefs. These are included within other temporary differences at 31 December 2010. No deferred tax asset has been recognised in respect of £1,390m (2009: £1,428m) tax losses and unused tax credits of £5m (2009: £11m) due to the unpredictability of future profit streams. Included in unrecognised tax losses are losses of £152m (2009: £115m) which will expire between 2011 and 2027. Other tax losses and unused credits may be carried forward indefinitely.
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 tax liability. The temporary difference in respect of the retained earnings of overseas subsidiaries is £841m (2009: £748m).
Deferred tax assets of £138m (2009: £129m), which are in excess of profits arising from the reversal of existing taxable temporary differences and that relate to tax jurisdictions in which the Group has suffered a loss in either the current or preceding period, have been recognised on the basis that future taxable profits will be available against which these can be utilised.
Reorganisation provisions comprise costs relating to reorganisations mainly within Emerging Markets. These provisions primarily comprise property costs.
In 2003 a subsidiary of the Group wrote an Adverse Development Cover (ADC) contract with its former US subsidiary. The liabilities arising under the ADC contract comprise an insurance component and a deposit component. The liability arising under the insurance component of £0.1bn represents the timing risk on the settlement of those liabilities. The financial liability arising under the deposit component is offset by the value of funds held in a trust fund whose trust deed only permits the trust fund assets to be used to settle amounts due under the
ADC. The value of the funds held in trust at 31 December 2010 is £0.3bn and the value of the liability of the deposit component is £0.3bn.
Costs of £55m (2009: £49m) were recognised in respect of defined contribution schemes by the Group. The Group’s Swedish subsidiaries are part of a multi-employer defined benefit scheme along with other financial institutions in Sweden. As it is not possible to determine the assets and liabilities in respect of any one employer under this scheme, it is included in these accounts as a defined contribution scheme. Contributions of £12m (2009: £9m) were paid to this scheme during 2010 and are included in the costs shown above. The latest information regarding the funding of this scheme is taken from the interim report for the first half of 2010, when the scheme funding rate was 112% (2009: 113%).
In April 2002, the primary UK defined benefit schemes were effectively closed to new entrants and in 2005, following discussions with the Trustees and consultation with the members, the UK defined benefit schemes were altered from providing benefits on a final salary basis to benefits on a revalued average salary basis with effect from 1 January 2006. Under the new benefit formula, the accrued benefits of current active members are based on salaries at the date of change and will increase in line with inflation each year (limited to 5% in any year) up to their retirement date.
Benefits earned in each year from 1 January 2006 are based on salaries in that year and are revalued up to retirement.
During 2009 the Group entered into arrangements that insured 55% of the retirement obligations relating to pensions in payment in the two main
During 2010 changes were made to the benefit structure of the three main UK schemes. Changes affected future accrual from 1 March 2010 onwards. Accrual rates were reduced; the retirement age was increased; revaluation was subject to a cap of 2.5%; a cap was applied to the salary used for the defined benefit schemes and the schemes contracted back in to the State scheme. Employees were entitled to join the Stakeholder
For the two main UK defined benefit schemes, the level of contributions in 2010 were 23% and 22% of pensionable salaries (2009: 23% and 22%).
Additional contributions totalling £45m (2009: £45m) were made to the schemes, in accordance with the plan to reduce their funding deficits.
Life insurance benefits, which provide varying levels of coverage, are provided at no cost to retirees. Healthcare benefits, which also provide varying levels of coverage, require retiree contributions in certain instances. Benefits are generally payable for life.
Deferred tax in respect of net pension and post retirement asset 61 106
Actual return on assets in excess of/(below) expectations 244 13 257 (389)
Excluding 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
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
Present value of funded obligations fully covered by insurance arrangement 1,431 – 1,431 1,436
The Group has four types of share based payment plans which are settled in the form of ordinary shares: the Long Term Incentive Plan (LTIP), the
Sharesave Plan (SAYE), the Sharebuild Plan and the Executive Share Option Scheme (ESOS). Dilution levels for all schemes are held strictly within
European insurance companies) over a single three year performance period. Matching Shares related to Voluntary Deferred Shares are subject only to the return on equity performance condition. Restricted Shares are not subject to performance conditions. All awards vest on the third anniversary of the date of grant to the extent that the performance conditions have been met. Performance Shares and Restricted Shares are normally forfeited on an employee leaving the Group.
The Group designates certain forward exchange contracts as hedging instruments against the net investment in designated subsidiaries to reduce the foreign exchange risk exposure. On designation, the interest element is separated from the forward exchange rate and is excluded from the hedge relationship. Effectiveness of the hedge is then measured using the spot rate, which is also the exchange rate used when measuring the net investment in the designated subsidiaries. The fair value of the hedging instruments at 31 December 2010 is a liability of £39m (2009: £9m). The hedge ineffectiveness recognised in the income statement during 2010 is £nil (2009: £nil).
3. Except where indicated all the subsidiaries listed are wholly owned within the Group. In all cases the proportion of voting power held equals the proportion of ownership interest.
4. In addition to the principal subsidiaries listed above held at the period end, the Group acquired 100% of the share capital of Glenstone Capital Incorporated in Canada, the holding company of GCAN Insurance Company on 7 January 2011. Further information on the acquisition can be found in note 30.
On 1 April 2010, the Group acquired 80.8% of the share capital of Sveland Sakförsäkring AB in Sweden. On 30 April 2010, the Group acquired 100% of the share capital of Al Ahlia Insurance Company SAOC in Oman. The acquisition was made by a subsidiary in which the Parent Company shareholders have a 34.5% equity interest. On 17 September 2010, the Group acquired 100% of the personal lines assets of Bradley’s Insurance
(Stittsville) Limited in Canada. On 17 September 2010, the Group acquired 100% of the assets of Hunt Insurance Brokers Limited in Canada.
On 23 September 2010, the Group acquired 100% of the share capital of 123 Money Limited in Ireland. In addition, a number of business combinations were completed in Canada during the period. The acquisitions increase the Group’s insurance activity in each of the countries.
The total consideration paid was £146m and goodwill of £104m arose on these acquisitions.
The aggregate fair value of the contingent liabilities recognised in the business combinations is less than £1m.
The fair value of the financial assets acquired includes premiums and insurance balances receivable of £51m, a reduction of £2m on their nominal value to account for balances that are expected to be uncollectable.
The total consideration for the business combinations is subject to agreement with the vendors of the valuation of certain assets and liabilities.
The outcome of these arrangements could increase the aggregate consideration by £2m.
Deferred consideration includes consideration which is contingent on the financial performance of the acquired business. The fair value of this consideration is £11m, with the minimum possible payment being £nil and the maximum possible payment being £23m.
Equity consideration was issued by a subsidiary of the Group on acquisition of Al Ahlia Insurance Company SAOC. The fair value of the shares issued as consideration was determined by an independent market valuation.
Acquisition related costs for acquisitions concluded during the period (included in other operating expenses in the income statement for the year ended 31 December 2010) amounted to £3m.
On acquisition of Sveland Sakförsäkring AB, the Group recognised £1m of non controlling interests. The non controlling interest was measured as the proportionate share in the identifiable acquired net assets.
If the acquisitions had occurred on 1 January 2010, Group net written premiums and fee income for the year would have increased by £62m and the Group’s profit after tax would have increased by £2m. The total net written premiums and fee income of the acquired entities since the acquisition dates included in the Group’s net written premiums and fee income for the year is £28m. The total profit after tax of the acquired entities since the acquisition dates included in the Group’s profit for the period is £nil.
The goodwill shown above arose from the premium paid for strengthening the Group’s market position in targeted business segments and acquiring the skilled workforce to drive future profitability in those segments. Goodwill also represents the future cost saving from expected synergies and economies of scale from central costs and the benefits of enhancing distribution channels.
On 7 January 2011, the Group acquired 100% of the share capital of Glenstone Capital Incorporated in Canada, the holding company of GCAN
Provisional fair values of identifiable assets acquired and liabilities assumed: £m
In addition to the acquisition of share capital, the Group acquired the rights to debt owed by Glenstone Capital Incorporated for consideration of £48m from their former parent.
The goodwill shown above arises from the premium paid to strengthen the Group’s Commercial proposition in Canada by adding further technical expertise, geographic diversification and product breadth. Goodwill is further derived from the value of the workforce acquired, the growth from new customers and the significant anticipated synergies from reinsurance, capital and expense savings on integration into the Group.
Fair value gains (including gain on disposal) on financial assets (37) (42)
The ultimate Parent Company of the Group is RSA Insurance Group plc which is incorporated in England and Wales.
As at 31 December 2010, there are interest free loans totalling £10,000 (2009: £10,000) outstanding to two members of the Executive Team under standard terms of the Group’s UK Car Ownership Scheme, which is open to all UK managers within a qualifying salary band.
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 (2009: £10m) 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.
The Group leases various outlets and offices under non cancellable operating lease agreements. The leases have varying terms, escalation clauses and renewal rights.
After five years 121 103 34. ASSETS AND LIABILITIES HELD FOR SALE
The Group has classified office property within the International operating segment as assets held for sale. The Group is actively marketing these properties. No material gain or loss has been recognised in the income statement since the reclassification.
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 Ethical Standards for Auditors.
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Parent Company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements.
• Have been prepared in accordance with the requirements of the Companies Act 2006.
In our opinion: • The information given in the Directors’ report for the financial year for which the financial statements are prepared is consistent with the
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
• We have not received all the information and explanations we require for our audit.
Graham Richardson (Senior Statutory Auditor) for and on behalf of Deloitte LLP
PARENT COMPANY STATEMENT OF COMPREHENSIVE INCOME for the year ended 31 December 2010 £m £m
Fair value losses net of tax – – – (672) – – (672)
Total comprehensive (expense)/income for the year – – – (672) – 345 (327)
Issued for cash (note 4) 6 9 – – – – 15
The movement in equity for the year net of tax includes a net tax charge of £1m (2009: £nil).
The principal activity of the Company is to hold investments in its subsidiaries and the receipt and payment of dividends.
Changes in the fair value of the investments in subsidiaries are recognised directly in equity in the statement of comprehensive income.
The Directors believe that the methodology used supports the inclusion of the investments in subsidiaries in the statement of financial position, at the fair values ascribed to them. The market value of the Company’s ordinary shares at 31 December 2010 was 125.2p. A movement of 1%
in the share price would have an impact of £44m on the fair value.
Deferred tax for the current year is based on a rate of 27.0% (2009: 28.0%). The following are the major deferred tax assets recognised by the
Deferred tax assets at 1 January 2009 7 16 2 25
Within other temporary differences, there is £7m (2009: £6m) in respect of deferred tax reliefs. Deferred tax assets of £25m have been recognised on the basis that future taxable profits will be available against which these can be utilised.
The following transactions were carried out with related parties: Provision of services and benefits
Year end balances with related parties are set out below: £m £m
Additional loans to subsidiaries of £871m (2009: £871m) as disclosed within note 2 have been made. Of this, £294m (2009: £294m), £78m
The enormous complexity of the build meant that a flexible, innovative and creative insurance solution was required, just the kind
The food bank distribution centre’s building was virtually derelict and faced closure.
RSA’s corporate website provides shareholders with a broad range of information about RSA’s heritage, social and environmental responsibilities and investor information such as the Group’s financial statements, current and historic share prices, AGM materials, events, governance information and answers to frequently asked questions in respect of shareholder matters. You may visit the investor website at www.rsagroup.com/rsa/pages/ir/irhome
Please quote your shareholder reference number (on your share certificate and dividend tax vouchers) when contacting or corresponding with Equiniti. (Calls are charged at 8p per minute from a BT landline. Other telephone providers’ costs may vary.)
at 11.00am on 23 May 2011. Ordinary shareholders who are unable to attend the AGM to ask a question in person are invited to send the
Changes to legislation allows companies greater flexibility when communicating with shareholders and allows corporate websites to be used as a primary source of information. By communicating with shareholders electronically RSA is able to distribute messages to all its shareholders instantaneously. Shareholders who register for electronic communications are more informed, receiving emails when our results are released. Shareholders may elect to receive paper copies of the
Shareholders are encouraged to have their dividends paid directly into their bank account as it is more secure than receiving cheques by post and ensures that cleared funds are available to shareholders on the dividend payment date. Those receiving dividends in this method are sent a consolidated tax voucher in March, showing both payments in the respective tax year. To take advantage of this convenient method of payment visit www.shareview.co.uk or contact Equiniti.
RSA offers shareholders the opportunity to use their dividends to buy more ordinary shares in the Company by participating in the Company’s
Scrip Dividend Scheme. The Scheme applies to both interim and final dividends and enables shareholders to increase their holding in the
RSA is listed on the London Stock Exchange under the code RSA.
Company mailings or on our website. If you receive any unsolicited advice, make sure you get the correct name of the person and organisation and check that they are appropriately authorised by the FSA by visiting www.fsa.gov.uk/register. More information on protecting your investment can be found at www.moneymadeclear.fsa.gov.uk
through their stockbroker, a high street bank or one of the providers detailed below: RSA’s registrar, Equiniti offers a telephone and internet dealing service.
+44 (0)845 6010 995 between 8.00am and 4.30pm, Monday to Friday.
Mackintosh Foundation, registered charity number 1052686. The relevant share transfer form can be obtained from Equiniti. Further details can be obtained from www.sharegift.org or by calling +44 (0)20 7930 3737.
RSA is committed to providing a quality service to all of its shareholders. An induction loop is installed at the AGM venue.
Ex dividend date for the ordinary final dividend for 2010 and the first preference share dividend for 2011.
Record date for the ordinary final dividend for 2010 and the first preference dividend for 2011.
Record date for the ordinary interim dividend for 2011 and the second preference dividend for 2011.
Announcement of the scrip dividend price for the ordinary interim dividend for 2011.
Affinity • Selling insurance through a partner’s distribution network, usually to a group of similar customers, e.g. store card holders, alumni groups, unions and utility company customers.
Claims Frequency • Average number of claims per policy over the year.
• Reserve established by the Group to reflect the estimated cost of claims payments and related expenses that we estimate we will ultimately be required to pay.
Commission Ratio • Ratio of net commission costs to Net Written Premiums.
The ratio does not include claims related expenses but can include or exclude commissions.
• A reserve for accidents or incidents that have occurred but which have not yet been reported to us.
• The value of the Group calculated by subtracting our total liabilities including loan capital from our total assets.
• The portion of Net Written Premiums for which we have already provided protection. This is included as income in the period.
• Property insurance covers loss or damage through fire, theft, floods, storms and other specified risks.
Yield • Rate of return on an investment in percentage terms
• The dividend payable on a share expressed as a percentage of the market price.
“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 Company’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 Company and its affiliates operate. As a result, the Company’s actual future financial condition, performance and results may differ materially from the plans, goals and expectations set forth in the Company’s forward-looking statements. The Company undertakes no obligation to update any forward-looking statements, save in respect of any requirement under applicable law or regulation. Neither the content of RSA’s website nor the content of any other website accessible from hyperlinks on RSA’s website is incorporated into, or forms part of, this document.