2020 was another excellent year for RSA overall. Despite the financial and operational impacts of Covid-19, the business remained resilient throughout, resulting in another year of strong profits for the Group.
In the second half of the year, RSA received a cash offer by a consortium of Canadian insurer Intact and Danish provider Tryg, to be implemented by a court-sanctioned Scheme of Arrangement which was approved by shareholders on 18 January 2021.
Visit us online to see summary information and listen to our Group Chief Executive’s statement at www.rsagroup.com/annualreport
Financial and operational highlights £6.2bn Net written premiums 51.2p3 Underlying earnings per share £364m Profit after tax
Further information on our key performance indicators is set out on pages 16 to 17
Our employees have been at the heart of these efforts, and we have been focussed on supporting them throughout these difficult times. All parts of our business shifted substantially to home working, and we prioritised providing not only the practical technology and kit needed to enable our teams to work effectively, but also flexibility to fulfil childcaring responsibilities and additional support for health and wellbeing. We took no furlough or other government support payments during this time.
Economic constraints led to the need to make changes to our workforce in some areas. Where possible this was achieved by voluntary means. Strong employee survey scores across RSA’s regions are testament to the strength of our leadership and the support colleagues have offered to one another.
Continued improvement While 2020 required agility around our plans and a rapid shift to new ways of working, we did not compromise on progressing toward our wider ambitions and goals to improve our company. We continued to focus on and further progress our diversity and inclusion agenda, in particular seeking views from our employees to shape our response to the issues raised by the Black Lives Matter movement. We further embedded our Group Customer Policy to support consistent standards of customer care, and to encourage the sharing of insight and learning between regions. Our scores improved on all the external responsible business indices in which we participate, including leading the pack on the insurance sector’s ClimateWise initiative for the second year running.
An exceptional year While 2020 required a rapid shift to new ways of working, we did not compromise on progressing toward our goals to improve the company.
While the operational strains of Covid-19 can’t be overlooked, and have impacted our operations in every region, it is particularly impressive in this context to be sharing record underwriting results at the end of 2020. I thank our shareholders for sticking with us during the more uncertain periods of the year, including our decision to postpone our dividend payments in April, which have since restarted.
Although not sought, the value placed on RSA by the bid underlined the success of our efforts, not just in 2020 but in the journey of improvement over the last 7 years under the outstanding leadership of our CEO, Stephen Hester. This period has seen the market capitalisation of the company double from £3.6 billion to £7.2 billion, whilst our underwriting profits – such an important indicator of the health of an insurer – went from losses in 2013 to reporting record results in 4 out of the last 5 years.
The Board’s decision to recommend the offer to shareholders reflected not only our belief that the transaction will accelerate the delivery of value to you, but our confidence that RSA’s customers, people and heritage will be passing to responsible hands who share our values.
We owe much to the leadership and skill of our Group Executive Committee. Particular thanks are due to Scott Egan, who has contributed to RSA’s achievements in recent years first as Group CFO and latterly as UK&I CEO, and to his fellow regional CEOs, Martin Thompson in Canada and Ken Norgrove in Scandinavia. Charlotte Jones, our current Group CFO, who served on the Board as non-executive prior to her appointment, has also made a significant positive impact.
It has been a privilege to Chair an excellent Board at RSA. I’d like to thank all my Board colleagues and extend special mentions to Martin Strobel as Senior Independent Director and Chair of the Risk Committee, Alastair Barbour as Chair of the Audit Committee, and Kath Cates as Chair first of the Risk Committee and then our Remuneration Committee. The Board has been ably supported throughout by our Group General Counsel, Charlotte Heiss, and her team.
Why we exist RSA exists to help protect customers against risk and to serve shareholders well. In so doing, we contribute to society at large.
Understanding risk to price correctly To ensure we offer the right products, at the right price on the right terms, we work hard to increase our understanding of our customers’ risks and their evolving needs.
Financial We have £5.1bn of capital which we use to support our customers and generate returns for shareholders.
Expertise Our core technical expertise lies with our underwriting and pricing teams who receive ongoing training to build their capabilities; we also prioritise developing a strong customer service culture to ensure that policyholders get the support they need.
Relationships and partnerships 75% of our business is distributed through our brokers and partner organisations.
Data The quantity and quality of data is constantly improving and we use this to price and underwrite more effectively and accurately, improving outcomes and experience for customers.
We have a balanced portfolio We have a balanced portfolio, in terms of where we operate – the major insurance markets of Scandinavia, the UK and Canada – our product offering, and the way we distribute these products. This scale and breadth helps us to manage the impact of volatility on the Group effectively.
We have strong brands and customer franchises We have developed excellent regional customer franchises with trusted and recognisable brands in our markets.
We have a strong capital base and prudent capital management We have a strong capital base and are well reserved to maintain our ongoing resilience and continue to serve customers well. Our funds are prudently invested in low-risk assets, and reserves are available to pay claims when the worst happens.
Our customers We strive to provide tailored products that meet the evolving needs of our consumers by analysing trends and keeping pace with digital developments.
Our people Our commitment to our people has helped us build a strong, highperforming workforce that believes in teamwork and is determined to serve our customers in the best way possible.
A balanced and collaborative approach to stakeholder engagement The Board recognises the importance of positive relationships between RSA, its shareholders and other stakeholders, and is committed to fostering and maintaining strong engagement with them. Open and collaborative dialogue and interaction is in the best interests of RSA and helps us to make a positive contribution to society.
Throughout the year, the Board has reflected on its engagement with various stakeholders, which the Board has found to be informative. The Board has also remained committed to maintaining a range of direct and indirect engagement between the Board and our stakeholders going forward, and has approved the stakeholder engagement plan for 2021.
The sections below set out some highlights from the Board’s engagement with key stakeholders during 2020, together with details of the actions taken as a result of this engagement.
Why the Board engages A key purpose of our business is to help protect our customers against risk. This was brought into particular focus during 2020 with the challenges of Covid-19, and we are proud to be able to support our customers through this difficult time.
One of the Group’s strategic goals is to continually deliver improvements in customer outcomes. The type of customer we serve ranges from individuals through to large corporations, and the Board engages with its customers so that we can continue to provide tailored products and services that meet their diverse and evolving needs.
How the Board engages The Board has maintained contact with our key strategic broking partners via a regular rhythm of virtual relationship meetings led by our executive directors.
Given the challenges of 2020, the Board ensured that it had visibility of the interim governance set up by management to oversee the hundreds of management decisions that impacted on the way we dealt with customers in response to the Covid-19 pandemic.
When the Board met virtually with our UK Commercial Lines leadership, they received an update on customer behaviours and customer satisfaction in the context of Covid-19, also discussing Motability and commending a Net Promoter Score (NPS) of 90+. They also discussed how our customers’ needs are being met by, for example, prioritising continuity of service as well as the affordability actions that were implemented for customers in response to the pandemic, such as premium deferrals. In Canada, the Board also took the opportunity to challenge management on their plans regarding capabilities for the future, growth and profitability in relation to Commercial Lines. The Board has also received an update from UK Personal Lines, which included an analysis of the impact of, and our response to, Covid-19 as well as our progress in delivering strategic objectives.
The Chair of the Board of Codan has attended a meeting of the Nomination and Governance Committee to discuss local stakeholders, including customers. The Board also receives periodic reports from the regional CEOs on customer and conduct matters, reviewing how management demonstrates that there is a customer centric and robust conduct culture and an appropriate response to customer issues when things go wrong. The Board also analyses management information that determines whether good customer outcomes are being delivered, including incident rates, responses and complaints, and in 2020 oversaw the development of additional management information in this area.
As the implications of Covid-19 unfolded, it became clear to the Board that this would be a key area of focus for customers in 2020. With this in mind, the Board discussed potential initiatives and support schemes, and agreed that management should engage actively in discussions with others in the insurance industry. RSA committed a donation to the Covid-19 Support Fund in 2020. In addition, the Board gave particular attention to business interruption insurance and related matters.
Long-term implications Customer satisfaction and retention are critical to the long-term sustainable prospects of the Group. The Board has engaged with and responded to the needs of customers with this in mind. Board meetings have also been a forum for management to communicate long-term strategic goals. The Board has reflected on management’s long-term goals for Personal Lines as an imperative to growing long-term profitability and the focus on key matters, including customer service and digital capability. The Board has also noted increasing customer demand for digital offerings as a long-term trend in Canada and Scandinavia and reflected on how RSA has invested in digital products across the regions.
We want to maintain our culture of working together effectively, fostering the diverse capabilities we require to succeed and achieve best-in-class performance. We are also committed to our strategy of improving our operational delivery for excellent customer service. The Board recognises the central role of the workforce in creating this culture and delivering this strategy.
· The Board has had virtual sessions with regional Diversity and Inclusion (D&I) councils and employees in the UK, Canada and Scandinavia. The sessions were very well received and considered to be a valuable exercise by both the Board and representative attendees.
· The Board reviewed papers relating to D&I with a particular focus on actions relating to race and ethnicity. The Board received an update on the multiple initiatives in place across the regions that aim to make RSA an inclusive workplace, including the publication of the UK Gender Pay Gap Report and received feedback on our successes as well as progress against stated targets.
· The Board also analysed and compared the results of regional workforce surveys to gauge the sentiment on the effect of Covid-19 on work conditions. The Board learned that continued communication about plans going forward and increased interest in remote working were priorities for our workforce, and about those areas where employees needed continued support. These priorities and the outcome of the regional workforce surveys, including focus areas going forward, were discussed by the Board with managers from the UK and Canada.
How the Board responds Direct engagement with the workforce has been particularly challenging during 2020 due to the Covid-19 pandemic, and the Board has risen to this challenge. The Board had particular focus on the practical implications of Covid-19 for the workforce, including enabling employees to balance their caring responsibilities with work, and making available various well-being initiatives and resources. While we believe that the Board has successfully achieved a meaningful dialogue virtually with employees, we have included even more opportunities for workforce engagement in our Stakeholder Engagement Plan for next year, including non-executive director dialogue with regional D&I councils. On International Women’s Day in 2021, members of the Board will also participate in roundtable discussions with female employees to support their progression to future leadership roles. The Board has reconfirmed its preference for all Board members to engage in a direct dialogue with the workforce.
The Board has reflected on the actions and precautions we are taking regionally to accommodate our workforce’s priorities and concerns, and has confirmed that management is appropriately considering and protecting the well-being of our people. The Board continues to monitor initiatives and policies in response to challenging business conditions that impact our people and, consistent with our values, this is approached with sensitivity and support as far as is practicable.
D&I updates have allowed the Board to monitor its compliance with the recommendations in a number of reviews and charters, such as the Women in Finance Charter and the Parker Review. The Board has endorsed actions and policies designed to support the increased representation of women in senior leadership roles. Additionally, the Board undertook the annual review of the Board Diversity Policy.
Long-term implications The Board’s engagement with the workforce revealed a number of key priorities, and the Board understands that responding to our workforce’s needs and removing any barriers to enablement in evolving working environments are key to the long-term success of the Group.
The Board has responded to the short- and medium-term impact of Covid-19 on the workforce and, in collaboration with management, it has also set longer term goals of growth and productivity.
Why the Board engages We consider there to be two main groups of shareholders: institutional investors and private shareholders. We understand that the views and priorities of these two groups are not necessarily the same. With this in mind, the Board looks to engage with both groups to determine their areas of focus.
Despite the impacts of Covid-19, we were able to continue our extensive investor engagement programme. This included our bi-annual London roadshow, held virtually, in March and September. These were positively received by investors and included meetings with some of our largest shareholders including Cevian, Columbia Threadneedle and Fidelity.
Why the Board engages RSA is committed to working with all of its regulators in an open, cooperative and transparent manner. We seek to ensure a strong regulatory compliance culture throughout the Group in order to pre-empt and, where necessary, resolve regulatory issues and to avoid or minimise business impact and the risk of customer harm.
The regulatory capital requirements of the Group are also monitored and discussed with the relevant regulators directly. The Board also receives periodic updates from the business on regulatory matters and priorities, including the priorities of the Group’s regulators in regions other than the UK. Key topics for engagement included culture and governance, treatment of existing customers, operational resilience, the impact of Covid-19 on our customers, treating customers fairly, solvency, liquidity and the FCA Test Case. Customer conduct, including pricing practices, has continued to be a focus of our regulators across the globe.
Community and the environment The Board engages with socio-economic and environmental issues because we know that they are important to our stakeholders, as well as to the future prospects of the Group. RSA plays an important role in supporting communities in their times of greatest need, and we also understand the implications of climate change for those facing more frequent and severe weather events.
The Board has received updates relating to our impact on the environment and the wider Environmental, Social & Governance (ESG) agenda. The Board has noted that RSA has continued to focus on responsible investment and underwriting as well as sustainable operations, and the workforce have responded positively to internal communications on our progress.
The Board received a corporate responsibility update which showed important progress such as the implementation of the Climate Change and Low Carbon Policy position, which was approved by the Board at the end of 2019. RSA has also been upgraded by the Carbon Disclosure Project (CDP) from a B to an A- rating, which was a positive step and reflected the improvements made by RSA in measuring and managing risks and opportunities associated with climate change. This was consistent with a significant improvement in the private assessment from ClimateWise.
In the context of a global health crisis, we have also been keen to support health workers in our communities. MORE TH>N gave customers who work for the NHS extended insurance cover to say thank you for their efforts battling Covid-19. Across the Group, we have given customers who work for healthcare providers preferential treatment in similar initiatives.
Considering the long-term interests of our stakeholders In making its decisions throughout the year, the Board has considered and balanced the views and interests gained through its stakeholder engagement, as well as the need to promote the long-term success of the Company.
Decision-making and section 172 of the Companies Act 2006 The success of the Group depends on our ability to engage effectively with our stakeholders and take their views into account. Section 172 of the Companies Act 2006 requires directors, in making their decisions and choices, to have regard to a non-exhaustive list of factors to ensure that, in promoting the success of the Company for the benefit of its shareholders, broader implications of decisions are considered. Information on the issues, factors and stakeholders taken into account by the Board when complying with the provisions of section 172 of the Companies Act 2006, the methods used to engage with stakeholders, and the effect of this engagement on the Board’s decision-making during 2020 are set out on pages 6 to 9.
The Board has balanced a desire to support our customers in their time of need against the need to protect the well-being of our workforce, maintain a robust capital position and preserve the value of the Group.
Throughout the year, the Board received periodic updates on the test case and associated activity, including in relation to RSA’s potential exposure, and following the judgment of the High Court considered in detail whether or not it was appropriate to seek permission (alongside other insurers and the FCA) to appeal the court’s findings to the Supreme Court. Given the questions of law of general public importance that were raised by the test case, and taking into account the interests of stakeholders including policyholders, shareholders and regulators in achieving maximum clarity, the Board considered that it was appropriate to seek permission to appeal.
The Supreme Court handed down its judgment on 15 January 2021 and the Board welcome the clarity that this brings for both customers and the insurance industry.
AGM arrangements As noted on page 8, the Board approved AGM arrangements in 2020 that were adapted to comply with government restrictions on public gatherings while also giving shareholders the opportunity to participate in the meeting. Shareholders had the opportunity to join the AGM remotely, ask questions in advance or by telephone, and cast their votes by proxy or remotely during the meeting.
Decisions relating to our workforce The Board remained committed to protecting the health, safety and well-being of our workforce. However, the Board also understands that the needs of our customers are best met by a workforce that is easily accessible, and that the requirements of our regulators cannot always be met outside of the office environment. Taking into account these competing priorities, the Board endorsed the actions and precautions taken by management to support our workforce and facilitate working from home wherever possible in accordance with government guidelines. At the same time, the Board actively monitored the increased operational risk and responses to challenges such as business process outsourcing and ensuring robust IT infrastructure. The Board endorsed support given to employees who were unable to fulfil their work obligations due to caring responsibilities. The Board also supported a phased return to office working for staff when appropriate in each region, and considered matters such as employees’ safety, mental health and wellbeing and the most effective and efficient way of working for each team when doing so.
At the same time, the Board acknowledged employees’ desire for increased remote working going forward and noted the opportunities this also presents for the business. Plans to trial such arrangements on a more permanent basis are underway. For more information on the workforce surveys, please refer to page 7.
Throughout the year, the Board reflected on the Group’s Dividend Policy and the priorities of investors and institutional shareholders, as well as the views and needs of other stakeholders (in particular our customers, and including the recommendations of the PRA and European Insurance and Occupational Pensions Authority) in light of the evolving Covid-19 pandemic. The Board also considered the recommendation from management and the views of non-executive directors, as well as the expectations of investors based on market trends. The Group’s views on an appropriate dividend were shared with the PRA, and the Board reflected on its response.
In April 2020, the Board announced the decision to suspend the 2019 final dividend, having reflected on the challenges presented by Covid-19 as well as the need to support customers and the sensitivity of regulators and other stakeholders to short-term use of capital. The Board took the view that showing forbearance on dividends, maximising capability to support policyholders and contributing to industrywide initiatives would be in RSA’s long-term interests. After reflecting on management’s recommendation, the Board approved an interim dividend to be paid in December 2020.
The Board has endorsed our policies and challenged management on what else can be done.
The Board familiarised itself with the bidders so it could be confident that they shared RSA’s values and ambitions. In common with RSA, Intact and Tryg have long histories in their home markets, strong corporate values and a central focus on serving customers. The Board also noted the importance that
The Board communicated directly and indirectly with the workforce, providing information as and when they could about the offer and its implications. ‘Town halls’ were hosted by leaders including the Group Chief Financial Officer (CFO) during which the workforce could ask questions directly, and the workforce were also kept informed through the intranet (see page 7).
The Board knows that RSA’s three UK defined benefit pension schemes are important stakeholders, and it was also important to Intact to engage with the trustees in advance of the announcement. There was robust, open and constructive engagement between the trustees, Intact and the Board which focussed on putting measures in place to make sure that, should the transaction go ahead, members’ benefits would be protected.
· Extreme weather events are not only becoming more frequent but also more intense.
· Significant action is needed to meet the targets set by the 2015 Paris Agreement on Climate Change, which could create transition risks as we shift to a low-carbon economy.
· As part of our Confident Futures strategy, we aim to further reduce our own environmental impact, including helping our customers respond to climate change, and assisting in the transition to a low-carbon economy.
· We are a leading insurer of offshore wind farms and provide cover for solar projects of varying size and scale across the world.
· Our Climate Change and Low Carbon Policy position was approved on 1 January 2020. The policy sets out our position for investments and underwriting across the energy sector, with a clear commitment to supporting renewable energy. Further details can be found on page 32.
Financial markets dislocation Financial market volatility remains a risk while a persistent low bond yield environment continues to impact investment income.
· Financial market conditions in 2020 displayed significant volatility across multiple asset classes due to uncertainties driven by the global pandemic. RSA is relatively well protected, although not immune, with a conservative bond portfolio and a broad array of internationally derived profits.
· The low bond yield environment continues to persist and, as such, investment income is forecast to fall if yields remain at today’s level. This is putting greater emphasis on underwriting discipline and control. We will continue to exit underperforming segments of business where we can’t generate long-term sustainable returns and seek to improve underwriting standards, pricing accuracy and risk management in areas where sustained profitability can be achieved.
· As we move into a new era between the UK and the EU, there remains some potential for economic shocks, claims inflation and supply disruption, but we believe we are well placed to respond to and mitigate any impacts.
Cyber risk The demand for cyber insurance is increasing as the frequency, severity and sophistication of attacks increase.
· We have a framework in place to ensure that we protect customer data and monitor and mitigate against potential threats and risks, as well as keeping our employees informed about their responsibilities.
Automation Automation and robotics are helping corporates better serve customers and become more efficient.
· Automation and robotics, supported by investments in technology, are increasing efficiency and supporting better customer experience by digitising manual and routine tasks.
· Automation is also impacting customer needs and expectations, with customers more reliant on technology than ever before.
· Our customers are increasingly expecting us to be able to serve them digitally, both through sales and service and claims processing. We are investing in new technology in all our regions to meet these needs.
Dear Shareholders This is likely to be my last letter to you at RSA, assuming the takeover bid by Intact/ Tryg completes as expected in the coming months. It therefore seems appropriate to offer something of a retrospective view of the changes at RSA since I joined in 2014 and what they have delivered.
But first it is right to recognise the context of 2020, and indeed the start of 2021. COVID-19 has blighted the world in so many ways, from health to economics and beyond. All those badly affected deserve our sincere sympathies and understanding. For our own part, RSA has prioritised sustaining customer service during these difficult times. In addition to paying out claims of some £4.6bn for business as usual, COVID-19 related claims of over £250m have been provided for, on top of a range of other customer support measures from premium rebates to bill forbearance and charitable donations.
In 2020 RSA produced excellent underlying profits, record underwriting results and a return on tangible equity of 18.2%1, above the top end of the targeted range and exceptional for a capital intensive financial institution. This was our fourth record underwriting result in 5 years. Many companies in our industry and elsewhere fared worse and, like them, RSA’s results had to be achieved despite a drag on profits from COVID-19 as well as coping with the many other severe challenges it posed – to capital and operations, and most especially to customer service. RSA’s results for 2020 are a remarkable achievement, a reflection of 7 years of business building and in turn were the foundation for showcasing the attractiveness of RSA’s business in discussions with Intact and Tryg.
However, RSA in early 2014 also had a legacy of key weaknesses – in capital, in performance, in management, in costs and capability and in a strategy that had not evolved to deal with modern realities. Some of these weaknesses will take still more years to completely eliminate. However, during 2014/15 a fundamental restructuring of the company set right much that was failing, put RSA on a stronger footing and allowed a second phase to begin, aiming not at rescue, but at business outperformance.
What did we do? We implemented a focused strategy to divest underperforming or ill suited business and concentrate all our resources on our strongest franchises which collectively had coherence and complementarity. We restored capital and risk profile to undoubted strength. We made extensive management changes and began to implement a harder driving performance culture married to the positives of the historic legacy. We cut costs substantially to recognise the essential nature of competitiveness in a mature industry without patents. And we embarked on a comprehensive rebuilding of capabilities across the company, centred on the effective service of customers.
RSA’s results for 2020 are a remarkable achievement, a reflection of 7 years of business building 1. Excluding UK&I exit portfolios, refer to pages 181 to 190 for further information.
People, culture and customers All businesses need the right tools, whether technology, capital, expertise etc. But it’s humans that wield those tools and must be accountable for what is made with them. And in particular its leadership. In most businesses the workforce are hard working, dedicated and want their company to succeed. But how well their efforts and talents are aimed and organised, and whether the tools they need are provided, these are the tasks of leadership. And business outcomes so often reflect the effectiveness or otherwise of leadership.
Thank you Thank you to our customers for their trust which is the lifeblood that motivates our Company. Thank you to our forebears for the inheritance of RSA. Thank you to the Board for constant support and constructive challenge. Thank you to an amazing Chairman, the best I have worked with. Thank you to all my colleagues. Together we achieved a lot. And thank you to our shareholders without whose encouragement and support the urge to achieve would have been much weaker.
RSA’s journey is not over. We have momentum into 2021. I’m confident we will do well up to when ownership changes and beyond, and in the unlikely event the bid does not complete, the future will be bright nevertheless.
Outlook We target continued growth in underlying earnings per share (EPS) as performance improvement actions take effect.
KPIs are linked to executive remuneration. To read more about executive variable remuneration, including the set of financial and non-financial performance measures on which it is based, please see pages 56 to 84.
Definition A measure of underwriting performance – the ratio of underwriting costs (claims, commissions and expenses) expressed in relation to net earned premiums.
RSA uses APMs, including certain underlying measures to help explain its business performance and financial position. 1. The Solvency II capital position at 31 December 2020 is estimated and for both year end 2019 and year end 2020 excludes an accrual for a final dividend.
2. Calculations have been amended to include data that was not available at the time of publication and reflect improvements in methodology. See page 89 for further details.
For the executive remuneration, an underlying measure of profit before tax is used. See page 60 for further detail.
Outlook We target continued progress toward our ambition of an earned controllable expense ratio of less than 20% in each of our regions.
Outlook By ensuring that customers are at the heart of everything we do, we can optimise business performance. We target improving retention over time.
Outlook We target a 50% reduction in carbon emissions by 2030, with an interim target of 37% by 2025.
I am pleased to report another year of strong performance at RSA, reflecting excellent underwriting performance for the Group. We report record Group underwriting results and combined ratio, as well as underlying earnings per share of 51.2p and an underlying return on tangible equity above our target range (all on an excluding exits basis).
Personal Lines (56% of the Group’s premium) continues to deliver excellent results reporting a combined ratio of 86%1 helped by lower weather costs overall and Covid-19 frequency benefits. We continue to focus on delivering digital propositions in order to better serve our customers whilst improving efficiency within our operations.
Commercial Lines (44% of the Group’s premium) has shown continued improvement, reporting a combined ratio of 97%1. In Scandinavia, Danish Commercial improved significantly following pricing and underwriting actions taken. Despite the sharp improvement in results, further actions are to follow in 2021. Canadian Commercial Lines has improved but remains challenging; we have taken extensive underwriting and pricing actions, including some reductions to risk appetite, which has contributed to volumes falling by 8%. The UK Commercial business was significantly impacted by the direct claims costs arising from Covid-19 business interruption claims. However, the underlying business is continuing to improve and we are achieving good growth in our profitable Regional Commercial business.
We continue to provide Alternative Performance Measures (APMs) to show the results for our ongoing businesses, given the significant portfolio exits undertaken in the UK&I to enable better assessment of potential future performance. On this basis, the Group reported 2020 underwriting profits of £550m, a combined ratio of 91.1%, underlying EPS of 51.2p, and underlying return on tangible equity of 18.2%. All APMs are defined and reconciled on pages 181 to 190.
Covid-19 The Covid-19 pandemic had a significant impact upon our customers, our staff and society as a whole in 2020.
From an operational perspective, RSA was able to adjust well to substantially all employees working from home. While there were some areas of service slippage, in general business remained largely as usual. We prioritised health and welfare of our staff and did not take part in government furlough programmes in any of our territories.
· Capital levels remain strong with a Solvency II coverage ratio of 189%3 as stated, 170%3 including proforma dividend accrual for full year 2019 and full year 2020 (31 December 2019: 178% as stated, 168% proforma) and tangible equity of £3.3bn (31 December 2019: £2.9bn).
On 15 January 2021, the Supreme Court handed down judgment relating to the FCA’s UK business interruption court proceedings. Subsequently, on the 5 February 2021, the Irish High Court handed down judgment relating to Irish business interruption court proceedings. The estimated impact of these judgments is included in the actuarial indication of ultimate losses, based on initial interpretations of the judgments. Work to fully understand the various implications of these judgments, as legal interpretations develop and claims profiles mature, will continue in future months. As a result there is uncertainty in these estimates at this stage.
It is estimated that Covid-19 had a negative impact of £25m1 on the underwriting result overall.
Below the underwriting result, other charges include £40m of net losses and economic assumption changes relating to estimated Covid-19 market volatility.
Scandinavian premiums were down 1% at constant FX. Personal Lines premiums were down 2%2, albeit Swedish Personal Accident, our most profitable portfolio, grew by 3%2. Premiums were flat in Commercial Lines at constant FX, with planned contraction in Denmark offset by growth in Sweden and Norway.
organic growth). We continued to achieve high single-digit rate and hard market conditions meant that retention remained strong at c.90% for Johnson. Overall, policies-in-force (PIFs) were up 1% in Johnson. Premiums in Commercial Lines decreased by 1%2 where volumes broadly offset strong rate. Premiums in Canada were down 1%2 overall, including an estimated £70m of Covid-19 related customer relief measures impacting written premiums, which also included the delayed renewal of a block of travel business which has been deferred to 2021.
Statutory earnings per share * Excluding UK & International exit portfolios.
1. Excluding UK & International exit portfolios. 2. At constant FX. 3. The Solvency II capital position at 31 December 2020 is estimated.
4. Gross numbers are net of specific quota share and facultative reinsurance impacts.
Controllable costs Group written controllable costs were £1,339m (2019: £1,346m). This comprised 2% cost reductions, offset by 1% inflation. At constant FX and gross of inflation, Scandinavia written controllable costs of £371m were down
Net written premiums 1,764 1,692 2,728 3 2,731 36 6,220 6,223 6,417 Net earned premiums 1,728 1,702 2,765 15 2,780 (11) 6,184 6,199 6,462
1.9% (2019: 2.1%). Based on year end 2020 forward rates, we expect investment income of c.£230m-£245m in 2021.
Group FTE2 of 11,840 was down 4% versus 2019 primarily reflecting actions taken in the UK cost programme as well as other cost actions across our regions as we continue to automate business processes. Group FTE2 is down 28%3 vs. a 2013 baseline.
The earned controllable expense ratio of 21.5%1 was up versus 2019 (20.9%) due to a lower premium base driven by both portfolio actions and Covid-19. Cost action plans are in place across our regions and our ambition of an earned controllable expense ratio of less than 20% in each region by the end of 2022 remains unchanged.
Investment result The investment result was £213m (2019: £263m) with investment income of £258m (2019: £306m), investment expenses of £14m (2019: £12m) and the liability discount unwind of £31m (2019: £31m).
Investment income was down 16% on prior year, primarily reflecting the impact of reinvestment at lower yields. The average book yield across our bond portfolios was
5. Profit after tax adjusted for items relating to goodwill and intangible assets.
impact of a reduction in the discount rate on long-term insurance liabilities in Denmark driven by Covid-19 impacts on interest rates, while there was also £14m of transaction related costs arising from the proposed sale of the business.
The taxes borne by the Group in 2020 were a total of £370m from our four largest territories (UK £95m, Ireland £8m, Scandinavia £145m and Canada £122m). Taxes collected by the same territories were an additional £544m.
For more details, please refer to our published Group tax strategy: www. rsagroup.com/responsibility/disclosures/
The Solvency II coverage ratio (‘SCR’) of 189%4 was up 11 points in the year (2019: 178%4).
The key drivers included underlying capital generation6 which added 32 points of coverage. Pull-to-par on unrealised bond gains accounted for a 4 point reduction and net capital investment after amortisation accounted for a 2 point reduction. Underwriting losses on UK&I Exit portfolios accounted for a 3 point reduction while market movements accounted for a 3 point reduction to coverage. The 2020 interim dividend reduced the coverage ratio by 5 points. The impact of restructuring costs were already recognised in the 2019 coverage ratio and thus have no impact on the 2020 ratio.
At an aggregate level, the pension fund surplus under IAS 19 increased during 2020 from a £211m surplus at 1 January to a surplus of £290m at 31 December (net of tax). This was driven primarily by deficit funding contributions paid in January (£75m pre-tax) with the impact of market movements and experience also positive in aggregate.
Summary 2020 has been an extraordinary year in so many ways. The actions taken over this and recent years to improve performance has enabled the delivery of excellent results, demonstrated a resilient capital position and above target range return on tangible equity1, despite the negative impacts of Covid-19. The shareholder approval for the all cash offer from Intact and Tryg at 52% premium is on track for completion over the coming months and demonstrates the value created and potential of RSA’s businesses.
BrandsType of business 1. At constant FX. 2. Included within Scandinavia is a reduction of £22m to gross written and gross earned premium which reflects premium recognised over a number of years in respect of cancelled insurance policies and an increase of £10m to expenses in relation to write-off of aged debtors, following completion of a balance sheet remediation programme in Sweden.
RSA is a top five insurer in Scandinavia, operating as Trygg-Hansa in Sweden and Codan in Denmark and Norway. Our Personal Lines operation, which accounts for around 60% of our regional business, is distributed direct and via agencies, while Commercial Lines makes up the rest of our business.
Approximately 60% of our Scandinavian business is Personal Lines and 40% is Commercial Lines. We distribute mainly direct to customers, but also leverage strong agency relationships
Net written premiums of £1,764m decreased by 1% at constant FX. Personal Lines premiums were down 2%1 although Swedish Personal Accident, our most profitable lines of business was up 3%1.
Geographically, Sweden generated an underwriting profit of £237m (2019: £263m1) and a combined ratio of 77% (2019: 75%). Improved current year performance was more than offset by lower (but still positive) reserve releases. Denmark reported an underwriting profit of £62m (2019: £19m1 loss) and a combined ratio of 89.4% (2019: 102.9%). This was supported by a strong turnaround in Danish Commercial Lines performance. The underwriting loss in Norway of £8m was lower (2019: £14m1 loss) driven by modest improvements in the attritional loss ratio and expenses. 1. At constant FX.
Covid-19: our response The majority of our workforce in Scandinavia has been working from home during the Covid-19 pandemic, reflecting guidelines set by local governments. Significant resource has been deployed to ensure our staff received the appropriate support regarding physical and mental well-being during remote working. Despite remote working, we continued to maintain strong levels of customer service levels with customer satisfaction metrics being in line with expectations. These new working conditions have further accelerated the digital agenda with a greater shift in customer behaviour towards these channels. In Sweden, our Trygg-Hansa brand saw a 20%+ increase in digital traffic in 2020 with over 50% of customers notifying their claims digitally.
There is scope for medium-term growth based on the stability of the regional economies, especially if we continue to improve the appeal of our brand, customer service levels, operational excellence and underwriting.
Our operations in Canada We distribute our products through a variety of channels, with Commercial Lines operating mainly through brokers, and the majority of Personal Lines offered direct and through affinity partners.
Financial Performance Canada delivered a business operating result of £256m for 2020, up 61% versus last year. The combined ratio improved by 6.2 points to 88.3%. Excluding the estimated impacts of Covid-19 the combined ratio was 91.4%. Personal Lines continued to perform well and the combined ratio improved by over 6 points to 84.9%. Pleasingly, Personal Broker performance showed continued improvement and is now operating at target profitability levels. The combined ratio in Commercial Lines improved by 5 points to 97.3% (2019: 102.3%) driven by improved attritional and large loss performance.
Weather losses of 3.7% of earned premiums was 1.3 points better than both prior year and the five year average2. The large loss charge of 6.9% was 1.1 points better than 2019. The attritional loss ratio of 47.5% improved by 8.5 points in 2020. Excluding the estimated impacts of Covid-19 the attritional loss ratio was 51.4%.
Written controllable expenses of £325m were 12%1 higher than 2019 driven primarily by an increase in both planned software amortisation charges as well as higher staff costs (also planned) relating to the Scotiabank partnership and some one-off items. The earned controllable expense ratio was 18.8%.
Covid-19: our response The majority of our workforce in Canada has been working from home during the Covid-19 pandemic, reflecting guidelines set by local and national governments. We continue to prioritise employee well-being, focussing on mental health initiatives and resources for employees. Despite the impacts of remote working, customer metrics remain strong with an overall Net Promoter Score (‘NPS’) for Johnson sales and service of +46 (Q4 2019: +45) and an NPS for Personal Broker of +33 (Q4 2019: +29). The Covid-19 pandemic has continued to shift customer interactions towards digital mediums and we continue to invest and develop our digital propositions. 2020 was the first year Johnson handled over 1 million digital sales and servicing engagements, and has seen a 29% increase in fully automated online policy servicing transactions. In addition, chatbot use grew 178% to an average of 600 customers using this channel each day. In our Broker Personal Lines, our digital RSA Pro tool has seen a +30% increase in overall quotes vs. 2019. Additionally, the business provided over $120m in of Covid-19 related relief measures, which included price reductions, refunds and coverage changes, as well as support for the most vulnerable Canadians through a $100,000 donation to Food Banks Canada.
Our operations in Canada are well balanced geographically, by customer type, product and distribution channel, helping us to manage the challenges of adverse weather, increasing claims cost and regulation. Our strategy is one of continuity – to pursue growth in the Johnson business, improve our digital capabilities and retain a focus on disciplined underwriting and pricing to maintain a strong commercial insurance footprint and improved profit contribution.
In Ireland, we are a leading Personal and Commercial insurer distributing through 123.ie (our direct-to-consumer business), affinity partnerships and brokers. Our Middle East operations, of which we own 50%, cover Bahrain, the United Arab Emirates, Oman (where we operate under the Al Ahlia brand) and Saudi Arabia (where we operate under the Al Almiya brand).
In 2019, we established a distinct European business with its own regional leadership team, headquartered from our office in Luxembourg, with a presence in Belgium, France, Spain and the Netherlands.
UK & International financial performance The UK & International region delivered a business operating result of £200m1 for the period (£152m including exits), down on prior year due to Covid-19 related losses and lower investment income. The business delivered a combined ratio of 96.7%1 (98.5% including exits). However, excluding the estimated impacts of Covid-19, the business operating result was £278m1 the combined ratio was 94.0%1. The attritional loss ratio improved by 3.3%1 of which 1.4 points related to the estimated positive Covid-19 frequency benefits, while large losses were 2.5%1 worse of which 2.3 points related to direct Covid-19 claims. Premiums were down 5% overall in the UK & International region at constant FX, this included an estimated £86m impact from Covid-19.
The weather ratio of 4.1% was 1.2 points worse than prior year and was driven by the February floods which cost c.£35m. The large loss ratio of 14.0% was 2.7 points worse than last year, but was stable versus prior year excluding Covid-19 impacts. The attritional loss ratio of 45.0% was 2.8 points better than 2019 driven substantially by frequency benefits associated with Covid-19 and improved by 1.8 points excluding Covid-19. Prior year underwriting result was an £6m profit or 0.3% benefit to the combined ratio (2019: 0.5% loss). The expense ratio increased slightly due to premium shortfalls but controllable expenses fell in absolute terms. A new simplification programme commenced in 2020 targeting the key levers of people, property and IT, with benefits expected to come through in 2021.
International portfolios performed well generating a consolidated underwriting result of £79m (2019: £94m). Continued improved performance in Europe was offset by lower profitability in Ireland and the Middle East (both impacted by lower premiums as a result of Covid-19).
Premiums in Europe were down 3%2 driven by planned business lapses. Premiums in Ireland decreased by 2%2 excluding estimated Covid-19 impacts (down 7%2 overall) due to lower Personal Motor new business. In the Middle East, premiums were down 11%2 excluding Covid-19 impacts (down 18%2 overall) largely due to lower volumes in Commercial Lines and rating pressure in Personal Lines.
Covid-19: our response The majority of our workforce in the UK & International has been working from home during the Covid-19 pandemic, reflecting guidelines set by local governments. Significant resource has been deployed to ensure staff across our regions have received the appropriate support regarding physical and mental well-being during remote working.
In the UK and Ireland, RSA quickly put in place digital solutions for customers whose lives and financial situations were impacted by Covid-19. Customers were able to flex their policies free of usual administrative charges, and make a number of changes to make sure their cover remained appropriate for them throughout the pandemic. Additionally, MORE TH>N, our UK personal insurance brand, gave customers who work for the National Health Service (NHS) extended insurance cover to say thank you for their efforts in battling coronavirus. In the UK we were proud to be a significant contributor to the insurance and long-term savings industry’s Covid-19 Support Fund which launched in May 2020 and has now raised over £100 million.
Our European business launched a new initiative called ‘quality education for all’, working with EDUCO to provide schools in Burkina Faso with hygiene kits for hand-washing.
Our strategy Our aim is to build a more balanced business in the UK & International, with all parts of the region contributing to underwriting profits. This requires further improvement to results in the UK, and investments to ensure that our excellent results in our International businesses can be sustained. We will achieve this by stabilising and then strengthening our Commercial Lines business, growing our direct channel in UK Personal Lines and continuing to improve our productivity. We are therefore focussed on simplifying our business, equipping it with the tools and digital capabilities required to serve customers efficiently and well, and building a culture that values high performance and develops talent.
The Group’s operating plan provides a platform for ensuring the business remains aligned with its strategic goals, including strong delivery for our customers and sustainable performance while maintaining a robust capital base. Risk takes an active role in challenging the plan, informed by financial analysis, economic projections, peer reviews (e.g. by the underwriting and actuarial teams), expert judgment and current risk assessments.
A key part of our culture is ensuring our customers are at the heart of all we do, and our staff are passionate about achieving good customer outcomes. We give considerable attention to ensuring our customers are treated fairly.
Risk Management and Governance approach during Covid-19 Maintaining the Risk Management and an effective control environment is essential in times of organisational stress as it helps protect the organisation from harm. Covid-19 has had an unprecedented impact in our business and while it has not fundamentally changed our risk profile the pandemic heightened some risks. Mitigating actions to reduce ongoing pandemic risk have been put in place, these included: · early changes to policy wordings based on second-wave scenarios,
· RSA also implemented an agile response to ensure that we kept the control environment under constant review. This allowed us to identify where controls needed to be adjusted or reprioritized through a flexible, timely and transparent process that sustained strong governance, while providing continuity to our customer service and ensuring staff safety.
Terrorist threats remain high. Attacks could impact a large number of our customers and staff as well as broader society.
The full extent of the economic, political, and social consequences associated with Covid-19 are yet unknown. Risk of further waves, vaccine-resistance variants and lockdowns remain high.
Volatile capital markets negatively impact on the value of assets and potential increase capital requirements for market/credit risk, and continued low interest rates.
Tensions over trade, international relations and EU stability are all factors that may have significant social and economic implications.
Climate Change trends have been recognised as a key emerging risk for insurers for some time, however, the work of the Intergovernmental Panel on Climate Change (IPCC) and other bodies has increased understanding.
Solvency II and Solvency Capital Requirement (SCR) Insurers are required to calculate the level of capital needed based on their unique risk profile under the Solvency II regulatory regime. For RSA, this is calculated using our own internal model and is a key component of the annual Own Risk and Solvency Assessment (ORSA) process. RSA also publishes its Solvency and Financial Condition Report (SFCR) annually, which contains extensive information on how RSA manages its risks and exposures, and reports the financial position of the Company using Solvency II valuation principles. RSA operates a programme of continuous development in relation to the internal model and a Grouplevel major change approval was received in 2020 for the latest set of enhancements.
U nd er w rit in g ex cl . C
Policies direct management of risks within appetite Comprehensive policy suite sets the required business processes and controls to deliver the operational plan within appetite. Robust control testing used to identify risks out of appetite.
Monitor appetite and action tracking Line 1 manage risks and define actions, where out of appetite, with oversight provided by Regional Risk and Control Committees and escalation to local and Group boards.
Model outputs used in ORSA The internal model is run regularly throughout the year in order to assess the risks impacting the Group and determines how much capital the Group needs to hold to remain solvent even after a major stress event(s). This forms part of the ORSA process.
Model outputs checked and used in business decisions Output from the model is sense checked against non-modelled stress and scenario events to ensure it provides a reliable basis for making business decisions, including capital planning, reinsurance purchase, performance analysis and pricing.
This is the risk that the Group’s estimate of future claims is insufficient. Longer taillines of business present more uncertainty on the size and timing of payments, with our largest exposure being the Swedish Personal Lines (including motor).
This risk relates to customer and/or reputational damage arising from operational failures such as IT system failure.
· Operational risk and resilience processes and procedures are in place, including incident management.
· Operational resilience mechanisms have been particularly important in 2020 given the pace of change and disruption to the operating environment from Covid-19. Through this time the customer focus and governance has continued to be strong, and resilience plans and procedures have ensured service continuity.
· A long-term de-risking plan is in place following the last triannual valuation. · Possible market impacts are examined and well understood with a specific focus on Pension risk.
This is the risk to our insurance funds arising from movements in macroeconomic variables, including widening credit spreads, fluctuating bond yields and currency fluctuations.
· Investment positions are regularly monitored to ensure limits remain within quantitative and qualitative appetite (including ESG factors).
· Asset Managers positioning assets to minimise Brexit risk where possible. · Enhanced monitoring was implemented since the early phases of the pandemic to monitor premium credit risk exposures.
· Brexit risks to inflation and supply chain delays are being monitored and we are ready to respond.
· Extensive control validation and assurance activities are performed over underwriting pricing and claims.
· During 2020 RSA has taken focussed actions in response to the Covid-19 global pandemic, these include adjusting policy wordings, and enhanced claims monitoring of covid-19 related risks.
· Our reinsurance programme significantly reduces our exposure to catastrophe risks, with historical losses being well covered by our programme. The programme is designed to cover at least 1-in-200year events and is stress-tested for climate change scenarios.
Our corporate responsibility strategy, Confident Futures, supports how we integrate consideration of a wide range of environmental and social issues into our business practices.
More information on the steps we’ve taken in 2020 can be found in our corporate responsibility report, Confident Futures: rsagroup.com/responsibility/resources/
Many of these actions were in place before the impact of the pandemic, however we are committed to taking the additional learning from the switch to more flexible ways of working on board in our future carbon reduction plans. The pandemic demonstrates that the scale of reductions needed to meet our target of a 50% reduction in carbon emissions by 2030 are achievable; nevertheless we need to avoid a rebound to ‘business as usual’ when restrictions lift. We have also made good progress on switching to renewable electricity sources across our UK and Scandinavian operations: 28% of electricity is now from renewable sources, avoiding more than 1,700 tonnes CO2e. Full emissions data can be found on page 89.
This year, we have continued to collaborate with external stakeholders through our memberships of ClimateWise, the CRO Forum, United Nations Principles for Sustainable Insurance, and the Climate Financial Risk Forum, developing and sharing best practice on reporting and discussing new ways to integrate environmental, social and governance issues into our decision-making.
Further information can be found in our Modern Slavery Statement: com/responsibility/disclosures/
Communities Our Group Community Investment policy ensures that our activities are aligned to our business, employee and community needs. Throughout the year we have contributed more than £13 million worldwide to support the most vulnerable in society through financial relief to local charities and providing support for a wide range of causes, including food distribution, mental health services, and projects to combat loneliness. In response to the Covid-19 pandemic we launched a Community Grant Scheme supporting small, local charities impacted in the UK, distributing over £280,000 in rapid response grants. We also adapted our volunteering programmes to enable people to use their two-day volunteering allowance remotely.
Anti-bribery and corruption Bribery and corruption are not tolerated anywhere in our operations. Our Anti-Bribery and Corruption Policy and Conflicts of Interest, Gifts and Hospitality Policy apply across our business. They set out detailed guidance on facilitation payments, gifts and hospitality and relationships with third parties, as well as the systems and controls to ensure effective implementation. All employees, contractors, business partners and suppliers are expected to comply with applicable laws of the UK and countries in which we conduct business, as well as with our Broker Remuneration Policy and Third Party Contracts Policy, which set out requirements for payments to brokers and procurement activity.
The TCFD recommendations, published in 2017, provide guidance for businesses on increasing disclosure of climate-related information.
Responsibility for climate change is integrated into the roles and responsibilities of senior managers across several key functions, including Finance, Underwriting, Investments and Risk. William McDonnell, our Group Chief Risk Officer, has overall responsibility for the Group’s Environmental Policy and response to the risks of climate change, chairing our ESG Committee which regularly updates the Group Corporate Responsibility Committee, Executive Committee and Group Board on activities and progress against targets. Within each region, country-level senior management is responsible for ensuring that the business strategy is executed and that our business plans take into consideration the operating environment and material risks.
This encompasses actions to respond to climate risks and opportunities, including minimising the impact of our direct operations by setting targets and monitoring progress, and supporting the transition to a low-carbon economy.
Risk management Our enterprise-wide approach to risk management (covered in more detail on pages 28 to 31) ensures that the right processes and procedures are in place to identify, understand and monitor the risks associated with a changing climate across our operations. Climate risks feature on our emerging risk profile and are built into our risk control environment for assets and underwriting. This year we have reviewed our Group-wide policies to ensure that climate change is integrated into relevant requirements and controls, updating our Risk Management and Environmental policies. We have also integrated climate change into our Group Risk Appetite Statement and ORSA.
· New product and service offerings to provide insurance for new technologies, resource efficiency or infrastructure, such as electric vehicles, rail (transition, short/medium term) – managed through product/service offering, customer engagement and ongoing market analysis
· Increased demand (and revenues) for insurance as changes to weather patterns increase public awareness of the need for cover (physical, long term) – managed through product/service offering and customer engagement.
Strategy As an insurer, the risks and demands of a changing climate are of critical importance to our business, customers and stakeholders. The climate-related risks and opportunities outlined in this section are integrated into strategic decisions covering: · Underwriting strategy and portfolio management – particularly in relation to physical risks and reinsurance decisions
· Company strategy – including the decision to invest in renewables underwriting specialism
Managing physical risk RSA’s risk and operational teams regularly review the emerging risk landscape – analysing company-wide data, exposure and trends, and external research to identify a management approach to climate-related risks. Climate risk is well managed through our operational policies and standards: · Annual policies mean we can respond to changing weather patterns.
Our operational planning processes also consider changing weather patterns. Using up-to-date catastrophe models and building identifiable trends into our weather planning, technical pricing and exposure management is a key part of our underwriting guidance. We also have an opportunity to influence our customers to improve their resilience through risk management tools and advice.
RSA’s stress and scenario testing programmes are designed to help the business understand the potential financial consequences of complex risk events, such as climate change, where the impacts will be broad, far-reaching and with a range of future outcomes. The use of climate scenario analysis to assess climate-related financial risks is a growing focus of insurance regulators and provides a valuable input to inform strategic business decisions.
These scenarios explored: Impact of a 3 month period of rainfall and flooding on UK exposures This scenario focussed on modelling an extended period of rainfall and flooding consistent with Met Office research on how climate trends could affect UK weather, and the potential financial impact on RSA. We used loss data from the 2015/16 winter storms as the base case and tested both severity and duration.
Supporting low-carbon transition Our Climate Change and Low Carbon Policy position sets out the important role we can play in helping society transition to a low-carbon economy. This policy, which came into effect in January 2020, formalises our position on investments and underwriting of carbon-intensive sectors. This seeks to ensure that our business activities are consistent with a below 2°C world, in line with the Paris Agreement, and sets out our commitment to supporting the development of renewable energy technologies through our products and services while restricting capacity available to and investments in certain fossil fuels.
This year, with the majority of our offices largely unoccupied and limitations on travel, we observed a 38% reduction in our total carbon emissions, including a 75% reduction in emissions associated with business travel. We are committed to using the lessons from this year to inform our plans as we seek to progress our ambitions to lower emissions and achieve our target.
Our metrics: · Weather-related losses in 2020 were £140m (2019: £167m), representing a weather-loss ratio of 2.3% (2019: 2.5%)
· Total carbon emissions (scopes 1, 2 and 3) in 2020 were 11,077 tonnes CO2e (2019: 17,810).
“Your Best U” We believe and are proud that our people bring their best selves to work with a shared purpose to deliver good outcomes for our customers and shareholders.
· Recognising the personal and workrelated changes from Covid-19, we launched new well-being resources, providing a wide range of practical and emotional support to help our people and their families adjust.
· We were careful to ensure that our people continued to benefit from personal development during new working conditions through virtual training, and we invested in our digital platforms to make access even easier.
· Similarly, we continued momentum in our inclusivity activities and goals, including starting to monitor ethnicity data in the UK.
· Due to economic conditions, we moved to new operating models which resulted in a reduction in our employee workforce. We were sensitive to the personal impacts of these changes and therefore invited applications for voluntary redundancy and shorter hours where feasible.
For information on workforce headcount by gender for 2020, please refer to page 57.
“ Colleagues rated the support from RSA during Covid-19 conditions as 4.5 out of 5.”
Working together effectively Our group-wide policies for Employment Practices and Speaking-up & Whistleblowing are designed to support inclusivity and drive consistent standards in line with our values and long-term success. The policies are reviewed annually.
Working conditions in 2020 meant that communicating and remaining focussed on our standards was more important than ever. To gauge how we were doing and to inform next steps, we surveyed our people and were encouraged by the high response rate (a median of 75% across our regions) and the positive feedback. We also took on board views about increased flexible working in future and the need for more development in digital business solutions.
“ Colleagues rated the compassion shown to them by RSA during Covid-19 conditions as 4.2 out of 5.”
© 2020 Friend Studio Ltd File name: Gov_XChairman_sXLetter_v20 Modification Date: 4 March 2021 1:19 pm
Dear reader 2020 was an unprecedented year for RSA and the world we live in and I am extremely proud of the hard work and commitment my Board colleagues, the management team and the Group’s workforce have shown throughout the year.
The Covid-19 pandemic continues to challenge the Group, both from an underwriting and claims perspective, and operationally. The High Court judgment in the Financial Conduct Authority’s (FCA) test case was handed down in September 2020, with the Supreme Court’s judgment following in January 2021. The clarity provided by the Supreme Court’s judgment has been welcomed and the Group continues to benefit from the reinsurance protection in place.
· People and culture, in particular the impact of Covid-19 on the workforce
The primary responsibility of the Board is to provide effective leadership to ensure that it promotes the long-term sustainable success of the Company, generating value for our shareholders and other stakeholders, and contributing to wider society.
Commitment to governance Shareholders and stakeholders continue to be central to the Board’s decision-making and at the heart of long-term sustainable growth. The Board believes the framework it has supports effective decision-making, robust governance and risk management throughout the Group, and this report sets out RSA’s framework for good governance against this backdrop.
The primary responsibility of the Board is to provide effective, entrepreneurial leadership to ensure that it promotes the long-term sustainable success of the Company for the benefit of its members as a whole.
Alastair Barbour had intended to step down from the Board in October 2020, being the ninth anniversary of his appointment as a non-executive director. Alastair has continued to serve on the Board during the proposed acquisition of the Group to provide continuity and to contribute his considerable knowledge and experience to the Company and the Board. With effect from 23 October 2020, Alastair ceased to be a member of the Group Audit, Board Risk, and Nomination and Governance Committees but remained on the Board as a non-executive director and a member of the Group Investment Committee.
The performance of the Board over the last 12 months was very highly rated. The results evidenced that the Board has the appropriate balance of skills, experience, independence and knowledge to enable it and its committees to discharge their duties and responsibilities effectively. The directors agreed that the Board was functioning effectively, with positive dynamics and a wellbalanced composition. Further information can be found on pages 47 and 48.
I would like to thank you for your support over what has been a challenging year.
External appointments Non-executive director of Threadneedle Investment Services Limited, Threadneedle Pensions Limited and Threadneedle Asset Management Holdings Sàrl, non-executive director and member of the Nomination and Remuneration Committees of United Utilities Group plc and non-executive director and member of the Audit, Nomination & Governance and Risk Committees of TP ICAP plc.
Scott Egan CEO, UK & International Appointment date: October 2015 Nationality: British
Alastair Barbour FCA Independent Non-Executive Director Appointment date: October 2011 Nationality: British Committee membership: I
Skills and experience Alastair has extensive experience in advising on accounting and financial reporting, corporate governance and management issues in the financial sector. He brings in-depth knowledge and understanding of accounting and global governance. He is a Fellow of the Institute of Chartered Accountants in England and Wales. Alastair retired from KPMG in March 2011. In the last 20 years of his 36-year career with the firm, in the UK and overseas, he led its financial services team in Scotland with a primary focus on insurance and investment management.
External appointments Chairman of Liontrust Asset Management plc, Senior Independent Director and Audit Committee Chairman of Phoenix Group Holdings and director of The Bank of N.T. Butterfield & Son Limited (a company listed in Bermuda and New York).
Skills and experience Enrico has over 35 years’ experience in the financial and insurance sector, in both global executive and non-executive positions. Previously, he was Group CEO at Intesa Sanpaolo and, prior to that, member of the Executive Board of Allianz where he was responsible for companies in Europe, Africa and Latin America and, globally, for property and casualty. Other previous board appointments include Unicredit and Pirelli.
Martin Scicluna Chairman Appointment date: January 2013 Nationality: British Committee membership: N I
Skills and experience Martin has considerable knowledge and understanding of the financial services sector and how it operates. He brings valuable experience in developing strategy and evaluating business opportunities. He is an experienced Chair and leader and ensures the Board operates effectively, promoting constructive engagement with shareholders and other stakeholders. Previous roles include Chair of Great Portland Estates Limited, Senior Independent Director and Audit Committee Chair of Worldpay Group plc, non-executive director and Chair of the Audit Committee at Lloyds Banking Group plc, 34 years at Deloitte LLP, including as Chairman from 1995 to 2007, and member of the Financial Services Trade and Investment Board from 2013 to 2015.
External appointments Non-executive director and member of the Risk & Audit, Nomination & Compensation, and Strategy Committees of Partners Group Holding AG and member of the supervisory board of MSG Life AG.
Clare Bousfield Independent Non-Executive Director Appointment date: April 2020 Nationality: British Committee membership: A B N
External appointments Chief Financial Officer of M&G plc, the international savings and investment company which recently demerged from Prudential plc.
Sonia Baxendale Independent Non-Executive Director Appointment date: March 2019 Nationality: British/Canadian Committee membership: I A
Skills and experience Sonia has over 25 years’ experience in the banking and financial services industry in Canada. She is an experienced business leader and has run large global businesses and has served at operating board level at Canadian Imperial Bank of Commerce. Since stepping down from Canadian Imperial Bank of Commerce in 2011, Sonia has held a number of non-executive positions.
External appointments Non-executive director, Chairman of the Risk Management Committee and member of the Human Resources and Corporate Governance Committee of Laurentian Bank of Canada, nonexecutive director, Chair of the Human Capital and Governance Committee and member of the Audit and Compliance Committee at Foresters Financial, President and Chief Executive Officer of the Global Risk Institute in Financial Services and nonexecutive director of The Bank of N.T. Butterfield & Son Limited (a company listed in Bermuda and New York).
Charlotte Jones Group Chief Financial Officer Appointment date: April 2018 Nationality: British
Skills and experience Charlotte has over 25 years’ financial services experience in the banking and asset management sectors which she brings to the Board when overseeing the financial operations of the Group and setting the financial strategy. Before RSA, Charlotte held the position of Chief Financial Officer of Jupiter Fund Management plc since September 2016. Prior to Jupiter, Charlotte was Head of Group Finance and Chief Accounting Officer at Credit Suisse Group. From 2004 to 2013, she held various senior finance roles at Deutsche Bank and between 1990 and 2004 progressed from trainee accountant to partner in the financial services practice of Ernst & Young.
Through regular review of the Board’s rolling agenda and previews of each Board meeting’s agenda, the Chairman ensures that sufficient time is provided for discussion and debate and ensures the provision of timely, accurate and clear information.
The division of responsibilities No individual director or small group of directors is able to dominate the Board’s decision-making.
Role statements define the separation of responsibilities between the Chairman and Group Chief Executive and provide a mandate to independent non-executive directors to debate and challenge strategy, execution and performance and bring an independent, objective opinion.
The role statements for the Chairman and Group Chief Executive are reviewed annually.
The Group Chief Executive is responsible for identifying and developing business opportunities, recommending actions to the Board with particular attention to strategic plans, risk appetite and risk exposure for the business, monitoring the performance of the Group, and overseeing the delivery of objectives and business plans within agreed timescales and budget.
Board committee structure and membership In order that it can operate efficiently and give the right level of attention and consideration to relevant matters, the Board delegates authority to its Board committees, as set out opposite.
Following each committee meeting, an update is provided to the Board, ensuring that all directors are aware of the deliberations and challenges on relevant topics and specific matters.
The composition of each committee is reviewed by the Group Nomination and Governance Committee annually and whenever there is a change to the Board. All committees have some members in common to ensure cross-committee awareness of matters discussed. For example, the chair of the Group Audit Committee is a member of the Board Risk Committee and the chair of the Board Risk Committee is a member of the Group Audit Committee.
Although Covid-19 impacted the Board’s ability to meet in person, most Board and certain stakeholder activities proceeded in a revised, virtual format. Covid-19 and its impact on our customers, people and businesses was a key area of focus and, at the beginning of the Covid-19 pandemic, the Board received weekly updates on the impact of the pandemic on the Group’s operations and the global economy, the Group’s workforce, insurance and financial markets. The Board also received updates at every scheduled Board meeting.
The Board seeks to ensure that the views of its stakeholders are considered during Board discussions and decision-making. The principal decisions of the Board during the year include: · Decisions in response to Covid-19 for our customers and our workforce and the contribution to the ABI’s Covid-19 relief fund
Further information can be found in the section 172 statement on page 10
During the financial year, key activities of the Board included the following: Customers · Customer and conduct matters were discussed with management at every Board meeting, including regular updates on group-wide customer metrics and updates from the UK Customer Committee.
Strategy and execution · The Board spent a significant amount of time considering and subsequently recommending the cash offer from Intact and Tryg for the RSA Group. As noted in the Group Chief Executive’s statement on page 14, we were not looking to sell the Group and the future for RSA as an independent company was bright. However, this bid offers exceptional value to shareholders and opportunities to our other stakeholders.
· Received a report on market trends and competitor activity in relation to claims performance and innovation following Covid-19. Following challenge from the Board, management agreed to accelerate the pace of digital adoption and artificial intelligence within the Group.
· Received an update on the Climate Change and Low Carbon Policy position and the corporate responsibility strategy.
People and culture · Reviewed the development of diversity, inclusion and equal opportunities within the business, including feedback from the Group Diversity and Inclusion (D&I) Council and progress across the Group against agreed targets and priorities.
· Received regular updates on culture and the results of the various mechanisms to monitor and assess culture, including a regional employee survey on the effect of Covid-19 on working conditions. Further information can be found on pages 38 and 39.
· Recommended the 2019 final dividend, which was subsequently postponed, and approved the 2020 interim dividend.
· Approved the Annual Report and Accounts 2019, as well as approving the preliminary results and trading updates in 2020.
· Received an update on the Group’s investments and pensions performance.
Governance, controls, risk and regulatory · Approved the Group’s 2020 recovery plan and resolution plan.
Each year, a formal and rigorous evaluation of the Board, its committees, the Chairman and each individual director is conducted. This year’s Board evaluation was conducted internally, led by Martin Strobel, Senior Independent Director (SID), and the Group General Counsel and Company Secretary.
Online Questionnaires The questionnaires covered: the effectiveness of the Board; the effectiveness of the Board committees; and 360-degree reviews of the performance of individual directors.
Regular management attendees at committee meetings were also asked to complete the online questionnaire to provide an external view on the performance and effectiveness of the Board and relevant committees.
The results of the self-assessment element of the survey were shared with the Chairman and discussed at one-toone meetings between the Chairman and individual directors.
The results of the Chairman’s review were shared with the SID, who facilitated a separate discussion of the Chairman’s performance with the non-executive directors only.
Recognising its strengths and potential development areas, the Board agreed actions for the coming year, as set out below. The committees also discussed the results of their respective evaluation reports and agreed actions where appropriate.
The SID met with the Chairman privately to discuss the output from the discussion with the non-executive directors. The overall effectiveness of the Chairman was unanimously rated as excellent; he was said to be a good listener, foster an inclusive Board which was open and transparent and to have a genuine focus on the best outcomes for the Company in all aspects of his role.
Continue to seek additional opportunities for the Board’s direct engagement with customers and workforce
The Board recognises that the outcome of the proposed cash offer for the Company will have an impact on the actions emanating from this year’s Board evaluation process, for example the Board does not currently anticipate making further appointments ahead of the offer completing. Some of the remaining actions would be undertaken on the basis that the cash offer does not complete and in the interim, i.e. in the period up to receipt of confirmation that the cash offer has completed.
Progress in 2020 Completion of the 2019/2020 actions has inevitably been impacted by changing business priorities as a result of Covid-19. However, the spirit of the actions has continued, and good progress has been made against last year’s actions.
Role of the Committee The Committee plays an important role assisting the Board in its oversight and monitoring of the Company’s financial statements and the robustness of the Group’s systems of internal control, and oversees the effectiveness and objectivity of the internal and external auditors. It manages the relationship with the external auditor, including making recommendations to the Board and shareholders in relation to appointment, re-appointment and removal.
Committee composition, skills and experience Clare Bousfield succeeded Alastair Barbour as chair of the Committee with effect from 23 October 2020. The Committee comprises four independent non-executive directors, and the Board is satisfied that the Committee has competence relevant to the insurance sector, and at least one member has recent and relevant financial experience as required by the Code. The members possess diverse experience, knowledge and skills, which enables them collectively to act as an effective committee.
The impact of Covid-19 has increased the level of estimation uncertainty within several of the significant accounting judgments and estimates. The Committee considered and challenged how this additional estimation uncertainty had been addressed by management and were satisfied that management exercised appropriate judgment and control in line with Financial Reporting Council (FRC) and European Securities and Markets Authority (ESMA) guidance issued on this matter during the year. Given this heightened risk and uncertainty, the Committee also reviewed and challenged the year-end reporting timetable and were satisfied that management had allowed sufficient flexibility to complete all necessary work to an appropriate standard.
Insurance liabilities valuation The Committee ensured that management exercised appropriate judgment and control in estimating insurance contract liabilities. The key actuarial assumptions underpinning the valuation of insurance liabilities and associated risks and uncertainties were reviewed and challenged.
This included the impact of the Covid-19 pandemic on our claims experience and the claims environment, the impact of the FCA Test Case judgment and legal interpretations, experience following the Ontario insurance auto reforms, business mix changes, changing economic assumptions and potential legislative increases in retirement age in Sweden.
The Committee also received and considered detailed written and verbal reporting from KPMG setting out its observations and conclusions in respect of the reported insurance liabilities based on its audit procedures, as further described in the independent auditor’s report on pages 94 to 101.
The Committee was satisfied that management exercised appropriate judgment and control in estimating insurance liabilities, reflecting available and reliable information when setting the reserves, and that an appropriate margin of circa 5% for uncertainties is maintained.
The Committee reviewed the valuation methodology supporting the value of the pension scheme assets, specifically plan assets relating to the longevity swap. The Committee was satisfied with management’s procedures to assess the independent asset valuations received from valuation specialists.
Goodwill and intangible asset valuation The Committee reviewed management’s assessment of the carrying value of goodwill and other intangible assets. This included the key assumptions, in particular the reasonableness of future cash flow and profit projections and the appropriateness of the discount rate used.
The Committee reviews the carrying value assessments on an annual basis with a review for any indications of impairment performed by management on a regular basis.
Investment valuations The Committee has ensured that management have exercised appropriate judgment and control in performing valuations of equity and debt security investments. This includes the judgment required when assessing for objective evidence of impairment, specifically if a decline in fair value is significant or prolonged. The Committee approved impairments of £32m.
Swedish debtor remediation programme The Committee also spent time understanding the overstatement of debtors identified in Scandinavia during a balance sheet remediation programme.
The Committee received presentations from management on the background to the issue and whether the identified error, which had built incrementally over a number of years required a prior year restatement to be included within the financial statements. With input from the internal and external auditors, the Committee discussed and challenged management on the planned remediation activity including internal controls and interim measures to ensure that these were sustainable and would adequately remediate the issues identified.
IT systems and controls The Group’s IT infrastructure, including retained legacy systems, is complex and financial reporting is dependent on the operational and financial IT systems operating effectively and the control environment in which they operate. This is a key area of focus for both Group Audit and Board Risk Committees and, during the year, they received updates from accountable management, both in Finance and Technology, on progress to enhance IT general controls, the oversight of IT testing processes and improvements in documentation and standards, together with regular reporting from Internal Audit on the results of its reviews and testing.
The Committee received updates from KPMG on their assessment of general IT controls, including information on areas where additional controls or substantive testing was required, and the conclusions reached in support of the audit. After consideration and discussion with management and KPMG, the Committee concluded that the financial results as prepared were appropriate and reliable.
Alternative Performance Measures (APMs) The Committee discussed and challenged management on the presentation of APMs in the half- and full-year results announcements and Annual Report and Accounts in line with external guidance and FRC expectations. Specifically, further guidance was issued in 2020 in response to Covid-19 and the potential impact on reported results. The Committee reviewed the additional disclosure included in the 2020 full-year results announcement to provide a number of adjusted APMs relating to the impacts of the UK&I exited portfolios, in line with those provided at half year 2020 and the estimated impact of Covid-19.
Solvency II reporting Solvency II reporting is a key focus for the Committee. It received quarterly reports on the Solvency II Technical Provisions, Balance Sheets and Own Funds, including the reconciliation to International Financial Reporting Standards (IFRS) results as well as quarterly and annual movements. The Committee satisfied itself that the calculations had been conducted according to the Group’s Basis of Preparation, including the introduction of allowance for the Volatility Adjustment. The Committee reviewed management’s proposals and basis of preparation for the Solvency and Financial Condition Report (SFCR) and the Regular Supervisory Report (RSR) for the year ended 31 December 2020.
Key activities during the year In addition to the significant issues set out above, the Committee undertook the following key activities during the year: · Considered whether it was appropriate to adopt the ‘going concern’ basis of accounting for the 2020 Annual Report and Accounts and the basis on which the viability statement is made, recommending to the Board that both were appropriate. The viability statement, on page 88, helps demonstrate how the Group’s prospects and viability have been assessed.
· Received regular updates on relevant accounting standards that could impact on the financial statements to ensure that new accounting standards were understood and appropriately reflected in the financial statements. Specifically, the Committee received updates on the IFRS 17 Insurance Contracts Group delivery programme and reviewed and approved the Group’s proposed accounting policies to be adopted on transition. The Group did not make any significant changes to its accounting policies during 2020.
· Received quarterly updates on the assessment and testing of financial processes and controls as part of the Financial Control Framework (FCF), including any deficiencies and the actions taken to address. The Group operates an external Quality Assurance (QA) programme, providing independent assurance over the FCF and its operation as well as bringing industry insight and
· Received briefings and undertook deep dives on a number of matters, including IT validation, and long outstanding issues raised by Internal Audit in areas including Underwriting, IT and Systems, Claims, Product and Distribution, and regional updates from Scandinavia and Canada.
· Considered an externally commissioned assessment relating to our Scandinavian reserves and assessed its recommendations. The Committee also received an update on last year’s externally commissioned assessment of substantially all of our UK reserves.
The Committee considers that an effective and appropriate ongoing process for identifying, evaluating and managing the significant risks faced by the Group was in place during 2020 and for the purposes of approving the Annual Report and Accounts. See pages 28 to 31 for more information on the Group’s Risk Management Framework.
Group Internal Audit (GIA) The primary purpose of GIA is to ‘keep RSA safe and improving’. Specifically, GIA helps the Board and executive management protect the assets, reputation and sustainability of the Group. GIA does this by assessing whether all significant risks are identified and appropriately reported by management and the second line of defence to the Board and executive management, and adequately controlled. GIA also challenges executive management to improve the effectiveness of governance, risk management and internal controls.
In December 2020, the Group Chief Auditor also provided the Committee with an assessment of the skills and capabilities required to conduct the audit work for 2021, and whether the budget is sufficient to recruit and retain staff with the expertise and experience necessary to provide effective challenge throughout the Group and to executive management.
GIA operates an ongoing QA programme that is performed by external specialists. A summary of the QA results is reported annually to the Committee. The Committee remained satisfied that GIA was operating effectively, sufficiently resourced, and that the risk to their independence and objectivity was low.
During the year, the Committee considered its position on the external audit services contract and concluded that it was not appropriate to tender the audit at this time in the context of the offer. This position will be reviewed again in 2021, as appropriate.
The Company has complied with the Statutory Audit Services for Large Companies Market Investigation (Mandatory Uses of Competitive Tender Process and Audit Committee Responsibilities) Order 2014 for the year ended 31 December 2020. It is the intention of the Committee that the Company will tender the external auditor appointment at least every ten years, with the next tender due by the end of 2023.
· Private meetings with KPMG without management present to provide the opportunity for open dialogue and to raise any matters in confidence.
Audit quality To maintain audit quality, the Committee reviews the strategy and plan for the audit of the financial statements prior to approval, to make sure that KPMG has identified all key risks and developed robust audit procedures and communication plans.
Auditor performance The Committee undertakes a thorough review of the perceived quality, effectiveness, objectivity and independence of the external auditor on an annual basis. The views and opinions of the Committee, senior management and members of the Group Finance team were sought via a questionnaire.
On the basis of the review, the Committee is satisfied with the work of KPMG. The Committee believes that KPMG’s performance reflected the relevant skills, rigour, perseverance and robustness expected and that it is objective and independent. Accordingly, resolutions to re-appoint KPMG LLP and give authority to the directors to determine their remuneration will be submitted to shareholders at the 2021 AGM, as appropriate.
There are no contractual obligations restricting the Company’s choice of external auditor nor limitation of liability in the terms of their appointment.
Fees and non-audit services The audit fee for 2020 was discussed and considered before being approved by the Committee on behalf of the Board.
All permitted non-audit services must be authorised in advance and must be approved by the Committee. The Committee has delegated the approval of smaller preapproved engagements up to the value of £50,000 to the Group Financial Controller (or alternatively the Group Chief Financial Officer). These engagements are then noted and ratified by the Committee at the following meeting.
Clare Bousfield Non-Executive Director and Chairman of the Group Audit Committee
Alastair Barbour ceased to be a member of the Group Audit Committee, Board Risk Committee, and Nomination and Governance Committee with effect from 23 October 2020 but remains a member of the Group Investment Committee and member of the Board.
The Committee recognises the importance of reviewing executive and senior management succession plans to ensure that a diverse pipeline of high-performing, talented individuals across the Group is being maintained. Individuals identified as possible future candidates to join the Executive Committee team have tailored development plans and the Committee also seeks to ensure they are given appropriate opportunities to meet with Board members. With input from executive directors, development themes and activities for possible future candidates to join the Executive Committee are devised and an assessment of the strength of the succession pipeline is conducted to highlight areas where action may be required.
Board succession planning was put on hold in September 2020 in light of the proposed cash offer for RSA Insurance Group plc by a consortium of Canadian insurer Intact and Danish provider Tryg. Existing executive and senior management succession plans remain in place and will be promptly revisited by the Committee in the event that the cash offer does not complete.
The Board and Committee has continued its focus on diversity and inclusion this year: · The Board reviewed its Board Diversity Policy which codifies previous commitments to diversity and incorporates a commitment in relation to the Parker Review to have at least one Black, Asian, or minority ethnic background board member. The Committee is pleased to confirm that the Board is currently compliant with this recommendation.
· Group-wide gender data was provided to the Hampton-Alexander Review for a consecutive year, demonstrating our continued commitment to good governance and transparent reporting. The Board aspires to meet the recommendations of the HamptonAlexander Review and can report that, as at the date of our submission, 31 October 2020, women made up 40% of the Board and 36.4% of our senior leadership positions.
· The Company remains a signatory to the Women in Finance Charter having exceeded the initial target of a 33% representation of women in our management group by 2020. We have continued to make progress and now have a 35.3% representation in our management group (a further improvement since 2019 when the representation was 34.6%).
Workforce headcount by gender at the end of 2020 Male Female
NOTES: Based on Group-wide permanent and non-permanent headcount. In line with FRC guidance, the headcount information shown in the table above covers RSA's wider workforce, including contractor, temporary and agency workers. Senior management reflects the same group reported in Women in Finance Charter goals. As at 31 December 2020 there were 115 males and 34 females who were directors of subsidiary undertakings included in the consolidation. This includes dormant companies. It is not a reference group that RSA uses and we do not believe it is an accurate indicator of diversity; however it is disclosed to comply with regulatory requirements. There are independent contractors in Scandinavia for whom gender data cannot be collected. These individuals have been excluded from the gender headcount analysis shown above.
· Across each region we continue to invest in strengthening the pipeline of female employees for senior leadership positions and have developed a framework of initiatives designed to help retain, develop and promote female employees and improve diversity and inclusion more broadly, including targets for senior management in each key region.
Stakeholder engagement The Board’s planned stakeholder engagement activities for 2020 were inevitably impacted by Covid-19. However, the Board was able to adapt and continue with the spirit of the planned engagement by virtual means in lieu of physical site visits, town halls and meetings. Further details of the Board’s stakeholder engagement activities are set out on pages 6 to 9.
We welcome the external focus on stakeholder engagement and have considered at length the different workforce engagement models proposed in the Code. The Committee and Board as a whole believe that meaningful engagement with our workforce is crucial to the success of our business and best owned by all Board members. Equally we have determined that we want to hear from as many of our workforce as possible, both across our regions and at different levels of seniority and role type, and have designed our engagement plans to facilitate this.
The Committee was satisfied the stakeholder engagement undertaken by the Board during the year was appropriate and agreed, having regard to the challenges posed by Covid-19, that there had been constructive two-way dialogue with the Group’s workforce through Board members’ virtual attendance at town halls, regional D&I council meetings and sessions with the UK Personal Lines, UK Commercial Lines and Canadian teams.
The Committee agreed that the key priorities for stakeholder engagement in 2021 are customers, workforce, shareholders and regulators. Stakeholder engagement is a standing agenda item at each Board meeting, demonstrating the Board’s commitment to maintaining meaningful engagement with all its key stakeholders. The Board is looking forward to returning to site visits and physical town halls with the workforce as soon as reasonably possible.
Other activities · The Committee reviewed compliance against the Code and concluded that the Company has complied with the Principles and Provisions of the 2018 Code throughout the year, see page 86. Alastair Barbour had intended to step down from the Board in October 2020, being the ninth anniversary of his appointment as a non-executive director, however the Board requested that Alastair continued to serve on the Board during the proposed acquisition of the Group. The Board remains confident that Alastair continues to demonstrate independence of thought and judgment, and believes the stability of Alastair’s continued tenure is in the best interests of the Company and its shareholders during the offer period.
· The Committee reviewed and discussed the results of the Board and committee evaluations, with particular emphasis on how the results will influence Board composition and succession planning. Further information relating to the Board evaluation process and results is included on pages 47 to 48.
· The Committee also has responsibility for the oversight of regulated subsidiaries. The Committee meets with each of the regulated subsidiary chairs on a rolling basis and has received updates on matters including board composition, governance, people matters and strategic priorities.
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As at the date of this report, the Board is composed of ten members: the Chairman, six non-executive directors and three executive directors. The table below shows the attendance at the scheduled Board and Committee meetings. The Chairman also met with the non-executive directors without management present four times during the year. Biographical information of the current directors can be found on pages 42 and 43.
Alastair continues to serve on the Board and as a member of GIC. Alastair was unable to attend the September NomCo meeting owing to time zone clashes. 2. Clare Bousfield joined the Board and became a member of GAC on 1 April 2020. Clare assumed the role of GAC Chair when Alastair Barbour stepped down from this role on 23 October 2020. Clare also became a member of BRC and NomCo from this date.
Annual Report on Remuneration 58 2. The Group Remuneration Committee 58 3. Executive Director total 4. Components of variable remuneration 60 5. Executive Director Shareholding 68 6. External directorships 70 7. Loss of office and former director payments 70 8. Contextual figures 70 9. Implementation of Policy in 2021 72 10. Non-Executive Directors 74 11. Statement of voting at
Directors’ Remuneration Policy Summary 77 2. Determining and reviewing the Policy 77 3. RSA’s remuneration principles 78 4. Remuneration Policy for
2020 was an extraordinary year, with the Covid-19 pandemic and the announcement of a cash bid for the Company. The Committee has reviewed its remuneration decisions with particular sensitivity to this context, as well as its normal stakeholder lenses, to ensure they are justified and proportionate. Notably, RSA has reinstated its dividend and shareholders will receive the value of the suspended 2019 final dividend as explained below, while Government employee furlough aid has not been used.
Although Covid-19 had a negative overall impact on the business, the financial results show an exceptional Return on Tangible Equity driven by strong underwriting performance.
Key indicators include: · Underlying EPS 51.2p, up 15%, · Underlying pre-tax profit £718 million
(2019: 168%). RSA’s total shareholder return for 2020 is 21%, versus -9% for the SXIP Index comprising of UK and European listed insurers.
Covid-19 has challenged all businesses. However, actions taken by management have ensured that the company has dealt effectively with the challenges presented. These actions have included: · Ensuring the continuity of our customer contact channels.
While the 2019 final dividend was postponed in line with regulatory guidance to insurers, dividends were restarted in September when the company announced an interim 2020 dividend of 8.0p per Ordinary Share (up 7%). The value of the suspended 2019 final dividend is reflected in Intact and Tryg’s cash offer to RSA shareholders, and the company has stated its intention to catch up the payment should the bid not complete. The financials and capital ratios for 2020 are presented on that basis.
Strategic report Governance Financials condition until the bid outcome is confirmed to ensure there is no unjustified benefit in the resulting vesting level.
The Committee reviewed these outcomes through a number of lenses in order to be satisfied that they fairly reflected and were proportionate to performance: · Incentive targets were not relaxed or adjusted for Covid-19 despite its negative impact on the Company’s results. The incentive performance targets were similarly achieved both with and without the value of the 2019 final dividend.
· A downwards adjustment was applied to the Business Scorecard element of the UK and International bonus as the Committee took account of the impact of restructuring and portfolio exits, as set out on page 62.
· In addition to the shareholder experience, it considered the awards for other RSA employees, customer outcomes and ESG factors, and ‘how’ performance had been delivered in the context of RSA’s business values, which it considered aligned to culture.
· A risk report prepared for the Committee by the Group Chief Risk Officer was also considered. The Committee concluded that the incentive outcomes were fair and appropriate taking into account the formulaic outturn and the experience of wider stakeholders in the round, and that there were no issues warranting the application of malus or clawback.
Given the above, the Committee’s view was that the operation of the Remuneration Policy worked as intended in terms of performance and quantum within the ranges predicted.
Our 2021 Annual Bonus Plan will focus on shareholder returns and profit alongside risk and capital management, controllable expenses, attritional loss ratios, costs, strategic improvement, the customer franchise, ESG and people. Measures will be consistent with the previous year. Should the bid to acquire RSA complete as expected, the timing will influence the 2021 Annual Bonus Plan and the Committee will use its discretion under the approved Directors’ Remuneration Policy to react to a shorter period, in consideration of an appropriate outcome.
There will be no increases to directors’ salaries in the 2021 review.
Shareholding levels Stephen and Scott’s shareholding levels are 536% and 250% of salary respectively, exceeding their targets of 300% and 200%. Charlotte Jones is progressively building her holding following her appointment in July 2019, and all vested awards must be retained post-tax until the required level is reached.
This included oversight of salary increase budgets, bonus funding levels and internal pay relativities to ensure alignment of executive and workforce reward, as well as reviewing and affirming the approach to long-term incentives beyond executives. The Committee also reviewed the all-employee share plan participation levels, the UK pension updates made in light of regulatory change and workforce pay and benefits protections put in place as part of the bid discussions.
Employee pay ratios are shown on page 71. These reflect the job roles in those parts of our business located in the UK, as per the required calculation. Similar factors are used in setting pay across the workforce, including performance, market positioning, job size and content, and individual experience. The Committee is satisfied that the remuneration in this report properly reflects these factors and is therefore appropriate.
Diversity and inclusion In line with the broader approach of the Board, the Committee considers workforce remuneration matters and HR decisions through a diversity lens.
We voluntarily published our Gender Pay Gap figures this year, despite the pause in the statutory reporting obligations, as we support the transparency that this provides. The mean and median pay gaps show an improvement compared to the prior report, and our actions to keep up progress in this area are detailed at www.rsagroup.com/responsibility. We are using the lessons learnt on gender pay to help build ways to collect data on ethnicity in support of our wider diversity and inclusion efforts.
We also engaged prior to the 2020 AGM on remuneration and governance more broadly, including our initial response to Covid-19.
I am grateful for the support shown for our Policy and Remuneration Report at last year’s AGM, and welcome any comments you may have going forward.
Annual Report on Remuneration 1. Introduction This Annual Report on Remuneration details how the approved Remuneration Policy has been implemented for Directors in the financial year ended 31 December 2020, and how the Group intends to implement its Policy in 2021.
Advisers PricewaterhouseCoopers (PwC) is appointed by the Committee as its independent adviser. It was selected following a market tender exercise. During 2020, PwC also provided advice and consultancy services across the Group globally on matters including data and analytics technologies, regulatory risk and compliance, operations strategy, IT risk and governance, direct and indirect tax and compliance. PwC is a member of the Remuneration Consultants’ Group and a signatory to its Code of Conduct. In addition, the Committee has satisfied itself that the advice it receives is objective and independent as PwC has confirmed there are no conflicts of interest arising between it, its advisers and RSA. The fee paid for services to the Committee in the year was £126,252 excluding VAT, based on a fixed fee for a defined scope of work and hourly rates for advice in respect of the impact of the bid for RSA on Executive Director remuneration.
· Approval of 2020 incentive plan performance conditions, and long-term incentive grant 2020–22 •
· Approval to operate all-employee share plans (Sharesave and Sharebuild) and off-cycle long-term incentive grant
· Review of Committee terms of reference and effectiveness • •
· Update on the performance of the Annual Bonus Plan 2020 and current long-term incentive cycles • •
Notes: 1. Taxable benefits: Stephen Hester received a car allowance and the use of a car and driver service which totalled £25,818 (2019: £43,904), Scott Egan received a car allowance of £15,000 (2019: £15,000), Charlotte Jones received a car allowance of £15,000 (2019: £6,304), and each of the Executive Directors were provided with medical benefits and life cover.
2. Bonus: Awards in respect of performance measures relating to the financial year shown, as described on pages 60 to 65. Half of the bonus shown is awarded in Deferred Bonus Shares which vest three years from the date of grant, and are subject to malus adjustment.
6. Other remuneration 2019: The figure for Charlotte Jones reflects compensatory awards made to replace those forfeited on leaving her previous employer, as detailed on page 94 of last year’s report.
7. Scott Egan was appointed as an Executive Director effective 1 October 2015. In 2020 he received an annual base salary of £559,866 from 1 January to 31 March. His salary increased by 2% effective 1 April to £571,063.
8. Stephen Hester was appointed as an Executive Director effective 5 February 2014. In 2020 he received an annual base salary of £1,033,352 from 1 January to 31 March. This increased by 2% effective 1 April to £1,054,019.
9. Charlotte Jones was appointed as an Executive Director effective 31 July 2019. In 2020 she received an annual base salary of £500,000 from 1 January to 31 March. This increased by 2% effective 1 April to £510,000. Remuneration for her period as a Non-Executive Director of RSA prior to this in 2019 is shown in the table on page 74.
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Bonus 2020 performance measures Weighting CEO UK & Intl Group CEO Group CFO
Group underlying ROTE, UK & Intl Underwriting Result, UK & Intl COR 20% – –
The measures applicable to the CEO UK & International for this component of the bonus plan are shown in the following table: Bonus Financials: CEO UK & International 2019 Actual1 2020 Target1 2020 Actual1 Weighting (% of maximum) Achievement (% of maximum)
Bonus Business Scorecard: Group CEO and CFO 2019 Actual1 2020 Target1 2020 Actual1 Weighting (% of max) Achievement
The Committee examined each performance outcome in the round and assessed the Scorecard as strongly met both including and excluding Covid-19 impacts with an outcome of 30/30. It determined that no adjustment was required.
· In Risk and Resilience, capital reflected the Group Scorecard. Key risk areas in the operational response to the pandemic were addressed well.
· On Business Sustainability, UK customer retention was up on the prior year, with increasing Net Promoter Scores in Personal Lines. Total premiums were lower, with continued focus on underwriting quality. Across the region, the customer franchise remained stable. RSA launched its own community grant programme to provide funding to local charities in the UK impacted by Covid-19 and announced a new partnership with the Royal Society for the Prevention of Accidents.
Scott’s objectives included: · Strategy: Develop and implement UK & International region plans, responding to best-in-class challenge and competitor benchmarks.
· Successfully completed the initial UK cost programme and commenced work on the second phase to accomplish target of <20% controllable expense by 2022.
· Excellent performance in International businesses, with European turnaround complementing existing strong performance in Ireland and Middle East.
· Sustained growth momentum in key areas including region’s Commercial Lines business and MORE TH>N Household.
· Financial delivery: Drive achievement of financial targets, focused on large loss underwriting, productivity and operational efficiency.
· Stakeholders/Customer: Continue to build strong stakeholder relations and advance initiatives to elevate customer service in the region.
· Overall increases in UK customer retention and trust (NPS) scores. · Continued to embed the UK’s purpose that sets a revitalised ‘best-in-class’
customer ethos. Proactive leadership around customer/broker relationships. · As part of Covid-19 response, MORE TH>N initiative to give NHS workers priority service, free courtesy cars and extended cover for home emergencies. · Leadership: Embed accentuated performance culture. Shape and support Environmental, Social & Governance (ESG) initiatives including diversity and inclusion.
· Drove employee welfare, safety and operational resilience in response to Covid-19, e.g. facilitation of remote and flexible working, review of dependent carer/compassionate leave policies, mental health toolkit. Employee surveys show this has been very well received.
· Sponsored diversity and inclusion in UK & International, e.g. signing of the Business in the Community Race at Work Charter, supporting RSA Balance on gender inclusion/networking, progress towards aim of doubling the number of apprentices to c.500 by 2022.
Stephen’s objectives included: · Strategy: Drive implementation and evolution of the strategic plan, including digital/data and customer initiatives, as part of the Group’s ‘best-in-class’ ambitions.
· Exceptional and effective leadership of the bid negotiations with Intact and Tryg leading to a 52% premium offer.
· Re-insurance strategy effectiveness. Group volatility cover provided good protection from Covid-19 losses and generated recoveries greater than the annual premiums paid.
· Led from the front to prioritise service to customers, the safety of RSA’s people and resilient operations during the year.
· Financial delivery: Deliver new operating plan and manage company to meet planned targets with focus on P&L targets, capital and balance sheet, costs and underwriting improvements.
· Risk profile: Ensure good control standards – regulatory and financial. Driving improvements where needed.
· Solvency II Coverage Ratio at top of range (on all bases), despite Covid-19-related market volatility in Q1.
· Continued to proactively manage stakeholder relationships, e.g. >220 investor meetings in the year.
· Group executive succession plans reviewed. · Minimised business disruption from Covid-19 across the regions. · Carbon emissions reduced by 34.7% per FTE (2019: 15.3% per FTE reduction).
Embedded new policy on fossil fuels – 62% of underwriting portfolio for energy production is low carbon (vs a target of >50%, ahead of the IEA’s Sustainable Development Scenario targeted energy mix for 2040).
Charlotte’s objectives included: · Strategy: Develop the Group’s three-year plan to a high standard. Influence strategic decision-making across regional businesses including plans to fix productivity/cost imbalances.
· Took a leadership role to develop a tangible Group-wide approach in the data space, leveraging the different activities across the Group.
· Good capital and balance sheet monitoring. · Effective risk management actions across investment, actuarial and pensions. · Enhancements in financial analysis and reporting in Scandinavia and Canada, including accounting and reconciliations.
· Stakeholders/Customer: Build and maintain strong relations with Board and external stakeholders, including investors, rating agencies, regulators, brokers and auditors.
· Leadership: Develop bench strength, succession plans and capability improvements across Finance function. Contribute to ESG goals.
· Functional succession plans reviewed. Supported the coaching and development of regional finance teams.
RSA’s TSR outperforms the unweighted index of comparators by at least 7% per annum or exceeds the TSR of the highest performing company in the index
Zurich. A straight-line calculation is applied to determine the portion of awards that vest for performance between the threshold and maximum targets. The result shown is an estimate assuming the bid for RSA completes. The final calculation will be made by the Remuneration Committee once there is clarity in this regard.
Group underlying ROTE (33.33% weighting) The Group underlying ROTE three-year average achieved was 15.6%. The 12–18% target range was set 1% point wider either side of RSA’s stated mid-term goal of 13–17%, as communicated at the start of 2018. The average required for an on-target vesting (62.5% vesting) was 16.7%, a level significantly in excess of the Group’s cost of equity. This average was set based on RSA’s original operating plan for the period, and therefore was not automatically the mid-point of the range.
Business Scorecard (33.33% weighting) The Business Scorecard focuses on key underlying performance indicators relevant to RSA’s business. The Scorecard differs from that applied to the Annual Bonus Plan in timescale (three years vs one year), and reflects targets set at the beginning of the three-year period rather than set annually. In order to avoid conflicting signals, it has similar headings to the bonus Business Scorecard, however the assessment outcome is geared to the medium term and therefore differs.
The vesting outcome on this element was determined by the Committee assessing RSA’s progress during the three years in the round, consistent with the methodology applied in previous years. The Scorecard indicators are shown in the following table.
S&P credit rating ≥A- stable A stable A stable A stable
· On Risk and Resilience, Solvency II coverage was maintained at the top of the targeted range annually. This has been supported by the consistently strong capital actions taken, including the successful UK pension agreement, the pricing of £350m of Senior Notes to ensure liquidity pre-Brexit, the completion of the UK legacy sale and the obtaining of regulator approval to apply Volatility Adjustment in the Group’s capital model. The internal risk and control environment was strengthened over the period.
· On Business Sustainability, good customer service levels were maintained throughout the period with overall retention consistently at the targeted level. Customer satisfaction levels remained generally strong over the three years, with significant increases in UK Personal Lines and Canadian Claims NPS scores particular highlights. These outcomes reflect the efforts of management to instil a customer focus in all we do, with investment in our brands and adjustments to the Group’s underwriting to address market challenges. Also relevant to Business Sustainability were the Group’s progress on diversity and inclusion, as well as new Corporate Responsibility/ESG initiatives.
The Committee assessed the Scorecard achievement as excellent with an outcome of 33.33/33.33.
3. Estimate includes the vesting 63,049 Performance Shares valued at £367,867 (of which £36,658 is attributable to share price appreciation), and accrued dividend equivalents valued at £9,615 that will be added to the awards that vest. Valued using an average share price over the last quarter of 2020 of £5.8346 and compared to a grant share price of £5.2532. Awarded as part of Charlotte Jones’ compensatory buyout award.
Long-term incentive awards granted in 2020 Conditional long-term incentive awards were made to Scott Egan, Stephen Hester and Charlotte Jones in the form of Performance Shares. Awards were granted on 6 March 2020, and scheduled to vest in 2023 subject to the satisfaction of the plan’s performance conditions. These conditions are based on Relative Total Shareholder Return, Group underlying ROTE, and a Business Scorecard.
The Business Scorecard measures a range of indicators on an underlying basis, and includes: regulatory capital ratios, credit rating, capital actions, risk management, attritional loss ratio, total controllable costs/cost ratios, key business improvement projects, customer franchise and other relevant actions related to the Company’s long-term success. Achievement will be evaluated using a performance framework whereby metrics will be reviewed against their targets, together with any other aspects connected to the business performance, including material risk items. Judgment in the round will be used by the Committee to determine the level of vesting. The specific targets cannot be disclosed prospectively for commercial reasons, including price sensitivity. A performance narrative regarding the level of Scorecard vesting will be given in the Directors’ Remuneration Report at the end of the performance period once the conditions have been tested, to the extent that such a report is required.
Long-term incentive performance measures 2020–22 Weighting Threshold target: 25% vesting Maximum target: 100% vesting
Zurich. A straight-line calculation is applied to determine the portion of awards that vest for performance between the threshold and maximum targets. 2. Group underlying ROTE will be calculated on a three-year average basis. A straight-line calculation is applied to determine the portion of awards that vest for performance between threshold and on-target, and between on-target and maximum. The average required for on-target vesting (62.5% vesting) is considered commercially sensitive because it is set in line with, and therefore signals, the Group’s forward plan for the period. Disclosure will be provided retrospectively following the end of the performance period.
Directors’ Remuneration Report continued 5. Executive Director Shareholding (audited) The table below shows the interests of Executive Directors in Ordinary Shares of £1.00 each of the Company, including those of closely associated persons.
Notes: 1. As at 25 February 2021, the interests in Ordinary Shares of the current Directors have not changed since 31 December 2020. 2. Full details of all Directors’ shareholdings and options to subscribe for shares are recorded in the Group’s Register of Directors’ Interests which is open to inspection by shareholders at the AGM and at the Company’s registered office during standard business hours. The Directors had no share options that vested and remained unexercised, or were exercised in the year.
Number of share awards not subject to performance conditions2 Valuation after tax3
Charlotte Jones 43,094 £208,394 104,621 £268,141 £476,535 93% 200% Building holding in targeted five-year period
2. Deferred Bonus Shares vest three years from the date of grant, and are subject to malus adjustment. Those granted during the year reflect the 50% of the 2019 annual bonus deferred, with a face value at grant of £393,215, £769,175 and £140,151 for Scott Egan, Stephen Hester and Charlotte Jones respectively. 3. Deferred Bonus Shares granted to Scott Egan and Stephen Hester in 2017 vested during the year and 6,057 and 13,000 accrued dividend equivalent shares were added to the number of vesting awards shown above respectively. A portion of the shares were sold to cover statutory deductions, the rest were retained. 4. Performance Shares granted to Scott Egan and Stephen Hester in 2017, and Charlotte Jones in 2019 as part of her buyout awards, partially vested during the year and 9,081, 19,277 and 523 accrued dividend equivalent shares were added to the number of vesting awards shown above respectively. A portion of the shares were sold to cover statutory deductions, the rest were retained.
5. Performance Shares granted in 2018, 2019 and 2020 have performance conditions of Group underlying ROTE, Relative TSR and a Business Scorecard (one-third weighting each). The date by which performance conditions are to be met is as follows: 2018 awards by 31 December 2020, 2019 awards by 31 December 2021, 2020 awards by 31 December 2022.
7. Retention period applicable to 14,277 of the 22,972 share awards shown. 8. No other Directors of the Company held long-term incentive scheme interests during the year. 9. Details of the employee benefit trusts used to satisfy grants under the Group’s share incentive schemes are on pages 90 and 148.
Directors’ Remuneration Report continued 6. External directorships Stephen Hester received fees of £93,000 during the year in respect of his non-executive role at Centrica plc, where he is Senior Independent Director. As permitted under the Remuneration Policy, he retained these fees. Scott Egan and Charlotte Jones do not hold outside directorships of FTSE 100 (or any other listed) companies but would be allowed to have one such appointment, subject to the approval of the Group Nomination and Governance Committee.
Relative importance of spend on pay The table below shows the all-employee pay spend and returns to shareholders by way of dividends for 2020. Figures from 2019 are provided for comparison. The employee pay data covers the Group’s employees globally, and therefore includes the impact of exchange rate changes.
Percentage change in remuneration The table below sets out the percentage change in salary, benefits and bonus for Executive Directors compared with Group employees on average on a full-time equivalent basis.
All employees (excluding directors)1 2019 to 2020 2.0% 4% 30% 2018 to 2019 2.3% 2% 100%
Notes: 1. A comparison to Parent Company employees is not possible, as the Parent Company RSA Insurance Group plc employs only Directors. 2. Charlotte Jones was appointed as an Executive Director effective 31 July 2019. The calculation above includes 2019 on an annualised basis. On an actual earnings basis, the change in Charlotte’s salary, taxable benefits and bonus was 142%, 55% and 191% respectively. As Charlotte had no executive remuneration in 2018, it was not possible to calculate a percentage change from 2018 to 2019 in her case.
Year Method 25th percentile pay ratio Median pay ratio 75th percentile pay ratio 20201,3 Option B2 211:1 141:1 82:1 20191,4 Option B 174:1 119:1 67:1 20181 Option B 180:1 122:1 69:1
3. The total pay and benefits for the individuals identified at the 25th percentile, median and 75th percentile was £23,394, £35,161 and £59,992 respectively. The base salary for the individuals identified at the 25th percentile, median and 75th percentile was: £20,105, £29,949 and £49,473 respectively.
5% over 10 years for discretionary schemes, including long-term incentives 2.41%
Fixed remuneration No increases will apply to Executive Directors’ salaries, which will remain at current levels: Director
Group underlying ROTE, Group underlying PBT, Group/Region COR, Region Underwriting Result
· Underlying Performance: Attritional loss ratio, total controllable costs/cost ratios, key business improvement projects; · Risk and Resilience: Regulatory capital ratios, credit rating, capital actions, risk management; · Business Sustainability: Customer franchise and other relevant actions related to the Company’s long-term success including People and Corporate Responsibility.
Annual Bonus Plan 2021 The Annual Bonus Plan is aligned with the core priorities for focus in 2021. The Executive Directors will be expected to deliver against stretching targets, which are geared towards making continued performance improvement. The Group Chief Executive and CFO are targeted against the performance of the entire Group, taking into account their contribution thereto. The CEO UK & International will be targeted against a combination of the performance of his region and the Group, taking into account his contribution thereto.
The following table sets out the structure of the Executive Directors’ bonus plan for 2021.
2. Sonia Baxendale was appointed as a Non-Executive Director effective 1 March 2019. 3. Clare Bousfield was appointed as a Non-Executive Director effective 1 April 2020.
4. Isabel Hudson resigned as a Non-Executive Director effective 31 July 2019. 5. Charlotte Jones was appointed as a Non-Executive Director effective 1 April 2018 until 30 July 2019. She became an Executive Director on 31 July 2019 at the effective date of her appointment as Group CFO. Figures shown here relate to her Non-Executive appointment only. 6. Joseph Streppel resigned as a Non-Executive Director effective 9 May 2019.
Percentage change in remuneration The following table sets out the percentage change in fees and benefits for Non-Executive Directors compared with salary and benefits for Group employees on average on a full-time equivalent basis.
Notes: 1. A comparison to Parent Company employees is not possible, as the Parent Company RSA Insurance Group plc employs only Directors. 2. Alastair Barbour’s % fee change reflects his change in committee responsibilities. 3. Sonia Baxendale was appointed as a Non-Executive Director effective 1 March 2019. The calculation above includes 2019 on an annualised basis. On an actual earnings basis, Sonia’s % fee and benefits changes were 24% and 21% respectively.
4. Martin Strobel’s % fee change reflects his becoming Senior Independent Director during 2019, and is in line with the fee structure below. 5. Clare Bousfield was appointed as a Non-Executive Director effective 1 April 2020 and therefore it is not possible to calculate a percentage change in her case.
Contracts The table below shows when the Non-Executive Directors’ appointments became effective and their ninth anniversary. All Non-Executive Directors, including the Chairman, are subject to annual re-election by shareholders at the Annual General Meeting.
2. Determining and reviewing the Policy The Policy has been determined by the Group Remuneration Committee (‘the Committee’) on behalf of the Board after reviewing the impact of the existing Policy, key governance factors, and taking account of stakeholder feedback. To ensure conflicts of interest are managed, the Committee ensures no Director determines the policy regarding their own remuneration. The factors considered are set out below: Clarity The Committee has reviewed stakeholder feedback since the 2017 Policy was put in place and concluded the Policy is clear and well understood, it facilitates transparent Director pay decisions, and allows incentive targets and outcomes to be published in detail.
Predictability The Executive Directors’ remuneration potential in threshold, target and maximum performance scenarios is noted on the following pages. The Policy states the maximum bonus and LTIP grant values.
To provide the Committee with context when considering Executive Directors’ remuneration, and when developing the Policy, it considered the remuneration arrangements for the Group’s employees in general (for example, salary increases and pension and incentive opportunities) as well as pay relativities. In 2016, the Company was accredited by the UK’s Living Wage Foundation as a Living Wage Employer.
· Executive Directors and other executives are required to hold a significant number of shares in the Company; they are encouraged to act in shareholders’ best interests by having a personal investment in RSA.
Strategic report Governance Financials 4. Remuneration Policy for Executive Directors The following table sets out the components of the Executive Directors’ remuneration package and how they operate.
Benefits typically cover the areas of: health and well-being, leave of absence, car and business travel, sickness benefit, insurances, professional subscriptions, external advice and employee discounts on certain insurance products. Home to work travel may be covered where appropriate.
The Committee can amend any benefit or introduce new ones to ensure the remuneration package remains market competitive or to respond to regulatory, legal or best practice changes.
Benefits are fixed remuneration, however the cost to provide them can vary from year to year in line with market conditions, which therefore determine the maximum value.
Pension cash allowances are paid monthly and are subject to statutory deductions.
Annual Bonus Plan (variable remuneration) This element incentivises the achievement of short-term financial and non-financial goals in line with RSA’s risk profile.
Performance measures and weightings are set each year considering the Company’s strategy and shareholder interests, and will vary based on each Directors’ area of responsibility where appropriate.
Vested shares must be retained until the relevant shareholding level is reached, excluding any sold to satisfy statutory deductions.
Measures are typically linked to value creation through performance of the Group’s share price, profit, capital and balance sheet strength and underlying performance.
Notes: 1. Post-employment retention periods apply to awards granted from 2019 onwards. 2. The current LTIP, referred to as the Performance Share Plan 2014 (PSP), was approved by shareholders at the 2014 AGM. It is also used as a vehicle for granting deferred bonus shares, and restricted shares where these are awarded as part of an Executive Director buy-out. The LTIP policy provisions are the same for all other participants who receive performance-based awards, with the exception of the two-year post-vesting retention period which only covers Executive Directors, and local regulatory requirements. LTIP award opportunities vary for individuals below the Board. Members of the Executive Team and selected senior leaders across the Group are also required to hold shares in RSA.
3. To ensure the Policy remains risk aligned, the use of hedging or insurance contracts in connection with variable remuneration is not permitted.
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Strategic report Governance Financials 5. Approach to recruitment remuneration The Committee ensures a consistent and transparent approach is taken when appointing Executive Directors to the Board, as shown in the following table. When a new Executive Director is recruited, the Committee will provide details of how the Policy has been implemented in respect of their appointment terms in the relevant Directors’ Remuneration Report.
Base salary · Set using the same approach as for existing Directors’ salary reviews. The Committee can exercise discretion on the timing and level of salary reviews for newly appointed Directors reflecting the individual’s development and performance in the role.
Incentive awards · Under normal circumstances, a new Executive Director will be eligible for incentive awards in line with the usual policy. However, in exceptional circumstances, a higher bonus opportunity of up to 200% of salary may be agreed and a performance-related LTIP award may be approved by the Committee in the Director’s first year of service up to the limit of 400% of salary.
· If a loss of office were to occur giving rise to a redundancy payment under prevailing employment legislation, the payment will be calculated taking account of the Director’s length of service with the Group and his/her annual gross basic salary as at their employment termination date.
· In cases of death and, with Committee discretion, medical severance, performance can be tested and awards made sooner than the scheduled date.
· The Committee has the discretion to make the final bonus award in cash and so waive deferral, subject to any regulatory requirements.
Note: 1. The Committee will make reasonable judgment on determining whether a Director qualifies for good leaver status by reason of retirement, by understanding the individual’s intentions post employment termination and taking account of the context of his/her departure from the Group.
7. Malus and clawback The Group operates malus and clawback provisions. In summary, the Committee has the ability to reduce or forfeit awards that have yet to be paid or vest in the case of shares, to delay the payment or vesting date or to amend another form of award or benefit which has yet to be received (malus adjustment). The Committee may also recover sums already paid to Executive Committee members if it considers it appropriate to do so (clawback). This can be applied during a two-year period after receipt (in the case of cash bonuses) or vesting (in the case of long-term incentives).
· Deterioration in the financial health of the Company leading to severe financial constraint
· Executives have a targeted five years in which to build up their holding, commencing from the first date an unconditional share award is made to them as a Director. No shares are to be sold until the holding level is reached, except where required to cover statutory deductions.
· The shares which count towards the holding level are those held either in the executive’s own right or that of immediate family members. Outstanding RSA share awards which are not, or cease to be, bound by any performance conditions are also included on a post-tax basis (i.e. a deduction is made for those awards that would be sold to cover tax and other statutory deductions at vesting).
10. Policy for Non-Executive Directors The following table outlines the components of Non-Executive Directors’ remuneration: Purpose and Strategic Link Operation and maximum level of remuneration
· Fees are paid in cash, subject to any required statutory deductions.
· They receive no other benefits, but they can have RSA insurance products at a discount.
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Provision 1: The board should describe in the annual report how opportunities and risks to the future success of the business have been considered and addressed, the sustainability of the company’s business model and how its governance contributes to the delivery of its strategy.
Relevant disclosures contained in the Strategic Report pages 4 to 5 and 12 to 13 and the Corporate Governance Report
Provision 5: The board should understand the views of the company’s other key stakeholders and describe in the annual report how their interests and the matters set out in section 172 of the Companies Act 2006 have been considered in board discussions and decision-making.
Provision 14: The annual report should set out the number of meetings of the board and its committees, and the individual attendance by directors.
Provision 15: Additional external appointments should not be undertaken without prior approval of the board, with the reasons for permitting significant appointments explained in the annual report.
Provision 20: If an external search consultancy is engaged it should be identified in the annual report alongside a statement about any other connection it has with the company or individual directors.
Provision 21: The external evaluator should be identified in the annual report and a statement made about any other connection it has with the company or individual directors.
Provision 26: The annual report should describe the work of the audit committee. Pages 49 to 52
Provision 28: The board should carry out a robust assessment of the company’s emerging and principal risks. The board should confirm in the annual report that it has completed this assessment, including a description of its principal risks, what procedures are in place to identify emerging risks, and an explanation of how these are being managed or mitigated.
Relevant disclosures contained in the Strategic Report pages 28 to 31
Provision 29: The board should monitor the company’s risk management and internal control systems and, at least annually, carry out a review of their effectiveness and report on that review in the annual report.
Articles of Association The directors may exercise all the powers of the Company subject to the Articles of Association, relevant law and any directions that may be given by the Company at general meetings by shareholder resolution. The Articles of Association authorise the Board to manage the business of the Company and give the directors power to appoint and replace directors as required until the next AGM.
Conflicts of interest In accordance with section 175 of the Companies Act 2006, each director has a duty to avoid conflicts of interest. Under Articles 94 and 95 of the Company’s Articles of Association, conflicts of interest may be authorised by the Board or a Board committee. Directors are required to notify the Company Secretary when a potential conflict of interest arises. Each director’s conflicts of interest are reviewed on an annual basis. Any director who has declared a conflict of interest shall not count towards the quorum or vote on any resolution to authorise the conflict of interest and, at the Board’s discretion, may be excluded from any meeting at which the conflict of interest is under consideration. Where a conflict of interest is authorised, restrictions may be imposed on the conflicted director, such as excluding the director from the discussion or restricting the receipt of information in connection with the conflict of interest.
Directors’ indemnity Article 143 of the Articles of Association provides that, among other things and insofar as permitted by law, the Company may indemnify its directors against any liability and may purchase and maintain insurance against any liability. The Company has granted an indemnity to each of the directors pursuant to the power conferred by Article 143 of the Articles of Association. The indemnities granted constitute qualifying third-party indemnity provisions, as defined by section 234 of the Companies Act 2006, and is in addition to appropriate insurance cover. The Company believes that it promotes the success of the Company to provide this indemnity to its directors in order to ensure that the Group attracts and retains highcalibre directors through competitive terms of employment in line with market standards.
Employment information At RSA, our vision is to create an inclusive workplace where everyone can bring their best selves to work. We do this by building diversity across all levels of our organisation and creating an inclusive culture which attracts, encourages and is strengthened by diverse perspectives, establishing the best foundation to serve our customers.
RSA is committed to the promotion of equal opportunities and the only acceptable form of discrimination is on the basis of an individual’s ability to do the job. We aim to ensure there is no less favourable treatment on the grounds of: · Sex
As well as the town halls with the Board and other methods of workforce engagement described on page 7, members of the Executive Committee and senior management host regular ‘town hall’ meetings to update employees on topical issues and other matters of concern to the workforce, including giving performance updates following the announcement of results or a trading update. At these updates, senior management will present on the results and the key factors affecting performance of the Group and provide an opportunity for individuals to ask questions. These ‘town hall’ meetings are supplemented by internal communications, including emails, internal social collaboration tools and intranet postings, which provide our entire workforce with relevant updates and further information on key issues.
Essential contracts and change of control The Company does not consider that there are any significant agreements to which the Company is a party that take effect, alter or terminate upon a change of control of the Company following a takeover bid, that are required to be disclosed pursuant to paragraph 13(2) (j) of Schedule 7 of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (as amended).
Going concern The Board has made an assessment of going concern covering a period of at least 12 months from the date of approval of these financial statements. The Board’s assessment included the review of Group’s strategic plans and updated forecasts, capital position, liquidity including credit facilities and investment portfolio, which are based on the Group continuing to operate on a standalone basis and reflects the Group’s assessment of the impact of the current challenging economic environment. The review included significant stress testing, including extreme downside scenarios and a reverse stress test. Scenarios considered include significant deteriorations in market and credit conditions, and severe claims events from catastrophe losses. In making their assessment, the Board has considered the impact of the recent UK Supreme Court decision on business interruption losses, including the availability of reinsurance to recover incurred claims.
In addition, the Group, as part its Own Risk and Solvency Assessment (ORSA) process, uses stress tests to assess the capital resilience of the Group to a range of severe but plausible scenarios including a reverse stress test. In the context of the current challenging environment from Covid-19 and Brexit the scenarios reflected: · Premium reductions from an economic downturn
· Ongoing Covid-19 and Brexit impacts, including lower economic activity, suppressed spending, business confidence, supply chain disruption and market volatility.
Our reporting has been conducted in accordance with the World Resources Institute’s GHG Protocol Corporate Accounting and Reporting Standard. We consolidate our organisational boundary according to the operational control approach, which includes emissions from all operations with 50 or more full-time equivalent employees.
Energy efficiency measures: We are reporting our Scope 2 market-based emissions for the first time this year to reflect our purchase of REGO-backed renewable electricity at UK sites where we are directly responsible for energy procurement or have engaged with landlords to switch to a renewable supply.
We have also completed energy efficiency projects at our UK offices during 2020 including the replacement of boilers in our Horsham and Manchester offices with more efficient models, and upgrading the carpark lighting to more energy efficient motioncontrolled LEDs at our sites in Chelmsford and Liverpool. The boiler replacement projects are anticipated to have saved 624,000 kWh between them. The energy saving attributed to the car park lighting replacement projects is expected to save a further 15,000 kWh electricity per annum. During 2020 we also moved our office location in Glasgow to more energy efficient premises.
Total emissions (scope 1, 2, 3)MB 10,544 N/A N/A N/A N/A
Notes: The emissions reported above have been restated versus numbers previously disclosed, in accordance with GHG Protocol guidelines. 1. Calculations have been amended to include data that was not available at the time of publication and reflect improvements in methodology (including updated emissions factors).
2. We have reclassified emissions associated with use of hire vehicles in Denmark from scope 3 emissions to scope 1 emissions in all years to reflect the fact that these are company cars and enable a fair comparison year on year.
The GHG referenced in the table cover: Scope 1: Direct emissions from the Group’s activities, including natural gas consumption, diesel and companyowned vehicles. Scope 2: Indirect emissions from purchased electricity, district cooling and district heating. This year we are reporting scope 2 emissions according to two different methodologies (‘dual reporting’): (i) the locationbased method, using average emissions factors for the country in which the reported operations take place; and (ii) the market-based method, which uses the actual emissions factors of the energy procured.
Business travel: Emissions from flights, trains and vehicles not owned by the organisation.
Share capital More information on the Company’s share capital can be found in Note 34 and Note 35 on pages 147 to 148. Note 35 includes a summary of the principal terms of the Company’s SEK 2,500,000,000 and DKK 650,000,000 floating rate Restricted Tier 1 Contingent Convertible Notes which were issued in March 2017. The notes are convertible into Ordinary Shares of the Company upon the occurrence of certain conversion trigger events.
During the year, the Company operated two employee benefit trusts to hold Ordinary Shares in the Company which are used to satisfy grants under the Company’s share incentive schemes. The Trustees are Link Market Service Trustees Limited (for the Share Incentive Plan Trust) and Apex Financial Services (Trust Company) Limited (for the Royal and Sun Alliance ESOP Trust No.2), respectively. The Trustees may vote in respect of any shares held in the trusts but have no obligation to do so, and the Trustees may have regard to the financial interests of the beneficiaries in exercising their voting rights over the Company’s shares. A standard dividend waiver agreement is in place for the for RSA ESOP Trust No.2, an employee benefit trust, to receive dividends of 0.01 pence per share. Further information can be found on page 148 in the Notes to the Financial Statements.
Pentwater Capital Management LP n/a n/a n/a 32,000,000 3.09% Financial Instruments
Société Générale SA (SG SA) 34,664,862 3.35% Direct 85,902,547 8.30% Direct
T. Rowe Price Associates, Inc 48,657,079 4.75% Indirect 48,657,079 4.75% Indirect
The Companies Act 2006 and the UK Listing Authority’s Listing Rules and Disclosures and Transparency Rules also require the Company to provide a Directors’ Report for the year ended 31 December 2020. The information that fulfils this requirement and which is incorporated by reference into, and forms part of, this report is set out on pages 1 to 91 and includes the information on financial risk management objectives and policies contained in Note 6 in the consolidated financial statements.
A balanced and understandable assessment of the Group’s position and prospects, and an explanation of its strategy for delivering the objectives of the Company are contained in the Strategic Report on pages 1 to 39 which includes: · Use of financial instruments by the Company and details of financial risk management objectives and policies of the Company, including the policy for hedging each major type of forecasted transaction for which hedge accounting is used
A full list of the Group’s subsidiaries and related undertakings is in Appendix B on page 171. Further explanation of the assurances undertaken by the Group Audit Committee on behalf of the Board are set out in the Group Audit Committee Report found on pages 49 to 52. A report from the external auditor can be found on pages 94 to 101.
Directors’ Responsibility Statement The Directors’ Responsibility Statement appears on page 93 and is incorporated by reference into this Report.
Basis of preparation and significant accounting policies 1 Basis of preparation 107 2 Significant accounting estimates and judgments 108 3 Adoption of new and revised accounting standards 108 4 New accounting standards, interpretations and amendments yet to be adopted 109 5 Significant accounting policies 109
Notes to the consolidated income statement, consolidated statement of comprehensive income and dividends 9 Segmental information 124 10 Net investment return 125 11 Net claims 126 12 Other operating income 126 13 Other operating expenses 126 14 Finance costs 127 15 Employee expenses 127 16 Related party transactions 127 17 Auditor’s remuneration 128 18 Income tax 128 19 Share-based payments 130 20 Earnings per share 131 21 Dividends paid and proposed 131 22 Total other comprehensive income 132
Notes to the consolidated statement of financial position 23 Goodwill and intangible assets 133 24 Property and equipment 135 25 Investment property 136 26 Financial assets 136 27 Fair value measurement 139 28 Interests in structured entities 143 29 Reinsurers' share of insurance contract liabilities 144 30 Insurance and reinsurance debtors 145 31 Current and deferred tax 145 32 Other debtors and other assets 147 33 Cash and cash equivalents 147 34 Share capital 147 35 Other equity instruments – Tier 1 notes 148 36 Non-controlling interests 149 37 Issued debt 149 38 Other borrowings 149 39 Insurance contract liabilities 150 40 Insurance and reinsurance liabilities 155 41 Post-employment benefits and obligations 155 43 Other liabilities 161
· State whether they have been prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and, as regards the Group financial statements, IFRSs as adopted by the EU
Responsibility statement We confirm that, to the best of our knowledge: · The financial statements on pages 102 to 180, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Parent Company and the undertakings included in the consolidation taken as a whole.
We consider the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s position and performance, business model and strategy.
Stephen Hester Charlotte Jones Group Chief Executive Group Chief Financial Officer
In our opinion: · the financial statements give a true and fair view of the state of the
Group’s and of the parent Company’s affairs as at 31 December 2020 and of the Group’s profit for the year then ended; · the Group financial statements have been properly prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and International Financial Reporting Standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union (“IFRSs as adopted by the EU”); · the parent Company financial statements have been properly prepared in accordance with international accounting standards in conformity with the requirements of, and as applied in accordance with the provisions of, the Companies Act 2006; and
2. Key audit matters: our assessment of risks of material misstatement Key audit matters are those matters that, in our professional judgement, were of most significance in the audit of the financial statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. We summarise below the key audit matters, in decreasing order of audit significance, in arriving at our audit opinion above, together with our key audit procedures to address those matters and, as required for public interest entities, our results from those procedures. These matters were addressed, and our results are based on procedures undertaken, in the context of, and solely for the purpose of, our audit of the financial statements as a whole, and in forming our opinion thereon, and consequently are incidental to that opinion, and we do not provide a separate opinion on these matters.
Independent auditor’s report to the members of RSA Insurance Group plc
Refer to page 49 (Audit Committee Report), page 110 (accounting policy) and pages 150 to 154 (financial disclosures).
The effect of these matters is that, as part of our risk assessment, we determined that the valuation of insurance liabilities has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole, and possibly many times that amount. The financial statements (note 39) disclose the sensitivity estimated by the Group.
Data capture: The valuation of insurance liabilities depends on complete and accurate data about the volume, amount and pattern of current and historical claims since they are often used to form expectations about future claims. If the data used in calculating insurance liabilities, or for forming judgments over key assumptions, is not complete and accurate then material impacts on the valuation of insurance liabilities may arise.
With the assistance of our own actuarial specialists across the Group and component audit teams, our procedures included: · Controls design and observation: We evaluated the governance around the overall Group reserving process. We assessed the qualifications and experience of those responsible and examined the output of the reviews to assess the scope and depth of these processes. We also evaluated key controls designed to ensure the integrity of the data used in the actuarial reserving process (including both current and prior year case reserve data). The controls included reconciliations between data in the actuarial reserving systems and data in the policy administration systems; · Data comparisons: We inspected reconciliations between the claims data recorded in the policy administration systems and the data used in the actuarial reserving calculations to test the completeness of the data used in the actuarial reserving process; · Independent re-performance: We performed independent re-projections of reserve balances using our own models for certain classes of business. The determination of which classes to re-project was based on risk assessment and consideration of the evidence available from other alternative data analysis procedures; · Our sector experience and benchmarking assumptions: We compared assumptions, reserving methodologies and estimates of losses to expectations based on the Group's historical experience, current trends, externally-derived data and benchmarking against industry trends including information relating to Covid-19 claims that may affect claims settlement speed or amount; · Sensitivity analysis: We evaluated sensitivity analysis over key judgments and assumptions, such as large claims and the discount rates for longer tail classes of business; · Margin evaluation: We evaluated the appropriateness of the Reserve Committee’s recommended margin to be applied to the actuarial best estimate. In order to do this we assessed the Directors’ approach to setting the margin. In particular we considered the allowance for uncertainties inherent in the data and assumptions in developing the actuarial best estimate through inquiry with the Directors and with respect to our understanding of any changes in the Group’s risks and our own sector experience of approaches to setting the margin and the level of margin held by the Group’s peers; · Assessing principles: We inspected a sample of Business Interruption policy documents, other policyholder information and external information to verify assumptions in the modelling of exposure to claims as a result of the FCA Test Case outcome and the Group’s legal assessment of the extent of cover; · Tests of details: We compared samples of claims case reserves to appropriate documentation, such as reports from loss adjusters in order to test the valuation of individual claims reserves, particularly where such claims may be subject to recovery under reinsurance arrangements, particularly the Group’s GVC contract. We also inspected samples of policy documents to verify completeness and accuracy of data in the modelling of exposure to claims as a result of the FCA Test Case outcome, and considered the eligibility for recovery under the Group’s reinsurance arrangements; · Assessing transparency: We considered the adequacy of the Group’s disclosures in respect of the sensitivity of the insurance liabilities to key assumptions.
Refer to page 50 (Audit Committee Report), page 109 (accounting policy) and page 145 (financial disclosures).
Historic issue and judgement over accounting treatment: There is a risk over the existence of insurance debtors in Sweden as a result of issues identified in respect of the historic reconciliation of insurance debtor balances.
Through the course of the audit, there was a risk that the correcting adjustment made by management was incorrect and that a material misstatement remained in the Swedish insurance debtors balance.
We performed the tests above rather than seeking to rely on any of the Group's controls because the nature of the balance is such that we would expect to obtain audit evidence primarily through the detailed procedures described.
With the assistance of our own pension actuarial specialists, our procedures included: · Benchmarking assumptions and our experience: Comparing the key assumptions such as discount rate, inflation rate and mortality improvements against our independent models using external data and information relating to the pension schemes’ liability and demographic profile; · Assessing valuer’s credentials: Evaluating the Group’s external valuer’s competence, objectivity, capability and scope of work; · Assessing transparency: Considering the adequacy of the Group’s disclosures in respect of the sensitivity of the defined pension obligation to these assumptions.
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Valuation of deferred tax assets (2020: £181 million of the total deferred tax assets of £199 million; 2019: £180 million of £209 million)
Forecast-based assessment: The recoverability of the recognised deferred tax asset is dependent on the future profitability of the UK business and Royal & Sun Alliance Insurance plc as the taxable legal entity, in particular. There is inherent uncertainty involved in developing the operational plan upon which forecast future taxable profits are based and further judgement in assessing to what extent the deferred tax assets can be recovered against those forecast taxable profits. These forecasts determine the extent to which deferred tax assets are or are not recognised in the financial statements.
The effect of these matters is that, as part of our risk assessment, we determined that the recoverable amount of deferred tax assets has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole. The financial statements (note 31) disclose the sensitivity estimated by the Group.
Our procedures included: · Historical comparisons: Assessing the accuracy of the Group’s approved operating plan in relation to the forecasting process in the past. We considered whether projected margins are achievable with reference to the business's recent performance and operating plans; · Our experience: Assessing the appropriateness of the assumptions in the Group’s approved operating plan based on our own knowledge and experience of the business; · Sensitivity analysis: Sensitivity analysis of taxable profits to assumptions such as expected weather losses, the development of claims reserves, projected future expense levels, future investment returns, and the projection period used for the forecast taxable profit; · Our tax expertise: With the support of our own tax specialists and their knowledge of tax legislation, we also assessed the extent to which projected profits were taxable, in particular the Group’s assumptions about how accumulated tax losses and other similar items can be utilised within the Group against the UK business, and Royal & Sun Alliance Insurance plc as the taxable legal entity, in particular; · Assessing transparency: Assessing the adequacy of the Group’s disclosures in respect of the assumptions applied in the calculation and the adequacy of the Group’s disclosures in respect of the sensitivity of the valuation of the deferred tax asset to key assumptions.
We performed the tests above rather than seeking to rely on any of the Group’s controls because the nature of the balance is such that we would expect to obtain audit evidence primarily through the detailed procedures described.
Valuation of parent company’s investment in subsidiaries (2020: £6,276 million; 2019: £4,986 million)
Low judgement, high value: The carrying amount of the parent company’s investments in subsidiaries represents 71% (2019: 67%) of the company’s total assets. The valuation is not subject to significant judgement, however, there is estimation in the adjusting item which is dependent on assumptions of future cash flows discounted to present value. Due to its materiality in the context of the parent company financial statements, this is considered to be the area that had the greatest effect on our overall parent company audit.
Our procedures included: · Comparing valuations: We compared the market value of the Group, used as the base for the Company’s valuation, to an independent source of market capitalisation; · Internal consistency: In respect of the adjusting items, we compared the expected cash flows to the Group’s approved operating plan and considered the historical accuracy of previous projections; · Tests of detail : We independently recalculated the weighted average cost of capital used to discount the cash flows to determine the value of the adjusting items.
We performed the tests above rather than seeking to rely on any of the Company's controls because the nature of the balance is such that we would expect to obtain audit evidence through the detailed procedures described.
We previously reported a key audit matter in relation to the Group’s IT systems and control environment, and we continue to perform procedures over this matter. Further to our identification of deficiencies in certain controls in the prior years, we have not sought to place significant reliance on the operation of IT controls designed to mitigate the risk of failure to transfer data appropriately or the risk of inappropriate changes being made to data and systems. We have addressed these risks through performing additional substantive testing over and above that which would be required if reliance could be placed on IT controls. As we do not seek to place reliance on these controls, we have not assessed IT controls as one of the areas of most significance in our current year audit and, therefore, it is not separately identified as a key audit matter in our report this year.
Materiality for the parent company financial statements as a whole was set at £32.0m (2019: £31.5m), which is capped at 90% of Group materiality and with reference to net assets represents 0.4% (2019: 0.5%).
Performance materiality for the group was set at 65% (2019: 65%) of materiality for the financial statements as a whole, which equates to £22.8m (2019: £22.8m). We applied this percentage in our determination of performance materiality based on the level of identified control deficiencies during the prior period and the number of areas of significant judgement in the audit.
We agreed to report to the Audit Committee any corrected or uncorrected identified misstatements exceeding £1.75m (2019: £1.75m), in addition to other identified misstatements that warranted reporting on qualitative grounds.
Of the group's seven (2019: nine) reporting components, we subjected those located in the UK, Canada and Scandinavia to full scope audits for group purposes. The Ireland component previously in scope for full audit procedures was reduced to specific risk-focused audit procedures relating to insurance liabilities and cash during the year. Specified risk-focused audit procedures were also performed over investments in the parent company component. Both the Ireland and parent company components were not individually financially significant enough to require a full scope audit for group purposes, but did present specific individual risks that needed to be addressed. Within the Scandinavia reporting component, audits were performed by local audit teams in Denmark, Sweden and Norway.
Group Materiality £28m Range of materiality at five components (£10m-£28m) (2019: £8m to £28m)
Full scope for group audit purposes Specified risk-focused audit procedures Residual components
The Group team visited nil (2019: four) component locations (2019: UK, Ireland, Canada and Denmark) during the year due to travels restrictions as a result of the pandemic and instead increased the virtual interactions with component teams. Video and telephone conference meetings were held with the component auditors and local management since they were not physically visited. At these meetings, the findings reported to the Group team were discussed in more detail, and any further work required by the Group team was then performed by the component auditor.
We used our knowledge of the Group, its industry, and the general economic environment to identify the inherent risks to its business model and analysed how those risks might affect the Group’s and Company’s financial resources or ability to continue operations over the going concern period. The risks that we considered most likely to adversely affect the Group’s and Company’s available financial resources over this period were: · adverse insurance reserves development, potentially caused by impacts of the Covid-19 pandemic; · a deterioration in claims experience, potentially caused by market wide catastrophe event(s) including impacts of the Covid-19 pandemic; · a deterioration in the valuation of the Group’s investments arising from a significant change in the economic environment; and
We considered whether these risks could plausibly affect the liquidity in the going concern period by assessing the Directors’ sensitivities over the level of available financial resources indicated by the Group’s financial forecasts taking account of severe, but plausible adverse effects that could arise from these risks individually and collectively.
· We considered whether the going concern disclosure in note 1 to the financial statements gives a full and accurate description of the directors' assessment of going concern, including the identified risks, dependencies, and related sensitivities.
Our conclusions based on this work: · we consider that the directors’ use of the going concern basis of accounting in the preparation of the financial statement s is appropriate; · we have not identified, and concur with the directors’ assessment that there is not, a material uncertainty related to events or conditions that, individually or collectively, may cast significant doubt on the Group’s or Company's ability to continue as a going concern for the going concern period; · we have nothing material to add or draw attention to in relation to the Directors’ statement in note 1 to the financial statements on the use of the going concern basis of accounting with no material uncertainties that may cast significant doubt over the Group and Company’s use of that basis for the going concern period, and we found the going concern disclosure in note 1 to be acceptable; and
· the same statement under the Listing Rules is materially consistent with the financial statements and our audit knowledge.
· Considering remuneration incentive schemes and performance targets for management and directors.
· Using professionals with forensic knowledge to assist us in identifying fraud risks and designing appropriate procedures based on discussions of the circumstances of the Group and Company.
We communicated identified fraud risks throughout the audit team and remained alert to any indications of fraud throughout the audit. This included communication from the group to full scope component audit teams of relevant fraud risks identified at the Group level and request to full scope component audit teams to report to the Group audit team any instances of fraud that could give rise to a material misstatement at group.
Identifying and responding to risks of material misstatement due to non-compliance with laws and regulations We identified areas of laws and regulations that could reasonably be expected to have a material effect on the financial statements from our general commercial and sector experience, and through discussion with the directors and other management (as required by auditing standards), and from inspection of the Group's regulatory and legal correspondence and discussed with the directors and other management the policies and procedures regarding compliance with laws and regulations.
As the Group is regulated, our assessment of risks involved gaining an understanding of the control environment including the entity’s procedures for complying with regulatory requirements.
In addition, as with any audit, there remained a higher risk of nondetection of fraud, as these may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal controls. Our audit procedures are designed to detect material misstatement. We are not responsible for preventing non-compliance or fraud and cannot be expected to detect non-compliance with all laws and regulations.
Strategic report and directors’ report Based solely on our work on the other information: · we have not identified material misstatements in the strategic report and the directors’ report; · in our opinion the information given in those reports for the financial year is consistent with the financial statements; and
Our work is limited to assessing these matters in the context of only the knowledge acquired during our financial statements audit. As we cannot predict all future events or conditions and as subsequent events may result in outcomes that are inconsistent with judgements that were reasonable at the time they were made, the absence of anything to report on these statements is not a guarantee as to the Group’s and Company’s longer-term viability.
We are required to review the part of Corporate Governance Statement relating to the Group’s compliance with the provisions of the UK Corporate Governance Code specified by the Listing Rules for our review. We have nothing to report in this respect.
7. We have nothing to report on the other matters on which we are required to report by exception Under the Companies Act 2006, we are required 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
8. Respective responsibilities Directors’ responsibilities As explained more fully in their statement set out on page 93, the directors are responsible for: the preparation of the financial statements including being satisfied that they give a true and fair view; such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; assessing the Group and parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and using the going concern basis of accounting unless they either intend to liquidate the Group or the parent Company or to cease operations, or have no realistic alternative but to do so.
9. The purpose of our audit work and to whom we owe our responsibilities 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 Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members, as a body, for our audit work, for this report, or for the opinions we have formed.
Final dividend proposed1 21 – 15.6p 1. The 2019 proposed final dividend of 15.6p was suspended. Refer to note 21 for further information.
Fair value gains on available for sale financial assets net of tax 22 98 121
Movement in property revaluation surplus net of tax 22 – 1
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Other comprehensive income/(expense) (note 22) – – – – – 107 – (64) (86) (43) (6) (49)
Share-based payments (note 19/34) 2 – – – – – – – 17 19 – 19
Total equity and liabilities 20,706 19,962 1. Consistent with the consolidated statement of changes in equity, equity attributable to owners of the Parent Company is a new line item, which combines the shareholders equity and Tier 1 notes line items that were disclosed in the 2019 Annual Report and Accounts.
The financial statements were approved on 25 February 2021 by the Board of Directors and are signed on its behalf by: Charlotte Jones Group Chief Financial Officer
1) Basis of preparation The consolidated financial statements have been prepared on a going concern basis and in accordance with International Accounting Standards (IAS) in conformity with the requirements of the Companies Act 2006 and in accordance with International Financial Reporting Standards (IFRS) adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union. The consolidated financial statements are prepared on an historical cost basis. Where other bases are applied, these are identified in the relevant accounting policy.
Based on this review no material uncertainties that would require disclosure have been identified in relation to the ability of the Group to remain a going concern for at least the next twelve months, from both the date of the consolidated statement of financial position and the approval of the consolidated financial statements.
In line with industry practice, the Group’s consolidated statement of financial position is not presented using current and non-current classifications, but broadly in increasing order of liquidity.
The assets and liabilities considered as current include cash and cash equivalents, insurance and reinsurance debtors, and elements of financial investments, insurance contract liabilities and reinsurers’ share of insurance contract liabilities.
The remaining balances are of a mixed nature. The current and non-current portions of such balances are in the notes on pages 107 to 173 or in the risk and capital management note (note 6).
Basis of preparation and significant accounting policies continued 2) Significant accounting estimates and judgments In preparing these consolidated financial statements, management has made judgments and calculated estimates in accordance with Group’s accounting policies. Estimates are based on management’s best knowledge of current circumstances and expectation of future events and actions, which may subsequently differ from those used in determining the accounting estimates.
The most significant estimates are described below. Additional information on estimation techniques and assumptions is presented in the relevant note in order to provide context to the figures presented.
· Measurement of defined benefit obligations: the use of key actuarial assumptions, such as discount rates, inflation rates and mortality rates. Refer to note 41 for additional information.
· Recognition of deferred tax assets: availability of future taxable profits against which deductible temporary differences and tax losses carried forward can be utilised. Forecast future taxable profits include the potential impact of Covid-19. The proposed takeover of RSA has increased the level of uncertainty in forecast profits, however this has not been taken into account when valuing the deferred tax asset at 31 December 2020 as there is no certainty over what actions or decisions the purchaser may take if the acquisition completes. Sensitivities have been used to assess the impact of changes in the key assumptions supporting profit forecasts, and further specific downside scenarios have been modelled in the current year to capture the heightened estimation uncertainty in the established profit forecast due to the current economic environment. Refer to note 31 for additional information.
· Valuation of level 3 financial assets and investment properties: use of significant unobservable inputs. The current ongoing economic uncertainty means that asset valuation techniques that rely on unobservable inputs have a greater degree of estimation uncertainty. Refer to note 27 for additional information.
The areas where management has applied judgment are as follows: · Classification of financial assets in the fair value hierarchy: management apply judgment when deciding to classify financial instruments for which immediate prices are available as being level 1 in the fair value hierarchy and financial assets for which observable prices are also available as level 2 on the basis of a lower level of activity in the market from which those prices are quoted. The level of trading activity in certain markets has been impacted by Covid-19 and the classification has been reviewed and updated accordingly. Refer to note 27 for additional information.
3) Adoption of new and revised accounting standards There are a small number of narrow scope amendments to standards that are applicable to the Group for the first time in 2020, none of which have had a significant impact on the consolidated financial statements.
The effective date for IFRS 17 is two years later than in the original version and an equivalent change has been made to IFRS 4 to extend the exemption from applying IFRS 9 ‘Financial Instruments’ (IFRS 9).
It is not yet possible to quantify the impact that implementing IFRS 17 will have on the measurement of insurance, reinsurance and related transactions and balances.
The Group meets the criteria and has elected to defer the application of IFRS 9 to the reporting period beginning on 1 January 2023, alongside IFRS 17.
5) Significant accounting policies The significant accounting policies used in the preparation of these consolidated financial statements, as set out below, have been applied consistently to all periods presented in these consolidated financial statements, unless otherwise stated.
Basis of preparation and significant accounting policies continued 5) Significant accounting policies continued Gross claims incurred and insurance contract liabilities Gross claims incurred represent the cost of agreeing and settling insurance claims on insurance contracts underwritten by the Group. Provisions for losses and loss adjustment expenses are recognised at the estimated ultimate cost, net of expected salvage and subrogation recoveries when a claim is incurred.
The provisions for losses and loss adjustment expenses, and related reinsurance recoveries, are discounted where there is a long period from incident to claims settlement or when nominal interest rates are high and where there exists a suitable claims payment pattern from which to calculate the discount. In defining those claims with a long period from incident to claims settlement, an average period of settlement of six years or more has been used as a guide. The discount rate used is based upon an investment return expected to be earned by financial assets which are appropriate in value and duration to match the provisions for insurance contract liabilities being discounted during the period expected before the final settlement of such claims.
At the end of each reporting period tests are performed to ensure the adequacy of the Group’s insurance contract liabilities by considering the cash flows associated with the provision for unearned premium net of related DAC. In performing these tests, best estimates of future contractual cash flows, including loss adjustment and administrative expenses as well as investment income on financial assets backing such liabilities are used. Any deficiency is charged to the consolidated income statement immediately by establishing a provision for liability adequacy known as the unexpired risk provision. The requirement for an unexpired risk provision is assessed in aggregate for business classes which are managed together and where there are no restraints on the ability to use assets held in relation to such business to meet any of the associated liabilities.
Further information on net claims can be found in note 11, and insurance contract liabilities in note 39.
Further information can be found in notes 26, 27 and 28.
Category Financial instrument Description Subsequent measurement Recognition of change in fair value
Designated fair value through profit and loss (FVTPL) on initial recognition
Where the investment return on equity or debt securities is managed on the basis of the periodic cash flows arising from the investment
Cash and cash equivalents Consist of cash and highly liquid investments that are readily convertible into a known amount of cash, are subject to insignificant risk of changes in value and have a maturity date of 90 days or less from the date of acquisition
Loans, reinsurance deposits, other deposits and financial assets arising from non-investment activities, and loans made for investment purposes
Issued debt Financial liabilities with fixed or determinable payments and maturity date
Acquired or incurred principally for the purpose of selling or repurchasing in the near term
Hedge of fair value – recognised in the income statement. The change in fair value of the hedged investments (classified as AFS) attributable to the hedged risk is transferred from the revaluation reserve to the income statement
Unrealised gains and losses on AFS investments are recognised in other comprehensive income, except for impairment losses and foreign exchange gains and losses on monetary items which are recognised in the consolidated income statement. On derecognition of an investment classified as AFS, the cumulative gain or loss previously recognised in other comprehensive income is recognised in the consolidated income statement. Further information can be found in note 10.
An impairment loss in respect of debt instruments is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate of the instrument and is recognised in the consolidated income statement. Interest on the impaired asset continues to be recognised using the effective interest rate method.
IFRIC 23 is applied to the recognition and measurement of both current and deferred tax assets and liabilities. In cases where the applicable tax regulation is subject to interpretation, the positions taken in tax returns are recognised in full in the determination of the tax charge in the financial statements, if the Group considers that it is probable that the taxation authority will accept those positions. Otherwise, provisions are established based on management’s estimate and judgement of the likely amount of the liability/recovery by providing for the single best estimate of the most likely outcome or the weighted average expected value where there are multiple outcomes.
A defined contribution scheme is a pension scheme under which the Group pays fixed contributions and has no further payment obligations once the contributions have been paid. Contributions to defined contribution pension schemes are charged in the consolidated income statement in the period in which the underlying employment services are provided to the Group.
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· The past service costs and gains or losses on settlement: these are changes to the obligations already established for past service costs that have arisen from an amendment to the terms of the scheme or a curtailment of the benefits payable by the scheme. These are recognised at the earlier of when the terms of the scheme are amended or the curtailment occurs or, where applicable, when the Group recognises related restructuring costs or termination benefits.
Customer related intangible assets comprise acquired renewal rights and customer lists. The useful economic lives are generally between one and ten years and are estimated considering relevant metrics such as customer retention rates and contract length. The asset is amortised on a basis which reflects usage of economic benefit.
Impairment of goodwill, other intangible assets, and internally developed and externally acquired software Goodwill and intangible assets not yet available to use are subject to an impairment test on an annual basis or more frequently if there has been an indication of impairment. Other intangible assets, and internally developed and externally acquired software, are reviewed for indications of impairment on an annual basis and are subject to an impairment test only if there is an indication of impairment.
Reorganisation costs Reorganisation costs represent external and clearly identifiable internal costs that are necessarily incurred and directly attributable to the Group’s restructuring programme. The aim of the restructuring programme is to both reduce operating costs and improve profitability. Employee termination costs are only recognised when they are part of a restructuring programme that has been communicated to those affected or when a detailed plan of redundancies is announced. Reorganisation costs that are uncertain in terms of their amount and timing are included within provisions (see note 42).
Risk and capital management 6) Risk and capital management Insurance risk The Group is exposed to risks arising from insurance contracts as set out below: A) Underwriting risk
The Group establishes a provision for losses and loss adjustment expenses for the anticipated costs of all losses that have already occurred but have not yet been paid. Such estimates are made for losses already reported to the Group as well as for the losses that have already occurred but are not yet reported together with a provision for the future costs of handling and settling the outstanding claims.
The Group seeks to reduce its reserving risk through the use of experienced, regional actuaries who estimate the actuarial indication of the required reserves based on claims experience, business volume, anticipated change in the claims environment and claims cost. This information is used by local reserving committees to recommend to the Group Reserving Committee the appropriate level of reserves for each region. This will include adding a margin onto the actuarial indication as a provision for unforeseen developments such as future claims patterns differing from historical experience, future legislative changes and the emergence of latent exposures. The Group Reserving Committee reviews these local submissions and recommends the final level of reserves to be held by the Group. The Group Reserving Committee is chaired by the Group Chief Financial Officer and includes the Group Chief Executive, Group Underwriting Director, Group Chief Actuary and Group Chief Risk Officer. A similar committee has been established in each of the Group’s primary operating segments. The Group Reserving Committee monitors the decisions and judgments made by the business units as to the level of reserves to be held. It then recommends to the Group Board via the Group Audit Committee the final decision on the level of reserves to be included within the consolidated financial statements. In forming its collective judgment, the committee considers the following information: · Emerging trends where Covid-19 has caused changes in experience along with analysis to demonstrate the impact on reserving estimates. Some areas such as business interruption, travel and wedding and events have observed direct claims, whereas many other lines have seen material indirect changes in policyholder behaviour such as reduced motor frequency during lockdown. Changes in experience such as reduced claims frequency can result in a different mix or magnitude of claims and, therefore, exhibit different claims and runoff characteristics compared to historic experience.
Credit risk Credit risk is the risk of loss resulting from the failure of a counterparty to honour its financial or contractual obligations to the Group. RSA ensures that assets are broadly matched in duration and currency with insurance liabilities to hedge volatility. The Group’s credit risk exposure is largely concentrated in its fixed income investment portfolio favouring high quality fixed income bonds reducing the risk of default. Also to a lesser extent credit risk exists in its premium receivables and reinsurance assets.
Credit risk is managed at both a Group level and at a local level. Local operations are responsible for assessing and monitoring the creditworthiness of their counterparties (e.g. brokers and policyholders). Local credit committees are responsible for ensuring that these exposures are within the risk appetite of the local operations. Exposure monitoring and reporting for fixed income investments and premium receivables is embedded throughout the organisation with aggregate credit positions reported and monitored at Group level. In addition, the Group’s Credit Ratings Review Committee reviews the credit ratings of investments with a focus on material exposures and unrated investments.
The Group has offered payment relief to customers experiencing financial difficulty as a result of Covid-19, and has increased credit risk monitoring to proactively manage the financial risk from the current economic environment and the provision for bad debts is being assessed on a regular basis.
The Group Reinsurance Credit Committee oversees the management of credit risk arising from the reinsurer failing to settle its liability to the Group. 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 rarely used and are excluded from the Group’s list of approved reinsurers. The exceptions are fronting arrangements for captives, where some form of collateral is generally obtained, and some global network partners. At 31 December 2020 the extent of collateral held by the Group against reinsurers’ share of insurance contract liabilities was £36m (2019: £36m), which in the event of a default would be called and recognised on the balance sheet.
Of which would qualify as SPPI under IFRS 91 5,030 2,125 1,852 959 106 1 10,073