RSA uses Alternative Performance Measures (APMs) including certain underlying measures to help explain its business performance and fi nancial position. Where not identifi ed in the body of this report, further information is set out in the appendix on pages 177 to 186.
RSA is a leading international general insurer, focused on three complementary markets: Scandinavia, Canada, and the UK & International1. With strong regional brands and emphasis on operational and performance improvement, we are proud to be a customer focused, agile and resilient business.
We are one of the world’s longest-standing general insurers, providing peace of mind to individuals and protecting businesses from risk for more than 300 years.
We are committed to delivering great service and outcomes for our customers.
Running an effi cient, productive business helps us to remain competitive, invest for the long term and achieve sustained value for our shareholders.
We are investing in our underwriting tools and capabilities, so we can constantly improve our understanding and pricing of the evolving risks that our customers face.
RSA and our customers operate within a turbulent and challenging landscape. The Group is responding to a changing macroeconomic, political and competitive environment with focus and agility.
The growing frequency, severity and sophistication of cyber-attacks has implications for all businesses. While no business is immune, RSA has a strong framework in place to understand and mitigate the potential threats, spanning the risks associated with theft or loss of customer information as well as disruption to business operations. We continue to invest in people and technology to enhance our cyber security capabilities and protect the Group from evolving threats. For our clients, we have developed several cyber specifi c insurance products, which include risk assessments and data breach response planning.
Alongside new risks, the old remain: we bore our share of weatherrelated claims during the year, with extremes of cold and heat affecting our core markets of the UK and Canada. This had an adverse impact on our combined ratio as we helped our customers return to normal.
Despite challenges, now is a time of opportunity for insurers to do our job more effectively than ever. New developments in data and technology help us to get to know our customers better, serve them more quickly, price more precisely, and support efforts to manage risks more proactively.
Addressing these opportunities means dedicating our resources to business lines where we have the expertise and capacity to deliver sustainable value for our customers and shareholders. RSA’s successes in the last fi ve years have been underpinned by a focus on those areas where we have the strength and expertise to deliver best-in-class performance. In recognition of recent poorer than targeted underwriting results, particularly in the UK business, we took steps in the second half of 2018 to exit a number of portfolios where we no longer see this opportunity. Most signifi cantly, we have streamlined our London Market business to focus on a smaller number of core specialisms.
RSA is focused not only on delivering great performance, but on doing business in the right way. As a large business, employer and insurer, we recognise our infl uence and know that our actions matter to the communities and partners we work with.
We continue to prioritise improvements to diversity around the Group. We published our UK Gender Pay Gap fi gures, accompanied by a robust set of actions intended to improve the opportunities for women across our business.
RSA exists to help protect customers against risk and to serve shareholders well. In so doing, we contribute to society at large.
We want RSA to be a place where fulfi lling careers can be built.
Meanwhile, Joseph Streppel, Chair of RSA’s Investment Committee, will retire from the Board in May. We thank Jos for his considerable contribution over the last seven years. Thanks and best wishes are also due to Steve Lewis, who led our UK & International business for the past four years, and left RSA in February.
2018 was also the fi nal year of our Group corporate responsibility strategy, ‘Making things better, together’. We undertook a wide review of RSA’s responsible business activities to develop our new fi ve-year strategy, ‘Confi dent Futures’, of which more details can be found later in this report and in our accompanying corporate responsibility report.
“ RSA is focused not only on delivering great performance, but on doing business in the right way.”
On behalf of the Board, I would like to extend thanks to our Chief Executive, Stephen Hester, and all our executive management teams for their thoughtfulness, rigour and positivity over the course of 2018. Together they have taken decisive action when required, and their continued focus on building the underlying capabilities needed to develop our business for the long-term gives me great optimism. It is a privilege to work with expert and motivated colleagues, who I am sure will secure RSA’s ongoing success. I thank all employees for their hard work this year.
I would also like to thank all our shareholders for your continued support, and look forward to welcoming you to our Annual General Meeting in May.
Financial: £4.7bn of capital is employed within RSA to support customers and generate shareholder returns.
Expertise: Our intellectual capital is found in the underwriting expertise of our people, enhanced through ongoing technical training and capability building.
People: We have 12,244 employees worldwide, whose skills we value and invest in.
Our strategy is executed within a robust risk management (see pages 40 to 43) and governance framework (see page 55).
A balanced portfolio: We have complementary leadership positions in the major general insurance markets of Scandinavia, Canada and the UK, together with our international business. We are well balanced between personal and business customers, across our geographies, product lines and distribution channels. This scale and breadth help us manage the impact of volatility on the Group more effectively.
2 Effi cient multi-channel distribution: Effi cient access to our chosen customers is key to continuing to develop our business. We distribute our products in two ways: directly to customers, and through brokers and affi nity partnerships.
4 Proactively managing claims: We are committed to settling claims quickly and smoothly. We carefully manage our indemnity spend to keep the cost of claims effi cient.
c.90% Percentage of RSA employees who believe there is good collaboration and teamwork
We seek to deliver value to our shareholders by generating attractive sustainable returns.
Our performance target of 13–17% return on tangible equity represents an attractive shareholder return both relative to cost of capital and insurance industry norms. RSA’s shareholders have benefi ted from a strong combined operating ratio, dividend growth of 7% and an increase in share price over the past fi ve years of 20%1. The business model on pages 06 and 07 provides the framework to deliver value to our shareholders.
Good business starts with our customers and we strive to keep them at the heart of what we do. While the type of customer we serve ranges from individuals through to large corporations, our ambition to provide support and excellent service is the same. We aim to be proactive and digitally enabled and provide tailored products that address evolving customer demands and needs. We also created a UK Customer Committee which was established to help ensure we promote and secure positive outcomes for our customers.
In approving the 2019 stakeholder engagement plan, the Board confi rmed that the key priorities for stakeholder engagement in 2019 are shareholders, customers, employees and regulators, and its commitment to continuing with the current level of direct and indirect engagement with other stakeholders. Pages 50 and 51 provide highlights of the Board’s activities during the year in relation to engagement with stakeholders, together with details of how the Board’s decisions are informed by the interests and views of its shareholders and other stakeholders.
Details of the Board’s engagement with employees are set out on page 56.
In 2018, the Group invested £1.8m in local communities through payments to charities, employee fundraising and supporting employee volunteering. To fi nd out more on engagement with communities and our impact on the environment see pages 35 to 37.
Our suppliers are critical to our business. We aim to treat suppliers fairly and consistently, for example by offering equal payment terms between suppliers.
RSA is committed to supporting fully the pension schemes and, in 2018, approved the funding agreements for the Group’s two defi ned benefi t pension schemes.
“ The Board continues to have constructive engagement with our regulators, ensuring that they gain a comprehensive view of the Group’s governance priorities and that we understand the issues of interest to them.”
Responding to changing market dynamics and insurance themes Well placed to support customer and industry needs now and into the future
Growth in global economies remains good, but with some signs of slowing
The global economy continues to show good growth, projected to reach 3.5% in 2019 according to the
TECH Digitisation, big data and new technologies are creating opportunities and threats for incumbents
Digitisation and the growing availability and complexity of data is enabling operational improvements, shifting customer expectations, and introducing new areas for regulatory scrutiny. Developments in data analytics, artifi cial intelligence and automation can provide new opportunities for more sophisticated risk management and effi cient customer services, but also provide challenges as the insurance industry seeks to keep up with innovations.
· We are working to become more competitive through harnessing big data and advanced modelling capability to assess and price risk more effi ciently.
· RSA takes the protection and integrity of customer data very seriously and has a strong framework in place to understand potential threats, as well as to manage and mitigate potential risks.
SOCIAL Societal changes are driving changes in consumer expectations and business needs
Societal change continues apace as developments in technology and growing interconnectivity drive changes in customer behaviour. Consumers now expect a seamless digital service, with quick responses and at a time that suits them.
· RSA’s core values and social purpose are to protect our customers against risk and ensure that the products and services we offer them meet their changing needs.
· Our international Commercial Lines business is only modestly exposed to trade volumes.
RSA’s reinsurance treaties ensure our exposure to weather events remains within appetite.
The cyber insurance market is rapidly expanding as the frequency, severity and sophistication of attacks increases: RSA takes protection and integrity of customer data very seriously. We have a strong framework in place to understand potential threats, and to manage and mitigate potential risks.
The Group has extended its suite of cyber products for business, and continues to engage with customer demand.
RSA has some protection against volatility and large losses, as industry experience and knowledge grows.
RSA continuously invests in technology, increasing data analytics capabilities, increasing pricing sophistication and digitising operations.
We have planned for a range of potential impacts on customers, compliance, strategy and structure, including those associated with a no-deal Brexit.
Sensitivities to potential macroeconomic shocks are considered in the Risk and Capital Section of
We are confi dent in our preparations and continue to monitor developments to refi ne our plans, although some impacts cannot be meaningfully anticipated and mitigated at this stage.
New entrants and disruptive technology are changing business models and the value chain: Global Fintech investment has been high for several years. UK Personal Lines has already seen disruption with aggregators enabling consumers to seek the lowest possible price at the touch of a button.
Europe, the expectation is that disruptors will gain momentum in selected areas.
We seek to refl ect emerging infl ation quickly in pricing or management of claims supply chain.
Delivering profi t growth in a challenging market In the face of some disappointments in 2018, we have taken decisive actions to improve performance and we expect a good recovery in 2019.
In 2018, RSA delivered growth in profi ts and earnings per share, further dividend growth and underlying return on tangible equity of 12.6%, substantially above our cost of capital.
Insurers are exposed to fi nancial markets, and through them to political and macroeconomic challenges, despite core insurance activities being relatively well insulated in themselves. From RSA’s perspective, 2018 was comparatively uneventful in fi nancial market impacts; although there was an adverse FX translation effect (4% of underlying EPS) from sterling strength, and bond yields did not hold the increases initially forecast as political and trade worries impacted markets in the second half of the year. Volatility remains a risk for 2019, not least in the UK via the continuing Brexit debate. RSA earns the large majority of its profi ts overseas which is at least a comfort.
Business improvement: our pursuit of best-in-class operating metrics and capabilities continues to drive much activity. This is grouped across three areas – customer service, underwriting and cost effi ciency – and enabled by data, technology and our own human capital.
Where underlying profi tability is good, we have been successful at growing our business and receiving positive customer support. Personal Lines policy counts rose in 2018 in all regions. We also were successful in winning a major bancassurance partnership in Canada with Scotiabank.
Cost effi ciency remains a critical element of competitiveness. RSA’s excellent progression continued in 2018 and our cost programmes reached gross annual savings of £460m, meeting our > £450m target a year early. This effort now becomes ‘business as usual’ but has contributed a 4 point improvement to our combined ratio since 2013.
Underwriting actions: substantial actions were taken in 2018 and are continuing to address areas of underperformance in underwriting: · In Personal Lines, the primary challenge was weather volatility which is hard to specifi cally manage. Canada was our worst affected territory. Auto Lines claims infl ation also remains a market challenge. Extensive rate increases are going through in affected portfolios, together with selected broker cancellation where rate alone is unlikely to have the required result.
Financial results: at a headline level, pre-tax profi ts rose 7% to £480m and earnings per share rose 21%. Underlying return on tangible equity was 12.6% (versus 13-17% target range).
Nevertheless, it was a disappointing year fi nancially with the fi rst decline in underlying profi ts since 2013. Underlying EPS was 34.1p per share (2017: 43.5p), although proforma results were c.42p1.
The fundamentals of our business are solid. Overall premiums rose 1%2 3 on an adjusted basis (down 3% on a reported basis), driven by growth in Personal Lines.
As in 2017, our UK & International business recorded poor results – a combined ratio of 101.4%. Proforma for business exits, this improves to 97.4%1 and within it were excellent Ireland and Middle East performances.
We have proposed a fi nal dividend of 13.7p per share making 21p per share total for 2018, up 7%. This represents a 62% payout of underlying EPS and a 50% payout of proforma EPS1 and in so doing we are aiming to smooth the impact on shareholders of underwriting volatility in the light of our belief in improved future results. Our strong capital position and in-year free capital generation support this stance. RSA’s dividend policy is unchanged, targeting 40-50% ‘normal’ payout levels with additional possible where free capital generation so supports.
Looking forward 2018’s challenges have not changed our view of RSA’s attractive performance potential or any of our targeted fi nancial metrics. We recognise the importance of demonstrating resumed progress in 2019 and believe the actions are in place to support that. No business is free of challenge, and the insurance industry will undoubtedly continue to present volatility. We nevertheless are confi dent that good improvement can be achieved.
But all this has its limits. We are inescapably in a capital deploying, risk absorbing business that will have some volatility.
We are growing in many parts of our business where the combination is right – for example, Personal Lines in Sweden and Denmark and our Johnson business in Canada. In other areas, such as London Market Specialty and Wholesale Lines, we are trimming back activities in the face of diffi cult market conditions. Here, our goal is to rebuild the shareholder result, so we have a stable platform to grow customer business once more.
We make insurance easy by putting our customers at the heart of our business.
· In July 2018, we announced an exciting new distribution partnership between Johnson and Scotiabank, one of the largest banks in Canada. They cited Johnson’s commitment to customers as a key factor in selecting RSA.
· In Canada, where the broker channel makes up 67% of the business, RSA PRO3 was launched in May and is on track to drive a channel shift to 60% digital interaction by the end of 2021.
· The 2018 underwriting result was heavily impacted by adverse weather and large losses, which were 2.6% higher in aggregate than the 5 year average1.
· However, we are confi dent that we are taking the right actions. We are exiting underperforming lines of business and improving underwriting, pricing accuracy and risk management in areas where sustained profi tability can be achieved.
· Premiums in our most profi table lines are growing, with Swedish Personal Lines up 8%2, Johnson up 6%2 and 123.ie Motor up 2%2.
· We have successfully rolled out Radar Live to all Swedish Personal Lines and 85% in Canada Personal Lines. This enables more complex algorithms in rating and signifi cantly increases speed to market.
· We have delivered capability enhancements to our people, with twice as many employees trained in 2018 compared with 2017. We introduced a mandatory training module relating to a key element of the underwriting process. We also developed RSA’s fi rst Group-wide technical induction programme.
The I&E phase of underwriting is where the underwriter determines the overall quality of the case based on an evaluation of the information provided. Throughout 2018, the RSA Technical Academy has signifi cantly increased the number of training sessions delivered on I&E.
Managing our cost base effi ciently Running an effi cient, productive business helps us to remain competitive, invest for the long term and achieve sustained value for our shareholders.
· In 2018, Group written underwriting controllable costs of £1,343m were down 2%1.
· Scandinavia earned controllable expense ratio down 2 points versus 2017; costs still higher in Norway.
· Improved digital and online self-service capabilities driving lower call volumes: use of Johnson self-service facilities increased 34% year-on-year; Claims Automation in the UK is powered by nearly 30 robots (generating an overall FTE saving of 18); and online sales in Sweden rose by 53%.
· Zero based budgeting (ZBB) is being implemented across regions to drive deeper understanding and stronger control of our cost base. ZBB is building a culture of ongoing cost management and continuous improvement.
Our people have helped us save costs by implementing more effi cient business processes
– the ratio of underwriting costs (claims, commissions and expenses) expressed in relation to earned premiums.
The COR is used as a measure of underwriting effi ciency across the industry. The aim is to achieve a COR
as sustainably low as possible – that is without uncompetitive pricing or compromising reserves.
RSA uses Alternative Performance Measures (APMs) including certain underlying measures to help explain its business performance and fi nancial position.
This is the underlying loss ratio (net incurred claims and claims handling expense as a proportion of net earned premiums)
of our business prior to volatile impacts from weather, large losses and prior year reserve development.
Improvements in the business mix together with investments in digitally enabled underwriting and claims excellence are targeted at reducing the attritional loss ratio.
We target improving attritional loss ratios in the medium term in line with best-in-class performance.
A key measure of the underlying earnings power of the Group as it excludes shorterterm and temporary changes, such as restructuring costs, such as impairment of goodwill.
To read more about executive variable remuneration, including the set of fi nancial and non-fi nancial performance measures on which it is based, please turn to pages 66 to 91.
3 Emissions data for 2016-2017 has been restated in accordance with GHG protocol guidelines.
Operating profi t attributable to ordinary shareholders less interest costs and underlying tax, expressed in relation to opening tangible shareholders’ funds, i.e.
A key measure of shareholder value and one that informs overall valuation in the insurance sector.
This is a key statutory measure of the overall earnings performance of the Group that can be retained or distributed.
Reduction of controllable expenses is a key element of the Group’s strategy. We monitor both the absolute level of expense and the expense ratio as part of the ongoing performance focus.
A measure of the amount of business that is renewed with us each year.
Gross tonnes of carbon dioxide equivalent per full-time equivalent (FTE) employee.
We endeavour to reduce our emissions as far as possible by operating effi ciently, procuring sustainable alternatives and promoting sustainable business practices.
In 2019 we will be setting a new carbon emissions target in line with our Confi dent
We will continually seek opportunities to improve energy effi ciency and reduce our environmental impact.
RSA has seen increases in both headline profi t after tax and dividends in 2018. Profi t after tax is at its 3rd highest level for the past 10 years, demonstrating the progress we have made as a Group. However, our underwriting profi t is down for the fi rst year since 2013 which is disappointing given the high expectations we have set ourselves. Some of the decrease is down to the nature of insurance, as best demonstrated by weather (£76m1 higher than 2017). There will always be some volatility, but there are also areas across our businesses where we know we can do better, particularly in the UK.
2018 has also seen successes for RSA and we mustn’t forget this. Overall, our Personal Lines businesses (which represent 57% of the Group) are performing well with a combined ratio of 92.4% despite 2.5% higher weather costs over 2017.
Commercial Lines business remains challenging, particularly in the UK but also across our other regions. Market conditions continue to be tough and large losses have been elevated. This has driven some of our decision making to exit certain portfolios. These decisions have not been taken lightly but we believe they are required for us to reduce our exposure to volatility in the UK.
In addition to our existing metrics, this year we have provided additional proforma profi tability metrics to show the result for our ongoing businesses, given the signifi cant portfolio exits undertaken in the UK Commercial Lines businesses and our reinsurance programme changes. The aim of this is to enable better assessment of potential future performance, although recognising that the full benefi t of our exits will only be realised in 2020. This of course doesn’t change the 2018 reported numbers.
· Underlying return on tangible equity 12.6% (2017: 15.5%) versus 13-17% target range.
· Group written controllable costs down 2% to £1,343m at constant FX. With gross annual savings of £460m since the beginning of 2013, we have achieved the Group target of £450m savings a year early and will now move our cost effi ciency efforts into ‘business as usual’ mode.
· Capital levels remain strong with a Solvency II coverage ratio of 170% (31 December 2017: 163%) and tangible equity of £2.9bn (31 December 2017: £2.8bn).
· Final dividend of 13.7 pence per ordinary share bringing total 2018 dividends to 21 pence per ordinary share (up 7%) representing a 62% payout ratio of underlying earnings.
Scandinavian premiums were down 1% at reported FX but up 2% at constant FX. Attractive growth in Sweden was partly offset by contraction in Norway. Personal Lines policies-in-force (PIFs) were up 1%, while Commercial Lines volumes (excluding rate) were down 8%.
Canadian premiums were up 2% at reported FX and 6% at constant FX. The region continued the positive growth trends seen in 2017, with Personal Lines PIFs up 1% and Commercial Lines volumes up 1% (excluding rate). Retention is particularly strong with both Johnson, our direct and affi nity channel, and Personal broker improving over the last year to 90% and 89% respectively.
Current year underwriting profi t was £85m (2017: £237m). The Group attritional loss ratio of 55.8% was 0.5 points higher than 2017. However, this reduces to 0.2 points4 higher when adjusted for the impact of changes in 2018 reinsurance. There were increases in Scandinavia (0.7 points), improvement in Personal Lines more than offset by deterioration in Commercial Lines and Canada (1.3 points) due to higher mid-sized losses in Household and claims infl ation in Commercial Auto. The UK & International loss ratio reduced by 0.8 points4 in 2018, when adjusted for changes in reinsurance, and includes a 4.1 point improvement in Household refl ecting our actions to address the ‘escape of water’ issues in H2 2017. Any claims infl ation experienced in 2019 as a result of ‘no deal’ Brexit due to exchange rate volatility or supply chain diffi culties will be monitored closely, with pricing action taken where appropriate.
Group prior year profi t of £165m provided a 2.6 point benefi t (2017: 2.8 points) to the combined ratio, and included positive development from each region.
2 Proforma for UK exits and/or reinsurance, see defi nition on pages 185 to 186.
3 Underlying measure, please refer to page 183 for further information.
Underlying return on tangible equity (%) ◊ 12.6 15.5 1 Underwriting result for Canada & UK & International stated on a proforma basis is £53m and £77m respectively (combined ratio 96.7% and 97.4%). See pages 185 and 186 for further details.
On a proforma basis the combined ratio for the UK & International was 97.4%1, Canada was 96.7%1 and the Group was 94.6%1.
The investment result was £275m (2017: £284m) with investment income of £322m (2017: £331m), investment expenses of £14m (2017: £13m) and the liability discount unwind of £33m (2017: £34m).
Interest costs were £25m (£39m including the Tier 1 issuance), down from £43m in 2017. The reduction refl ects the debt restructuring actions taken in 2016 and 2017. From 2019, changes to lease accounting (IFRS 16), mainly on properties, will add c.£7m to this line. Coupon costs of £14m (2017: £11m) for the 2017 Tier 1 issuance are presented at the bottom of the management basis Income statement (shown in this section of the Annual Report) as ‘other equity costs’, as per accounting rules.
Other non-operating charges were £12m (2017: £172m). Net gains of £47m in 2017 included a £66m gain relating to the UK Legacy disposal (mainly mark-to-market of the assets transferred to the buyer) and a £22m charge relating to the commutation of the Group’s adverse development reinsurance cover. 2017 also included a charge of £59m relating to the premium paid on the retirement of c.£600m in high coupon debt.
The Group reported a tax charge of £108m for 2018, giving an effective tax rate (ETR) of 23% (2017: 28%). The tax charge largely comprises tax payable on overseas profi ts. The Group underlying tax rate for 2018 was 20% (2017: 22%).
The carrying value of the Group’s deferred tax asset at 31 December 2018 was £234m (2017: £276m), of which £189m (2017: £217m) was in the UK. The decrease in 2018 is mainly due to a reduction in the IAS 19 defi cit on a UK pension fund. At current tax rates, a further c.£261m (2017: £229m) of deferred tax assets remain available for use but not recognised on balance sheet; these are predominantly in the UK and Ireland.
In 2019, we continue to expect the Group’s ETR and underlying tax rate to trend towards 20% given the scale of the unrecognised UK tax assets.
Our tax strategy supports our Group objective to be a responsible business with a positive impact on society. We pay and collect tax in the markets where we operate and comply with all statutory obligations. We understand the importance of transparency and seek to have an open relationship with the tax authorities.
For more details please refer to our published Group tax strategy: www.rsagroup.com/ responsibility/responsible-business/ disclosures/
RSA’s balance sheet is strong and our capital has demonstrated its resilience to market volatility. Tangible net assets increased by 4% to £2.9bn at 31 December 2018.
We maintain a measured approach to capital management, targeting a single ‘A’ credit rating (the Group’s S&P rating is ‘A’ stable and its Moody’s rating is ‘A2’ stable). This involves considering a range of indicators relating to capital, to operating results, and to qualitative factors.
The key drivers of the increase in the year included underlying capital generation which added 22 points of coverage. Market movements, including IAS 19 and other, added 5 points. Pull-to-par on unrealised bond gains accounted for a 5 point reduction and net capital investment after amortisation accounted for a 3 point reduction. The 2017 interim and fi nal dividends reduced the coverage ratio by 12 points.
We have considered the impact of a no-deal Brexit scenario on the Group capital position based on externally published views of possible market movements and key risks to RSA and are comfortable that capital measures remain inside risk appetite even in adverse outcomes. This refl ects our high quality asset portfolio, well matched interest rate position and signifi cant overseas assets. Given our UK pension schemes, we are, however, exposed to any tightening of long dated corporate bond yields on an accounting basis. As such we remain alert to the potential secondary risks such as the impact of downgrades or an increase in quantitative easing by the Bank of England.
Pensions The IAS 19 pension valuation generated a gain of £161m and this was primarily as a result of an increase in ‘AA’ corporate bond spreads.
We are also pleased to have reached agreement with the Trustees of RSA’s main UK pension schemes on the results of the latest triennial valuations. The two schemes had an aggregate funding defi cit at 31 March 2018 of £468m, equivalent to 95% funding adequacy (2015: 95%).
Core defi cit contributions are to remain at £65m per annum, with the potential for additional contributions of £10m per annum, to be paid, dependent on Group capital levels. The Group has made a further one-off payment of c.£65m, reducing the aggregate funding defi cit to c.£400m all things remaining equal. The majority of this was paid in 2018. In addition, the Group has further committed to pay contributions at this level until the schemes are fully funded on a lower-risk basis; something we will work with the Trustees’ on over time.
These commitments provide the pension scheme with greater security, while reducing the level of pension risk for the Group.
Group Chief Financial Offi cer 1 Capital generation represents profi t after tax attributable to ordinary shareholders, adjusted for changes in intangible assets, deferred acquisition costs and other non-capital items.
RSA is the only international insurer operating within the top fi ve in Scandinavia. In Sweden, we operate as Trygg-Hansa, and in Denmark and Norway as Codan.
Against this backdrop, insurance markets remained resilient, with incumbents maintaining a competitive position against market challengers despite increased competition in Commercial Lines.
Regional net written premiums of £1,817m were down 1% at reported FX and up 2% at constant FX, with Personal Lines premiums up 6%1. Swedish Personal Lines grew by 8%1 and policies-in-force (‘PIFs’) were 2% higher year-on-year. Commercial Lines premiums were down 4%1 with volumes down 8%. A non-recurring 2017 risk, together with a 2017 large scheme exit, accounted for 3%1 of the reduction in Commercial Lines premiums (both in Norway).
The current year attritional loss ratio of 63.3% was 0.7 points worse than 2017. While Sweden was in line with 2017, Danish Commercial Property increased.
Norway was impacted by higher weatherrelated frequency, Motor claims infl ation, mid-sized Commercial Property losses and underperforming schemes currently in remediation. Large losses were elevated at 8.9% compared to the fi ve year average of 6.1% (2017: 5.7%). This was dominated by the (exited) Interconnector segment and by a Commercial Property fi re in Denmark.
Sweden generated an underwriting profi t of £251m (2017: £245m1) and a combined ratio of 75.7% (2017: 75.3%). The movement was mainly driven by the weather loss ratio which was 0.6 points higher than last year. Denmark produced a combined ratio of 99.0% (2017: 90.3%1). The Commercial Lines ratio deteriorated by 15.6 points due to elevated large losses, and, to a lesser extent a lower prior year result. Norway recorded an underwriting loss of £19m (2017: £4m1 loss) refl ecting a deterioration in attritional claims, higher large losses and higher operating costs.
Our brands in Scandinavia are well-known and trusted, providing a strong trading basis on which to expand our business across the region. However, customers’ demands are changing as they seek to interact with us online. Recognising the need to adapt, we are upgrading our digital capabilities and increasingly allowing customers to buy and manage policies online and via mobile. In late 2018, we established an IT-hub in Malmö, Sweden, to increase our technical capabilities and accelerate our digital transition.
We have also used digital tools to target sustainable customer base growth in Sweden, rolling out live pricing tool Radar Live for our Personal Lines customers. By enabling us to assess and segment risks in a more sophisticated way, the tool has helped us offer more competitive prices and reduced the time it takes us to provide quotes.
Moving forward, we will focus investment for growth in our most profi table segments and portfolios, targeting improvements in four key areas: customer experience; excellence in underwriting and claims; continued cost effi ciency; and innovation and agility.
Weather events have increased in severity and frequency. Property damage from severe weather has been the leading cause of insurance claims in 2018. Auto Lines have seen rising repair costs impact on profi tability.
In 2018, our Canadian business delivered operating profi t of £84m, down from £153m1 in 2017. The combined ratio of 98.5% was 4.6 points higher than last year. Adverse weather was the dominant feature, while large losses also increased. The combined ratio improves to 96.7%3 proforma for net GVC recoveries and for new 2019 reinsurance additions.
Retention remained strong, with both Johnson and Personal broker improving over last year to 90% and 89% respectively. We held our pricing discipline in both Auto and Household, achieving rate above our plans and last year.
In our ongoing efforts to balance and respond to weather impacts, we are advancing a tighter pricing strategy and implementing more sophisticated predictive models.
We also secured an important partnership with Scotiabank, one of Canada’s leading retail fi nancial services providers, making Johnson the exclusive service provider for their Home and Auto insurance products from April 2019.
For brokers, we have worked to simplify our claims process and this year we piloted a new claims management tool, Claims Point, using our Guidewire software, which reduces wait times and provides customers with immediate access to claims details without having to wait in a phone queue.
Our business in Canada is well balanced by province, customer, channel and product. However, we face challenges such as continued weather volatility, rising claims costs and the burden of operating in an increasingly regulated environment. It is also clear that, while we have made great strides in cost and underwriting discipline, there is more to be done.
We have also expanded our digital capabilities to maintain our high retention levels. Chat volumes increased 107% (85K) with high FCR5 and NPS (+52 NPS for WebChat in 2018).
For brokers, we have had positive feedback on our digital tool, RSAPro, which enables brokers to service their clients remotely and provides on-the-spot communication with RSA underwriters. This has driven improvements to underwriting as well as cost effi ciencies, and Commercial Lines customers score their interaction with RSA highly at 74%.
3 Stated on a proforma basis. Please refer to pages 185 and 186 for further details.
“ Despite a challenging year for UK&I, we have refocused on lines of business where we can grow and thrive.”
In the UK, our Commercial Lines business is split between our Commercial Risk Solutions business (CRS), which supports UK-based businesses and schemes, and Global Risk Solutions (GRS), which caters for large and multinational customers and risks written through the London Market and European branches.
In late 2018, we refocused our GRS portfolio to concentrate on a core set of Specialty Lines, exiting business experiencing persistent volatility and poor profi tability. We also established an offi ce in Luxembourg as the headquarters for our European branches, enabling us to minimise disruption to our EU-based customers as a result of Brexit.
In Personal Lines, we are best known to customers through our direct insurance brand, MORE TH>N, which has strength in Pet and Household insurance, and is a leading insurer of young drivers through our telematics product, SM>RT WHEELS. Partnerships with some of the UK’s major retailers, banks and building societies make up the balance of our Personal Lines business.
Our Middle East operations, of which we own 50%, cover Bahrain, the United Arab Emirates, Oman and Saudi Arabia. 60% of the business is in Personal Lines.
Net written premiums were down 2% excluding reinsurance changes. Headline premiums were dampened by £44m due to higher reinsurance costs. Personal Lines premiums were up 2% as reported or up 4% excluding reinsurance changes. Household premiums were up 16%. Our Nationwide partnership is doing well and generated premiums of £170m in its fi rst year of trading; retention was 85% and NPS scores remain strong (claims +63; sales and service +65). On the wider book, we held our discipline on rate to mitigate the ‘escape of water’ issues which presented in H2 2017. However, rate of between 3% and 19%, depending on the channel, drove a decrease in retention and new business.
The combined ratio of 104% improved by 0.3 points in 2018. The weather loss ratio increased by 0.9 points. Storm Emma cost c.£45m and subsidence claims increased as a result of the unusually hot and dry summer weather. While large losses reduced by 1.2 points, they remained elevated in Specialty and Wholesale (particularly Marine). Excluding the impact of reinsurance changes, the attritional loss ratio of 48.5% reduced by 0.3 points in 2018. Improvements in Household and Pet were dampened by increases in Marine and Motor.
High quality underwriting and pricing is critical for all insurers. In 2018, we undertook a series of immediate actions and initiated a long-term investment programme to improve our capabilities.
We continue to invest signifi cantly in our digital capability and services, with an emphasis on reducing complexity for our customers and our employees.
Unity enables online claims tracking, video calling and self-serve claims settlement, helping to meet customer expectations for fast digital service and freeing up employee time for higher value and specialist work.
We’re researching new ways to detect and alert homeowners to leaks before they become fl oods.
Recognising the risks that our customers need to protect against are changing, we strengthened our support for those facing cyber risks, releasing an end-to-end product for global businesses, which offers proactive risk management support, full loss cover and post-event crisis management.
Our relationship with the communities we work in is important to our business and to our people. Our network of champions across all offi ces support the valuable link to our local communities, working closely with local groups and charitable organisations.
Ireland’s performance improved strongly in 2018, generating an underwriting profi t of £30m (2017: £9m), and reporting a combined ratio of 90.2% (2017: 97.0%). The attritional loss ratio of 57.6% was 2.8 points better, while the large loss ratio improved by 1.7 points. Prior year development was a favourable 3.7%, compared to adverse development of 0.2% in 2017.
The information contained in the Corporate Responsibility and People sections of this report on pages 35–39, together with the description of our business model on pages 6–7 and our principal risks on pages 40–43 form our non-fi nancial information statement.
Over the past fi ve years, our corporate responsibility strategy ‘Making things better, together’ has played an important role in addressing the key social, environmental and ethical risks and opportunities that affect our business and customers. Our achievements and actions in 2018 are set out against the four pillars of our strategy on page 37.
To support the implementation of this Group-wide strategy, we have established a Group Corporate Responsibility Committee. During 2019, we will be transitioning our programmes and delivering against a new roadmap to help us achieve our Confi dent Futures objectives.
As signatories to the UN Global Compact, we set clear expectations for our employees, business partners and suppliers, and empower them to operate in a way that respects and protects human rights. We do this by raising awareness of issues, ensuring procedures are in place to prevent breaches, conducting due diligence and reporting on progress.
Our contribution in a changing world We seek to create sustainable value for shareholders and society by managing our operations ethically, ensuring fi nancial strength and transparency, putting our customers fi rst, supporting our employees and minimising our impacts on the environment.
In the UK in 2018, our supplier due diligence assessments covered 330 suppliers (58% of our total spend), to help ensure the organisations we work with meet our expectations. Further information can be found in our Modern Slavery Statement on our website.
Our policies are communicated to all employees through our company intranet and mandatory eLearning modules; this is supplemented by additional resources such as our anti-bribery toolkit and targeted training for employees in higher risk roles. All employees complete training on whistleblowing and are equipped with tools to identify and escalate concerns, including access to a confi dential third-party 24/7 whistleblowing helpline in line with our ‘Whistleblowing policy’.
The insurance sector plays an important role in responding to the risks and opportunities presented by climate change through the data and insight we generate, products covering natural catastrophes and our infl uence within the fi nancial system. We consider the risks associated with persistent or more extreme weather patterns through our risk management function and support clean growth by providing insurance products for renewable energy projects.
Our environmental policy sets out our commitment to reducing our environmental impact, engaging relevant stakeholders to adapt and respond to climate change and working with industry peers through our memberships of ClimateWise and the UN Principles for Sustainable Insurance (UN PSI) to integrate consideration of environmental, social and governance issues into business decisions.
Our direct environmental impact is limited to our building portfolio and business travel associated with our work. We regularly monitor and review our energy use, business travel, water use and waste to ensure we manage our own operations effi ciently, and our reported carbon emissions are subject to independent assurance by PwC.
We work with charitable organisations and causes around the world to support activities that promote employability, entrepreneurship and benefi t local communities, investing £1.8m in 2018 in support of 785 organisations. Our community contributions also play a practical role in supporting our customers to avoid risks through awareness campaigns and partnerships focused on topics such as road safety, mental health and online safety.
As experts in risk, we know there are many ways for people and businesses to protect the things they care about. We can use our products, services and partnerships to help people and businesses to learn about the risks they face, and how to manage them more effectively.
people reached through safety campaigns £1.8m invested in local communities reduction in carbon emissions
People and businesses face a wide range of risks every day. We can play a powerful role in helping our customers avoid risks by sharing our skills and expertise.
We work across our business and collaboratively with partners to raise awareness of risks through engaging safety campaigns. These cover a diverse range of topics, including keeping people safe on the roads, in their homes and at work, and responding to the risks presented by changing environments, including the natural and digital world.
Our business will not be successful unless the communities we operate in also fl ourish and thrive. We use our skills and experience to support communities in areas we operate.
· Hosted our fi rst UK-wide Community Action Month, volunteering 2,000 hours and fundraising over £40,000.
· Partnered with ‘Welcome’ to assist the integration of new immigrants into Swedish society through events and other support.
· Celebrated our worldwide renewables insurance business covering wind, solar and bioenergy projects in support of ‘Green GB Week’.
· Trygg-Hansa continued its commitment to ‘paperfree ’, reaching 790,000 customers.
For our customers this means striving to keep them at the heart of what we do and achieve fair outcomes for all. For our employees this means being inclusive, investing in training and development, and promoting health and well-being. In our supply chain this means ensuring ethical behaviours and high standards of conduct on social and environmental issues.
In Canada, the CEO has spent time in 2018 visiting several regional offi ces to deliver a personal thank you to employees for their achievements.
During 2018, the Middle East (RSA Oman) worked towards implementing an Automated Insurance Machine which is now ready to be deployed at the Hafeet border post in Oman. The machine is an end-to-end system that will assist travellers from all neighbouring countries to purchase the mandatory insurance required to enter Oman while they drive in. This is the fi rst such initiative pioneered by RSA Oman for its customers, providing an easy insurance purchase.
RSA’s ambition is to perform at best-in-class levels and in so doing to deliver well for our customers and our shareholders. We recognise that we can only achieve this if our people share this ambition and feel that RSA is offering them a fulfi lling career. We want a culture of high performance, where working together as a team is valued and the business invests in its people, so we all have the capabilities to embrace the future. We use ‘Your Best U’ to articulate our aspiration to have an organisational culture that allows us all to bring our very best selves to work every day.
The UK and Group Corporate Centre have introduced ‘Your Best Performance’. This enhanced approach to performance management includes process improvements such as rating ‘What’ and ‘How’ separately to increase focus on behaviour and values and using a fi ve-point scale to better support differentiation.
Ireland has introduced a new relaxed dress code to celebrate ‘Your Best U’ where people now have the option to wear what they want to work when working in non-customer facing roles. They also encourage managers to offer fl exible working to talent in their teams.
At RSA Group level we have a Group Technical Academy which creates competitive advantage through building technical capability in underwriting, claims and actuarial. The academy supports all the technical communities across the Group and offers several training solutions that are ready for employees to use and deliver.
Our Group-wide Diversity & Inclusion (D&I) vision: To create an inclusive workplace where everyone can bring their best selves to work. We do this by building greater diversity across all levels of our organisation and creating a more inclusive culture which attracts, encourages and capitalises on diverse perspectives, establishing a stronger foundation to serve our customers.
Going forward into 2019, the regions will continue to make benefi cial changes under each of our People Principles, as well as embedding the changes we have made so far, in order to continue our journey towards best-in-class.
Managing risk to achieve our goals Aiming to deliver consistently for our customers while achieving good long-term sustainable performance.
The three year cash fl ow forecast supports the Group’s ability to sustain positive cash fl ows in its businesses through targeted underwriting, portfolio and distribution actions, and to pay dividends as forecast. This is further supported by the Group’s credit facilities and highly liquid investment portfolio which provide further sources of short term cash if needed.
Every effort is taken to manage risks within appetite. For principal risk areas, especially fi nancial risk and capital surplus measures, this was achieved throughout the year and operational plans predict this will continue within the three-year planning period. From time to time, risks stray outside target, especially operational risk types. Where targets are not met, action is taken to manage them back to acceptable positions. This year saw signifi cant progress in some key risk areas, including IT, cyber and underwriting capability.
· Policies are reviewed annually, with IT, information security and reputation risk policies signifi cantly revised in 2018. New policies were introduced for pensions risk and customer risk.
Initiative, which resulted in the publication of a paper on insurance industry implications. We continued monitoring threats to and opportunities for our products, reinsurance and investments on behalf of customers and stakeholders. We also quantifi ed climate trends and took them into account in our weather assumptions and reinsurance strategy. The creation of a new ESG committee will maintain this momentum going forward.
Underwriting and Risk work closely to understand current and future needs in relation to underwriting skills and capability. For example,
relations, Russia tensions and EU stability are all factors that have signifi cant social and economic implications.
Attacks could impact a large number of our customers as well as broader society.
Geopolitical tensions could result in new diplomatic, economic, cyber or physical confl icts.
Governance Committee and, where appropriate, the Group’s internal model is updated.
Validated output from the model is reported to the Board, so that changes can be made to the three-year operational plan to ensure the Group remains in appetite. Cycle will continue until the Board is satisfi ed with the future plan.
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.
The internal model is run regularly throughout the year in order to assess the risks impacting the
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.
Following a best practice review, we decided to strengthen governance over customer risk and achievement of good customer outcomes, to ensure appropriate oversight informed by insightful MI. A new UK
Customer Committee was established and a new risk appetite statement implemented, supported by redeveloped management information. These new arrangements will be further monitored and enhanced as we learn from the experiences gained from across the Group and from our customers.
Arises from the risk of large natural disasters, with our main exposure being to North European windstorms and Canadian earthquakes.
Consistent with our strategy and appetite of retaining risks that reside within our core expertise, where we are able to maximise risk-adjusted returns, our Solvency II Capital Requirement
While our investment strategy remains deliberately conservative, we continue to look for opportunities to increase returns through the purchase of less liquid high-quality assets as we are able to match the cash fl ow profi le against that of our liabilities.
Another key SCR risk arises from the Group’s defi ned benefi t pension schemes. Although these schemes are well funded (95% at the latest triennial review), under the Solvency II
· Controlled through well-defi ned risk appetite statements which are rigorously monitored at quarterly portfolio reviews, with remediation action taken where deemed necessary.
· Brexit risks to infl ation and supply chain delays are being monitored and we are ready to respond.
· RSA ensures assets are closely duration and currency matched with insurance liabilities to hedge volatility.
We face longevity and in particular market-related risks, which arise from our defi ned benefi t pension schemes. The largest exposures arise from credit spread and equity movements, although these are partly hedged by offsetting movements in the
· Funding assets are well matched to liabilities in the pension schemes, including the use of swap arrangements.
Insurers are required to calculate the level of capital needed based on their unique risk profi le under the
Condition Report (SFCR) annually, which contains extensive information on how RSA manages its risks and exposures and reports the fi nancial position of the Company using Solvency II valuation principles.
M a rk e t a n d c u rr e n c y
E x p e c te d f u tu re c o s ts a n d
The Board is committed to effective governance, sound risk management and a robust control environment. This report sets out RSA’s framework for good governance. The Board believes this framework provides the necessary structure in order to ensure effective decision-making and robust governance and risk management throughout the Group.
RSA is a people-centred business which aims for a culture of high performance, where working together as a team is valued and the business invests in its people. As part of the Board’s two-day strategy meeting, we discussed the Group’s positioning around its purpose, vision and values, as well as the results of the cultural survey which the workforce completed in the year. As a result, we approved a re-invigorated articulation of our purpose, values and strategy which can be found on page 05.
This year, the Group has continued to work towards the ambition of delivering improvements and effi ciencies across customer service, underwriting effectiveness and technology and digital. The Board recognises that it has been a trying year for the Group and I would like to extend my thanks to my Board colleagues and the management team for the constructive way in which we have engaged and collaborated on these issues during the year. As announced in February 2019, Scott Egan was appointed CEO, UK & International and Charlotte Jones was appointed Group CFO. Both appointments are subject to regulatory approval.
Further information on the above areas of focus is set out later in this report.
Chairman’s Governance Letter The primary responsibility of the Board is to provide effective, entrepreneurial leadership to ensure that it promotes the long-term success of the Company for the benefi t of its members as a whole.
The activities undertaken in 2018 and planned for 2019 include increased direct engagement with employees, such as employee ‘town halls’ and employee breakfasts with Board members, which the Board views as the most effective way to gain a deeper understanding of the views of the workforce. The Board looks forward to increased engagement with the Company’s stakeholders, particularly more direct engagement with shareholders, customers, employees and regulators.
The Board values the breadth of perspective that diversity brings and is committed to maintaining a board that is diverse (in its widest sense). As at the date of this report, women make up 30% of the Board. Following Sonia’s appointment and Joseph’s retirement, women will make up 40% of the Board. This exceeds the recommendation for women on boards set out in the Davies Review. This is good progress, and we will maintain and seek out opportunities to further improve gender equality on our Board and across the Group.
During the year, the Board re-approved the Diversity, Inclusion and Equal Opportunities Group Policy which outlines the importance of diversity of gender, social and ethnic backgrounds, and of cognitive and personal strengths to the Board. For further information on our approach to succession planning, appointments and diversity, see pages 62 and 63.
This year the performance and effectiveness evaluation of the Board and its committees was conducted internally. The evaluation was undertaken using online questionnaires which were then complemented by individual interviews with each of the Board members. The process was facilitated by the Senior Independent Director and the Company Secretary. The results of the evaluation concluded that respondents had unanimously concurred that the Board is highly engaged and operating effectively. As required by the Code, an externally facilitated evaluation of the Board will be undertaken in 2019. Further information is presented on page 54.
Executive remuneration remains an important topic in the UK and is evaluated by the Board and the Remuneration Committee. Further information on the work of the Remuneration Committee can be found on page 66.
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Isabel brings wide-ranging commercial, corporate fi nance and business development experience to the Board from the UK and internationally, especially Europe, focused on the insurance sector, spanning life and general insurance as well as pensions. Isabel’s previous experience chairing a remuneration committee contributes and adds value to the Group Remuneration Committee.
Isabel previously served as Executive Director of Prudential’s UK business and Chairman of
Prudential International Assurance between 2002 and 2006, Chief Executive of specialised pension buyout fi rm Synesis Life, Chief Financial Offi cer of
Eureko and International Development Director for GE Insurance Holdings Limited. She was also non-executive director at Standard Life plc, QBE
Executive Offi cer at Towergate Insurance, having previously held the post of Chief Financial Offi cer.
Scott also held the post of Chief Financial Offi cer at Brit Insurance, after four years as Chief Financial
Group Financial Controller. He has also held various senior fi nance roles at Norwich Union Insurance and
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 P&C. He also served on the boards of, among others, Unicredit and Pirelli.
Accounting Offi cer at Credit Suisse Group. From 2004 to 2013, she held various senior fi nance roles at Deutsche Bank and between 1990 and 2004 progressed from trainee accountant to partner in the fi nancial services practice of Ernst & Young.
Martin has considerable knowledge and understanding of the fi nancial services sector. He brings valuable experience in developing strategy and evaluating business opportunities, along with understanding of the fi nancial services sector and how it operates. As
Chair of the Audit Committee at Lloyds Banking Group plc, 34 years at Deloitte LLP (26 years of which as
Director, Deloitte Touche Tohmatsu from 1999 to 2007 and membership of the Financial Services Trade and
Stephen has over 30 years’ experience in fi nancial services and FTSE100 companies. He is responsible for the executive management team, along with leading strategy and business plan development and execution for the Company and its major operating subsidiaries, having regard to the requirements of the Company’s shareholders and other stakeholders.
Kath has spent over 25 years in a variety of roles in global fi nancial services, both in the UK and globally. She was previously Chief Operating Offi cer,
Wholesale Banking, for Standard Chartered Bank and spent 22 years at UBS. Kath has gained a deep knowledge of control, governance and risk management, working in emerging markets and across different sectors and cultures.
Sonia has over 25 years’ experience in the banking and fi nancial services industry in Canada. She has run large global businesses and has served at operating board level at Canadian Imperial Bank of
Management Committee of Laurentian Bank of Canada, non-executive director, Chair of the
Human Resources and Governance Committee and member of the Audit and Finance Committee at Foresters Insurance and President and Chief
Group in 1999 as the Head of IT at Basler Switzerland and, within Baloise Group, was responsible for major cross-functional insurance and fi nance projects.
Corporate Executive Committee with responsibility for the Corporate Division Switzerland. From 1993 to 1999, Martin performed various roles at Boston
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Internal Audit all report directly to a Board committee providing expert advice on their remits to the relevant committee and senior management.
Details of the activities of these committees are set out later in this report.
Committee annually and when 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
The GAC plays an important role assisting the Board in its oversight and monitoring of the Company’s fi nancial statements, the robustness of the Group’s systems of internal control and its fi nancial and regulatory risk management, and oversees the effectiveness and objectivity of the internal and external auditors.
The BRC has a pivotal role in ensuring the key risks to the Group are identifi ed and understood, are effectively managed within risk appetite and appropriately refl ected in the
The GIC manages all aspects of investment policy and strategy for the Group and provides oversight of the operation of the Group’s investment portfolios, including oversight of the defi ned benefi t pension schemes, within established strategy and risk frameworks.
The RemCo is responsible for the oversight of remuneration decisions and reviews, challenges and sets the remuneration of Executive Directors and the Chairman of the Board.
ExCo is the Group management committee that assists the Group Chief Executive in discharging his delegated authority. It is not a committee of the Board. ExCo is responsible for
Group performance, including fi nancial, capital and fi nancing requirements; the relationship and communication with the Regulator; reviewing risk management across the Group; Group-wide human resources and development issues; any signifi cant corporate relations issues; and signifi cant operational issues.
Read more on page 66 For Terms of Reference visit www.rsagroup.com/termsofreference
As set out in the Matters Reserved for the Board, the Board is responsible for: Through regular review of the Board’s rolling agenda and previews of each Board meeting’s agenda, the Chairman ensures suffi cient time is allowed for discussion and debate and he encourages constructive challenge during Board meetings.
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The Board has sought to interact directly with employees and customers and ensure that the information fl ow and key metrics are properly analysed and understood by the Board.
During its visit to Toronto, the Board met with senior leaders to understand better the Johnson brand and the customer journey within Canada. Board members also attended a site visit to St John’s, Newfoundland, to better understand how digital technology is being used in Canada to improve the customer journey.
The Board received quarterly updates from the new UK Customer Committee which was established to ensure we promote and secure positive outcomes for our customers.
The Board reviewed the results of the ‘YouRSAy’ employee engagement survey and the proposed actions arising from it. The Board supported management in the launch of a new people strategy under the Employer brand ‘Your Best U’.
The Board reviewed Executive succession planning with a view to ensuring a strong pipeline of talent needed for the future development of the business.
Senior management from the Group’s top 50 management and key businesses in Ireland and the UK were invited to present to the Board on specifi c business initiatives.
The Board undertook a deep dive on the Group’s approach to volatility and whether the reinsurance structures in place were fi t for purpose. Taking into account feedback from investors and having challenged the approach, the Board supported management’s recommendation to purchase new regional aggregate covers for 2019. With the additional covers in place, the Board agreed that the overall reinsurance structure managed volatility appropriately.
The Board approved the 2017 fi nal dividend for recommendation to shareholders which was subsequently paid to shareholders in May 2018. The Board also approved the 2018 interim dividend, which was paid to shareholders in October 2018.
The Board receives recommendations from the Group Audit Committee on the Company’s fi nancial statements and other related matters.
The Board approved the Annual Report and Accounts 2017, as well as approving the preliminary results and trading updates which were disclosed to the market in 2018.
The Investor Relations team present semiannually on investor sentiment, competitor trends and comparison.
The Chairman and non-executive directors, together with senior members of the management team, hosted meetings with external stakeholders, including regulators, shareholders and other external advisers to discuss a variety of topics, including business performance and market trends.
The Board engages regularly with the FCA and PRA, and some Board members have met directly with the FCA and PRA. Key topics for engagement include culture and governance, treatment of existing customers and technology resilience. The Board also receives periodic updates from the business and from Line 2 on regulatory matters and priorities.
As at the date of this report, the Board is composed of ten members: the Chairman, seven non-executive directors and two executive directors. The table below shows the attendance at the Board and committee meetings. Biographical information of the current directors can be found on pages 46 and 47.
4 Enrico Cucchiani joined the BRC on 1 June 2018. He was unable to attend the June 2018 Committee meeting due to a prior commitment predating his membership of the Committee.
5 GAC regular attendees: Group CFO, Group Chief Auditor, Group & UK Regulatory Compliance Director, Group Chief Risk Offi cer, Group Chief Legal Offi cer and Company Secretary, Group Chief Financial Controller and representatives from the External Auditor. The Chairman and the Senior Independent Director attend ahead of RSA’s full and half-year results.
8 RemCo regular attendees: Chairman, Group CEO, Group Chief Legal Offi cer and Company Secretary, Group HR Director, Group Reward Director and PwC as independent advisers to the Committee. Additional input was provided by the Group Chief Risk Offi cer.
9 GIC regular attendees: Group Investments Director, Group CEO, Group CFO and Group Chief Legal Offi cer and Company Secretary.
The primary responsibility of the Board is to provide effective leadership to ensure that it promotes the success of the Company for the benefi t of its members as a whole. The Board, supported by its committees, provides leadership within a framework of prudent and effective controls. The Board is accountable to stakeholders for the creation and delivery of strong sustainable performance and the creation of long-term shareholder value.
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.
The Senior Independent Director supports the Chairman in the delivery of his responsibilities as required, ensuring the views of each of the non-executive directors are given due consideration and facilitating communication between the non-executive directors and the Chairman.
The Board, through the Group Nomination and Governance Committee, monitors compliance with the Code. The Company has complied with the 2016 Code which was in force throughout the year (which is available at www.frc.org.uk). Details of how the principles and provisions of the Code have been applied are set out in the Directors’ and Corporate Governance Report, the reports from each of the Board committees and in the Strategic Report.
Through the annual Board evaluation process, the Board has confi rmed it has the appropriate balance of skills, experience, independence and knowledge to enable it and its committees to discharge their duties and responsibilities effectively, and continues to work towards achieving external diversity recommendations.
The NomCo is responsible for reviewing Board membership, succession planning and diversity to ensure the skills, experience and balance of the Board remains appropriate. When appointing new directors, regard is given to the size of the Board, the balance of executive and non-executive directors and the benefi ts of all forms of diversity.
Following recommendations from the NomCo, the Board took into consideration the Code and indicators of potential non-independence, including length of service. Following due consideration, the Board determined that, with the exception of the Chairman, whose independence is only determined on appointment, all non-executive directors remained independent in character and judgement throughout the year as defi ned in the Code. Charlotte Jones ceased to be independent during February 2019 when she agreed to assume the role of Executive Director and Group CFO.
Additional training is provided for all Board members when committee membership changes occur.
In 2018, an internal evaluation was led by Isabel Hudson, the Senior Independent Director (SID) and the Company Secretary. The evaluation was carried out via online questionnaires, which were supplemented with individual interviews conducted by the SID and the Company Secretary in order to canvas the views of each director and regular attendees of Board and committee meetings. The questionnaire covered the effectiveness of the Board and its committees and 360-degree reviews of the performance of individual directors. The questionnaires were then complemented by individual interviews conducted by the SID and the Company Secretary. The results of the 360-degree reviews were used for one-to-one discussions between the Chairman and directors. In addition, the SID facilitated a separate discussion with the non-executive directors on the Chairman’s performance.
The results of the evaluation were presented to the Board in December and actions agreed against the key themes. Respondents unanimously concurred that the Board was highly engaged and operating effectively. Key strengths included feedback regarding the openness and transparency of both discussions at Board meetings and also in relation to management’s reporting of challenges and issues. Board members commended the collaborative and positive atmosphere at Board meetings and the degree of challenge provided to management.
During 2018, progress has been made against the key themes identifi ed in the 2017 evaluation and good or signifi cant progress had been made on all actions. In 2019, the Board will focus on enhanced stakeholder engagement, improvements to the fl ow of information presented to the Board, and IT and the ability to react to the ever-changing IT environment.
The Board, supported by its committees, operates within a framework of prudent and effective controls in the interests of shareholders, customers and other stakeholders. The purpose of the System of Governance is to ensure the safety and soundness of the Group and its key entities. The System of Governance comprises three elements: 1. Corporate Governance Framework how the business is managed.
2. Risk Management System: how risks are identifi ed, measured, managed, monitored and reported.
3. Internal Control System: the controls behind the Corporate Governance Framework and the Risk Management System.
Through the Corporate Governance Framework, effective decision-making, good procedures and strong internal reporting are embedded into the business processes, which align to the Group’s strategy of ‘focused, stronger and better.’
· Provides a framework which supports the realisation of its business strategy and supports long-term success
· Provides effective and effi cient decisionmaking by the Board and its committees
· Ensures that both directors and employees act within a chain of delegated authority and specifi ed powers
· Consistent approach throughout the Group to identify, measure, manage, monitor and report risks
· Risk Management Policy establishes a framework of standard risk management processes
Second line of defence: independent review and challenge of the fi rst line activities, providing assurance that controls and validation are properly designed and operating effectively
Third line of defence: evaluation of the effectiveness of our risk management, control and governance processes.
The Internal Control System comprises three key elements: 1. Internal Control Framework
· Policies establish standard controls, which are implemented and operated by the business
· Supplemented by objective fi rst line validation and independent second line assurance processes
· The Group Controllership Policy sets out the standard control processes to mitigate against material financial reporting misstatement and fi nancial loss. Assurance is provided through the Financial Control Framework.
· Onward delegation to senior management through ‘Executive Licences’ which set out specifi c limits of authority to ensure all employees execute their responsibilities within clearly defi ned limits in compliance with relevant regulatory and statutory requirements
· Day-to-day management is undertaken by the Group Chief Executive and Executive Committee supported by executive level committees
· Each executive is responsible for ensuring a similar process of delegation is in place within his or her area of responsibility
· Regulatory Compliance Policy sets out the standard control processes to minimise and/or prevent the risk of material loss, reputational damage or liability arising from the failure to comply with regulatory requirements
Accountability The Board, through the Board Risk Committee, ensures that material risks are identifi ed and ensures these risks are mitigated and managed.
Throughout the year, senior management has actively engaged with shareholders, customers, employees, regulators and other stakeholders on relevant matters. The Board has attended internal leadership events, overseas visits, presentations and dinners hosted by senior management to gain a deeper understanding of certain business areas. During the year and with reference to the new Code provisions, the Board undertook a review of the Company’s engagement with its key stakeholders and established a stakeholder engagement plan to identify opportunities to engage further in 2019. The engagement plan outlined the Board’s direct and indirect engagement with the Group’s key stakeholders, including meetings with investors and ratings agencies, site visits, customer interaction, employees and ongoing interaction with the Regulator.
See pages 08 and 09 in the Strategic report for further information.
During the year, the Group met with a number of key institutional investors. The Board receives regular updates in relation to shareholder views.
The Group remains committed to maintaining high levels of transparency and disclosure to investors to aid understanding of the Company’s investment case.
At each AGM, the Group Chief Executive presents an update on the Company’s performance and activities during the year.
One of the Group’s strategic goals is the ambition of delivering improvements in customer service. The Board receives regular updates on customer metrics as it moves towards realising this ambition.
More information on employees can be found on pages 38 and 39.
Engagement The Board is committed to transparent disclosure and engagement with the Group’s stakeholders. The Board believes that its stakeholder engagement programme provides meaningful insight into the views, priorities and issues facing each of its stakeholders.
For more details, see the Remuneration section on pages 66 to 69
The role and responsibilities of the Committee are set out in our terms of reference which are available on the Company’s website and summarised on page 49.
The Group’s IT infrastructure continues to be the focus of transformation and both the Group Audit and Board Risk Committees received updates on enhancing general IT controls and the steps taken to ensure compliance with the 2018 General Data Protection Regulation (GDPR).
During the year, the Committee received briefi ngs on a number of items, including reporting developments, the key aspects of IFRS 17 and its likely impact on the Group, the recommended transitional approach for the Group under IFRS 16, the FRC Financial Corporate Reporting Review and the preliminary fi ndings of the CMA’s review of the audit market.
The Committee found the visit extremely useful in further building its understanding and review of the end-to-end fi nance processes, up to and including the production and controls of the Annual Report and Accounts, the continual developments across the fi nance teams and how the Framework operates in practice.
The members possess diverse experience, knowledge and skills, which enables them collectively to act as an effective Committee.
Details of membership and attendance at Committee meetings are shown on page 52 and biographies are available on pages 46 and 47.
Management reports key accounting matters, fi nancial controls assurance and fi nancial results to the Committee at least quarterly. When considering the 2018 Annual Report and Accounts, the Committee focused on the signifi cant judgements and estimates which could be material to the fi nancial statements. These included the matters set out below.
The Committee has ensured that management exercised appropriate judgement and control in estimating insurance contract liabilities, including assessing the impact of claims trends and other infl uencing factors consistent with previous years. The key judgements underpinning the valuation of insurance liabilities were reviewed, including: · The level of margin held to make allowance for specifi c risks and uncertainties that are not allowed for in establishing the actuarial best estimate
· International Financial Reporting Standards (IFRS): IFRS 9 (Financial Instruments), 16 (Leases) and 17 (Insurance Contracts)
The Committee is also responsible for the oversight and monitoring of the objectivity and operation of both the external auditor and the internal audit function.
The signifi cant issues the Committee considered in relation to the 2018 Annual Report and Accounts are set out later in this report together with key activities during the year.
· The eligibility of claims for recovery under the Group volatility reinsurance cover
The Committee reviewed reports on the valuation of the pension schemes. The pension schemes are sensitive to changes in key assumptions, therefore management completed an assessment as to the appropriateness of the assumptions used versus benchmark data and external expert reviews, and reported the fi ndings to the Committee. This included an assessment of the additional provision required following the UK’s High Court ruling on equalisation of ‘Guaranteed Minimum Pensions’ for men and women.
· The Committee considered whether the 2018 Annual Report and Accounts were fair, balanced and understandable, and whether the disclosures were appropriate. Taken as a whole, the Committee is satisfi ed that the 2018 Annual Report and Accounts are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company’s position and performance, business model and strategy.
· Reviewed and challenged management on the appropriateness and application of Alternative Performance Measures in press releases, analysts briefi ngs, quarterly, interim reports and the Strategic Report.
· Reviewed the quarterly Solvency II balance sheets and technical provisions prepared by management and monitored the Group’s Solvency and Financial Condition Report providing appropriate challenge to key judgements and the adequacy of disclosures.
· Considered KPMG’s wider comments on governance, fi nancial reporting processes and effi ciencies as well as information systems and controls, and separately its reporting on the Solvency II balance sheet, annual Solvency and Financial Condition Report and observations on key areas of judgement in relation to Solvency II.
· Received regular reports from the Group and UK Regulatory Compliance Director on progress towards delivery of regulatory requests, the outcome of site visits and updates on regulatory developments and issues. The Committee reviewed and approved the 2019 Compliance Plan which sets out the work to be undertaken in the upcoming year to ensure compliance with regulatory requirements and maintenance of an open, constructive and cooperative relationship with the Group’s regulators.
· Received quarterly reports from Group Internal Audit on audits conducted, progress made in dealing with the issues raised as well as any thematic issues arising and the underlying causes. Delays in closing any actions arising are given particular scrutiny.
· Held private meetings with the Group Chief Auditor, the Group and UK Regulatory Compliance Director, the Group Chief Financial Offi cer, the external auditor and the Group Chief Actuary without members of management being present.
· Amended the Committee Terms of Reference, available at www.rsagroup.com, to refl ect the requirements of the new Code.
GIA operates a six-monthly rolling riskbased audit plan, allowing for a frequent and dynamic risk assessment that includes emerging and systemic risks. The Committee may request additional audits as required.
RSA Annual Report and Accounts 201860 rsagroup.comRSA Annual Report and Accounts 201860 rsagroup.com
The Committee is responsible for overseeing relations with the external auditors, including the proposed external audit plan and the approval of fees, and makes recommendations to the Board on their appointment or re-appointment.
The Committee attaches considerable importance to the work, opinions and fi ndings of the external auditor wich participates in all Committee meetings. The Committee has provided clear guidance to KPMG on the expectations of it as auditor; that the Committee on behalf of shareholders, not management, is KPMG’s client. KPMG is expected to challenge appropriately, raise issues and concerns with the Committee as soon as is appropriate and, on material matters, indicate its agreement to the position taken by management, or to explain why it does not, and the implications.
Auditor independence and objectivity are safeguarded by a number of control measures, including: · Limiting the nature and value of non-audit services performed by the external auditors as set out in the non-audit services policy
· Ensuring that employees of the external auditors that have recently worked on the audit are not appointed to senior roles within the Group
· Private meetings with KPMG without management present to provide the opportunity for open dialogue and to raise any matters in confi dence.
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 fi nancial reporting team were sought via a questionnaire.
On the basis of the review, the Committee is satisfi ed with the work of KPMG; that its performance refl ected the relevant skills, rigour, perseverance and robustness expected and that it is objective and independent. Accordingly, a resolution to reappoint KPMG LLP and giving authority to the directors to determine its remuneration will be submitted to shareholders at the 2019 AGM.
The audit fee for 2018 was discussed and considered before being approved by the Committee on behalf of the Board.
All permitted non-audit services should 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 Offi cer). These engagements are then noted and ratifi ed by the Committee at the following meeting.
If an engagement requires Committee approval but work needs to commence before the next meeting at which approval could be sought, the Chairman of the Committee and the Group Financial Controller may approve the engagements (up to £50,000 and £20,000 respectively). These are then reported to the following Committee meeting for ratifi cation.
In line with FRC guidance, the non-audit services policy caps such fees at 70% of the average total audit fee paid in the previous three years calculated. The Committee is satisfi ed that the auditor’s independence and objectivity was not compromised by providing non-audit services.
Despite some signifi cant headwinds and uncertainties, 2018 saw the continuation of generally positive global economic conditions. Growth in North America remained relatively strong, enabling both the US and Canada to further tighten monetary policy. European growth, while still positive, was more subdued although still suffi cient to enable a small rise in UK interest rates.
During the year, the Committee managed all aspects of investment policy and strategy for the Group and provided oversight of the operation of the Group’s investment portfolios within established strategy and risks frameworks. There were no signifi cant changes to the Group’s investment portfolios with a continued focus on high-quality investments.
Bonds and cash continued to represent the substantial majority of assets (c.90%) while equities and property represent just 4%. Bond investments continue to be managed and monitored to ensure that they provide an appropriate match against both the currency and term of the underlying insurance liabilities. The Group has also maintained its commitment to high-quality assets with c.72% of bonds having credit ratings of AA or higher and just 2% rated lower than BBB. The core high-quality matching policy has meant that the Group is well protected against the volatility caused by political and market developments, including Brexit.
In refl ection of the growing risks to global economies and markets, the Committee reviewed alternatives to further reduce exposure to negative market movements with a focus on strategies in relation to credit and infl ation exposure. No substantive changes in policy however resulted from these reviews, refl ecting the protection already provided by the high-quality nature of the existing asset position.
In response to the growing focus on Environmental, Social and Governance (ESG) factors, a review of the approach to ESG investment was undertaken. The Committee discussed the options available for ESG-linked initiatives and approved the use of third-party ESG rating agency input to provide additional screening and data on the Group’s investment holdings as well as providing access to research and data on broader market developments.
Joseph Streppel Non-executive director and Chairman of the Group Investment Committee
· Review of the approach to Environmental, Social and Governance investment
“The Board values the breadth of perspective that diversity can bring and the benefi cial impact it can have on Board effectiveness and throughout the Group more broadly.”
· Implementation of the changes required to support our compliance with the principles of the new Code
The Board is committed to the progressive refreshment of the Board. Russell Reynolds Associates were appointed to undertake a search for a new non-executive director to take over from Joseph Streppel, who decided not to seek re-election at the 2019 AGM. This search included candidates from Canada and Scandinavia. Following due consideration and discussion with Committee members, a short list of four potential candidates were interviewed by Alastair and myself and then two of the candidates were interviewed by other Committee members. Following these interviews, a preferred candidate was identifi ed and this candidate met with Isabel and Martin Strobel, and Stephen and Scott. Following a recommendation from the Committee, Sonia Baxendale was appointed as a Non-executive Director to the Board and as a member of the Group Audit and Group Investment Committees with effect from 1 March 2019.
Sonia brings extensive senior banking and Canadian fi nancial services experience to the board. Her experience serving at operating board level for one of the top fi ve banks in Canada and portfolio of nonexecutive positions in listed and privately held businesses, together with a wide range of audit, fi nance, human resources, risk management and governance experience, was considered to benefi t and complement the current experience of the Board.
It has been a busy year for the Committee; overseeing the changes being introduced by the new UK Corporate Governance Code, our continued work on succession planning, the search and selection process for our new Directors, Charlotte Jones and Sonia Baxendale, and the search for a new Group Chief Financial Offi cer (CFO).
fi nancial services and technical fi nancial and accounting expertise from the banking and asset management sectors, together with a wide range of commercial, investment, risk management and regulatory experience.
Following a recommendation by the Committee, the Board approved the appointment of Enrico Cucchiani to the Board Risk Committee with effect from 1 June 2018.
Korn Ferry and Russell Reynolds Associates are accredited by the Davies Review under the Enhanced Code of Conduct for Executive Search Firms. Neither of these fi rms have any other connection with the Group.
The independence of the non-executive directors is considered at least annually along with their commitment and performance on the Board and its Committees. The Board took into consideration the Code and indicators of potential non-independence.
Charlotte Jones is not considered to be independent following her appointment as CFO. Charlotte will act as a non-independent non-executive director until she assumes the role of CFO.
As well as considering the balance of skills, experience, independence and knowledge on the Board, the Committee also, as a matter of Board policy, recognises the importance of diversity of gender, social and ethnic backgrounds, and of cognitive and personal strengths.
Signifi cant focus has been given to the diversity and inclusion agenda during 2018 following the approval of a Group-wide Diversity and Inclusion Policy in 2017 and the establishment of a Group and three regional diversity and inclusion councils. The Company also signed the ‘Women in Finance Charter’ in 2017 through which the Group is committed to achieving a 33% representation of women in our management group by 2020. The Board is committed to improving diversity on the Board and at senior management level and aspires to meet the recommendations of the Hampton Alexander Review; 33% of Board and a minimum 33% representation of women in senior management positions by 2020. Group-wide gender data was provided to the Hampton Alexander Review in July 2018, demonstrating the commitment to good governance and transparent reporting.
As at the date of this report, women make up 30% of the Board (at the date of the 2019 AGM this fi gure will be 40%) and 32.8% of the Company’s senior management group. 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. See page 39 for more details.
The Committee has also focused on the changes being introduced in the new UK Corporate Governance Code and monitored the implementation of the changes required to support our compliance with the principles of the new Code.
A detailed Board stakeholder engagement plan was discussed and agreed by the Committee for recommendation to the Board. In addition to direct engagement with the workforce, regular updates to the Board on themes and subjects being raised by the workforce in the various forums such as town halls, employee intranet, the Groups social networking platform or works councils have been reviewed, enhanced and included in the plan.
· The Committee reviews compliance against the Code twice a year and concluded that the Company has complied with the Principles and Provisions of the 2016 Code throughout the year.
· The Committee has reviewed the time commitment of the non-executive directors and considers that they each devotes suffi cient time to discharging their duties.
Supporting the Board’s engagement with stakeholders has also been a key focus during the year. Members of the Committee visited the Johnson business in St John’s, Canada to meet management and receive detailed briefi ngs on business performance, customers and partners, IT, brands and digital. Members of the Committee also attended a meeting of the UK Customer Committee to better understand key customer and conduct matters.
The Committee has a pivotal role in ensuring the key risks to the Group are identifi ed and understood, are effectively managed within risk appetite and appropriately refl ected in the Internal Model. The key risk areas facing the Group are refl ected in the rolling agenda and specifi c areas of concern are subject to deep dives during the year. The risk management section of the Strategic Report includes the key risk areas on page 43.
Customer risk in the UK has been a substantial focus of the Committee in 2018 with a programme of work informed by an external benchmarking activity. The enhancements introduced and monitored in each committee meeting included oversight of a newly created UK Customer Committee and a new customer risk appetite statement supported by enhanced management information. Specifi c customer deep dives have been received in relation to complaints handling, renewal pricing, and meeting customers’ demands and needs under the Insurance Distribution Directive (IDD).
The year saw real progress in key areas of IT security, resilience and incident management, and the ever-growing importance of data means this topic received increasing attention. Data management capabilities have been identifi ed as of strategic importance and will be an area of focus for the Committee in 2019. During the fi rst half of the year, the Committee provided oversight of the risks associated with the Group’s GDPR compliance programme. This topic remained on the agenda during the second half of the year as the Committee monitored the risks from transition to business as usual.
“The Committee has continued to play a pivotal role in the oversight of our key risks whilst engaging stakeholders on specifi c topics.”
After taking over as Chair at the start of 2018, I undertook a full review of the effectiveness of the Committee and agreed a set of enhancements. While the Committee was considered effective, there were areas where additional consideration or focus is appropriate. Many of the specifi c topics are covered below, including additional focus on delivering good customer outcomes,
enhancements following recommendations from the Internal Model Governance Committee and subsequent approval by the Board. The Committee received a standalone training session that covered the key model design principles and addressed questions raised through the year, including dependencies between risks and model use. This will help inform future decisionmaking, especially in relation to regulatory model change approval processes in 2019. Additional model change activities will take place in Scandinavia, which the Committee will monitor but approval will be provided locally.
· Regional Chief Risk Offi cers from Scandinavia, UK & International and Canada presented to the Committee to brief them on key regional matters, outline their top risks and relay their insights and best practice activities for consideration.
· Emerging risk analysis is used to anticipate future risk issues that might arise and to support development of stress and scenario testing plans. Each year several risks are selected for more detailed analysis, which this year included hard Brexit, accelerating climate change and systemic risks arising from reinsurance. The Committee requested a new emerging risk associated with the changing use of consumer data be added.
· The Committee reviews the reinsurance strategy each year ahead of renewal, and at the start of the year a debrief is provided on completion of the renewal process.
· The Group Capital Report and the Group ORSA were presented and approved. In approving the ORSA, the Committee requested edits to clarify the potential for volatility in certain capital measures. The Committee’s oversight of the ongoing ORSA process includes consideration of a range of papers, such as risk updates, capital updates, stress tests and model results. Papers are clearly fl agged as being part of the ORSA process.
· Minor revisions to the Group Recovery Plan were reviewed and approved.
· Group Risk Policies are reviewed on an annual cycle and any major changes are communicated to the Committee for its comment and approval.
· The Terms of Reference for the Committee, available at www.rsagroup.com, were amended during the year to refl ect the additional responsibility for oversight of the UK Customer Committee and the review of potential internal confl icts of interest between overseas subsidiaries and UK regulated entities as escalated by the transaction review and approval processes.
Following on from my effectiveness review at the start of the year, further enhancements are planned for 2019 with a continued focus on the customer, increasingly robust prioritisation of the agenda to ensure crucial areas are given suffi cient time, oversight of longstanding actions that are challenging to close given their scale, complexity or nature, and a greater representation from subject matter experts from across the Group on key topics.
Model change applications will be reviewed and approved ahead of regulatory model change processes being initiated in 2019.
In relation to the new responsibility for oversight of the UK Customer Committee and Customer Compliance, the Committee will devote time and Committee members will continue to attend the UK Customer Committee in 2019 in order to understand and oversee the measures taken to further improve customer outcomes.
The Committee will also continue to oversee the evolution of the Brexit scenario and ensure that the necessary measures are taken to mitigate any risks during this period of uncertainty.
Remuneration Policy 85 2. RSA’s remuneration principles 85 3. Remuneration Policy for
In 2018, RSA delivered increases in headline profi ts, earnings per share and dividends, and a return on tangible equity well above the cost of capital. Nevertheless, it was a disappointing year fi nancially with the fi rst decline in underlying profi ts since 2013 driven by adverse weather and Commercial Lines losses, notably in London market portfolios that are being exited.
The key performance indicators include: · Pre-tax profi ts £480 million, up 7%,
There were many strong features of the year. Excluding exit portfolios, results were close to 2017’s record, and at an underlying level, excellent progress was seen across a range of measures including costs, Personal Lines results, pensions and capital actions, and geographically in Sweden, Ireland and Middle East.
In the 2018 Annual Bonus Plan, the fi nancial target ranges were set at a level that built on 2017's excellent results. Headline targets were not met, though a number of underlying fi nancial and other metrics performed well.
The Committee is satisfi ed the remuneration outcomes in this report fairly represent underlying performance. Further to our annual review of a report from the Group Chief Risk Offi cer, we considered whether any issues warranted application of malus or clawback and concluded that none so required.
The Committee will review the Policy ahead of its triennial renewal at the 2020 AGM, to ensure it continues to support RSA’s longterm success. In doing so, it will take account of emerging practice around the new UK Corporate Governance Code provisions.
In recognition of the changing remuneration guidelines of some institutional shareholders, the Group Chief Executive voluntarily began
∙ New bonus plan for UK front line colleagues, more directly linked to their own contribution.
∙ New self-service HR portal in Scandinavia, with simplifi ed process for employees and leaders.
∙ UK employer pension contributions increased for c.40% of UK employees from
∙ We design pay and benefi ts to be competitive in the local talent market, tailored by job family.
∙ We take care to avoid unconscious bias, allowing appropriate judgements in pay decisions.
Charlotte Jones has been appointed as Group CFO and will become an Executive Director. On commencing this role, Charlotte’s remuneration will comprise a base salary of £500,000, benefi ts provision and an incentive opportunity in line with the Remuneration Policy. Her overall pension rate of 10% of salary will be aligned to other new UK-based employees. Charlotte will be required to build and maintain a shareholding of 200% of salary.
The Committee is alert to the importance of monitoring and assessing internal pay relativities, and takes these into account when determining Executive Director remuneration. The ratios shown on page 79 are calculated on the required basis and so refl ect the range of job roles in our UK-based business.
We have programs underway to improve female representation in senior jobs and thereby reduce our gender pay gap, as set out at www.rsagroup.com/responsibility.
Policy consists of fi xed remuneration, annual and long-term incentive components only.
Financial and non-fi nancial incentive goals refl ect and support business strategy. Assessment considers both what is delivered and how.
Transparent Director pay decisions, with incentive targets and outcomes published in detail.
∙ Focus on continuously improving operational delivery, through better customer service, underwriting and cost effi ciency
Performance targets, results and full remuneration tables on pages 71 to 74
The Committee determines the remuneration and contractual terms for the Executive Directors, Executive Committee and the Chairman (who are detailed on pages 46 to 48).
The Committee reviews the Group’s employee remuneration arrangements at an overall level, and the alignment of incentives with culture, and takes these into account in its decision-making.
At the invitation of the Committee, the Chairman, Group Chief Executive and designated representatives from functions within the business attend meetings where relevant to advise on Group strategy, risk, performance, and HR policies and practices, and support the Committee’s work. These Committee attendees during 2018 included the Group HR Director, Group Chief Risk Offi cer, Group Chief Legal Offi cer & Company Secretary and Group Reward Director.
· Review of executives’ base salaries effective from 1 April 2018.
May · Review of the 2018 long-term incentive grant and an update on dilution levels.
September · Update on the performance of the Annual Bonus Plan 2018 and current long-term incentive cycles.
· Update on Sharesave and Sharebuild participation and renewal of the schemes in 2019.
· Review of Committee discharge of responsibilities against terms of reference.
2 Bonus: Awards in respect of performance measures relating to the fi nancial year shown, as described on pages 71 to 73. 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 under the Group’s Malus and Clawback Policy detailed on page 75.
6 Scott Egan was appointed as an Executive Director effective 1 October 2015. In 2018 he received an annual base salary of £538,125 from 1 January to 31 March.
The Business Scorecard focuses on key areas of management activity essential to the success of the Company spanning underlying fi nancial performance, risk and resilience (including capital) and business sustainability (including customer franchise). Achievement is measured against a range of objective measures, with the overall outcome being determined using judgement in the round. Absent unusual results, the highest Scorecard weightings are accorded to the Underlying Performance fi nancial measures and as a result the majority of annual bonus awards overall are driven by fi nancial measures. The Scorecard outcome will vary from the headline fi nancial metrics’ outcome if these are over or under representative of the underlying actions of management and their results.
Achievement under the Scorecard was assessed to have been stronger than the headline fi nancial metrics, though below that of 2017.
Within the Underlying Performance component, costs were reduced signifi cantly, and more than targeted, while attritional loss ratios were slightly worse. This combination produced an underlying fi nancial performance above target. Strategic Plan initiatives are discussed at length in the body of the Annual Report, and support the progress achieved on the underlying fi nancials. By comparison, headline fi nancial performance was reduced by adverse weather costs and Commercial Lines large losses, principally in exit portfolios.
In terms of Risk and Resilience, performance was again strong. Capital ratios were strengthened despite higher dividends. A successful UK pension agreement was also reached. Reinsurance coverages produced valuable protection in a volatile loss climate.
On Business Sustainability, the Group’s Personal Lines business (57% of total) made good progress, growing total customer premiums and gaining new partners. In Commercial Lines, management actions to exit portfolios and re-underwrite business impacted growth and retention, but deliberately so.
· Financial delivery: driving achievement of Group’s fi nancial plans, capital plans and ratings, investment income and functional cost goals.
· Capital strength increased with positive underlying development in risk profi le also.
· Strong ambassador for the Company and good with all relevant stakeholders.
· Effective partner to CEO in overall management of the business.
Stephen’s objectives included: · Strategy work: driving Best in Class capability improvements and sustaining plan trajectory.
· Risk profi le: operating Company to good standards of risk/regulatory control and capital resilience.
· Championed the Group’s vision on Diversity & Inclusion and corporate responsibility through a number of key initiatives.
Conditional long-term incentive awards were granted in 2016. In 2019, these Performance Shares will partially vest at 73.8% of the maximum, based on the achievement of the three performance conditions described below.
The Group underlying ROTE three-year average achieved was 14.1%. The average required for an on-target vesting (62.5% vesting) was 12.7% as envisaged by RSA’s operating plan for the period and being a level signifi cantly in excess of the Group’s cost of equity. This was arithmetically less than the mid-point of the 11-16% range refl ecting the nature of the turnaround where ROTE performance was targeted to improve substantially over the three year averaging period. For context, in the year prior to this LTIP cycle, i.e. 2015, RSA’s ROTE result was 9.7%. RSA’s continuing progress allowed the target range and the on-target value required for the 2017-19 LTIP cycle to be set higher to refl ect progress of the turnaround and to continue to incorporate an appropriate degree of stretch.
Performance measures 2016-18 Threshold target: 25% vesting Maximum target: 100% vesting Actual Weighting Vesting
Tryg and 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 is calculated on a three-year average basis. A straight-line calculation was 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) in this cycle was 12.7%.
The 2016-18 LTIP period captures important elements of the Company’s turnaround activity, together with emergence into ‘business as usual.’ Within the Business Review Scorecard indicators, performance overall was assessed to have been above target (though by a margin below that assessed for the 2015-17 LTIP). This conclusion is supported by the share price outperformance and ROTE outperformance also delivered. Capital and expense achievements were particularly strong. Attritional loss ratios were also signifi cantly better than prior years. Cumulative earnings (and related TNAV) fell short of plan due to 2018 large loss and weather volatility.
2 TNAV growth per share assessed consistent with the methodology in note 1 incorporating capex outcomes vs Board sanctioned totals. Market volatility (FX, Bonds,
3 This indicator was not separately listed in the Scorecard Key Performance Indicators but was a key underlying target and reviewed by the Committee as additional context on the transformation.
Notes: 1 Estimate includes vesting Performance Shares valued at £943,848 (of which £168,955 is attributable to share price appreciation). Accrued dividend equivalents valued at £80,638 will be added to the awards that vest. Valued using an average share price over the last quarter of 2018 of £5.373 and compared to a grant share price of £4.4112.
2 Estimate includes vesting Performance Shares valued at £2,003,393 (of which £358,620 is attributable to share price appreciation). Accrued dividend equivalents valued at £171,168 will be added to the awards that vest. Valued as in note 1.
Conditional long-term incentive awards were made to Scott Egan and Stephen Hester on 2 March 2018. These Performance Share awards will vest in 2021, subject to the satisfaction of the plan’s performance conditions based on Group underlying ROTE, relative Total Shareholder Return and a Business Scorecard.
Performance measures 2018-20 Weighting Threshold target: 25% vesting Maximum target: 100% vesting
Relative TSR1 1/3 RSA’s TSR is equal to the unweighted index of comparators
The awards granted are set out in the table below: Director
Notes: 1 The performance period is three years and ends on 31 December 2020. Performance measures are Group underlying ROTE, Relative TSR and a Business Scorecard
2 If threshold performance is achieved, 25% of the number of shares shown will vest.
· Material fi nancial misstatement of results for any fi nancial year or the material fi nancial loss/under-performance of a business unit that could have been reasonably risk-managed
· Deterioration in the fi nancial health of the Company leading to severe fi nancial constraint
· Material fi nancial loss of a business unit as a result of circumstances that should reasonably have been risk-managed by the individual
RSA Annual Report and Accounts 201876 rsagroup.com 5. Executive Director Shareholding (audited)
Notes: 1 As at 27 February 2019, the interests in Ordinary Shares of the current Directors have not changed since 31 December 2018.
The left-hand side of table below shows the Executive Directors’ Shareholding level as at 31 December 2018, calculated based on the shares they own outright. In addition, Executive Directors hold unvested scheme interests in the Company’s incentive plans, which are shown on the righthand side of the table.
Scott Egan joined RSA in October 2015 and continues to build his Shareholding to the target level shown below within the targeted fi ve-year period, with his fi rst long-term incentive award vesting due to take place in 2019.
4 Includes Deferred Bonus Shares as detailed in the following table.
6 Estimates the potential additional Shareholding that could result from these awards at vesting, after statutory deductions. Assumes an on-target (62.5%) vesting level of
Performance Shares. For simplicity, the dividend equivalents that are added to vesting share awards are not included here. Valued as in notes 2 and 3 above.
Details of Executive Directors’ existing awards in the Company’s share plans are set out in the following table. The interests shown were granted under the long-term incentive plan approved by shareholders at the 2014 AGM, the Performance Share Plan (PSP).
3 Deferred Bonus Shares granted to Stephen Hester in 2015 vested during the year and 9,009 accrued dividend equivalent shares were added to the number of vesting awards shown above. A portion of the shares were sold to cover statutory deductions, the rest were retained.
The date by which performance conditions are to be met is 31 December 2018. A two-year post-vesting retention period applies as set out in the Remuneration Policy.
6 Performance Shares granted in 2017 and 2018 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: 2017 awards by 31 December 2019, 2018 awards by 31 December 2020. A two-year postvesting retention period applies as set out in the Remuneration Policy.
7 No other Directors of the Company held long-term incentive scheme interests during the year.
There were no payments to Directors for loss of offi ce in 2018.
The table below sets out the percentage change in salary, benefi ts and bonus for the individual undertaking the most senior Executive Director role in the Company compared with Group employees on average between 2017 and 2018.
The table below shows the all-employee pay spend and returns to shareholders by way of dividends for 2018. Figures from 2017 are provided for comparison. The employee pay data covers the Group’s employees globally, and therefore includes the impact of exchange rate changes.
Notes: 1. Includes wages and salaries, social security costs, pension costs and share-based payments as shown in the notes to the Financial Statements on page 131.
2. Includes the fi gures as shown in the notes to the Financial Statements on page 134.
The Group aims to treat all employees fairly in the markets in which we operate and provide competitive, performance-linked remuneration. RSA is an accredited Living Wage Employer.
The following table compares the 2018 total remuneration single fi gure for the Group Chief Executive with the Group’s UK-based employees at the 25th percentile, median and 75th percentile. This is included in this year’s report ahead of formal reporting requirements coming into effect.
2 This calculation method was used as it is expected to give a fair representation of pay ratios given RSA’s remuneration structures. It is relatively time-effi cient to calculate while remaining appropriately specifi c. Under this option, gender pay gap data as at April 2018 is used to identify the best equivalents for the three RSA UK employees paid at the 25th percentile, median and 75th percentile. A 2018 total remuneration fi gure is then calculated for each of these employees, and for a sample of employees with hourly remuneration rates either side to ensure that a representative employee is selected. Each of the three identifi ed individuals was a full-time employee during the year.
3 The total pay and benefi ts for the individuals identifi ed at the 25th percentile, median and 75th percentile was £22,168, £32,783 and £57,771 respectively. The base salary for the individuals identifi ed at the 25th percentile, median and 75th percentile was: £19,759, £28,305 and £47,866 respectively.
This section outlines how the Committee intends to implement the Directors’ Remuneration Policy during 2019.
Notes: 1 For Scott Egan and Stephen Hester, this is based on the value of base salary and pension for 2019, and benefi ts in the 2018 total remuneration single fi gure. For Charlotte
3 Assumes 100% vesting of the award in the 2019-21 grant.
The table below shows the salaries that will apply from 1 April 2019. The level of increase is below the average increase levels for other UK-based employees this year: Director
The Group Chief Executive voluntarily began a process of pension contribution reduction, with payments from April 2019 to reduce by 3% of salary, to 27% of salary, and a further 3% reduction to 24% of salary from April 2020.
From the effective date of her appointment, Charlotte Jones’ annual base salary will be £500,000. Her overall pension contribution rate of 10% of salary is aligned to that for other new UK employees. She will receive benefi ts in line with the Remuneration Policy.
Half of the total bonus will be awarded in cash where clawback can apply, the balance is deferred into shares for a three-year period where malus adjustment can apply.
The plan directly supports the building of shareholder value by targeting Group underlying Return on Tangible Equity (ROTE), relative Total Shareholder Return (TSR) and a Business Scorecard.
For the 2019 grant, performance measures will be assessed against a performance period of 1 January 2019 to 31 December 2021, taking into account underlying business performance and material risk factors.
In contrast to the Business Scorecard in the 2019 Annual Bonus, which will capture calendar year actions and outcomes relative to RSA’s business plan, the long-term incentive Scorecard will capture progress over three years vs the Company’s strategy and three-year Operating Plans. Its specifi c targets cannot be disclosed prospectively for commercial reasons, including price sensitivity. A performance narrative will be given regarding the level of vesting on the Scorecard once the performance conditions have been tested.
Executive Directors must retain all vested shares arising from this incentive plan for two years post-vesting (except those sold to cover statutory deductions), and they are subject to the Group’s Clawback Policy. The table below summarises the LTIP’s structure.
Performance measures 2019-21 Weighting Threshold target: 25% vesting Maximum target: 100% vesting
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 set in line with, and therefore signals, the Group’s forward plan for the period and for this reason is considered commercially sensitive. Disclosure will be provided retrospectively following the end of the performance period.
On leaving her current employer, Charlotte Jones is due to forfeit a number of cash and share-based awards. In line with the principles in the Policy, a compensatory package will be constructed to match the timing and nature of awards forfeited following commencement of her employment as CFO (i.e. a mix of cash, restricted/deferred share awards and inclusion in current RSA incentive cycles). In addition to the rules governing RSA share awards, this will be subject to repayment terms in the event of resignation or termination for gross misconduct within two years of appointment. Charlotte must build her RSA shareholding to the required 200% of salary level prior to the sale of any shares, excluding those sold to cover statutory deductions.
The table below sets out the Non-Executive Directors’ total remuneration single fi gures for the fi nancial year ended 31 December 2018.
Cucchiani in the table has been restated for travel expenses incurred in year.
4 Johanna Waterous resigned as a Non-Executive Director effective 5 May 2017.
Note: 1 A fee of £5,000 applies for each committee a Non-Executive Director is a member of other than as Committee Chairman.
The table below shows the interests of Non-Executive Directors in Ordinary Shares of £1.00 each of the Company, including those of closely associated persons.
3 Hugh Mitchell resigned as a Non-Executive Director effective 11 May 2018. The table above shows his shareholding as at that date and not 31 December 2018.
4 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 offi ce during standard business hours. The Directors had no share options that vested and remained unexercised, or were exercised in the year.
The table below shows when the Non-Executive Directors’ appointments became effective and their 9th Anniversary. All NEDs, including the Chairman, are subject to annual re-election by shareholders at the Annual General Meeting.
· The remuneration framework is reviewed regularly to ensure that it continues to appropriately reward executives, while protecting shareholders’ interests and complying with principles of good risk management and reward governance and avoiding confl icts of interest.
The following table sets out the components of the Executive Directors’ remuneration package and how they operate.
There is no automatic right for any Director to receive a salary increase.
Some benefi ts are delivered as taxable cash-in-lieu allowances. Tax changes are not compensated.
Assistance would be available under RSA’s relocation policy or global mobility policy should this be required.
This element forms part of a market competitive package and enables executives to save for retirement.
Pension benefi ts take the form of employer contributions to a pension plan, or a full/partial cash allowance in lieu. The RSA UK defi ned benefi t pension schemes are closed to all new entrants and future accrual.
No Executive Director will receive a pension benefi t in excess of 30% of salary.1
Bonus awards are calculated against stretching annual fi nancial and non-fi nancial targets, as well as the performance of the individual executive.
Vested shares must be retained until the relevant shareholding level is reached, excluding any sold to satisfy statutory deductions. The applicable shareholding levels are detailed on page 76.
The Committee can exercise discretion to change the bonus measures, how they are weighted, calculated and targeted. It can adjust bonus outcomes provided this is appropriate and in shareholders’ interests, including adjustment downwards for current or future risk exposure, and make such amendments as are necessary to respond to regulatory, legal or accounting requirements. Shareholders will be notifi ed if this has been carried out by disclosure in the relevant Directors’ Remuneration Report.
Performance measures and weightings are set each year considering the Company’s strategy and shareholder interests, and will vary based on each
Vested shares must be retained until the relevant shareholding level is reached, excluding any sold to satisfy statutory deductions, as detailed on page 91.
For recruitment purposes, or in highly exceptional circumstances, such as for retention, the Committee may agree to a conditional performance-related award being made up to an additional 170% of salary. This would be considered a ‘one-off’ award.
Where an exceptional award is made, full disclosure will be given on the rationale.
The performance period will normally be at least three years for all measures, with no re-testing.
The measures and targets for the 2019-21 cycle are on pages 81 to 82.
2 The overall remuneration principles in this Policy apply across the Group. Employee remuneration packages are set with reference to the relevant competitive markets in which the Group operates, and remuneration levels therefore refl ect differences in location and job role. All permanent UK-based employees are eligible to receive a bonus award, but deferral is only operated for senior leaders and where required by Solvency II. The LTIP policy provisions are the same for all other participants who receive performance-based awards, with exception to the two-year post-vesting retention period which only covers Executive Directors. 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.
RSA Annual Report and Accounts 201888 rsagroup.com 4. Approach to recruitment remuneration
Incentive awards · Under normal circumstances, a new Executive Director will be eligible for incentive awards in line with the usual policy as detailed on page 87. 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 fi rst year of service up to the limit of 400% of salary.
- This will only be permitted on receipt of reasonable evidence of loss.
5. Service contracts and policy for payments on loss of offi ce
Each of the Executive Directors is employed under a service agreement, which contains a variety of contractual terms and conditions. Contracts are available for inspection by shareholders at the Company’s registered offi ce. Terms are designed to ensure fair treatment for departing executives while avoiding reward for failure.
· In the case of summary dismissal, no notice will be served by the Company and no compensation will be paid in lieu of it.
· Salary, benefi ts and pension contributions continue during garden leave, but this time will not count towards the calculation of any Annual Bonus award that may subsequently be due.
External appointments · Executive Directors may hold one external non-executive position of a FTSE 100 company provided this does not give rise to any confl ict of interest, with the approval of the Group Nomination and Governance Committee. If there is any remuneration arising from this role, the individual can retain it.
Resignation or dismissal for cause · Not eligible if left or under notice at the date of payment.
· Normally vest in line with the normal timetable if resignation.
· Performance is tested in line with the normal performance timetable.
· In cases of death in service and, with Committee discretion, medical severance, performance can be tested and awards made sooner than the scheduled date.
· In cases of death in service and, with Committee discretion, medical severance, awards can vest sooner than the scheduled date.
Change of control · Normally good leaver treatment applies as above.
· Where this is the case, performance can be tested and awards made sooner than the scheduled date.
· Vesting level determined with regard to performance and time served.
Note: 1 The Committee will make reasonable judgement on determining whether a Director qualifi es 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.
RSA believes it is in shareholders’ interests for its executives to hold shares in the Company and build a stake in the business. They are expected to retain vested shares arising from the Company’s share plans to build and maintain a minimum shareholding level.
· The shares which count towards the holding level are those held either in the executive’s own right or that of immediate family members and any awarded by RSA which cease to be bound by any performance or service conditions. Vested Performance Shares count towards the holding level during the two-year retention period.
The following table outlines the components of Non-Executive Directors’ remuneration: Purpose and Strategic Link Operation and maximum level of remuneration
This element ensures competitive remuneration is paid to attract high calibre non-executives and recognise their time commitment on the Board.
· Director Fees will not exceed the limit stated in the Company’s Articles of Association, as approved by shareholders.
· The Company has the discretion to introduce new fees or change the Non-Executive Directors’ terms.
· They receive no other benefi ts, but they can have RSA insurance products at a discount.
· Non-Executive Directors may hold shares in RSA but this is a personal matter and is not mandatory.
Section 414A of the Companies Act 2006 requires the directors to present a Strategic Report of the Company for the fi nancial year ended 31 December 2018. The information that fulfi ls the requirements of the Strategic Report set out in section 414C of the Companies Act 2006 can be found on pages 04 to 43.
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 04 to 43 which includes: · Use of fi nancial instruments by the Company and details of fi nancial 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
· The Company’s exposure to price risk, underwriting risk, reserving risk, credit risk, liquidity risk and cashfl ow risk
· An indication of likely future developments in the Company’s business.
A full list of the Group’s subsidiaries and related undertakings is in Appendix B on pages 166 to 168.
Based on this review, no material uncertainties that would require disclosure have been identifi ed in relation to the ability of the Group to remain a going concern for at least the next 12 months, from both the date of the Statement of Financial Position and the approval of the Consolidated Financial Statements.
The directors recommend a fi nal dividend (subject always to the dividend being cancelled, withheld or deferred) of 13.7 pence per Ordinary Share (2017: 13 pence) to be paid on 17 May 2019 to holders of Ordinary Shares on the register at the close of business on 8 March 2019, subject to Ordinary Shareholder approval. An interim dividend of 7.3 pence was paid during 2018, making the total proposed dividend for the year 21 pence (2017: 19.6 pence).
More information on the Company’s share capital can be found in Notes 32 and 33 on pages 148 and 149. Note 33 includes a summary of the principal terms of the Company’s SEK2,500,000,000 and DKK650,000,000 fl oating 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.
The Group has a close working relationship with trade unions and employee associations in all parts of the business where they exist and consults with employees and representatives on relevant matters, taking their views into consideration. The European Works Council (EWC) consults with employee representatives on transnational matters across the UK, Ireland, Sweden, Norway, Denmark, France, Spain, the Netherlands, Belgium and Germany. The annual meeting of the EWC took place on 13–15 March 2018. Regular consultations with employee representatives took place throughout the year.
The directors and offi cers of the Company and its subsidiaries also have the benefi t of insurance which provides suitable cover in respect of legal actions brought against them. In addition, the Company also maintains a pension trustee liability indemnity policy for the directors of SAL Pension Fund Limited and Royal & Sun Alliance Pension Trustee Limited, subsidiaries of the Group, in relation to such company’s role as a trustee of an occupational pension scheme. This indemnity constitutes a qualifying pension scheme indemnity provision under section 235 of the Companies Act 2006. These indemnities were in force during the year ending 31 December 2018 and remain in force as at the date of this report.
The Company’s Articles of Association may be amended by special resolution of the Company’s Ordinary Shareholders.
Cevian Capital II G.P. Limited 137,645,130 13.50% Indirect 137,645,130 13.50% Indirect
All conversion factors have been sourced from recognised public sources, including the UK’s Department for business, energy and industrial strategy, the International Energy Agency and the GHG protocol’s stationary combustion tool.
NOTES: The emissions reported above have been restated versus numbers previously disclosed, in accordance with GHG protocol guidelines.
2. Calculations have been amended to include data that was not available at the time of publication. A values independently assured by PwC in accordance with ISAE 3000 (Revised) and ISAE 3410. For further information, please refer to our reporting criteria and PwC’s assurance opinion which can be found on our Corporate Responsibility pages at www. rsagroup.com/responsibility.
Scope 2: Indirect emissions from imported energy; electricity, district cooling and district heating.
Business travel: Emissions from fl ights, trains, taxis and vehicles not owned by the organisation.
As per section 54(1) of the Modern Slavery Act 2015, our Slavery and Human Traffi cking Statement is published annually on our Group website. The statement covers the activities of RSA Insurance Group plc and its subsidiaries and details policies, processes and actions we have taken to ensure that slavery and human traffi cking are not taking place in our supply chains or any part of our own business.
The Strategic report is considered to form the management report for the purpose of DTR 4.1.8.R.
The Directors’ Responsibility Statement appears on page 97 and is incorporated by reference into this Report.
1 Basis of preparation 111 2 Adoption of new and revised standards 111 3 New accounting standards, interpretations and amendments 111 4 Signifi cant accounting policies 112
22 Goodwill and intangible assets 135 23 Property and equipment 137 24 Investment property 138 25 Financial assets 138 26 Fair value measurement 141 27 Interests in structured entities 144 28 Reinsurers’ share of insurance contract liabilities 145 29 Current and deferred tax 146 30 Insurance, reinsurance and other debtors 147 31 Cash and cash equivalents 147 32 Share capital 148 33 Other equity instruments – Tier 1 Notes 149 34 Non-controlling interests 149 35 Loan capital 149 36 Other borrowings 150 37 Insurance contract liabilities 150 38 Post-retirement benefi ts and obligations 155 40 Other liabilities 160
Company law requires the Directors to prepare Group and Parent Company fi nancial statements for each fi nancial year. Under that law they are required to prepare the Group fi nancial statements in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU) and applicable law, and have elected to prepare the Parent Company fi nancial statements on the same basis.
We confi rm that to the best of our knowledge: · The fi nancial statements on pages 106 to 175, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, fi nancial position and profi t or loss of the Parent Company and the undertakings included in the consolidation taken as a whole; and
· The strategic report on pages 04 to 95 includes a fair review of the development and performance of the business and the position of the Parent Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
We have audited the fi nancial statements of RSA Insurance Group plc (“the Company”) for the year ended 31 December 2018 which comprise the consolidated income statement, consolidated statement of comprehensive income, consolidated and parent company statement of changes in equity, consolidated and parent company statement of fi nancial position, the consolidated and parent company statement of cash fl ows and the related notes, including the accounting policies in note 4.
In our opinion: · the fi nancial 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 2018 and of the Group’s profi t for the year then ended; · the Group fi nancial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU); · the Parent Company fi nancial statements have been properly prepared in accordance with IFRSs as adopted by the EU and as applied in accordance with the provisions of the Companies Act 2006; and
· the fi nancial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group fi nancial statements, Article 4 of the IAS Regulation.
Materiality: group fi nancial statements as a whole £35m (2017: £35m)
The impact of uncertainties due to the UK exiting the European Union on our audit Refer to pages 40 to 43 (principal risks) and page 40 (viability statement).
In addition, we are required to consider the other information presented in the Annual Report including the principal risks disclosure and the viability statement and to consider the directors’ statement that the annual report and fi nancial statements 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.
We developed a standardised fi rm-wide approach to the consideration of the uncertainties arising from Brexit in planning and performing our audits. Our procedures included: · Our Brexit knowledge – We considered the directors’ assessment of Brexit-related sources of risk for the Group’s business and fi nancial resources compared with our own understanding of the risks. We considered the directors’ plans to take action to mitigate the risks.
· Assessing transparency – As well as assessing individual disclosures as part of our procedures on valuation of insurance liabilities, valuation of pensions and post-retirement obligations and valuation of deferred tax assets we considered all of the Brexit related disclosures together, including those in the strategic report, comparing the overall picture against our understanding of the risks.
Valuation of insurance liabilities (Insurance contract liabilities 2018: £9,468 million gross, £7,936 million net; 2017: £9,477 million gross, £7,954 million net, including provision for losses and loss adjustment expenses)
Refer to page 57 (Audit Committee Report), page 113 (accounting policy) and pages 150 to 154 (fi nancial disclosures)
A margin is added to the actuarial best estimate of insurance liabilities to make allowance for specifi c risks and uncertainties that are not specifi cally allowed for in establishing the actuarial best estimate. The appropriate margin to recognise is a subjective judgement and estimate taken by the directors, based on the perceived uncertainty and potential for volatility in the underlying claims.
Certain lines of business have greater inherent uncertainty, for example those where claims emerge more slowly over time, or where there is greater variability in claim settlement amounts and potential exposure to large losses due to effect of uncertain or unknown future events. This includes Abuse, Deafness classes; UK Professional and Financial Risk Classes; the Danish Workers Compensation class; the Swedish Personal Accident classes; the Canadian General Liability class; and classes of business affected by emerging industry issues such as the impact of Periodic Payment Orders (which are akin to annuities with longevity and infl ation risk) on UK motor business and associated reinsurance recoveries in relation to these areas.
· Sensitivity analysis: Evaluation of sensitivity analysis over key judgements and assumptions, such as large claims, the discount rates for longer tail classes of business and Periodic Payment Order projections.
Valuation of insurance liabilities (continued) (Insurance contract liabilities 2018: £9,468 million gross, £7,936 million net; 2017: £9,477 million gross, £7,954 million net, including provision for losses and loss adjustment expenses)
Refer to page 57 (Audit Committee Report), page 113 (accounting policy) and pages 150 to 154 (fi nancial disclosures).
· 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 ensure the integrity of the data used in the actuarial reserving process.
IT systems and control environment Refer to page 58 (Group Audit Committee Report).
This is an area of signifi cant risk in our audit due to the complexity of the IT infrastructure, particularly in the UK and Scandinavia, where there are legacy systems which require increased manual inputs, relative to more automated processes.
· Extended scope: Where general IT controls and compensating manual controls did not operate to mitigate a risk, we performed additional substantive testing, such as using extended sample sizes and performing data analysis routines over impacted accounts to test the integrity of the transactional level data that is fl owing into the Group fi nancial statements.
Our results Our testing identifi ed defi ciencies in the design and operation of controls. As a result we expanded the extent of our detailed testing over and above that originally planned, and this work was completed satisfactorily (2017 result: Our testing identifi ed defi ciencies in the design and operation of controls. As a result we expanded the extent of our detailed testing over and above that originally planned, and this work was completed satisfactorily).
Refer to page 58 (Group Audit Committee Report), page 115 (accounting policy) and pages 155 to 160 (fi nancial disclosures).
The valuation of defi ned benefi t pension obligations is dependent upon complete and accurate data about the members of the pension scheme.
The effect of these matters is that, as part of our risk assessment, we determined that the pensions and post-retirement obligations has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the fi nancial statements as a whole and possibly many times that amount. The fi nancial statements (note 38) disclose the sensitivity estimated by the Group.
· Benchmarking assumptions: Comparing the key assumptions such as discount rate, infl ation rate and life expectancy against externally derived data.
Our results We found the valuation of the pension and post retirement obligations to be acceptable (2017 result: acceptable).
Refer to page 58 (Group Audit Committee Report), page 115 (accounting policy) and pages 146 to 147 (fi nancial disclosures).
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 fi nancial statements as a whole. The fi nancial statements (note 29) disclose the sensitivity estimated by the Group.
· Own tax expertise: With the support of our own tax specialists and their knowledge of tax legislation, we also assessed the extent to which projected profi ts were taxable, in particular the Group’s assumptions about how accumulated tax losses and other associated tax attributes can be utilized within the group against the UK business, and RSAI plc as the taxable legal entity, in particular.
Subjective valuation The parent company’s holds its investments in subsidiaries at fair value, representing 66% (2017: 72%) of the company’s total assets. For the most signifi cant subsidiary, fair value is based on the market value of the Group, after adjusting for certain items. Whilst there is not a high degree of subjectivity, the estimation of some of the adjusting items is dependent on assumptions of future cash fl ows discounted to present value.
Our results: We found the assessment of the recoverability of the parent company’s investment in subsidiaries to be acceptable (2017 result: acceptable).
Materiality for the Parent company fi nancial statements as a whole was set at £31.5m (2017: £31.5m), determined with reference to a benchmark of Net Assets and chosen to be lower than materiality for the group fi nancial statements as a whole. It represents 0.5% of the stated benchmark (2017: 0.5%).
The Group team instructed component auditors as to the signifi cant areas to be covered, including the relevant risks detailed above and the information to be reported back. The Group team approved the component materiality’s, which ranged from £15m to £28m (2017: £15m to £28m), having regard to the mix of size and risk profi le of the Group across the components. All (2017: all) of the audits of reporting components were performed by the component auditors.
£28m Range of materiality at four components £15m to £28m (2017: £15m to £28m)
RSA Annual Report and Accounts 2018104 rsagroup.com 4. We have nothing to report on going concern
The Directors have prepared the fi nancial statements on the going concern basis as they do not intend to liquidate the Company or the Group or to cease their operations, and as they have concluded that the Company’s and the Group’s fi nancial position means that this is realistic. They have also concluded that there are no material uncertainties that could have cast signifi cant doubt over their ability to continue as a going concern for at least a year from the date of approval of the fi nancial statements (“the going concern period”).
Our responsibility is to conclude on the appropriateness of the Directors’ conclusions and, had there been a material uncertainty related to going concern, to make reference to that in this audit report. However, 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 reference to a material uncertainty in this auditor’s report is not a guarantee that the Group and the Company will continue in operation.
In our evaluation of the Directors’ conclusions, we considered the inherent risks to the Group’s and Company’s business model and analysed how those risks might affect the Group’s and Company’s fi nancial 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 fi nancial resources over this period were: · adverse insurance reserves development; · a deterioration in claims experience, potentially caused by market wide catastrophe event(s); · a deterioration in the valuation of the Group’s investments arising from a signifi cant change in the economic environment; and
As these were risks that could potentially cast signifi cant doubt on the Group’s and the Company’s ability to continue as a going concern, we considered sensitivities over the level of available fi nancial resources indicated by the Group’s fi nancial forecasts taking account of reasonably possible (but not unrealistic) adverse effects that could arise from these risks individually and collectively and evaluated the achievability of the actions the Directors consider they would take to improve the position should the risks materialise. We also considered less predictable but realistic second order impacts, such as the impact of Brexit and the impact on the economic environment, which could result in a rapid reduction in available fi nancial resources.
Based on this work, we are required to report to you if: · we have anything material to add or draw attention to in relation to the directors’ statement in Note 1 to the fi nancial statements on the use of the going concern basis of accounting with no material uncertainties that may cast signifi cant doubt over the Group and Company’s use of that basis for a period of at least twelve months from the date of approval of the fi nancial statements; or
The directors are responsible for the other information presented in the Annual Report together with the fi nancial statements. Our opinion on the fi nancial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except as explicitly stated below, any form of assurance conclusion thereon.
· the directors’ explanation in the Viability Statement of how they have assessed the prospects of the Group, over what period they have done so and why they considered that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifi cations or assumptions.
We are required to report to you if: · we have identifi ed material inconsistencies between the knowledge we acquired during our fi nancial statements audit and the directors’ statement that they consider that the annual report and fi nancial statements 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; or
Earnings per share on profi t attributable to the ordinary shareholders of the Parent Company
Items that may be reclassifi ed to the income statement: Exchange losses net of tax on translation of foreign operations 21 (13) (36)
Fair value losses on available for sale fi nancial assets net of tax 21 (149) (197)
Items that will not be reclassifi ed to the income statement: Pension – remeasurement of net defi ned benefi t asset/liability net of tax and tax credit for scheme contributions 21 161 44
Movement in property revaluation surplus net of tax 21 2 2
Shares issued for cash (note 32) 1 3 – – – – – – 4 – – 4
Share based payments (note 18/32) 3 – – – – – – 9 12 – – 12
Total transactions with owners of the Group 4 4 – – 4 – – (222) (210) – (14) (224)
Liabilities of operations classifi ed as held for sale 6 636 668
The fi nancial statements were approved on 27 February 2019 by the Board of Directors and are signed on its behalf by: Scott Egan
Cash element of reinsurance premium on UK Legacy assets – (96)
The consolidated fi nancial statements have been prepared on a going concern basis and in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union (EU) and the Companies Act 2006 where applicable. The consolidated fi nancial statements are prepared on an historical cost basis. Where other bases are applied, these are identifi ed in the relevant accounting policy.
In line with industry practice, the Group’s statement of fi nancial position is not presented using current and non-current classifi cations, but broadly in increasing order of liquidity.
During the year the Group has taken advantage of an election under IFRS 4 that permits an insurer which meets certain conditions to temporarily be exempt from adopting IFRS 9 ‘Financial Instruments’ that would have otherwise have become effective from 1 January 2018 until 1 January 2021 (it is anticipated that this date will be put back a further year until 1 January 2022 to coincide with the new expected implementation date for IFRS 17 ‘Insurance Contracts’). This will enable accounting policy choices to consider the interrelationships of IFRS 17 ‘Insurance Contracts’ and 9 particularly with regards to asset and liability management.
The International Accounting Standards Board (IASB) issued IFRS 17 ‘Insurance Contracts’ in May 2017 to replace IFRS 4 ‘Insurance Contracts’. The IASB deferred the implementation date of IFRS 17 by one year on 14 November 2018 to annual reporting periods beginning, at the latest, on or after 1 January 2022. It is anticipated that the IASB will issue a new Exposure Draft of the standard in the summer of 2019.
Draft legislation has been laid before Parliament to ensure that IFRS as endorsed by the EU at the date of the UK leaving the EU will be adopted for use in the UK as well as providing the Secretary of State with the power to adopt and endorse IFRS for use in the UK. It is expected that this power will be delegated to a UK IFRS Endorsement Board. In the event that IFRS 17 has not been endorsed by the EU by the time the UK leaves the EU, including any transitional period or arrangements that may be agreed, then the UK IFRS Endorsement Board will have responsibility for its endorsement.
IFRS 9 ‘Financial Instruments’ has been issued to replace IAS 39 ‘Financial Instruments: Recognition and Measurement’ and primarily changes the classifi cation and measurement of fi nancial assets. As described above the Group has elected to defer applying IFRS 9 ‘Financial Instruments’ until 1 January 2021. Further information can be found in note 25.
IFRS 16 replaces the existing standard IAS 17 ‘Leases’ with effect from 1 January 2019. The Group has assessed the estimated impact that initial application of IFRS 16 will have on its consolidated fi nancial statements, as described below.
The Group will recognise new assets and liabilities mainly relating to: · Real estate operating leases (see note 42); and
The following amended standards and interpretations are not expected to have a signifi cant impact on the Group’s consolidated fi nancial statements over the following twelve months: · Annual improvement to IFRSs 2015-2017 Cycle – Amendments to IFRS 3, IFRS 11, IAS 12 and IAS 23; · IFRIC 22 Foreign Currency Transactions and Advance Consideration; · IFRIC 23 Uncertainty over Income Tax Treatments; · Amendments to IAS 19 Employee benefi ts on plan amendments, curtailment or settlement.
The signifi cant accounting policies used in the preparation of these consolidated fi nancial statements, as set out below, have been applied consistently to all periods presented in these consolidated fi nancial statements, unless otherwise stated.
Premium written is recognised in the period in which the Group is legally bound through a contract to provide insurance cover. It represents the full amount of premiums receivable under the contract, including estimates where the amounts are not known at the date they are written. These are deferred as a provision for unearned premiums until recognised as revenue principally computed on a monthly or daily pro-rata basis. Net premiums earned are stated net of amounts passed (‘ceded’) to reinsurers. Premiums are shown before deduction of commission and exclude any sales based taxes or duties.
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 defi ning 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 fi nancial assets which are appropriate in value and duration to match the provisions for insurance contract liabilities being discounted during the period expected before the fi nal 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 fl ows associated with the provision for unearned premium net of related DAC. In performing these tests, best estimates of future contractual cash fl ows, including loss adjustment and administrative expenses as well as investment income on fi nancial assets backing such liabilities are used. Any defi ciency is charged to the consolidated income statement immediately by establishing a provision for liability adequacy known as the unexpired risk provision. The 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.
The Group initially recognises fi nancial instruments at their fair value on the date at which they are purchased.
Transaction costs that are directly attributable to the acquisition of fi nancial assets and fi nancial liabilities that are not FVTPL are added to their fair value in their initial measurement.
Further information can be found in notes 25, 26 and 27.
RSA Annual Report and Accounts 2018114 rsagroup.com 4) Signifi cant accounting policies continued
The table below summarises the classifi cation and treatment of the Group’s fi nancial assets and fi nancial liabilities.
Where the investment return is managed on the basis of the total return on investment (including unrealised investment gains)
Cash and cash equivalents Consist of cash and highly liquid investments that are readily convertible into a known amount of cash, are subject to insignifi cant risk of changes in value and have a maturity date of 90 days or less from the date of acquisition
Loan capital Financial liabilities with fi xed or determinable payments and maturity date
Hedge of future cash fl ows – effective portion is initially recognised in OCI; subsequently recognised in the income statement when the hedged cash fl ows affect profi t or loss
Dividends on equity investments are recognised as investment income in the consolidated income statement on the date at which the investment is priced ‘ex dividend’. Interest income is recognised in the consolidated income statement using the effective interest rate method.
If the fair value of a previously impaired debt security increases and the increase can be objectively related to an event occurring after the impairment loss was recognised, the impairment loss is reversed and the reversal recognised in the consolidated income statement. Impairment losses on equity investments are not reversed. Further information can be found in note 9.
Current and deferred tax are recognised in the consolidated income statement, except to the extent that the tax arises from a transaction or event recognised either in other comprehensive income or directly in equity. Any exceptions permitted under IAS12 are disclosed in the notes.
Deferred tax in respect of the unremitted earnings of overseas subsidiaries and principal associated undertakings is recognised as an expense in the year in which the profi ts arise, except where the remittance of earnings can be controlled and it is probable that remittance will not take place in the foreseeable future, in which case the tax charge is recognised on the dividends received.
Deferred tax assets are recognised to the extent that it is probable that future taxable profi ts will be available against which unused tax losses and temporary differences can be utilised.
The Group operates both defi ned contribution and defi ned benefi t schemes.
The value of the net defi ned benefi t liability/asset recognised in the consolidated statement of fi nancial position for each individual post-retirement scheme is calculated as the difference between the present value of the defi ned benefi t obligations of the scheme and the fair value of the scheme assets out of which the obligations are to be settled.
For those schemes in a net liability (defi cit) position, the net liability is recognised in the consolidated statement of fi nancial position in provisions. For those schemes in a net asset (surplus) position, the asset is recognised in the consolidated statement of fi nancial position in other debtors and other assets only to the extent that the Group can realise an economic benefi t, in the form of a refund or a reduction in future contributions, at some point during the life of the scheme or when the scheme liabilities are settled.
Remeasurements of the net defi ned benefi t liability/asset recognised in other comprehensive income comprises actuarial gains and losses as a result of changes in assumptions and experience adjustments in the calculation of the defi ned benefi t obligation, and return on scheme assets excluding interest during the year. The most signifi cant of these is the selection of the discount rate used to calculate the defi ned benefi t obligation, details of which are set out in note 38.
Goodwill is the difference between the cost of a business acquisition and the net fair value of the identifi able assets, liabilities and contingent liabilities acquired. Goodwill is initially capitalised in the consolidated statement of fi nancial position at cost and is subsequently recognised at cost less accumulated impairment losses (see below). The cost of the acquisition is the amount of cash paid and the fair value of other purchase consideration.
Customer related intangible assets are valued at cost less accumulated amortisation, and less any accumulated impairment losses.
Customer related intangible assets comprise 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, contract length, and forecast period to technological obsolescence. The asset is amortised on a straight-line basis across this period.
Impairment of goodwill, other intangible assets and internally developed computer software
Assets and liabilities held for sale are each presented as a single line in the statement of fi nancial position, at the lower of the carrying amount and fair value less costs to sell.
Where the asset or liability comprises a separate business operation (e.g. a subsidiary, an associate or a branch), the assets (including any goodwill allocated to the business) and the directly associated liabilities of the business are considered together as one disposal group. In the period when assets are recognised as held for sale on the face of the consolidated statement of fi nancial position for the fi rst time, the comparative prior period is not re-presented.
Reorganisation costs represent external and clearly identifi able 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 profi tability. 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.
Underwriting risk refers to the risk that claims arising are higher (or lower) than assumed in pricing due to bad experience including catastrophes, weakness in controls over underwriting or portfolio management, or claims management issues.
Pricing for the Group’s products is generally based upon historical claims frequencies and claims severity averages, adjusted for infl ation and modelled catastrophes, trended forward to recognise anticipated changes in claims patterns after making allowance for other costs incurred by the Group, conditions in the insurance market and a profi t loading that adequately covers the cost of capital.
Passing elements of our insurance risk to reinsurers is another key strategy employed in managing the Group’s exposure to insurance risk. The Group Board determines a maximum level of risk to be retained by the Group as a whole. The net retained risk is distributed across the Group in accordance with Group and local risk appetite.
There is a risk to the Group from the inherent uncertainty in estimating provisions at the end of the reporting period for the eventual outcome of outstanding notifi ed claims as well as estimating the number and value of claims that are still to be notifi ed. There is also uncertainty in the level of 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 review these local submissions and recommend the fi nal level of reserves to be held by the Group. The Group Reserving Committee is chaired by the Group Chief Financial Offi cer and includes the Group Chief Executive, Group Underwriting Director, Group Chief Actuary and Group Chief Risk Offi cer. A similar committee has been established in each of the Group’s primary operating segments. The Group Reserving Committee monitors the decisions and judgements 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 fi nal decision on the level of reserves to be included within the consolidated fi nancial statements. In forming its collective judgement, the Committee considers the following information: RISK AND CAPITAL MANAGEMENT
Financial risk refers to the risk of fi nancial loss predominantly arising from investment transactions entered into by the Group, and also to a lesser extent arising from insurance contracts, and includes the following risks: · Credit risk; · Market risk including price, interest rate and currency rate risks; · Liquidity risk.
Credit risk is the risk of loss resulting from the failure of a counterparty to honour its fi nancial or contractual obligations to the Group. The Group’s credit risk exposure is largely concentrated in its fi xed income investment portfolio and to a lesser extent, 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 these exposures are within the risk appetite of the local operations. Exposure monitoring and reporting for fi xed income investments and premium receivables is embedded throughout the organisation with aggregate credit positions reported and monitored at Group level.
The Group’s investment management strategy primarily focuses on debt instruments of high credit quality issuers and seeks to limit the overall credit exposure with respect to any one issuer by ensuring limits have been based upon credit quality. Restrictions are placed on each of the Group’s investment managers as to the level of exposure to various rating categories including unrated securities.
Total fi nancial assets that are neither past due nor impaired excluding held for sale £m
Reinsurers’ share of insurance contract liabilities – 657 1,467 672 41 33 2,870 604 2,266 1 The debt securities meeting SPPI criteria under IFRS 9 which are below investment grade are stated under IAS 39 at fair value. 2 Loans and receivables are measured using amortised cost and their carrying amounts are considered to be as approximate fair values. 3 The insurance and reinsurance debtors classifi ed as not rated comprise personal policyholders and small corporate customers that do not have individual credit ratings.
Reinsurers’ share of insurance contract liabilities – 617 1,574 605 45 41 2,882 636 2,246 1 The debt securities meeting SPPI criteria under IFRS 9 which are below investment grade are stated under IAS 39 at fair value. 2 Loans and receivables are measured using amortised cost and their carrying amounts are considered to be as approximate fair values. 3 The insurance and reinsurance debtors classifi ed as not rated comprise personal policyholders and small corporate customers that do not have individual credit ratings.
With the exception of government debt securities, the largest single aggregate credit exposure does not exceed 3% (2017: 3%) of the Group’s total fi nancial assets.
Ageing of fi nancial assets that are past due but not impaired
The following table provides information regarding the carrying value of fi nancial assets that have been impaired and the ageing of fi nancial assets that are past due but not impaired, excluding those assets that have been classifi ed as held for sale.
Cash and cash equivalents 788 – – – – – 788 –
Market risk is the risk of adverse fi nancial impact resulting, directly or indirectly, from fl uctuations from equity and property prices, interest rates and foreign currency exchange rates. Market risk arises in the Group’s operations due to the possibility that fl uctuations in the value of liabilities are not offset by fl uctuations in the value of investments held. At Group level, it also arises in relation to the overall portfolio of international businesses through foreign currency risk. Market risk is subject to the Board Risk Committee’s risk management framework, which is subject to review and approval by the Board.
The Group classifi es its investment portfolio in debt securities and equity securities in accordance with the accounting defi nitions under IFRS.
This analysis assumes that there is no correlation between interest rate and property market rate risks. It also assumes that all other assets and liabilities remain unchanged and that no management action is taken. This analysis does not represent management’s view of future market change, but refl ects management’s view of key sensitivities.
Interest rate risk arises primarily from the Group’s investments in long-term debt and fi xed income securities and their movement relative to the value placed on insurance liabilities. This impacts both the fair value and amount of variable returns on existing assets as well as the cost of acquiring new fi xed maturity investments.
Increase in interest rate markets: Impact on fi xed income securities and cash of an increase in interest rates of 100bps 20 18 (380) (412)
The sensitivity of the fi xed interest securities of the Group has been modelled by reference to a reasonable approximation of the average interest rate sensitivity of the investments held within each of the portfolios. The effect of movement in interest rates is refl ected as a one time rise of 100bps on 1 January 2019 and 1 January 2018 on the following year’s income statement and other comprehensive income. The impact of an increase in interest rates on the fair value of fi xed income securities that would be initially recognised in OCI will reduce over time as the maturity date approaches.
Operational currency risk is principally managed within the Group’s individual operations by broadly matching assets and liabilities by currency and liquidity. Operational currency risk is not signifi cant.
Structural currency risk is managed at a Group level through currency forward contracts and foreign exchange options within predetermined limits set by the Group Investment Committee. In managing structural currency risk the needs of the Group’s subsidiaries to maintain net assets in local currencies to satisfy local regulatory solvency and internal risk based capital requirements are taken into account.
At 31 December 2018, the Group’s total shareholders’ equity deployed by currency was: Pounds Sterling £m
Liquidity risk refers to the risk of loss to the Group as a result of assets not being available in a form that can immediately be converted into cash, and therefore the consequence of not being able to pay its obligations when due. To help mitigate this risk, the BRC sets limits on assets held by the Group designed to match the maturities of its assets to that of its liabilities.
Guaranteed subordinated step-up notes due 2039 39 – – – – – – 39 39
RSA Annual Report and Accounts 2018124 rsagroup.com 5) Risk and capital management continued
Provisions for losses and loss adjustment expenses 3,913 1,645 1,110 799 584 1,379 1,872 11,302 9,477
Deposits received from reinsurers 35 – – – – – – 35 35
The maturity analysis above is presented on an undiscounted basis including held for sale liabilities. The carrying values in the statement of fi nancial position are discounted where appropriate in accordance with Group accounting policy.
The Group’s overall capital position is primarily comprised of shareholders’ equity, Tier 1 Notes, and subordinated loan capital and aims to maximise shareholder value, while maintaining fi nancial strength and maintaining adequate regulatory capital. In addition the Group also aims to hold suffi cient capital so as to maintain its single ‘A’ credit rating.
The Group operates in many countries, and its regulated entities hold appropriate levels of capital to satisfy applicable local regulations. Compliance with local regulatory requirements is embedded within the BRC mandate, for the protection of the Group’s policyholders and the continuation of the Group’s ability to underwrite.
The Internal Model is used to support, inform and improve the Group’s decision making across the Group. It is used to determine the Group’s optimum capital structure, its investment and hedging strategy, its reinsurance programme and to determine the pricing and target returns for each portfolio.
At 31 December 2018, the estimated SCR and corresponding eligible own funds were as follows: Unaudited £bn £bn
2 The interest rate sensitivity assumes a non-parallel shift in the yield curve to refl ect that the long end of the yield curve is typically more stable than the short end. 3 The asymmetry in credit spread sensitivities refl ects the fact that upside pension sensitivities are restricted to the surplus cap.
The above sensitivities have been considered in isolation. The impact of a combination of sensitivities may be different to the individual outcomes stated above. Where an IFRS valuation of a pension scheme surplus is restricted under Solvency II, downside pension sensitivities may be dampened relative to those shown.
The assessments of how much risk to assume and how much capital to hold are inextricably linked. In some situations, it may be desirable to increase the amount of risk assumed or retained in order to make the most effi cient use of capital available or else to return excess capital to capital providers. In other situations, where the risks assumed give rise to a capital requirement that is greater than the capital immediately available to support those risks, it will be necessary either to reduce the risk assumed or to obtain additional capital.
Net assets of operations classifi ed as held for sale 3 – 3 –
On 7 February 2017, the Group’s UK Legacy liabilities were disposed of to Enstar Group Limited. The transaction initially takes the form of a reinsurance agreement, effective from 31 December 2016, which substantially effects economic transfer, to be followed by completion of a subsequent legal transfer of the business. The Group’s UK Legacy business is managed as part of the UK operations. It is not presented as a discontinued operation as it is neither a separate geographic area nor a major line of business.
The UK Noble Marine entities have been classifi ed as Held for Sale at fair value resulting in a £4m write down. The disposal was completed in February 2019 (see Appendix B).
A gain of £2m was recognised following the liquidation of Royal and Sun Alliance (Ireland) Limited.
In 2017, the net gain of £69m includes £66m relating to the realised gain on the investments transferred as part of the UK Legacy reinsurance transaction, a gain of £17m relating to the reversal of part of the valuation adjustment on the Group’s Oman business and a gain of £7m on the disposal of the Accident and Repairs business in the UK, offset by a charge of £22m on the commutation of the Group’s Adverse Development Cover reinsurance protection bought partly to protect the UK Legacy book.
In 2017, the reorganisation costs of £155m (notes 8, 12 and 39) are directly associated with continuing operations. The amounts are directly attributable to redundancy £68m and other restructuring activity of £87m. Restructuring costs in 2017 related to amounts incurred across the Group for activities such as process re-engineering and other cost reduction initiatives such as offi ce footprint consolidation and reduction, reducing spans of control, and outsourcing. The restructuring programme is now complete with no such costs incurred in 2018.
The Group’s primary operating segments comprise Scandinavia, Canada, UK & International and Central Functions which is consistent with how the Group is managed. The primary operating segments are based on geography and are all engaged in providing personal and commercial general insurance services. Central Functions include the Group’s internal reinsurance function and Group Corporate Centre.
The Group uses the following key measures to assess the performance of its operating segments: · Net written premiums; · Underwriting result; · Combined operating ratio (COR); · Operating result.
Underwriting result, COR and operating result are Alternative Performance Measures (APMs) and the key internal measures of profi tability of the operating segments. The COR refl ects the ratio of claims costs and expenses (including commission) to earned premiums, expressed as a percentage. Further information on APMs can be found on pages 177 to 186.
Loss on disposal of business and realised losses on held for sale assets (2)
Profi t on disposal of business and realised gains on held for sale assets 69
A summary of the net investment return in the income statement is given below: Investment income Net realised gains/(losses) Net unrealised gains/(losses) Impairments
At FVTPL – – – – – – – – – –
Net movement recognised in other comprehensive income £m £m £m £m £m £m £m £m 1 Net realised gains transferred to the income statement in 2017 of £105m included £81m gains on disposal of the UK Legacy business.
Gross changes in provision for losses and loss adjustment expenses (100) 42
Total fi nance costs 25 102 1 In 2017 the Group bought back loan capital of £608m on which total premiums of £59m were paid for early redemption.
Included in salaries and other short term employee benefi ts and bonus awards is £3,942,000 (2017: £4,625,000) paid in respect of directors. These amounts exclude the value of share options granted to directors and gains made on the exercise of such options, Group contributions paid in respect of pension schemes and cash or other assets received or receivable under long term incentive schemes. The total value of the directors’ remuneration (including values for these excluded items) and other details are disclosed in the remuneration report.
Fees payable to the auditor for audit of the Company’s annual accounts 0.9 0.8
Fees payable to the auditor and its associates for other services: The audit of the Company’s subsidiaries, pursuant to legislation 4.2 3.9
Included in the Audit related assurance services for 2018 is £0.9m (2017: £0.9m) of assurance work in respect of Solvency II reporting. The remainder of £0.5m (2017: £0.4m), together with Other services of £0.1m (2017: £0.1m), is ancillary non-audit work representing in aggregate 11% (2017: 11%) of the Group IFRS audit fee of £5.1m (2017: £4.7m).
The tax amounts charged/(credited) in the income statement are as follows: £m £m
Remeasurement of net defi ned benefi t pension liability 14 – (30) 15 (16) 15
Total credited/(charged) to other comprehensive income 52 20 (45) (3) 7 17
The net current tax and deferred tax charged directly to equity is £nil (2017: £nil).
This plan is the Group’s current Long-Term Incentive Plan. Awards of Performance Shares to executive directors and other selected executives and senior managers are subject to performance conditions. These consist of the Group’s underlying return on tangible equity; relative total shareholder return; and business scorecard/business review scorecard targets over a three year performance period. Typically awards vest on the third anniversary of the date of grant to the extent that the performance conditions have been met.
The earnings per ordinary share are calculated by reference to the profi t attributable to the ordinary shareholders and the weighted average number of shares in issue during the year. These were 1,026,040,413 for basic EPS and 1,030,450,240 for diluted EPS (excluding those held in Employee Stock Ownership Plan (ESOP) and Share Incentive Plan (SIP) trusts). The number of shares in issue at 31 December 2018 was 1,026,814,592 (excluding those held in ESOP and SIP trusts).
Profi t for the calculation of earnings per share (£m) 326 269
RSA Annual Report and Accounts 2018134 rsagroup.com 19) Earnings per share (EPS) continued
Ordinary dividend: Final paid in respect of prior year 13.0 11.0 133 112
Interim paid in respect of current year 7.3 6.6 75 68
The Tier 1 notes coupon payment relates to the two fl oating rate notes issued on 27 March 2017 (note 33).
Fair value (losses)/gains net of tax (150) – 2 (148) – – (148) (1) (149)
Pension – remeasurement of net defi ned benefi t liability net of tax and tax credit for scheme contributions – – – – – 161 161 – 161
Pension – remeasurement of net defi ned benefi t liability net of tax and tax credit for scheme contributions – – – – – 44 44 – 44
Total other comprehensive (expense)/income for the year (199) 2 5 (192) (24) 44 (172) (15) (187)
Additions acquired through business combinations 5 – – – – 5
Reversal of held for sale valuation adjustment (17) – – – – (17)
During the Group annual impairment testing it was identifi ed that the carrying value of Norway goodwill was greater than the CGU value in use. As a result an impairment of £7m has been recognised in other operating expenses. The remaining carrying value is £16m. The key assumptions used in determining the value in use for the Norway CGU are as follows: Norway CGU
Goodwill of £4m in respect of the UK Noble Marine entities has been impaired prior to its classifi cation as Held for Sale in order to write down the value of its net assets to fair value less costs to sell.
Following completion of the goodwill impairment testing, it was identifi ed that the Norway CGU was sensitive to changes in key assumptions.
Other includes fi xtures, fi ttings and other equipment. Group occupied property was revalued on 31 December 2018 by independent valuers using the basis of valuation as set out in note 26.
The lease agreements are normally drawn up in line with local practice and the Group has no signifi cant exposure to leases that include contingent rents.
Cross currency interest swaps (fair value/cash fl ow) 155 48 171 374 3 (57)
Currency risk (net investment in foreign operation) 1,253 – – 1,253 21 (5)
The Group also applies hedge accounting to specifi ed fi xed interest assets in its investment portfolio. In order to remove exchange risk from these assets the Group may also acquire cross currency interest rate swaps to swap the cash fl ows from the portfolio into cash fl ows denominated in pounds sterling or the functional currency of the entity acquiring the asset. The Group applies fair value hedge accounting when using ‘fi xed to fl oating’ interest rate swaps and cash fl ow hedge accounting when using ‘fi xed to fi xed’ interest rate swaps. The interest rate swaps exactly offset the timing and amounts expected to be received on the underlying investments. The investments have a remaining term of between one month and 37 years, with the substantial majority having a term of less than six years. There have been no defaults and no defaults are expected on the hedged investments. The Group also applies cash fl ow hedge accounting to certain foreign currency operating expense contracts in order to reduce foreign exchange risk on these contracts.
RSA Annual Report and Accounts 2018140 rsagroup.com 25) Financial assets continued
The total gains on cash fl ow hedge instruments during 2018 were £nil (2017: £3m) in the consolidated statement of other comprehensive income, and the amount reclassifi ed to the income statement was £1m (2017: £1m). There was no ineffectiveness recognised in the income statement in respect of these hedges during 2018 or 2017.
The Group enters into derivative transactions under International Swaps and Derivatives Association (ISDA) master netting arrangements. In general, under such agreements the amounts owed by each counterparty on a single day in respect of all transactions outstanding in the same currency are aggregated into a single net amount that is payable by one counterparty to the other. In certain circumstances, such as a credit default, all outstanding transactions under the agreement are terminated, the termination value is assessed and only a single net amount is payable in settlement of all transactions.
The ISDA agreements do not meet the criteria for offsetting in the statement of fi nancial position. This is because the Group does not have any current legally enforceable right to offset recognised amounts, because the right to offset is enforceable only on the occurrence of future events. The tables below provide information on the impact of the netting arrangements.
In addition, during 2018, the Group took out borrowings from credit institutions under repurchase agreements of £107m (2017: £119m) (note 36). The Group continues to recognise debt securities in the statement of fi nancial position as the Group remains exposed to the risks and rewards of ownership.
Reverse repurchase arrangements and other similar secured lending 107 – 107 (107) – –
Repurchase arrangements and other similar secured borrowing 107 – 107 (107) – –
Repurchase arrangements and other similar secured borrowing 119 – 119 (119) – –
The Group qualifi es for temporary exemption from applying IFRS 9 ‘Financial Instruments’ on the grounds that it has not previously applied any version of IFRS 9 and its activities are predominantly connected with insurance, with the carrying amount of its liabilities within the scope of IFRS 4 and debt instruments included within regulatory capital being greater than 90% of the total carrying amount of all its liabilities at 31 December 2015 and with no subsequent change in its activities.
Fair value is used to value a number of assets within the statement of fi nancial position and represents their market value at the reporting date.
For cash and cash equivalents, loans and receivables, commercial paper, other assets, liabilities and accruals, their carrying amounts are considered to be as approximate fair values.
The fair value of property has been determined by external, independent valuers, having appropriate recognised professional qualifi cations and recent experience in the location and category of the property being valued.
The valuations of buildings with vacant possession are based on the comparative method of valuation with reference to sales of other vacant buildings. Fair value is then determined based on the locational qualities and physical building characteristics (principally condition, size, specifi cation and layout) as appropriate.
Investment properties are valued using discounted cash fl ow models which take into account the net present value of cash fl ows to be generated from the properties. The cash fl ow streams refl ect the current rent (the gross rent) payable to lease expiry, at which point it is assumed that each unit will be re-let at its estimated rental value. Allowances have been made for voids and rent free periods where applicable. The appropriate rent to be capitalised is selected on the basis of the location of the building, its quality, tenant credit quality and lease terms amongst other factors.
Derivative fi nancial instruments are fi nancial contracts whose fair value is determined on a market basis by reference to underlying interest rate, foreign exchange rate, equity or commodity instrument or indices.
The fair value measurement of the Group’s loan capital instruments, with the exception of the subordinated guaranteed US$ bonds, are based on pricing obtained from a range of fi nancial intermediaries who base their valuations on recent transactions of the Group’s loan capital instruments and other observable market inputs such as applicable risk free rate and appropriate credit risk spreads.
Fair value for all assets and liabilities which are either measured or disclosed is determined based on available information and categorised according to a three-level fair value hierarchy as detailed below: · Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities; · Level 2 fair value measurements are those derived from data other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); · Level 3 fair value measurements are those derived from valuation techniques that include signifi cant inputs for the asset or liability valuation that are not based on observable market data (unobservable inputs).
A fi nancial instrument is regarded as quoted in an active market (level 1) if quoted prices for that fi nancial instrument are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency and those prices represent actual and regularly occurring market transactions on an arm’s length basis.
The following table provides an analysis of fi nancial instruments and other items that are measured subsequent to initial recognition at fair value as well as fi nancial liabilities not measured at fair value, grouped into levels 1 to 3. The table does not include fi nancial assets and liabilities not measured at fair value if the carrying value is a reasonable approximation of fair value.
Group occupied property – land and buildings – – 19 19
Available for sale fi nancial assets: Financial assets at FVTPL: Debt securities – – 18 18
Total value of liabilities not measured at fair value – 507 – 507
Level 3 fi nancial assets at 31 December 2018 355 410 – 19 784
The following table shows the level 3 available for sale fi nancial assets, investment properties and group occupied property carried at fair value as at the balance sheet date, the main assumptions used in the valuation of these instruments and reasonably possible decreases in fair value based on reasonably possible alternative assumptions.
Group occupied property – land and buildings1 Property valuation 19 (3) 35 (5)
The Group is exposed to the risks of the underlying investments of the investment vehicles. The investment return from the structured entities is expected to refl ect the returns from the underlying investments of the entity.
Collateralised debt obligations Structured debt security backed by bonds 223 – 223 260 – 260
Cash money market funds Short term cash deposits 196 – 196 332 – 332
Other Mainly consist of property funds 348 235 583 343 66 409
The line items in the statement of fi nancial position in which the investments above are included are as follows: £m £m
Other – 18 28) Reinsurers’ share of insurance contract liabilities £m £m
Reinsurers’ share of provisions for losses and loss adjustment expenses 1,532 1,523
Total reinsurers’ share of insurance contract liabilities net of held for sale 2,271 2,252
Reinsurers’ share of provision for unearned premiums at 1 January 729 818
Total reinsurers’ share of provision for unearned premiums at 31 December 739 729
Reinsurers’ share of provisions for losses and loss adjustment expenses at 31 December 2,136 2,159
RSA Annual Report and Accounts 2018146 rsagroup.com 29) Current and Deferred Tax
The majority of the deferred tax asset recognised based on future profi ts is that in respect of the UK. The value of the deferred tax asset is sensitive to assumptions in respect of UK future profi ts. Sensitivity analysis includes a 1% increase in the UK combined operating ratio for all of the 7 years in the forecast period, the impact of which would reduce the UK net deferred tax asset by £17m. The analysis also includes a one year change in the projection period, the impact of which is a change in the UK net deferred tax asset of £23m. The relationship between the net deferred tax asset and these sensitivities is not always linear. Therefore, the cumulative impact on the net deferred tax asset of combined sensitivities or longer extrapolations based on the above numbers will be indicative only.
Total insurance and reinsurance debtors net of held for sale 2,954 2,923
Issued in respect of employee share options and employee share awards 4,102,889 4 4
The rights attaching to each class of share may be varied with the consent of the holders of 75% of the issued shares of that class.
Each member holding an Ordinary Share shall be entitled to vote on all matters at a general meeting of the Company, be entitled to receive dividend payments declared in accordance with the Articles of Association, and have the right to participate in any distribution of capital of the Company including on a winding up of the Company.
The Preference Shares are not redeemable but the holders of the Preference Shares have preferential rights over the holders of Ordinary Shares in respect of dividends and of the return of capital in the event of the winding up of the Company.
Provided a resolution of the Board exists, holders of Preference Shares are entitled to a cumulative preferential dividend of 7.375% per annum, payable out of the profi ts available for distribution, to be distributed in half yearly instalments. Preference shareholders have no further right to participate in the profi ts of the Company.
On 27 March 2017, the Company issued two fl oating rate Restricted Tier 1 (RT1) Notes totalling £297m in aggregate size and with a blended coupon of c.4.7%. The Notes are as follows: Swedish Krona 2,500m at 3 month Stibor +525bps (equivalent to c.4.8% coupon on issue)
Royal & Sun Alliance Insurance (Middle East) BSC (c) owns 50% of the ordinary share capital of Al Alamiya for Cooperative Insurance Company, a company operating in the Kingdom of Saudi Arabia and 52.5% of Al Ahlia Insurance Company SAOG, a company operating in the Sultanate of Oman and are valued in its statement of fi nancial position at share of net assets.
The dated guaranteed subordinated step-up notes were issued on 20 May 2009 with a redemption date of 20 May 2039 and at a fi xed rate of 9.375%. Of the £500m bonds issued the Group has bought back a total nominal value of £461m. The remaining £39m has a fi rst call date of 20 May 2019.
There have been no defaults on any bonds or notes during the year. The Group has the option to defer interest payments on the bonds and notes, but has to date not exercised this right.
The Group’s other borrowings as at 31 December 2018 are £119m (2017: £123m), relating to borrowings from credit institutions under repurchase agreements of £107m (2017: £119m) and bank accounts in overdraft £12m (2017: £4m).
Provisions for losses and loss adjustment expenses are subject to a robust reserving process by each of the Group’s business units and at Group Corporate Centre, as detailed in the Risk Management note (note 5).