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Managing our cost base well is a necessity. To be competitive for customers, to invest in better capabilities and to properly deliver to shareholders, we need to permanently reduce costs.
Good business starts with our customers, and we strive to keep their needs at the heart of what we do.
We use our capabilities to anticipate and exceed customer expectations and improve outcomes for customers via our direct channel, our broker relationships or partner organisations.
We have established leadership positions in Scandinavia, Canada, and the UK & International (which includes Ireland and Middle East).
• Market-leading positions • Recognised strong brands • Award-winning products • Excellent broker relationships • Attracting leading affinity partners • Strong customer satisfaction metrics • High and stable customer retention
In Canada, our main brands are Johnson, RSA, Canadian Northern Shield, and Western Assurance.
a b c d e f g a. Personal 58% b. Commercial 42%
For more information see pages 26-27 a. Personal 69% b. Commercial 31%
For more information see pages 28-29 a. Personal 45% b. Commercial 55%
Managing volatility The purpose of insurers in society is to help our customers – individuals and businesses – to better manage the threats and uncertainties that life produces. To do that, we need to be strong and resilient ourselves, and to harness that strength in sustaining support for our customers – many of whom have been with us for decades.
In 2017, our industry supported customers through many challenges. These included some of the worst natural disasters on record in the US and the Caribbean, as well as more prosaic threats to property, transport and personal injury across our international business.
Societal changes Across society the pace of change is high. This can be seen in the ways technology is revolutionising information flows. It manifests in challenges relating to an aging population and growing life expectancy, as well as in the challenges from uneven intergenerational and other forms of wealth distribution. We see it too in changing social attitudes across many aspects of society.
RSA has some 300 years of rich history, serving our customers in good times and bad. Today RSA looks forward to continuing and building on this record.
Our focus as a Company is on the pursuit of outperformance. In each of our three regions – the UK & International, Scandinavia and Canada – we are seeing many advances in customer service, underwriting and cost efficiency. We know that there is much more that we can do, and we are dedicated in our efforts to drive RSA towards best-in-class capabilities and results.
Our focus as a Company is on the pursuit of outperformance. Martin Scicluna Chairman
After six years on the Board, Hugh Mitchell will retire as a Non-Executive Director with effect from the Company’s AGM in May 2018. Kath Cates, who has served as a Non-Executive Director of the Group since 2013, has succeeded Hugh as chair of the Remuneration Committee, with Martin Strobel taking over from Kath as chair of the Board Risk Committee. On behalf of the Board, I would like to thank Hugh for his contribution to the Group and to welcome Kath and Martin to their new roles.
Continued progressive dividend We know that one measure of the results we produce for shareholders is the dividend they enable us to pay. In that context, we are pleased to propose a final dividend of 13 pence per share making a total of 19.6 pence for the year. This is a 23 percent increase versus 2016, and reflects the strong advances we have made and the Board’s ongoing confidence in the Group’s prospects.
Board Thanks On behalf of the Board, I would like to thank our more than 12,600 colleagues around the world. RSA’s results and continuing progress would not be possible without their dedication, professionalism and commitment to the Group. In particular, I would like to thank Stephen Hester for his continued outstanding leadership in transforming our Company. The focus on serving our customers, the pride in our work and the desire to improve, gives me great optimism for the future of our business.
ECONOMIC Growth in global economies is evident, though with underlying challenges. The global economy has returned to good growth following the financial crisis, although there are some doubts about sustainability and latent inflationary pressures.
Continuing concerns over the occurrence of asset bubbles, levels of debt and the interconnected nature of economies requires caution.
• Our focused footprint in established markets and low risk and well-matched approach to investments provides some resilience against negative economic shocks
• While focused on a small number of core markets, our longstanding global network platform enables us to write global risks in a controlled fashion through locally established insurers.
• Our regional footprint enables us to be resilient to macro-political risks, and most of our business is local and locally incorporated
• At an operational level, our Brexit preparation plans are progressing well, notwithstanding some uncertainty
TECHNOLOGICAL & DIGITAL Digitisation and new technologies are creating opportunities and threats for incumbents. Digitisation is enabling significant shifts in customer expectations and demands.
RESPONDING TO CHANGING MARKET DYNAMICS AND INSURANCE THEMES As global markets respond to changing macro and insurance drivers, RSA is well placed to deliver against customer and industry needs now and in the future
• Automation technologies have become common practice, driving efficiency and supporting better customer experience
• RSA is continuously investing in the technological agenda, including Telematics, pricing sophistication, claims automation and digitisation of distribution and customer service.
• As well as responding to specific events for our customers, RSA is committed to reducing carbon emissions and achieved a 4.3 percent reduction in carbon emissions per full time equivalent employee in 2017. Our targets are achieved through a range of measures, including reducing business travel and improving operational efficiency
BREXIT In relation to Brexit, we are in the process of setting up a new operation in Luxembourg as the headquarters of our existing European Union (EU) Commercial Lines branches in Belgium, France, Germany, Spain and the Netherlands: • While Brexit is not a major issue for RSA, the move allows the sensible configuration of the European branch network in light of the UK’s exit from the EU
INFLATION Several of our markets are observing claims inflation trends: • Our businesses are alert to inflationary pressures, in terms of both claims and operational costs
• We seek to reflect emerging inflation quickly in pricing or management of claims supply chain
• More broadly, the European General Data Protection Regulation (GDPR) comes into effect in May 2018 and requires all companies to follow a clear framework on how personal data is handled. RSA has programmes in progress in each of our affected territories to ensure that we comply from the effective date.
ECONOMIC Markets have seen significant volatility with yields around historic lows, although expected to increase moderately, and Sterling materially weakened: • The continuation of the low yield environment mandates a higher focus on underwriting discipline and cost management for all insurers
• Weaker Sterling benefits our income statement, while balance sheet and capital exposure to FX is well-matched.
Best-in-class ambition Our values and culture support a high-performing and inclusive RSA. The collective drive of everyone at RSA raises the Group’s ambition and potential to improve.
Financial £4.5bn of capital (equity and debt) is employed within RSA to support customers and generates shareholder returns.
Relationships and partnerships Relationships across our value chain are a key resource for RSA. We rely on relationships with brokers and partner organisations to distribute 55 percent of our business. Relationships with our supply chain enable us to provide an efficient claims service.
Safe, secure world Developing products and programmes that give our customers confidence to lead their lives.
Sustainable future Supporting our customers in responding to a changing climate and encouraging sustainable working practices.
The expectations of our customers are increasing. We aim to constantly improve the service and experience that we offer throughout the customer journey, paying claims quickly and efficiently.
In 2017, RSA delivered growth in premiums, profits and dividends and an improved 15.5 percent return on tangible equity1 – all compared to an extremely strong 2016 result.
For the insurance industry, 2017 was a year with some major external underwriting challenges. At a global level, it seems likely to have been one of the worst loss years in recent times due particularly to three major US/Caribbean hurricanes and Mexico earthquakes. On a lesser scale, UK market losses around the Ogden discount rate change and Household insurance ‘escape of water’ inflation also dented domestic insurance results. Notwithstanding these factors, market capacity remains high, and there are limited signs of price inflation more broadly.
Conversely, financial markets during 2017 were more stable, at least as impacting RSA. Bond yields are off their lows and global central bank action to wean markets off Quantitative Easing (QE) give some optimism that coming years might offer return upside for insurers’ portfolios. However, tight credit spreads continue to hurt, especially on UK pension accounting. RSA makes a majority of profit outside the UK, so FX rates versus sterling are also important. During 2017 impacts were limited despite swings, although the Brexit process continues to have the potential to deliver volatility.
Personal Lines policy count rose at RSA in 2017 for the first time in four years as customers reacted positively to the many improvements we are putting through. The important home partnership with Nationwide commenced business in December. Operational initiatives also contributed, spanning service improvements via digital capabilities in claims and policy servicing, through to capability and proposition uplifts across our business lines. RSA will not chase unprofitable growth. We prize quality of customer relationship over quantity. But nevertheless, serving customers well remains at the heart of all we seek to achieve.
RSA’s most important capability lies in our underwriting judgement. Across the Group multiple improvements continued in areas like portfolio discipline, data and model improvement, machine learning and skills enhancement. Attritional loss ratios improved in every business except the UK. Here our attritional results experienced significant setback, largely through Household ‘escape of water’
claims, which we expect to rectify for 2018/ 2019. The Group attritional loss ratio was slightly better than prior year as a result, not quite as good as hoped for although still substantially better than historically achieved.
Financial results 2017 Underlying earnings per share rose 10 percent to 43.5p. This produced a return on tangible equity1 of 15.5 percent (2016: 14.2 percent), versus our target range of 13-17 percent.
Underwriting profits posted a new record at £394m, up 4 percent versus our record year in 2016. The combined ratio of 94.0 percent was also a new record for RSA. Underlying pre-tax profits rose 12 percent, benefiting from resilient investment income and lower interest expense.
The disappointment was our UK business (including its European branches and London market Commercial Lines business). A COR of 102.03 percent reflected three major loss items; £72m of losses from US/Caribbean hurricanes and Mexican earthquakes (net of Group aggregate cover recovery), elevated Household ‘escape of water’ inflation and significant adverse large loss volatility versus long-term averages. Underwriting action is well underway to improve results in 2018.
Looking forward Our performance target of 13-17 percent return on tangible equity represents attractive shareholder return both relative to cost of capital and insurance industry norms. To the extent that RSA’s underwriting performance progresses well towards our best-in-class combined ratio ambitions, even better returns are possible. We will try to achieve just that. For 2018, the key tasks are to re-establish respectable performance in our UK business whilst continuing underlying progress in our overseas markets where the majority of the Group trades.
3. Proforma for share of aggregate reinsurance recoveries and excludes the impact of the Ogden rate change. For more information see page 197.
Advance customer service · Digital platforms for convenience, flexibility and speed · Increase customer satisfaction and retention · Sharpen customer acquisition tools
Drive cost efficiency · Deploy ‘lean’, robotics and process redesign · Optimise overheads and procurement · Site consolidation and outsourcing · Automation
GREAT CUSTOMER EXPERIENCE Good business starts with our customers, and we strive to keep them at the heart of what we do. This means providing consistent support and excellent service. We are focusing on being proactive and digitally enabled, and providing tailored products that meet evolving customer requirements.
Our progress • Returned to growth across all divisions in Canada. Strong retention of 92.5 percent contributing to 4 percent growth in Johnson Affinity
• Highest EPSI1 score amongst peers in Codan Personal Lines. Top line trends improved due to retention focus and sales efficiency improvements
• Johnson digital success: Over 200,000 ‘self-service transactions’ in 2017, up 47 percent, and 86 percent ‘very satisfied’ with online chat experience
• Customer service portal in Denmark showing early indication of improving customer satisfaction metrics: +16 points NPS2 increase in Liability and +6 points NPS2 increase in Workers Compensation
• Industry leading same-day service at 96 percent in small or medium-sized enterprise (SME) in Commercial Lines Canada
• Nationwide: Simple, easy to understand modular product; 85 percent retention at renewal and +65 NPS in sales and services.
Ongoing initiatives • Significant activity planned in digital sales, servicing and claims journeys, self-service and data analytics.
Note: 1. Customer satisfaction index measured on industry level. 2. Net promoter score.
EXCELLENT PROGRESS IN PRICE SOPHISTICATION Pricing tools have been greatly enhanced in Personal Lines. ‘Radar Live’ and ‘Earnix’ (advanced point of sale pricing engines) continue to be rolled out across our businesses. Significant benefits have been observed when the new tools have gone live: in Canada Household, new business increased 71 percent year-on-year.
USE OF DATA AND ANALYTICS Data science advances: Competitions in data science and predictive modelling have been run across the Group. The first machine learning competition generated 29 new approaches to price modelling and estimated loss ratio benefits of up to 3 percent.
DISCIPLINED AND EXPERT UNDERWRITING Underwriting is our core discipline. It’s what we do. We want to be the best we possibly can, and amongst the very best in our industry.
• Addressing key vulnerability and learnings from adverse 2017 large loss experience across the Group
• Successful execution of remediation plan based on decile and large loss propensity analytics in Commercial Lines in Canada
• Policy administration platform projects in Denmark and Norway planned to go live during first half of 2018
• Automatic claims handling in Swedish Motor: end-to-end automated process with no human intervention (where appropriate)
Our initiatives Activities in progress to improve all dimensions of underwriting and claims processes, capabilities and technology.
MANAGING OUR COST BASE Driving cost efficiency will always be a key requirement for the business. To be competitive for customers, to invest in better capabilities and to properly deliver for shareholders, we need to permanently reduce costs.
Our progress • Group written total controllable costs of £1,425m were 6 percent lower in 2017 (2016: £1,512m1)
• ‘Lean’ practices (streamlining of our processes) across the Group showing great improvements in efficiency
• Continuous focus on increasing efficiency metrics (e.g. revenue per FTE) to best-in-class levels.
ZERO-BASED BUDGETING In 2017, our UK business adopted zero-based budgeting (ZBB) to help drive towards best-in-class cost performance. ZBB is a structured and softwareenabled approach to costs which facilitates forensic insight and drives a cost management culture, where every pound budgeted is rigorously challenged to minimise excess in budgets. It creates room for investing in agreed strategic priorities in the pursuit of best-in-class. Planned roll outs across the rest of the Group in 2018 and beyond.
Definition A measure of underwriting performance – the ratio of underwriting costs (claims, commissions and expenses) expressed in relation to earned premiums.
Commentary Attritional loss ratios are a key lever in the Group’s turnaround of financial performance. Improvements in the business mix together with investments in digitally enabled underwriting and claims excellence are targeted at reducing the attritional loss ratio.
Definition Operating profit less interest cost, tax, non-controlling interests and preference dividends, per share.
Outlook We target continued growth in underlying EPS as performance improvement actions take effect.
KEY PERFORMANCE INDICATORS The following nine key performance indicators are important in measuring the delivery of our strategic priorities.
Outlook We have upgraded our target to >£450m reduction in gross controllable expenses by 2019 and aim to improve expense ratios in the medium term, in line with our ambition of best-in-class performance.
By ensuring customers are at the heart of everything we do, we can optimise business performance.
Commentary We endeavour to reduce our emissions as far as possible by operating efficiently, procuring sustainable alternatives and promoting sustainable business practices.
Outlook In 2016 we surpassed our Group carbon reduction target of 12 percent reduction per FTE from a 2015 baseline. We set a new target of 4 percent per FTE year on year in 2017, which was also achieved, and aim to reduce our emissions by a further 4 percent per FTE in 2018.
Underlying return on tangible equity ◊ Profit before tax Solvency II coverage ratio2
Definition Operating profit attributable to ordinary shareholders less interest costs and underlying tax, expressed in relation to opening tangible shareholders’ funds, i.e. excluding goodwill and intangible assets.
Commentary This is a key statutory measure of the overall earnings performance of the Group that can be retained or distributed.
Outlook We target continued growth as performance actions take further effect.
Definition The Solvency II coverage ratio represents total eligible capital as a proportion of the Solvency Capital Requirement (SCR) under Solvency II.
Notes: 1. Group excluding disposals, at constant FX. 2. Coverage ratio under Solvency II introduced in 2015. APMs are referenced using ◊
Note: For the executive remuneration an underlying measure of profit before tax is used. See page 197 for further detail.
I am pleased to report that 2017 has been another year of strong performance at RSA, building on our record underwriting profits in 2016. Excellent results in our overseas divisions have been partly offset by a disappointing result in the UK caused by adverse weather events (US/Caribbean storms and Mexico earthquakes), adverse large loss volatility and higher Household claims inflation. Lower interest and restructuring costs have also improved profitability. The strength of our franchise, the investments we have now made in our operating capabilities, and the significant work we have done to strengthen capital and the balance sheet, mean that RSA is now better equipped to withstand volatility. This is good for customers, staff and our shareholders.
• A new record level of underwriting profits for RSA at £394m, up 4 percent (2016: £380m). The combined ratio of 94.0 percent, also a record (2016: 94.2 percent)
• Strong underwriting improvements in Scandinavia, Canada, Ireland and Middle East. Disappointing performance in the UK impacted by US/Caribbean storms, large losses and higher attritional claims
• 2017 restructuring costs were £155m (2016: £168m), and support the improved cost reduction targets above. It remains our ambition that 2017 will be the last year of such ‘below the line’ charges
Our entire focus is on continuing to drive for outperformance across the Group. Scott Egan Group Chief Financial Officer
We have seen a strengthening of underlying customer activity as capability improvements take effect. Customer retention trends have improved to 80.2 percent (2016: 79.5 percent). Our goal remains to serve our customers well.
Underwriting result Group underwriting profit of £394m was up 4 percent and a new record for RSA (2016: £380m). The combined ratio of 94.0 percent is also a record for RSA.
Current underwriting profit was £237m (2016: £271m). There were good improvements in the attritional loss ratio in Scandinavia (1.6 points better) and Canada (1 point better), offset by a higher ratio in UK & International due to the UK Household segment.
Group large losses were £713m or 10.8 percent of net earned premiums (2016: 9.13 percent at constant FX). This elevated large loss experience was driven by the UK and Canada. While substantial elements of this is volatility, underwriting interventions have also been made to target recovery in 2018 and beyond.
Prior year underwriting profits were £157m, with prior year development providing a 2.8 point benefit (2016: 2.23 points at constant FX) to the Group combined ratio. This included positive development from each region.
The 2017 underwriting result included a £23m net charge (after release of 2016 margin build) relating to the change in Ogden discount rate. £20m related to our UK business and £3m to Ireland. This also reflected the benefit of net settlement gains in H2 versus H1 revised case reserves.
Group Underwriting Result £m Underlying return on tangible equity ◊ (%)
Investment income was down 10 percent on the prior year, primarily reflecting the impact of the disposal of Latin America and the UK Legacy book, together with ongoing reinvestment at lower yields. The average book yield across our major bond portfolios was down slightly to 2.5 percent (2016: 2.6 percent). At current market forward rates, we expect investment income of c.£285-310m in 2018.
The £834m1 disposal in February of our UK Legacy insurance liabilities removed a source of long-tail risk whilst funding a £636m retirement of high cost subordinated debt capital. Debt restructuring over the past 12 months has significantly reduced interest costs in 2017 to £43m (£54m including the new tier 1 issuance), down from £99m in 2016.
Notes to the table above: 1. UK & International comprises the UK (and European branches), Ireland and the Middle East. 2. Proforma for share of aggregate reinsurance recoveries and excludes the impact of the Ogden rate change. 3. Preference dividends of £9m and coupons of £11m paid on 2017 issued restricted tier 1 securities.
Restructuring costs of £155m, whilst higher than originally planned, mark the end of the ‘below the line’ restructuring charges and have enabled an increase in our annualised cost savings target to over £450m by the end of 2019.
The carrying value of the Group’s net deferred tax asset at 31 December 2017 is £220m (2016: £216m), of which £217m (2016: £212m) is in the UK. At current tax rates, a further c.£230m (2016: £183m) of deferred tax assets remain available for use but not recognised on balance sheet; these are predominantly in the UK and Ireland.
In 2018, we expect the Group’s ETR and underlying tax rate to continue to trend towards 20 percent given the scale of the unrecognised UK tax assets.
The taxes borne by the Group in 2017 were a total of £391m for our four largest territories (UK £119m, Ireland £7m, Scandinavia £136m and Canada £129m). Taxes collected by the same territories were an additional £628m.
Balance sheet and capital RSA’s balance sheet and capital position are strong and resilient. Tangible net assets were broadly unchanged at £2.8bn at 31 December 2017.
The Solvency II surplus remained flat at £1.1bn with a coverage ratio of 1632 percent, up 5 points.
Notes: 1. £595m on a net discounted basis excluding claims handling provision and margin as disclosed in Note 6 of the financial statements.
2. The Solvency II capital position at 31 December 2017 is estimated.
3. Group excluding disposals for 2016. 4. Full time equivalent employees.
Market movements excluding IAS 19, partly due to a slight weakening of Sterling
Our operations in Scandinavia RSA is the only international insurer operating within the top 5 in Scandinavia. In Sweden, we operate as Trygg-Hansa, and in Denmark and Norway as Codan. Our business is split approximately 58 percent Personal and 42 percent Commercial Lines. Key strengths include our Swedish Personal Lines and our Danish Commercial business, while our Norwegian business is developing. We distribute mainly direct to consumer, leveraging strong agency relationships, with a growing bancassurance channel.
Scandinavian market context The Scandinavian economy is strong overall albeit with mixed experience across the region. There is good GDP growth in Sweden, whereas Denmark and Norway are set to pick up from relatively low growth levels. Against this backdrop, insurance markets remain broadly strong across the region with incumbents maintaining a competitive position against most market challengers.
Regional net written premiums of £1,833m were up 7 percent at reported FX and up 0.3 percent at constant FX (2016: £1,721m). The current year attritional loss ratio of 62.6 percent was 1.6 points better than 2016 reflecting underwriting discipline, ongoing capability improvements and lower claims handling costs.
Sweden generated an underwriting profit of £259m (2016: £184m1)and a combined ratio of 75.3 percent (2016: 82.21 percent). While the current year combined ratio improved by 2.2 points, favourable prior year development contributed 4.7 points year-on-year, partly reflecting more benign Motor account development. Denmark produced a combined ratio of 90.3 percent; while this was 0.6 points higher than 2016, the current year combined ratio improved by 1.7 points.
Keeping people safe at home, at work and at play. We believe that part of our job is to prevent risks, as well as being there when things don’t go as planned. Our Scandinavian operations go above and beyond to keep their customers safe, running regular awareness campaigns to minimise exposure to risks and developing innovative new approaches to improving public safety.
A customer focused business Across Scandinavia, we benefit from brands with high public awareness and credibility. Our task is to ensure that our customer experience meets the expectations that come alongside this. We continue to adapt to our customers’ changing preferences and needs, whilst ensuring we run our operations as efficiently as possible and continue to address our cost base.
We made a number of steps forward in 2017 to meet this challenge. Our new Codan claims handling system has brought our Personal Lines customers closer to the claims process and put them in control. Through an online portal, customers can now communicate with Codan employees and suppliers to track the progress of their claim and even choose replacement items. This increases the speed of resolution for our customers, and helps the business to manage indemnity spend more effectively.
Codan is offering a new ‘Websikring’ (WebSafe) proposition, which gives customers guidance on how to prevent abuse or harassment on social media, assistance removing illegally shared material, and help regaining control over accounts that have been hacked. Our centre of excellence for wind energy in Denmark continues to thrive and support our strength in the insurance of renewables, as we evaluate the risks of new technologies and prototypes to expand our expertise. A new hub for claims processing in Malmo is building our customer service capability.
Growing premium and customer satisfaction scores demonstrate the impact of these programmes, and others, on our appeal. Region-wide, more customers are rating their experience with us as ‘effortless’. Swedish Personal Lines policies-in-force grew steadily in 2017, and Commercial Lines new business in Q4 was 22 percent higher than the same quarter last year. Whereas Denmark Personal Lines policies-in-force had contracted between 2012 and 2016, this trend flattened in 2017.
We have also pursued further site consolidation and IT cost reduction, and we launched an outsourcing programme for certain operational and support activities.
Total written controllable expenses were down 3 percent year-on-year1, with 5 percent cost reductions absorbing 2 percent inflation.
Trygg-Hansa equipped life buoys with breathalysers to improve water safety in Sweden
We operate across all provinces and provide a broad offering of products and channels to both Personal and Commercial customers. Our portfolio is balanced at around 70 percent Personal and 30 percent Commercial Lines. We have leading market positions in affinity distribution, and via our Johnson brand, and are proud of our leading positions in both travel and marine underwriting.
Canada market context The Canadian market has remained competitive through a period of slowing economic growth. This has translated into tougher conditions for the insurance market and some consolidation trends in the sector.
Regulation in Canada tends to differ by region, and in Ontario, one of our larger regions, auto pricing is regulated. This drives a more challenging pricing environment in the segment. Industry disruptors looking to capitalise on developments in fintech also drive pricing pressures.
Financial performance In 2017, our Canadian business worked through these challenges and delivered a strong year. In addition to increasing operating profit by 14 percent to £159m (2016: £140m), underwriting profit rose 32 percent to £98m, despite higher large losses and lower prior year releases than 2016. We were pleased to achieve our best-in-class ambition of a <94 percent combined ratio.
Outlook Our target is to maintain the positive premium and underwriting trends we saw in 2017. As well as sustaining a combined ratio of <94 percent we will continue to look for further performance improvement opportunities, for our customers, and for our business.
Partnering with our communities Our Canadian business demonstrated its commitment to supporting local communities in 2017 through a number of initiatives to improve the local environment for their customers.
This year, RSA employees took part in Habitat for Humanity Canada’s biggest ever building project – aiming to build 150 homes in celebration of Canada’s 150th anniversary of Confederation, and supporting those affected by last year’s wild fires in neighbouring Fort McMurray.
We also aim to be a helping partner to our customers. As a particularly cold winter approached, we launched a campaign to encourage Canadians to review ‘What’s in my bag?’ This asked people to check they have what they need to survive being waylaid in extreme weather, and reflects how seriously we take our role in helping to educate about risk, in addition to offering support when things do go wrong.
For example, we have taken steps to improve our range of large loss volatility and exposure by developing insight tools that help front-line underwriters to evaluate large losses, and make better informed risk acceptance and pricing decisions for future risks.
In 2017, total written controllable expenses were down 7 percent year-on-year, with 9 percent cost reductions offset by 2 percent inflation.
We are a leading player in Ireland with particular strengths in household and motor insurance through our 123.ie directto -consumer business. In the Middle East, our operations cover the United Arab Emirates (UAE), Oman and Saudi Arabia, with headquarters in Bahrain. RSA owns 50 percent of its Middle East business.
UK market context The UK is a large, mature and stable market with high levels of competition. Personal Lines is particularly competitive with a strong focus on price as a result of the role of aggregators, and increasing pressure to improve digital capabilities in line with customer expectations and needs. Commercial Lines have experienced prolonged soft market conditions, increasing the importance of brand reputation and broker relationships for success.
The implications of the EU referendum have brought a level of uncertainty for the UK market that will take time to play out. RSA is well placed, with no significant structural or passporting challenges likely as a result of EU exit. In 2017, the UK market began to see inflationary trends in claims costs which are creating upward pressure on prices, reflected industry wide.
Underwriting losses partly reflected the impact of a number of natural catastrophes in the third quarter, including earthquakes in Mexico and hurricanes in the US and Caribbean that cost £72m net of Group Volatility Cover recovery. We also saw adverse large loss volatility against long run trends, and high claims inflation in our Household book. We have been frontfooted in our pricing and underwriting remediation for the challenges we saw in 2017, and expect to see the benefits of these actions from mid 2018 onwards.
Leveraging our expertise to build a sustainable future The unique insight we have built as a leading insurer in the renewable energies market enables us to anticipate and evaluate new technology and innovation in this area and, through this knowledge, reduce the risks and costs associated with renewable energies. We have developed sector specialisms around our renewable expertise, with a particular focus on wind and solar. This year we have been appointed as lead London insurer for the delivery of the 800MW Muhammed bin Rashid Al Maktoum – Phase III Solar Farm project. This project will support Dubai’s ambition to generate 75 percent of its energy through renewable sources by 2050.
The medium term outlook is positive and work is underway to further develop capabilities, including underwriting and pricing sophistication.
Risk management approach In a rapidly developing business environment we strive for best-in-class risk management in order to maximise shareholder risk adjusted returns and protect our customers from loss and poor outcomes. This includes leveraging our core expertise in being selective in the risks we wish to retain whilst ensuring that we manage, mitigate and avoid risks where we are not adequately rewarded. As a pure general insurer our key area of expertise is underwriting property and casualty insurance risks, which means we are able to provide our customers with competitive products that protect them against losses from uncertain future events whilst ensuring that the risks we accept are collectively managed to maximise our long-term risk-adjusted returns, and serve our customers well.
1. Board sets the business strategy which is incorporated in the three-year operational plan. Risk provide robust challenge of validity and achievability of plan.
3. 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.
5. Significant changes in risk assessments are considered by the Internal Model Governance Committee and where appropriate, the Group’s internal model is updated.
6. 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.
8. 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 satisfied with the future plan.
Keeping our focus on the road ahead One of the key roles of the risk team is to ensure that we support the business by anticipating future risks which could impact the Group. This has become increasingly more important as the business environment continues to be impacted by rapid and dynamic technological advancements. At RSA we perform an annual deep-dive assessment of the emerging risks facing the business. The deep dive is informed through the use of subject matter experts, thematic brainstorming workshops and consulting a wide range of key external documentation.
The five selected risks covered: 1) Global socio-political uncertainty 2) Financial market uncertainty 3) Persistent or more extreme weather Patterns 4) Cyber-risk 5) Critical infrastructure – geomagnetic storms
The results from these reviews, coupled with the work performed in previous years, satisfied the Board Risk Committee that the Group’s risks and controls frameworks were overall effective at managing future threats to the business.
RISK MANAGEMENT IN ACTION The risk function provides significant real time support to the business for change programmes including outsourcing, automation and technology deployments, whose aim is more efficiency and better customer experiences. Our focus is ensuring risks arising through these initiatives, both for execution and for long-term benefits, remain transparent and well managed. We help ensure the programme considers a broad range of key risks early, learning from internal and external failures, and manages these successfully in an integrated way. A key step is to design and agree approval criteria well in advance that tie to these key risks. In addition, the Control Environment Impact Assessment process has been deployed to manage specific risks to the control environment from business change. This process continues to be developed to reflect the dynamic nature of our change agenda.
Key risk and exposures Solvency II SCR % Key mitigants and controls Commentary
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 (SCR) is primarily comprised of insurance-related risks, including higher than anticipated underwriting losses, large retained catastrophe losses and deterioration in our stock of reserves for future claims.
Whilst 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 flow profile against that of our liabilities.
Another key SCR risk arises from the Group’s defined benefit pension schemes. Although these schemes are well funded (95 percent per latest triennial review), under the Solvency II rules we are required to hold sufficient capital to withstand a 1 in 200 year event. For more information on the pension schemes see note 38 of the financial statements.
• Economic transfer of the UK legacy insurance liabilities, effective at 31 December 2016, reduced Group’s exposure to Ogden rate change.
• Extensive control validation and assurance activities performed – with over 100 separate assurance reviews having been performed.
23 • Funding assets are well matched to liabilities in the pension schemes, including the use of swap arrangements
• RSA continues to work with the pension trustees in order to further explore options to de-risk the pension funds.
Operational risk These risks relate to customer and/or reputational damage arising from operational failures such as IT system failure.
• Clearly articulated IT risk appetite supported by control testing and appropriate remediation plans
• Extensive control review and testing with >1,000 control enhancement steps in the last two years.
Risk culture We consider the foundation for embedding an effective risk management framework is the cultivation of a risk culture which promotes accountability and openness (a willingness to admit mistakes and learn from the past), within an organisation built on respect, integrity and a clear focus on customer and employee outcomes. At RSA the senior management team have been instrumental in setting the right ‘tone from the top’, which is further underpinned by the Group’s quarterly cultural health check and annual staff survey.
A key part of our culture is ensuring that our customers are at the heart of all we do, and our staff are passionate about providing brilliant service to our customers. We give considerable attention to ensuring our customer are treated fairly. In the UK we are reviewing and enhancing our Conduct Risk Framework to enhance oversight of how our customers receive good outcomes.
Risk assessment of the operating plan – The Group’s operating plan provides the platform for ensuring the business remains aligned with its strategic goals, including delivery of profitable growth whilst maintaining a robust capital base.
IT risk monitoring framework – The Group has enhanced the IT control validation programme, moving away from self-assessment to a more independent and transparent programme which is linked to the RSA risk monitoring framework (IT Risk Appetite). This provides management with feedback on the effectiveness of the IT control environment, which has been strengthened through the creation of business owned control testing teams.
Solvency II and Solvency Capital Requirement (SCR) The Solvency II insurance regulatory regime became effective on 1 January 2016 and introduced the requirement to calculate the Group’s Solvency Capital Requirement (SCR). Insurers are required to calculate the level of capital required based on their unique risk profile. For RSA this is calculated using our own Internal Model that was approved by the regulator in December 2015.
Pillar two incorporates qualitative governance requirements, including the way the risk management function operates within the business and how key systems and controls are documented and reviewed. This includes the need for the Group to perform its ‘Own Risk and Solvency Assessment’ (ORSA).
Pillar three relates to enhanced and standardised disclosure requirements, including increased transparency of the risk strategy and risk appetite of the business. Since 2017, RSA has annually published its ‘Solvency and Financial Condition Report’; which contains extensive information on how RSA manages its risks and exposures and report on the financial position of the company using Solvency II valuation principles.
Safe, secure world At RSA we believe we can play a meaningful and practical role in helping our customers to avoid risks.
In the UK, our telematics and connected business is using the latest technology developments and behavioural sciences to help customers anticipate and avoid risks, particularly while driving. Our early trials have shown up to a 10 percent improvement in driving scores for the worst drivers, helping to improve road safety for everyone.
Last year, employees in Canada contributed to building 150 new homes in Edmonton, Alberta, supporting those affected by last year’s wild fires in neighbouring Fort McMurray. In the UK, our Ready, Set, Achieve programme helped young people develop the skills, knowledge and confidence they need to secure employment, through bespoke workshops hosted by our employees in communities close to our sites.
In 2017, we invested £1,893,600 in our communities. This included £265,900 raised for charitable causes by our employees, who also volunteered almost 9,000 hours of their time in their communities. Our community investment is guided by our Community and Charitable Policy and monitored through our Corporate Responsibility function to ensure compliance, including that no conflicts of interest exist, and no political donations are made by RSA Group.
Our commitment to helping build a sustainable future encompasses supporting our customers to adapt and respond to climate change, managing the impact of our business on the environment, and insuring renewable energy projects to accelerate the transition to a low carbon economy. We manage our own operations efficiently, monitoring our energy consumption, water use and waste, in line with our Environmental Policy, and engage third parties to support us in assuring the quality of our information and identify improvement opportunities. This year, we reduced emissions from our operations by 4.3 percent per employee by limiting our business travel and increasing efficiency in our operations. Full emissions data can be found on page 96.
Maktoum – Phase III Solar Farm project which is supporting Dubai’s ambition to use 75 percent clean energy by 2050. Through our insight and knowledge of such projects we are reducing the risks and costs associated with their development.
Responsible business We are committed to improving the way we operate, to ensure the positive impact of our business is maximised and the negative minimised. We engage with customers, employees and suppliers, being open and transparent in how we manage our operations and deliver our products and services, helping us build trust. We continually monitor the ESG risks associated with our operations and take action to manage those of material concern to our business, as outlined in the Risk Management section of this report.
As signatories of the UN Global Compact, we are committed to protecting human rights and eliminating discrimination, and our Human Rights Policy outlines the expectations placed on our employees, business partners and suppliers in this regard. To ensure we are taking appropriate steps to address the risk of modern slavery in our supply chains, we have updated our Third Party Contracts Policy and Supplier Code of Conduct to set a clear expectation of compliance. In addition, we have updated our due diligence processes to enable us to assess a supplier’s position on human rights and ESG issues more effectively. In the UK in 2017 we assessed 138 suppliers deemed as most high risk to our business to ensure they meet these expectations.
Information on policy compliance is escalated to management. Our Board receives updates on our anti-corruption controls at least annually. Where a breach is material or not in compliance with regulations, we will report externally.
We are committed to continuing to harness our business’s strengths and expertise to make the difficult times a little easier for our customers, and help to keep them and their communities safe.
BUILDING THE RIGHT WORKING ENVIRONMENT In 2017, we continued building a company with high standards of leadership, effective ways of working, great technical know-how and an inclusive, sustainable culture.
Over and above the right tools and ways of working, the cultural health of the organisation is critical to creating a sustainable business, and we have continued to monitor this on a quarterly basis. This involves co-ordinating input from HR, Risk and Audit to monitor any potential cultural risk factors such as employee engagement, employee turnover and succession coverage for critical roles. This means that we can spot any potential problem areas which need to be addressed before any serious issues occur.
These talent programmes have been successful in developing new leaders at RSA for a number of years. For example, in 2017 in the UK, female and male employees were promoted in broadly equal proportions into our senior leadership population. However like many financial services organisations, change is needed to ‘shift the dial’ on gender diversity in the senior management population at RSA. We have appointed a new Group Head of Diversity & Inclusion (D&I) to develop and implement the Group’s D&I strategy and take responsibility for the Group D&I Council action plan. And individual regions continue to make this a priority issue. In the UK, we are committed to actions which over time will reduce our gender pay gap. For example, when recruiting for senior roles, we require diverse shortlists of candidates and monitor the conversion rates of shortlisted candidates from under-represented groups to job offer. We were also very pleased in November 2017 to become a signatory to HM Treasury’s Women in Finance Charter which commits us to achieving a 33 percent representation of women in our Management Group by 2020.
To meet these commitments, developing women leaders who are already in the business is critical, and in 2018 we will further increase the number of female delegates attending our talent development programmes. In Canada we are funding attendance on Rotman Business School’s ‘Initiative for Women in Business’ and in the UK we have continued with our participation in the 30% Club cross-company mentoring programme This highly regarded programme is designed specifically to support female progression and during 2017 we were able to offer mentoring to women in RSA at the emerging leader level.
As part of our engagement of employees in shaping and giving feedback on our ongoing D&I agenda, we have begun to establish employee resource groups. To date in the UK we have groups which focus on gender and on LGBT+ issues and we will continue to support the growth and success of these groups, as well as the establishment of similar groups in other regions. Of course, feedback from all employees about what it’s like to work in RSA is important to us, and in 2017, we ran another ‘YOURSAY’ employee opinion survey. Our colleagues confirmed that RSA is a workplace with a strong performance culture, where there are opportunities to learn and grow, and where teams collaborate well. They also told us what more we need to do to achieve our Best in Class ambitions. We have listened, and as a consequence increased our senior leader communication of key business messages to all employees, including globally streamed Results town halls, face-toface ‘Buzz’ sessions, and online, open discussions – #YamJams – on our internal social collaboration tool, Yammer.
In 2017, we continued to focus on building the people capabilities and culture which will help us to achieve our best in class ambition for customers and shareholders and we intend to sustain this effort into 2018 and beyond.
Gaelle Tortuyaux, managing director of our French operations, at the Group Senior Leaders event
The Board is accountable to stakeholders for establishing and delivering strong sustainable performance and the creation of long-term shareholder value.
There are a number of changes to the Board to highlight. Johanna Waterous retired as a director and Isabel Hudson succeeded Johanna as Senior Independent Director in May 2017. Kath Cates succeeded Hugh Mitchell as Chair of the Remuneration Committee and Martin Strobel succeeded Kath as Chair of the Board Risk Committee with effect from 1 December 2017. Hugh will retire as a director with effect from the Company’s Annual General Meeting (AGM) on 11 May 2018. I would like to thank Hugh for his contribution to the Board over the past six years and I would also like to thank Kath for her leadership and oversight of the Board Risk Committee. I wish Martin and Kath success in their new roles as Chair of the Board Risk Committee and Chair of the Remuneration Committee respectively.
The Board continually challenges management to ensure that the flow and quality of information to the Board is of a high standard.
Breakdown of time spent on four key focus areas by the Board and Committees during 2017 a. Strategy and growth including business transformation 21% b. Risk management and internal control 27% c. Financial performance and reporting 32% d. Governance 20%
LEADERSHIP • A balanced Board with a broad range of skills, diverse experience and knowledge,demonstrating independence and constructive challenge
• The Senior Independent Director, through the annual Board effectiveness process, evaluates the performance of the Chairman in the leadership of a cohesive, effective Board
• Through regular review of the Board’s rolling agenda and previews of each Board meeting’s agenda, the Chairman ensures sufficient time is allowed for discussion and debate and he encourages constructive challenge during Board meetings.
• Letters of appointment set out the anticipated time commitment, which is reviewed annually by the Group Nomination and Governance Committee
• Viability assessed over a threeyear period which is aligned to the operational planning process and shorttail nature of the insurance contracts that the business underwrites
• The Board, through the Board Risk Committee, ensures that material risks are identified and ensures these risks are mitigated and managed.
• Remuneration Committee members receive background information on the remuneration of the Group’s employees in general to provide context when considering Executive Directors’ remuneration
• One of the Group’s strategic goals is the ambition of delivering improvements in customer service. The Board receive regular updates on customer metrics as it moves towards realising this ambition
• The Board is committed to dealing with regulators in an open, co-operative and transparent manner and takes its regulatory responsibilities seriously
• The Group Chief Executive presents an update on the Company’s performance at the AGM. Shareholders are encouraged to attend and ask questions.
The Board is aware of the proposals to change the UK Corporate Governance Code and the Group have contributed to the FRC’s consultation process about those proposed changes. Once the revised Code has been published, the Group will conduct a full review of the Company’s governance processes in light of the Code’s new Principles and Provisions.
The Financial Reporting Council (FRC) is responsible for the publication and periodic review of the UK Corporate Governance Code (the Code) which sets out standards and expectations on corporate governance matters for UK companies.
Board Contribution: Stephen has over 30 years’ experience in financial services and FTSE100 companies and brings extensive leadership experience contributing towards the Company’s forward looking strategy and policy. 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 shareholders and investors.
External appointments: Non-Executive Director of Phoenix Group Holdings, Liontrust Asset Management plc, CATCo Reinsurance Opportunities Fund Limited and The Bank of N.T. Butterfield & Son Limited (a company listed in Bermuda and New York).
Appointment date: August 2016 Nationality: British Committee membership: B R N
Skills and experience: Martin has considerable knowledge and understanding of the financial services sector and Board experience. Previous roles include Senior Independent Director and Chairman of the Audit Committee of Worldpay Group plc, Non-Executive Director and Chairman of the Audit Committee at Lloyds Banking Group plc, 34 years at Deloitte LLP, 26 years of which as Partner, Chairman of Deloitte LLP from 1995 to 2007, Director, Deloitte Touche Tohmatsu from 1999 to 2007 and membership of the Financial Services Trade and Investment Board from 2013 to 2015.
Skills and experience: Stephen was previously Chief Executive Officer of The Royal Bank of Scotland Group plc, 2008-13, where he led the largest ever corporate restructuring and recovery programme. Prior to that he held positions as Chief Executive at British Land plc from 2004 to 2008, Chief Operating Officer of Abbey National plc and a number of senior roles at Credit Suisse First Boston in London and New York. Stephen has over 30 years’ experience in financial services and FTSE100 companies with expertise in transforming the performance of businesses.
Board Contribution: Isabel brings wide ranging commercial, corporate finance 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.
Skills and experience: Alastair retired from KPMG in March 2011. In the last 20 years of his 36 year career with the firm, in the UK and overseas, he led their financial services team in Scotland with a primary focus on insurance and investment management. Alastair has extensive experience in advising on accounting and financial reporting, corporate governance and management issues in the financial sector and is a Fellow of the Institute of Chartered Accountants in England and Wales.
Role statements Chairman The Chairman is responsible for the leadership and effectiveness of the Board including the conduct at Board meetings. He promotes a culture of openness and debate ensuring effective decision-making and the provision of timely, accurate and clear information. The Chairman ensures that relevant objectives are established for the Group Chief Executive and his executive team, reviewing the overall management performance of the Company and senior management with the Group Chief Executive. The Chairman takes on the role of ambassador for the Company, participating in the engagement of and effective communication with the Company’s stakeholders.
Group Chief Executive The Group Chief Executive is responsible for identifying and developing business opportunities, recommending actions to the Board with particular attention on 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 Group Chief Executive develops targets and goals for his executive team and ensures succession plans for senior management are in place. He represents the Company at industry events and develops the Company’s communications strategy to meet the needs of, and engage with, all internal and external stakeholders.
Appointment date: October 2011 Nationality: Dutch Committee membership: I A R
Skills and experience: Enrico has over 35 years’ global executive and non-executive experience across financial services including banking and insurance: he was Group CEO at Intesa Sanpaolo and, prior to that, member of the Executive Board of Allianz where he was responsible for companies in Europe, Africa and Latin America and, globally, for P&C. He also served on the boards of, among others, Unicredit and Pirelli.
Skills and experience: Joseph has a comprehensive understanding of the insurance market globally, extensive financial services expertise and a good knowledge of international and emerging markets. Previous roles include Chief Financial Officer of Aegon until 2009 and Chairman of the Monitoring Committee of the Dutch Corporate Governance Code.
Senior Independent Director 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 Senior Independent Director holds meetings with the non-executive directors without the Chairman being present to review the Chairman’s performance as part of the internal Board evaluation process and chairs the Group Nomination and Governance Committee when considering matters relating to the Chairman of the Board.
Company Secretary The role of the Company Secretary is to support the Chairman and the Board. This includes bringing all governance matters to the attention of the Board and delivering a programme of Board and committee meetings, training, induction programmes and senior management presentations to ensure that each director has the information required to discharge his or her statutory duties. The Company Secretary ensures that papers are produced to a high standard and in a timely manner which are circulated to directors a week in advance of any meeting. The directors have access to the services and advice of the Company Secretary, and may take independent professional advice at the expense of the Company in the furtherance of their duties.
Appointment date: September 2013 Nationality: British Committee membership: R A B N
Board Contribution: Kath’s broad experience within the financial sector brings an insight into the businesses in the UK and globally, adding valuable contribution to the committees of which she is a member. Her in-depth knowledge, understanding of governance, and her experience in working across different sectors and markets are particularly useful in her role as Chair of the Group Remuneration Committee.
External appointments: Founding Partner of TGI-Think Global Investments; Non-Executive Director of Piraeus Bank; Member of the Board and of the Executive Committee of Bocconi University.
* Hugh will retire as a director with effect from 11 May 2018
Board Contribution: Joseph’s comprehensive understanding of the insurance market and extensive financial services experience, along with his commercial experience in emerging and international markets adds value to the development of strategy and how the business is run in the UK and globally.
Skills and experience: Most recently Chief Executive Officer of Baloise Group, a position he held for seven years to 2015. He joined Baloise Group in 1999 as the Head of IT at Basler Switzerland and, within Baloise Group, was responsible for major cross-functional insurance and finance projects. From 2003 to 2008, he was a member of the Corporate Executive Committee with responsibility for the Corporate Division Switzerland. From 1993 to 1999, Martin performed various roles at Boston Consulting Group, Düsseldorf, advising business in the banking and the insurance sectors.
The Executive Committee comprises Stephen Hester and Scott Egan, Executive Directors of the Group Board, Chief Executive Officers of the UK & International, Canadian and Scandinavian regional businesses and senior management in key functional roles.
Biographical details for the individuals fulfilling these roles can be found at www.rsagroup.com/thegroupexecutive
The Board annually host a two-day strategy meeting to which senior management are invited to attend to present on business issues, market trends and various innovations in support of the long-term strategy and vision of the Group. This year, the presentations included a detailed focus on underwriting, pricing and claims and digital capabilities.
• attendance at the annual Senior Leaders’ Conference, which focused on key priorities and challenges facing the Group
The Board reviewed Executive and senior management succession planning and spent time analysing and discussing with management the ‘YOURSAY’ employee engagement survey results and the proposed actions arising from it. The Board also looked at policies in place to ensure that a diverse and inclusive culture is provided across the Group offering advancement and progression. The Board values its workforce and the culture in which they work. Regular reviews will continue through 2018 in Board, committee and executive management forums, with diversity and inclusion presentations scheduled on the rolling agenda.
• Review of Board Governance: Board composition, succession planning, role statements, Board effectiveness and committee responsibilities and effectiveness with the support of the Group Nomination and Governance Committee
One of the key responsibilities of the Group Nomination and Governance Committee is to keep under review Board membership, succession planning and diversity to ensure the skills, experience and balance of the Board remains appropriate.
The names of the directors, together with their biographical details, committee membership and role statements are set out on pages 44 to 47. No one individual has unfettered powers of decision making and the roles of the Chairman and Group Chief Executive are separate and clearly differentiated through role statements, which are approved by the Board annually, along with role statements for the Senior Independent Director and Non-Executive Directors.
‘Women on Boards’ (Davies’ Review); ‘FTSE Women Leaders’ (HamptonAlexander Review); and ‘Ethnic diversity of UK Boards’ (Parker Review). The importance of diversity of gender, social and ethnic backgrounds, and of cognitive and personal strengths is recognised by the Board as a matter of Group Board policy. The Board values the breadth of perspective that such diversity can bring and the beneficial impact it can have on Board effectiveness and throughout the Group more broadly; and remains committed to maintaining a diverse Board and overseeing the development of a diverse workforce. All appointments to the Board are made on merit against an agreed selection criteria to ensure a balance of skills, experience, independence and knowledge.
Diversity of the Board as at 31 December 2017 a. Male 80% b. Female 20%
The Board is aware of the proposals of the Parker Report on ethnic diversity and of the Davies Review recommendation of a minimum of 25 percent representation of females on the Board rising to 33 percent by 2020. Following Hugh Mitchell’s retirement there will be two women and seven men on the Board. The Board values the breadth of perspective that diversity brings and is committed to maintaining a Board that is diverse (in its widest sense, encompassing not just gender and ethnicity).
Commitment The letters of appointment for the Chairman and each of the non-executive directors set out their anticipated time commitment, being an average of two days per week for the Chairman and 28-32 days per year for non-executive directors. In addition directors are required to allocate sufficient time to meet the expectations of the role, including attending Board and committee meetings, ad hoc meetings, spending time in the business, training and briefings with senior management as part of their induction and ongoing development programme, and attendance at the Annual General Meeting.
Martin Scicluna is the Chairman of Great Portland Estates plc and Stephen Hester is Senior Independent Director of Centrica plc. These appointments were considered by the Group Nomination and Governance Committee when considering Martin and Stephen’s time commitment and capacity to discharge their duties. The Board is satisfied that both Martin and Stephen’s external appointments are not a constraint on their time or ability to carry out their duties. Scott Egan is not currently a director of any other listed company but would be allowed to have one such appointment, subject to approval.
A role specification is agreed and provided to the external adviser appointed to assist with the recruitment. The Group Nomination and Governance Committee has responsibility for reviewing a shortlist of candidates and its recommendation is presented to the Board. The Board considers the skills, experience, independence and knowledge already represented when making decisions on new appointments.
Upon appointment to the Board, directors undertake a tailored induction programme, receiving a broad range of information about the Group. This includes information on the operational performance and business of the Group, including the Group’s approach to corporate responsibility, and details of Board procedures, corporate governance and directors’ responsibilities. Directors attend a series of meetings with senior management covering all aspects of the business including Capital, Claims, Company Secretarial and Legal, External Auditor, HR, Internal Audit, Investments, IT and e-business, Regulatory Compliance, Reserving, Risk and Underwriting. Each new director is invited to attend each Board committee as part of their induction programme to familiarise themselves with the remit of each committee and the matters discussed. Additional training is provided when committee membership changes occur.
Each year, the Board spends time on site visits, giving them the opportunity to meet with and challenge senior management, while also deepening their knowledge of specific business areas. More information on the Board’s activities during 2017 is detailed on page 49.
Board Evaluation To ensure the Board, its committees and individual directors remain effective, a performance evaluation is carried out annually, in compliance with the Code.
During the year, an internal evaluation was led by the Chairman and Senior Independent Director. Isabel Hudson who was well placed to carry out the Board evaluation given her wide-ranging commercial, business development and Board experience. The evaluation was carried out via an on-line questionnaire and interviews, canvassing the views of each director and regular attendees of Board and committee meetings. Key themes identified for focus in 2018 included a refreshed customer/digital focus, further improvement in the quality and balance of presentations, and a review of the split between strategic and performance metrics provided to the Board, including non-financial information.
The results of the evaluation were presented to the Board and actions agreed against the key themes. The evaluation concluded that the Board is working well and that its effectiveness continues to improve, with a good quality of challenge and debate. There were no points expressed during the evaluation process that had not previously been discussed over the course of the year, demonstrating the Board’s collaborative working style, supporting an ethos of continuous improvement throughout the year.
Each year, actions identified are monitored for development. During 2017, progress has been made against the key themes identified in the 2016 evaluation, with a clear focus on longer-term strategy and actions to embed the ‘best-in-class’ culture. Executive succession planning, was reviewed and there was a renewed focus on technology, with the launch of a new customer platform to improve the overall customer experience and pricing sophistication.
Members: M Scicluna (Chair) A Barbour K Cates I Hudson M Strobel
6. Group Remuneration Committee: Johanna Waterous ceased to be a member of the Committee on 5 May 2017. Hugh Mitchell chaired the Committee throughout the year until Kath Cates was appointed as member and chair on 1 December 2017. Kath previously served as a member of the Committee from May 2014 to June 2016. Regular attendees: Chairman, Group CEO, Group Chief Legal Officer and Company Secretary, Group HR Director, Executive Compensation and Benefits Director and PWC as independent advisers to the Committee. Additional input was provided by the Group Chief Risk Officer.
8. Absences at scheduled Board or committee meetings during the year were due to commitments predating joining the Board, an external Board commitment, ill health and a family bereavement.
ACCOUNTABILITY The Board is accountable to shareholders for the creation and delivery of strong sustainable performance and the creation of long-term shareholder value.
System of Governance The Group functions within a robust governance structure to operate a wellmanaged business, ensuring that the Group and its legal entities comply with all relevant legislation and regulation in each of the jurisdictions in which it has a business operation. The Group’s System of Governance comprises three elements: 1. Corporate Governance Framework: how the business is managed 2. Risk Management System: how risks are identified, measured, managed, monitored and reported 3. Internal Control System: the controls behind the Corporate Governance Framework and the Risk Management Framework.
• Provides effective and efficient decisionmaking by the Board and its committees
Risk Management System • A common framework through which risk management and control is embedded
• Consistent approach throughout the Group to identify, measure, manage, monitor and report risks
• Risk Management Policy establishes a framework of standard risk management processes
• Risk Management System is underpinned by the ‘Three Lines of Defence’ model: – First line of defence: activities undertaken to ensure that risks are identified and controlled to bring them within appetite
– Second line of defence: independent review and challenge of the first line activities, providing assurance that controls and validation are properly designed and operating effectively
Internal Control System The Internal Control System comprises three key elements: 1. Internal Control Framework
• Policies establish standard controls, which are implemented and operated by the business
• The Group Controllership Policy sets out the standard control processes to mitigate against material financial reporting misstatement and financial loss. Assurance is provided through the Financial Control Framework.
• Day-to-day management is undertaken by the Group Chief Executive and Executive Committee supported by executive level committees
ENGAGEMENT The Board is committed to transparent disclosure and engagement with the Group’s stakeholders.
Stakeholders Throughout the year, senior management have actively engaged with shareholders, 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.
Customers The Group knows that customer focus is key to the success of the business. One of the Group’s main strategic goals is the ambition of delivering improvements in customer service.
Employees The Board recognises the key role of the Group’s employees in delivering the Group’s strategy and values the time spent with them. Members of the Executive Committee and senior management host regular ‘Town Hall’ meetings to update employees on topical issues, including giving updates on company performance each quarter following the announcement of results or a trading update.
More information on employees can be found on pages 40–41 and page 95.
The Committee is authorised by the Board to manage all aspects of investment policy and strategy for the Group and provide oversight of the operation of the Group’s investment portfolios within established strategy and risk frameworks. The Group Investments Director attends all meetings of the Committee to provide an update on the economic and market background and outlook affecting the Group, the investment activities carried out since the Committee last met, an overview of performance and to seek approval of any proposed changes required to investment strategy.
As Committee Chairman, I report to the Board on the outcome of Committee meetings and the Board also receives the minutes of Committee meetings.
This economic backdrop continued to support strong asset valuations with the US stock market hitting new highs and corporate bonds remaining underpinned by strong demand. Although remaining close to historic highs, government bonds saw some declines in price as the stronger growth environment fuelled expectations of future interest rate rises.
Against this background there were no substantial changes to the core disposition of the Group’s investment portfolios. Bonds and cash continued to represent the substantial majority of assets (90 percent) while equities and property
The Committee’s main areas of responsibility are: Investment strategy • Review and approve investment strategy framework for Group’s investment portfolios
Over the last few years, the Group’s investment portfolios have been gradually building an exposure to less liquid bond and loan instruments. These investments, which include infrastructure loans, loans backed by property and trade receivables have been targeted to take advantage of the additional yield offered for illiquidity relative to traditional quoted bonds. Investment into these instruments continues to be very carefully managed and has been targeted so that it maintains the strong underlying credit quality of the Group’s investment portfolios. In total, the Group now has committed allocations to these assets of approximately £1.6bn with around £1.3bn of this invested at the year end.
The Committee reviewed and approved the increased allocation to illiquid credit. In addition, the progress on implementation of allocations and the performance of invested assets has been subject to ongoing review to ensure performance continues to be in line with expectations.
Joseph Streppel Non-Executive Director and Chairman of the Group Investment Committee 21 February 2018
Details of the Group’s investments can be found on pages 118–152
The Chairman reports to the Board on the outcome of Committee meetings and the Board also receives the minutes of Committee meetings for review.
Key activities during 2017 Board and committee composition The Committee keeps Board and committee membership under review to ensure that the Board and each of its committees have the appropriate balance of skills, knowledge, diversity and experience.
• Joseph Streppel was re-appointed for a third three-year term on 3 October 2017
In making these recommendations, the Committee considered the directors’ independent contribution to the Board and committees and the balance of their skills, knowledge and experience with those of the other directors.
In addition, an assessment of the criteria set out in the Code is undertaken in relation to independence. Isabel Hudson has a pre-existing entitlement to a deferred pension from one of the Group’s defined benefit pension schemes relating to a previous employment with Royal Insurance, which ended in 1993. Taking into account a number of factors, including the size of the pension benefit and its relative immateriality to her overall retirement planning, it remains the Committee’s view that Isabel’s pension entitlement in no way compromises her independence of character and judgement.
The Committee has concluded that all Directors proposed for re-election continue to be effective members of the Board and that each Non-Executive Director remains independent. Therefore, the Board are proposing the re-elections as set out in the 2018 Notice of Annual General Meeting.
GROUP NOMINATION AND GOVERNANCE COMMITTEE REPORT I am pleased to present the Group Nomination and Governance Committee Report for 2017. The Committee members and their attendance at meetings are shown on page 53.
• Identify and recommend suitable Board candidates to the Group Board
• Recommendation of re-appointment and annual re-election of directors to the Board
• Recommendation of membership of the Audit, Remuneration, Investment and Board Risk Committees in consultation with the Chair of those committees.
During the year, an evaluation of the Board and its committees has taken place. The Committee reviewed and discussed the results of the evaluation prior to the Senior Independent Director presenting the results to the Board. Further information relating to the Board evaluation process and results is included on page 52.
Martin A Scicluna Chairman and Chair of Group Nomination and Governance Committee a. Governance 69% b. Succession Planning, Diversity and Recruitment 31%
Throughout 2017, the Committee operated under the leadership of Kath Cates as Chair until 1 December 2017 and I thank her for her exemplary stewardship and efficient handover.
The Committee’s effectiveness has been assessed through a formal evaluation, which concluded that the Committee was effective.
Private meetings are held ahead of each Committee meeting to discuss any concerns and agree areas of focus. The Group Chief Risk Officer was asked to attend one private meeting so the Committee could share risk insights and committee enhancements.
Business risk review The Group Chief Risk Officer provides a quarterly update on the key risks and themes that potentially impact the Group, including an assessment of whether risks are within appetite and any actions necessary to ensure the Group remains within agreed risk appetite thresholds. Subject matter experts supplement this view providing more granular insight into specific risk areas and the remediating actions.
The Committee conducted its annual review of the Group’s risk strategy and appetite, recommending minor changes to the Board. In addition, emerging risk analysis was used to anticipate future risk issues that might arise and to support development of stress and scenario testing plans.
Key activities during 2017 The Committee met with regional Chief Risk Officers from Scandinavia, UK & International and Canada during the year. This enables the Committee to better understand the risks present in each region, to explore specific regional topics in more depth, and relay the insights and best practice considerations of the Committee. During 2017, the Board visited Scandinavia, spending time with the regional management to gain greater insight into the regional business, its activities, and local risk and governance matters.
• Consider, approve and recommend to the Board, the Group risk strategy, risk appetite framework and risk limits
• Through regular monitoring and reporting, ensure the Group remains within appetite and risk limits or appropriate actions are taken
• Ensure material risks have been identified, understood, are managed and appropriately reported, with reference to known control weaknesses, incidents or events, and breaches in policies or procedures
• Review outputs of the Internal Model (Model), including Solvency II capital ratios
• Maintenance of the Model with reference to assumptions, changes in the business and/or risk profile and Model validation. This work includes a review of the capital adequacy assessments to ensure capital remains within appetite
• Review the Group’s Own Risk and Solvency Assessment (ORSA) approach and report, including the performance of associated stress and scenario tests
• Review and monitor management’s responsiveness to findings and recommendations of Group Chief Risk Officer
Effective management of insurance risk is key to the Group’s performance and longer-term success. Every agenda of the Committee includes a general update with a focus on specific topics. Deep dives selected for 2017 have included Canada earthquake exposure, skills and capabilities, external delegation of authority, cyber underwriting and large losses.
During the year, the Committee received training or separate briefings on a number of items including Solvency II governance and disclosures, the potential impact of the Lord Chancellor’s review of the Ogden discount rate and the impact of forthcoming financial reporting standards. I am confident that the Committee is well briefed and continues to fulfil its duties to shareholders and other stakeholders, through an enquiring approach and high quality management challenge throughout the year, covering issues as diverse as: • The duration for risk remediation, associated resourcing requirements and subsequent assurance assessments, particularly where IT and information security are concerned
• Ensuring satisfactory risk management where continued Group finance transformation is concerned
The Committee was subject to internal evaluation as part of the wider review of the Board and its Committees during 2017. Further details are available in the Effectiveness section on page 52.
In addition, Martin Strobel is Chair and Kath Cates and Alastair Barbour are members of the Board Risk Committee, ensuring that risk is taken into account in the Committee’s decisions and that information flows appropriately between the two committees.
GROUP AUDIT COMMITTEE REPORT I am pleased to present the Group Audit Committee Report for 2017. The Committee oversees and as appropriate challenges the integrity of the Company’s financial statements and the robustness of the Group’s systems of internal control and financial and regulatory risk management.
Role and responsibilities The Committee’s main duties are to: • Coordinate and oversee the integrity of the financial reporting process
a b c d e f g h i j k a. Accounting policies, methodologies and practices 5% b. Reserves 15% c. Other balance sheet valautions 5% d. Pension assumptions 10% e. Financial results 10% f. Internal Controls 15% g. Governance and compliance 10% h. IT Matters 10% i. Solvency II 10% j. Internal Audit 5% k. External Audit 5%
The Committee held six scheduled meetings during the year and has held private meetings with the Group Chief Auditor, the Group and UK Regulatory Compliance Director, the Group Chief Financial Officer, the external auditor and the Group Chief Actuary without other members of management being present. The Committee members regularly met privately to discuss issues on which to concentrate with management and advisers in the subsequent Committee meeting.
The Group Chief Financial Officer, the Group Chief Auditor, the Group and UK Regulatory Compliance Director, the Group Chief Risk Officer, the Group Chief Legal Officer and Company Secretary and representatives of the external auditor, KPMG, are regular attendees at Committee meetings. The Group Chairman and the Senior Independent Director are invited to attend the meetings where the interim and final results are considered. Other members of management and external advisers may attend at the invitation of the Committee.
The Committee has unrestricted access to management, information and external advisers as required in order to fulfil its duties, and is satisfied that it has received sufficient, reliable and timely information during 2017 in order to discharge those duties.
• Monitored the Group’s compliance with anti-money laundering requirements and anti-bribery and corruption laws. In May 2017, the Committee approved the approach to the independent assurance plan concerning the Group’s Financial Crime Framework for 2017/2018
• Monitored the integrity of the control environment during transformation and considered the appropriateness of the design of key initiatives in relation to their impact on the Group’s control environment
The principal interactions with KPMG during the year in relation to financial reporting were: • Consideration of the strategy and plan for the audit of the financial statements including discussion and challenge in relation to materiality levels set; the scope of the proposed coverage by business unit; determination and approach to the audit of key areas of risk; understanding the oversight by the group audit team of subsidiary business unit audit teams and visits by the group team to business units
• Consideration of KPMG’s wider comments on governance, financial reporting processes and efficiencies as well as information systems and controls
• Consideration of their observations on controls and processes as reported to management and follow up with relevant management to be satisfied that the observations are being appropriately actioned; and
• Reporting on the Solvency II balance sheet, annual Solvency and Financial Condition Report and reviewing key areas of judgement in relation to Solvency II.
• Trends emerging in the UK household business from escape of water claims
The results of independent internal reviews carried out in the year with regard to all short-tail lines in Ireland, Canadian long-tail lines and Scandinavian business (excluding Danish Workers Compensation) were considered by the Committee.
The Committee received quarterly reports on the Solvency II Technical Provisions and reviewed the bridge from IFRS results as well as quarterly and annual movements. The Committee satisfied itself that the calculations had been conducted according to the Group’s Basis of Preparation.
The Committee received and considered detailed written and verbal reporting from KPMG setting out their observations and conclusions in respect of the recorded insurance contract liabilities based on their audit procedures as further described in their report on pages 99 to 105.
Pension and post-retirement obligations During the year, the Committee received reports on the valuation of the pension schemes. As the pension schemes are sensitive to changes in key assumptions, management completed an assessment as to the appropriateness of the assumptions used, including benchmark data, where appropriate, and reported their findings to the Committee. Any non-standard changes in assumptions and judgements were also reviewed by the Committee, which included a proposal to update the discount rate and inflation assumption methodology to better reflect the full term structure of the pension scheme liabilities. The Committee concluded that the proposed changes were appropriate and supported the conclusion that the assumptions used overall were reasonable and within an acceptable range of other companies with schemes of a similar duration.
Valuation of deferred tax assets The Committee reviewed the key assumptions and financial projections supporting the UK deferred tax asset. The forecasts presented by management were assessed and, in particular, the longer term projections of profitability in light of the changes to business plans as a result of restructuring activities and other completed management actions. After discussion and challenge, the Committee concluded that management’s proposed assessment as to the recoverable deferred tax asset was reasonable.
To ensure that new accounting standards were understood and appropriately reflected in the financial statements, the Committee received quarterly updates of relevant accounting standards that could impact the financial statements. The Group has not made any significant changes to its accounting policies during 2017 and has complied with updates to IFRS as required during the year.
Taken as a whole, the Committee is satisfied that the 2017 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.
The primary focus of the Framework is the production of information for the Group Annual Report and Accounts. In addition, the Framework mitigates material risks at the local operational level. Local teams carry out control validation work and a Group Controllership Team provides assurance over this work and reports on findings and actions to the Committee quarterly.
During the year, the Committee received quarterly updates on the assessment and testing of controls including any control deficiencies and the action taken as a result.
Internal control The Internal Control System forms part of the System of Governance, full details of which can be found in the Accountability section on pages 54 to 55.
Implementation and maintenance of the Internal Control System is delegated to the Executive Directors and senior management.
The Committee receives regular reports from the Group Chief Auditor, external auditor and Group Chief Risk Officer on the integrity of the control environment and also received regular reports on the Regulatory Compliance Framework, which is described in greater detail below. These reports enable the Committee to continually assess the effectiveness of the Internal Control System. The Committee discussed findings and recommendations from these reports, together with any control improvements recommended.
The Committee considers that an effective and appropriate ongoing process for identifying, evaluating and managing the significant risks faced by the Group has been in place during 2017 and up to the date of approval of the Annual Report and Accounts. For more information about the Group’s Risk Management Framework, see pages 33 to 37 and 54 to 55.
The aim of the policy is to encourage and enable employees to raise any malpractice or wrongdoing at RSA in a controlled environment, offering safeguards and support as may be necessary to protect employees’ personal integrity and, where reasonably possible, identity. Concerns can be raised by contacting local or Group senior management, including the Group Chief Auditor and Group Human Resources Director, or via an externally provided website and helpline, which allows employees to remain anonymous throughout the process.
Regulatory risk and compliance The purpose of the Regulatory Risk and Compliance function is to ensure that the Group meets all relevant regulatory requirements in each jurisdiction in which it operates. The function is an influencer in ensuring a strong regulatory compliance culture and ensure mechanisms are in place to monitor the regulatory environment, identify and analyse key changes impacting the business, identify, report and resolve regulatory issues to avoid or minimise business impact and surprises. The function is part of the Group’s second line of defence which monitors and validates first line activities. The Group and UK Regulatory Compliance Director provides regular reports to the Committee.
• Maintenance of an open, constructive and cooperative relationship with the Group’s regulators
• That the Board and employees understand their regulatory responsibilities; and
The Committee reviewed and approved the 2018 Compliance Plan, including the role of the Regulatory Risk and Compliance function, in December 2017.
Group Internal Audit Group Internal Audit’s (GIA) primary purpose is to ‘keep RSA safe and improving’. Specifically, GIA helps the Board and Executive Management to protect the assets, reputation and sustainability of the Group. GIA does this by assessing whether all significant risks are identified and appropriately reported by management and the second line of defence to the Board and Executive Management; assessing whether they are adequately controlled and by challenging Executive Management to improve the effectiveness of governance, risks management and internal controls.
GIA is an independent and objective function reporting to the Board. The Group Chief Auditor is a member of the Executive Committee and has a primary reporting line to the Chairman of the Group Audit Committee, with a secondary reporting line to the Group Chief Executive. Regional Chief Auditors report directly to the Group Chief Auditor, whilst recognising local regulation.
GIA’s scope of activities is unrestricted and includes first line of defence control validation and second line of defence assurance activities, as well as the risk and control culture of the Group.
In addition, the Group Chief Auditor attended all the Committee meetings during 2017. On an annual basis, GIA hosts a half-day informal meeting briefing for the Committee, providing further opportunity for detailed discussion concerning GIA plans for the forthcoming year. The Group Chairman and members of the Committee together with the chairmen of the regional audit committees in Canada, Scandinavia and Ireland attended the 2017 meeting in November.
The current audit partner is Stuart Crisp who has been the Group’s audit engagement partner since KPMG’s appointment. In line with FRC standards, Stuart will rotate off the audit engagement following completion of the 31 December 2017 audit and Daniel Cazeaux will assume responsibility. The Committee is satisfied that Daniel has the appropriate experience to lead the audit. There are no contractual obligations restricting the Company’s choice of external auditor and there is no limitation of liability in the terms of the appointments of KPMG as auditor to the Company.
The Committee has provided clear guidance to KPMG on the Committee’s expectations of them as part of their role as auditor; that the Committee, not management, is KPMG’s client; that they are expected to challenge appropriately; that they are expected to raise issues and concerns with the Committee as soon as is appropriate and on material matters they are expected to indicate their agreement to the position taken by management, or to explain why they do not, and the implications.
The Committee met with KPMG twice during the year without management present to ensure that they were given the opportunity to raise any concerns they may have and to ensure they remain independent and objective.
Fees and non-audit services The audit fee for the 2017 Annual Report and Accounts was discussed between the Committee and the external auditor and approved by the Committee on behalf of the Board.
The Group’s non-audit services policy has been revised following review against the requirements of the FRC’s Revised Ethical Standard. The policy continues to assist in maintaining the independence of the external auditor. All permitted activity must be authorised in advance and approved by the Committee with the Committee Chairman, Group Chief Financial Officer or Group Financial Controller able to sign off lower value engagements.
In exceptional circumstances the auditor will be considered for additional services where there is an overwhelming business rationale, but only with full Board approval. A summary of the policy is available on the Company’s website at www.rsagroup.com/termsofreference.
Each quarter, the Committee receives and reviews a report on non-audit services, together with information on fees agreed and billed by the other major accounting firms.
The review was conducted by both a questionnaire distributed to and completed by the Committee, senior management and members of the Group financial reporting team, seeking opinions against set criteria and the performance of the external auditor against those criteria and through Audit Committee meetings with the external auditor whereby the Committee challenged the auditor’s planning, strategy, risk identification process and conclusions.
Alastair WS Barbour FCA Non-Executive Director and Chairman of the Group Audit Committee
On behalf of the Group Remuneration Committee, I am pleased to introduce this year’s report.
Business performance in 2017 The Group delivered strong results in 2017, and particularly so in a year when the global insurance market experienced elevated loss challenges. Progress is more fully described in the Strategic Report on pages 4 to 41.
Underlying Earnings per share (EPS) is up 10% compared to the Company’s record performance in 2016. RSA’s share price increased by 8%, slightly outpacing the FTSE 100 Index and the European Insurance Index (SXIP). Dividends were increased by 23%.
As well as risk being part of the incentive measures, the Committee considered a report from the Group Chief Risk Officer as part of its overall incentive decision-making. On this occasion, additional adjustments were not considered necessary to award outcomes and the malus/clawback provisions were not exercised in the year.
As outlined above, while Group profits and shareholder returns increased during the year, underwriting results undershot our ambitions which were set even further ahead of 2016’s record level. As a result, the Chief Executive’s bonus award was 35% lower than in 2016, despite the Board’s continuing strong appreciation of his contribution to the Group. His total remuneration ‘single figure’ shown on page 73 increased in 2017 due to the outcome of the 2015-17 long-term incentive, the value of which benefitted from strong share price appreciation during that period, reflecting the successful turnaround of RSA. The incentive targets are set out on pages 73 to 76.
General Meeting 85 14. External directorships 85 15. Directors’ contracts 85
Summary of Directors’ Remuneration Policy 86 2. RSA’s remuneration principles 86 3. Remuneration Policy for Executive Directors 87 4. Approach to recruitment remuneration 89 5. Service contracts and policy for payments on loss of office 90 6. Legacy incentive plans 91 7. Required shareholding 92 8. Policy for Non-Executive Directors 92
For the 2018 cycle, the incentive plan measures will be consistent with those in the 2017 cycle. Emphasis will continue to be placed on key financial performance indicators directly linked to shareholder value and profit. In addition, complementary Business and Personal Scorecards will allow the Committee to take account of areas including risk and capital management, controllable costs, attritional loss ratios, business improvement, people and the customer franchise.
In line with salary increase levels for the Group’s UK-based employees, Executive Director salaries and the Chairman’s fee will rise by 2% from 1 April 2018.
Remuneration of other employees The Committee considers pay relativities with RSA’s wider workforce as part of its work on executive remuneration. As a principle, we aim to treat all employees fairly in the markets in which we operate (e.g. RSA is an accredited Living Wage Employer), while ensuring we continue to attract high calibre executives who have choices about where they work.
As with many other UK companies, RSA is publishing its gender pay gap figures for the first time in 2018. A key part of reducing the gap is improving female representation in senior jobs, and initiatives we are taking in this area are set out online at www.rsagroup.com/responsibility.
Committee transition Finally, having taken on the chairmanship of the Committee in December last year, I would like to thank my predecessor, Hugh Mitchell, for the role he has played over the last six years.
• Policy approved at AGM with 99% of shareholder votes in favour.
• Executive Director salary increases will not exceed the level of increases for other employees (bar exceptions e.g. role change).
• Bonus up to 160% of salary, LTIP up to 230% of salary.
• Half of bonus is deferred for three years, LTIP performance period is three years plus a two-year retention period.
1. Introduction This Annual Report on Remuneration provides details of how the approved Remuneration Policy has been implemented for Directors in the financial year ended 31 December 2017, and how the Group intends to implement its Policy in 2018.
2. Information about the Group Remuneration Committee Purpose of the Committee The Committee determines the remuneration and contractual terms for the Executive Directors and the Executive Committee (who are detailed on pages 44 to 48). It approves the fee and contractual terms of the Chairman (whose profile is on page 44). In addition, it maintains oversight of remuneration practice for roles covered by the specific remuneration principles of Solvency II, including Material Risk Takers and Key Governance Function holders.
Committee attendees 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 2017 included the Group HR Director, Group Chief Legal Officer & Company Secretary and Executive Compensation and Benefits Director. Additional input was provided by the Group Chief Risk Officer.
None of the above individuals are present if their own remuneration is being discussed.
Committee advisers PricewaterhouseCoopers (PwC) was appointed by the Committee as its independent adviser. It was selected following a market tender exercise. During 2017, PwC also provided advice and consultancy services across the Group globally on matters including data and analytics technologies, operations strategy, cyber security and privacy, IT risk and governance, internal audit, direct and indirect tax and compliance. PwC is a member of the Remuneration Consultants’ Group and a signatory to its Code of Conduct. In addition, the Committee has satisfied itself that the advice it receives is objective and independent as the firm has confirmed there are no conflicts of interest arising between it, its advisers and RSA. The fee paid for services to the Committee in the year was £80,000 excluding VAT, based on a fixed fee for a defined scope of work.
• Review of Directors’ base salaries effective from 1 April 2017.
• Review of the Directors’ Remuneration Report 2016 and Solvency II disclosures.
May • Review of the 2017 long-term incentive grant and an update on dilution levels.
• Approval for a supplementary grant of conditional long-term incentive awards in September 2017 for non-Board employees.
December • Update on the performance of the Annual Bonus Plan 2017 and long-term incentive cycle 2015-17.
3. Total remuneration 2017: ‘single figure’ tables (audited) The tables below set out the Directors’ total remuneration single figure for the financial year ended 31 December 2017. The fee structure applicable to Non-Executive Directors is detailed on page 84.
Salary Taxable benefits1 Bonus2 LTIP Pension related benefits Other remuneration Total
Notes: 1. Taxable benefits: This includes reimbursement in respect of travel and accommodation. Stephen Hester received a car allowance and the use of a car and driver service which totalled £43,760 (2016: 44,614), Scott Egan received a car allowance of £15,000 (2016: £15,000), and each of the Executive Directors were provided with medical benefits and life cover. Alastair Barbour received benefits of £17,561 (2016: £17,057) for taxable travel where relief under HMRC rules is not available.
2. Bonus: Awards in respect of performance measures relating to the financial year shown, as described on pages 73 to 75. 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 78.
4. LTIP 2016: Actual value of Performance Shares and accrued dividend equivalents under the 2014-16 LTIP cycle that vested on 19 May 2017. The vesting was as disclosed in the 2016 Annual Report and Accounts on page 93. Valuation has been restated using the share price on the vesting date of £6.095.
6. Scott Egan received an annual base salary of £525,000 from 1 January to 31 March 2017. This increased by 2.5% effective 1 April 2017 to £538,125. 7. Stephen Hester received an annual base salary of £969,000 from 1 January to 31 March 2017. This increased by 2.5% effective 1 April 2017 to £993,225. 8. Isabel Hudson was appointed as a Non-Executive Director effective 1 August 2016. 9. Martin Strobel was appointed as a Non-Executive Director effective 1 May 2016. 10. Johanna Waterous resigned as a Non-Executive Director effective 5 May 2017.
The maximum bonus opportunity was 160% of salary, of which half of any award is deferred into RSA shares for three years. Bonus awards are subject to malus and clawback provisions, as detailed on page 78.
From a Risk and Resilience perspective, achievements were very strong. Capital metrics significantly exceeded targets and credit ratings are strong. The successful sale of UK legacy liabilities reduced risk, boosted capital and allowed a major pay down of high cost debt, improving capital resilience further. Reinsurance structures successfully protected the Company against the worst of the US Cat losses.
– Underlying Performance: Group controllable expense ratio Group controllable expenses Attritional loss ratio1
– Risk and Resilience: Solvency II coverage ratio TNAV:NWP S&P credit rating Capital actions Broader risk management
– Business Sustainability: Policy / premium retention Top line growth Customer franchise £6,408m
• Risk profile: targeting strong financial control, actuarial reporting, capital reporting and audit results.
• Stakeholders: effective Investor Relations, investor and analyst interaction, regulator and rating agency relations.
• Financial and capital results were strong as set out above.
• Good progress in upgrading Finance function delivery and reducing its cost.
• Assumption of additional responsibility for Group transformation projects and IT oversight.
• Clean bill of health for Finance on risk and audit items overall.
• Risk profile: operating Company to good standards of risk/ regulatory control and capital resilience.
• Leadership: sustain strong stakeholder relations, continued team and culture development focused on top 50 leaders to support Best in Class strategies, support for Diversity & Inclusion and environmental/community policies.
• Clean bill of health on risk and regulatory items overall.
• Delivery of improved customer metrics and volumes. Good new partnership wins.
• Overall, the Board has a strong appreciation of Stephen’s leadership in driving RSA’s impressive performance transformation since 2014.
Performance measures 2015–17 Threshold target: 25% vesting Maximum target: 100% vesting Actual Weighting Vesting (% of maximum)
The Scorecard’s capital and business performance indicators shown in the following table form the basis of this judgement. Despite tough markets, underwriting performance has gone from losses to two successive record years, driven by underlying performance improvement. Cost saving targets have been beaten and raised four times and ROTE targets successfully raised also. Credit ratings and capital ratios have been raised to well above threshold zones.
3. TNAV growth per share assessed consistent with the methodology in note 2. Market volatility (FX, Bonds, Pensions) have been excluded as well as the impact of capital actions beneficial to the shareholder.
Notes: 1. Estimate includes vesting Performance Shares valued at £2,371,948 and accrued dividend equivalents valued at £194,628 which will be added to the awards that vest.
The Group underlying ROTE target range has been increased compared to the 2016-18 cycle.
Performance measures 2017–19 Weighting Threshold target: 25% vesting Maximum target: 100% vesting
Notes: 1. Relative TSR index of comparators includes: Admiral, Allianz, Aviva, Chubb, Direct Line, Gjensidige Forsikring, Hiscox, Intact, Mapfre, QBE, Topdanmark, Tryg and Zurich. A
Notes: 1. The performance measures are Group underlying ROTE, Relative TSR and a Business Scorecard ( weighting each). 2. The performance period is three years and ends on 31 December 2019. 3. If threshold performance is achieved, 25% of the number of shares shown will vest.
Malus and Clawback Policy The Group operates a Malus and Clawback Policy. This is reviewed annually, as set out on page 88. In summary, the Committee has the ability to reduce or forfeit awards that have yet to be paid or vest in the case of shares, to delay the payment or vesting date or to amend another form of award or benefit which has yet to be received (malus adjustment). For cash bonuses awarded for 2015 performance onwards, and long-term incentive awards granted from 2015 onwards, the Committee may also recover sums already paid to Executive Committee members if it considers it appropriate to do so (clawback). This can be applied during a two-year period after receipt (in the case of cash bonuses) or vesting (in the case of long-term incentives).
Employee misconduct, including regulatory or other breaches Gross or serious employee misconduct.
5. Directors’ shareholding (audited) The table below shows the interests of Directors in Ordinary Shares of £1.00 each of the Company, including those of closely associated persons.
Notes: 1. As at 21 February 2018, the interests in Ordinary Shares of the current Directors have not changed since 31 December 2017. 2. Johanna Waterous resigned as a Non-Executive Director effective 5 May 2017. The table above shows her shareholding as at that date and not 31 December 2017. 3. Full details of all Directors’ shareholdings and options to subscribe for shares are recorded in the Group’s Register of Directors’ Interests which is open to inspection by shareholders at the AGM and at the Company’s registered office during standard business hours. The Directors had no share options that vested and remained unexercised, or were exercised in the year.
Executive Directors’ required shareholding The table below shows the Executive Directors’ shareholding level and their unvested scheme interests in the Company’s incentive plans. Scott Egan and Stephen Hester joined RSA in October 2015 and February 2014 respectively and continue to build their shareholdings to the target levels shown below within the targeted five-year period.
4. Performance Shares granted in 2015 and 2016 have performance conditions of Group underlying ROTE, Relative TSR and a Business Review Scorecard ( weighting each). The dates by which performance conditions are to be met is as follows: 2015 awards by 31 December 2017, 2016 awards by 31 December 2018.
5. Performance Shares granted in 2017 have performance conditions of Group underlying ROTE, Relative TSR and a Business Scorecard ( weighting each). The date by which performance conditions are to be met is 31 December 2019.
6. No other Directors of the Company held long-term incentive scheme interests during the year.
8. Historical TSR and executive remuneration The following graph shows the TSR of the Group, with reference to the FTSE 100 Index and the Relative TSR peer group used as an LTIP performance measure (the constituents of which are noted on page 76). The FTSE 100 Index is included as it comprises the 100 most highly capitalised companies in the UK market, of which RSA was a member in 2017.
Total Spend on Employee Pay1 804 782 -3% Total Distributions to Shareholders2 131 200 53%
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 135. 2. Includes the figures as shown in the notes to the Financial Statements on page 139.
The following charts illustrate how Executive Directors’ remuneration potential changes according to varying levels of performance achievement, and the balance between fixed and variable remuneration. The Committee’s aim is that superior levels of remuneration will only be paid in return for delivering superior levels of performance. The variable element is fully flexible such that no award is guaranteed. The assumptions used in preparing these charts are noted in the following table.
• LTIP 125% of salary (this assumes 62.5% vesting, i.e. half-way between the 25% threshold vesting and 100% maximum vesting)
• LTIP 200% of salary (this assumes 100% vesting of the award in the 2018-20 grant)
• LTIP 144% of salary (this assumes 62.5% vesting, i.e. half-way between the 25% threshold vesting and 100% maximum vesting)
Base salary, benefits and pension The Committee reviewed the Executive Director salary levels, taking into account the average reviews applied elsewhere in the Group, including those for employees subject to collective bargaining agreements, and UK inflation figures. It referenced a range of information including market data from two benchmarking peer groups of listed international insurers and FTSE companies of a broadly comparable market capitalisation to RSA, excluding banks and heavy industries.
The table below shows the salaries that will apply from 1 April 2018. The level of increase is in line with those for other UK-based employees this year: Director Annual base salary effective
How will incentives be aligned to the business strategy in 2018? The table below shows how the business strategy, and the key performance indicators which underpin it, are reflected in the Annual Bonus Plan and long-term incentive performance measures for Executive Directors in 2018: Strategic priorities Annual Bonus Plan 2018 Long-term incentive cycle 2018-20
Business Scorecard: Underlying Performance: Attritional loss ratio, total controllable costs/cost ratios, key business improvement projects; Risk and Resilience: Regulatory capital ratios, credit rating, capital actions, risk management; Business Sustainability: Customer franchise and other relevant actions related to the Company’s long-term success including People and Corporate Responsibility
The Committee will assess performance for 2018 once the financial year has ended, taking into account material risk factors. All of the bonus targets are considered to be commercially sensitive because they signal the Group’s forward plan for the year, and therefore they are not provided in this document. Disclosure will be provided in the 2018 Directors’ Remuneration Report, to the extent that the targets do not remain commercially sensitive.
The table below sets out the structure of the Executive Directors’ bonus plan for 2018: Bonus performance measures Weighting
Long-term incentive 2018-20 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.
The Business Scorecard measures and assessment will be operated similarly to the 2017-19 LTIP cycle, as described on page 77. In contrast to the Business Scorecard in the 2018 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 specific 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.
The Committee has approved in principle that Stephen Hester’s Performance Share opportunity in the 2018-20 LTIP grant will be 230% of salary at maximum vesting, which is the usual level of award for the Group Chief Executive; and that Scott Egan’s opportunity will be 200% of salary at maximum vesting. 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.
RSA’s TSR outperforms the unweighted index of comparators by at least 7% per annum (22.5% compound over three years) or exceeds the TSR of the highest performing company in the index
Non-Executive Directors’ fees The Committee reviewed the Chairman’s fee in accordance with the Remuneration Policy, and did so referencing a range of information including market data on fees taken from the same peer groups used to benchmark the Executive Directors’ salaries, UK inflation figures and the average reviews applied elsewhere in the Group. An increase of 2% will be applied effective from 1 April 2018, moving the fee from £420,000 to £428,400.
Under the Company’s Articles of Association, the Non-Executive Directors’ remuneration is determined by the Board, within limits set by shareholders. The Chairman and Board (minus the Non-Executive Directors) discharges its accountability for setting and managing Non-Executive Directors’ remuneration; it will do this when their contractual terms or fee structure are under consideration, which is typically once a year, as noted on page 92.
The Company reviewed the Non-Executive Directors’ fees in accordance with the Remuneration Policy and the fees effective from 1 April 2018 are shown in the following table.
13. Dilution RSA monitors its dilution levels on a regular basis to ensure that they remain within the headroom limits set by the Investment Association (IA). As at 31 December 2017, the dilution levels were as follows: Limit RSA dilution %
14. External directorships Stephen Hester received fees of £92,500 during the year in respect of his non-executive role at Centrica plc, where he is Senior Independent Director. As permitted under the Remuneration Policy, he retained these fees.
Scott Egan does not hold outside directorships of FTSE 100 (or any other listed) companies but would be allowed to have one such appointment, subject to the approval of the Group Nomination and Governance Committee.
The table below shows when the Non-Executive Directors’ appointments became effective and when their terms will expire: Non-Executive Director Date of initial appointment Expiry date of current term
1. Introduction The Directors’ Remuneration Policy was approved by shareholders on 5 May 2017, and was effective from that date. No changes to the Policy are proposed this year.
The Policy covers how decisions on Directors’ remuneration will be made at RSA, and the remuneration philosophy and strategy which underpin these decisions.
• 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 conflicts of interest.
3. Remuneration Policy for Executive Directors The following table sets out the components of the Executive Directors’ remuneration package and how they operate.
An existing Executive Director’s salary may be increased outside of the normal review cycle for material role changes.
Performance conditions do not apply, but business and individual performance may be considered when conducting the review process.
The Committee can adjust contribution or allowance levels to ensure these remain appropriate and market aligned. It can also agree changes to the terms of the Directors’ pension plan(s), as appropriate.
No Executive Director will receive a pension benefit in excess of 30% of salary.
50% of the bonus is deferred into a share award for a period of three years, and 50% is awarded in cash.
Actual bonus awards are linked to achievement as follows: • Below threshold
The performance measures and targets used to inform the 2017 bonus awards are on pages 73 to 75.
This element supports RSA’s longterm strategy, performance and priority to create shareholder value through sustained earnings and share price growth.
Award vesting is linked to achievement against the performance conditions as follows: • Below threshold – 0%
The measures and targets for the 2018-20 cycle are on pages 83 to 84.
• Where the Director is an internal appointee to the Board, or appointed following a corporate transaction, he/ she may be permitted to retain any legacy benefits or terms at the Committee’s discretion, or a buy-out may be made depending on the benefit type and circumstance. Continuity of service with the Group will be maintained.
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 88. However, in exceptional circumstances, a higher bonus opportunity of up to 200% of salary may be agreed and a performance-related LTIP award may be approved by the Committee in the Director’s first year of service up to the limit of 400% of salary.
– Any compensatory award using cash or restricted shares will always carry a service condition and an appropriate repayment schedule to protect shareholders’ interests.
• There are no pre-determined special provisions for Directors with regard to compensation for loss of office.
• If a loss of office were to occur giving rise to a redundancy payment under prevailing employment legislation, the payment will be calculated taking account of the Director’s length of service with the Group and his/her annual gross basic salary as at their employment termination date.
• No payment or compensation for loss of office made to any departing Director will be disclosed if it is less than £10,000 gross.
• Executive Directors do not have terms which provide additional rights or payments to them in the event of a change of control, reconstruction or amalgamation of the Company.
• Not eligible if left or under notice at the date of payment.
• Normally vest in line with the normal timetable if resignation.
• At the Committee’s discretion, and normally including such circumstances as planned retirement, death, disability/ medical severance, transfers outside of the Group and redundancy1
• Performance is tested in line with the normal performance timetable.
• The Committee has the discretion to make the final bonus award in cash and so waive deferral, subject to any regulatory requirements.
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.
• The Committee can determine whether a pro-ration for time is applied to these awards.
• Vesting level determined with regard to performance and time served.
Note: 1. The Committee will make reasonable judgement on determining whether a Director qualifies for good leaver status by reason of retirement, by understanding the individual’s intentions post employment termination and taking account of the context of his/her departure from the Group.
6. Legacy incentive plans The Policy provides for any outstanding awards granted under legacy incentive plans to continue in place, although the current Executive Directors do not hold any such awards.
7. Required shareholding 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.
• Executives have a targeted five years in which to build up their holding, commencing from the first date an unconditional share award is made to them as a Director. No shares are to be sold until the holding level is reached, except where required to cover statutory deductions.
• The Executive Directors’ shareholding levels as at 31 December 2017 are noted on page 79.
• The Chairman receives a fee for his role and this is set by the Committee.
• Fees are reviewed annually but an annual increase may not always be applied.
• When assessing fee levels, account is taken of the required time commitment and the degree of expertise necessary to fulfil the particular role (such as chairing a committee),
• The fees are benchmarked using the same peer groups as for the Executive Directors’ remuneration, and will have regard to the market median.
• Details of the Chairman’s fee and the Non-Executive Directors’ fees earned for 2017 are noted on page 73.
• They receive no other benefits, but they can have RSA insurance products at a discount.
• As the Non-Executive Directors are not employed by the Company, they are not eligible to receive a bonus award or participate in any of RSA’s share plans.
• Non-Executive Directors may hold shares in RSA but this is a personal matter and is not mandatory.
Non-Executive Directors are expected to disclose any conflicts of interest prior to, and during, the course of their tenure. They will not participate in making a decision if any conflict is considered to impact their independence or limit their ability to discharge their duties to shareholders. Since Non-Executive Directors and the Chairman receive only fees and expenses, no individual can have a loss of office payment, although payment in lieu of notice can be made.
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 4 to 41 which includes: • Use of financial instruments by the Company and details of financial risk management objectives and policies of the Company, including the policy for hedging each major type of forecasted transaction for which hedge accounting is used
The Directors are responsible for preparing the Annual Report and Accounts and consider that the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy. Further explanation of the assurances undertaken by the Group Audit Committee on behalf of the Board are set out in the Group Audit Committee Report found on pages 62 to 67. A report from the external auditor can be found on pages 99 to 105.
Viability statement In accordance with the UK Corporate Governance Code, the Directors have assessed the viability of the Group over a three year period.
The Group prepares a three year operational plan and capital forecast along with sensitivity analysis in line with the Group’s strategy. These forecasts are subject to review and challenge by the Directors on at least an annual basis.
Based on this review no material uncertainties that would require disclosure have been identified in relation to the ability of the Group to remain a going concern for at least the next twelve months, from both the date of the Statement of Financial Position and the approval of the Consolidated Financial Statements.
Dividends In accordance with regulatory requirements, in order for the Company’s Ordinary Shares to be counted towards the new Group capital requirements, any dividends declared by the Company must be capable of being cancelled and withheld or deferred at any time prior to payment, if the relevant capital requirements have been breached or payment of the dividend would lead to non-compliance with those requirements. Directors do not expect to exercise this right, other than where they believe that it may be necessary to do so in light of the applicable legal or regulatory requirements.
The Company’s Preference Shares receive a dividend at the rate of 7.375 percent per annum paid in two instalments on, or as near as practicably possible to, 1 April and 1 October each year subject to approval by the Board.
Scrip Dividend Scheme The Company renewed its authority to offer a Scrip Dividend Scheme to shareholders at the 2014 AGM and updated the terms and conditions in 2016. The Company will not be offering a Scrip Dividend alternative in respect of the final 2017 dividend. For dividends where a Scrip alternative is offered, shareholders wishing to receive a Scrip dividend instead of a cash dividend should contact the Company’s Registrar for details or visit the shareholder services area of the Company’s website www.rsagroup.com/ investors/ shareholders.
More information on the Company’s share capital can be found in Note 32 and 33 on pages 155 to 156. Note 33 includes a summary of the principal terms of the Company’s SEK2,500,000,000 and DKK650,000,000 floating rate Restricted Tier 1 Contingent Convertible Notes which were issued in March 2017. The notes are convertible into Ordinary Shares of the Company upon the occurrence of certain conversion trigger events.
Preference Shareholders are only entitled to receive notice of, attend, speak and vote at general meetings if the dividend payable on the Preference Shares is in arrears at the date of the Notice, a resolution is proposed that affects the rights of the preference shareholders, a resolution is proposed to wind-up the Company, a resolution is proposed to reduce the capital of the Company (other than a redemption or purchase of shares), or in such other circumstances as the Board shall determine. In any of these situations the Preference Shareholders may only vote on the relevant resolution and not on all the business of the general meeting.
During the year, the Company operated two employee share trusts to hold Ordinary Shares in the Company which are used to satisfy grants under the Group’s share incentive schemes. Link Trustees (Jersey) Limited and Link Market Service Trustees Limited, respectively, are the Trustees. The Trustees may vote in respect of any shares held in the trusts but have no obligation to do so, and the Trustees may have regard to the financial interests of the beneficiaries in exercising their voting rights over the Company’s shares. Standard dividend waiver agreements are in place for the employee benefit share trust, of which Link Trustees (Jersey) Limited are Trustees, to receive dividends of 0.01 pence per share.
operated effectively in 2017. None of the directors had any interest in any contract of significance with the Company or any of its subsidiaries during 2017.
The Company’s Articles of Association may be amended by special resolution of the Company’s Ordinary Shareholders. It is proposed that an amendment be made to the Articles of Association at the 2018 AGM. It is proposed that provision be made to allow for hybrid general meetings enabling participation through technological means via the internet to supplement the meeting hosted at a venue. The Company does not have any current intention of hosting hybrid general meetings but may consider the use of technology to allow for flexibility in the future.
Ameriprise Financial, Inc, and its group 75,871,245 7.46% Direct & Indirect & CFD
Cevian Capital II G.P. Limited 137,645,130 13.50% Indirect & CFD 137,645,130 13.50% Indirect & CFD
T. Rowe Price Associates, Inc. 53,306,835 5.01% Direct & Indirect 53,306,835 5.01% Direct & Indirect
Borrowing powers Article 98 of the Articles of Association sets out the restrictions on the borrowings of the Company. The aggregate amount, for the time being, remaining borrowed by the Group must not, without the previous sanction of an ordinary resolution of the Company, be more than one-and-a-half-times the aggregate of: (i) the amount paid up on the issued share capital of the Company; and (ii) the total of the capital and revenue reserves of the Group (subject to certain adjustments).
Scope 1: Direct emissions from the group’s activities, including use of company-owned vehicles and onsite thermal energy
Scope 3: Emissions relating to RSA activities not within our direct control, including business travel, water supply, wastewater treatment, paper and waste generated.
All conversion factors have been sourced from recognised public sources, including the UK’s department for environmental and rural affairs, the international energy agency and the GHG protocol’s stationary combustion tool.
Political donations During the year the Group has not made any donations to political parties or independent election candidates. Each year the Company proposes a resolution authorising political expenditure up to £100,000 for each of donations to political parties and independent election candidates, donations to political organisations and incurring political expenditure. This resolution is proposed in the event that the funding of seminars, functions and charitable donations by the Group may be regarded as political in nature.
Disclosures required under Listing Rule 9.8.4R The following table sets out where in the Annual Report and Accounts the information required to be disclosed to meet the requirements of Listing Rule 9.8.4R, where applicable to the Company, can be located: Information required Location in Annual Report and Accounts
Charlotte Heiss Group Chief Legal Officer and Company Secretary 21 February 2018
Basis of Preparation and Significant Accounting Policies 1 Basis of preparation 111 2 Adoption of new and revised standards 111 3 New accounting standards, interpretations and amendments 111 4 Significant accounting policies 112
Notes to the Income Statement, Other Comprehensive Income and Distributions 8 Segmental information 131 9 Net investment return 134 10 Net claims 134 11 Other operating income 135 12 Other operating expenses, reorganisation costs and impairments 135 13 Finance costs 135 14 Employee expenses 135 15 Related party transactions 136 16 Auditor’s remuneration 136 17 Income tax 137 18 Share based payments 138 19 Earnings per share 139 20 Dividends paid and proposed 139 21 Total other comprehensive income 140
Notes to the Statement of Financial Position 22 Goodwill and intangible assets 141 23 Property and equipment 143 24 Investment property 144 25 Financial assets 144 26 Fair value measurement 147 27 Interests in structured entities 152 28 Reinsurers’ share of insurance contract liabilities 152 29 Current and deferred tax 153 30 Insurance, reinsurance and other debtors 155 31 Cash and cash equivalents 155 32 Share capital 155 33 Other equity instruments – Tier 1 notes 156 34 Non-controlling interests 157 35 Loan capital 157 36 Other borrowings 157 37 Insurance contract liabilities 158 38 Post-retirement benefits and obligations 163 40 Other liabilities 168
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group and the Parent Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Group and Parent Company and enable them to ensure that their financial statements comply with the Companies Act 2006 and as regards the Group financial statements, Article 4 of the IAS Regulations. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and Parent Company and to prevent and detect fraud and other irregularities.
Independent auditor’s report 1) Our opinion is unmodified We have audited the consolidated financial statements of RSA Insurance Group plc (“the Company”) for the year ended 31 December 2017 which comprises the consolidated income statement, consolidated and Parent statement of comprehensive income, consolidated and Parent Company statement of changes in equity, consolidated and Parent Company statement of financial position, the consolidated and Parent Company statement of cash flows and the related notes, including the accounting policies in note 4.
We were appointed as auditor by the shareholders of the Company at the Annual General Meeting held on 13 May 2013. The period of total uninterrupted engagement is for the five financial years ended 31 December 2017. We have fulfilled our ethical responsibilities under, and we remain independent of the Group in accordance with, UK ethical requirements including the Financial Reporting Council (‘FRC’) Ethical Standard as applied to listed public interest entities. No non-audit services prohibited by that standard were provided.
Recoverability of Parent Company’s investment in subsidiaries to the members of RSA Insurance Group plc
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 inflation risk) on UK motor business.
• Margin evaluation: Evaluation of the appropriateness of the Reserve Committee’s recommended margin to be applied to the actuarial best estimate. In order to do this we assessed the Director’s approach to, and analysis performed, in setting the margin with respect to recognised actuarial methods. In particular we considered the allowance for uncertainties inherent in the data and assumptions in developing the actuarial best estimate through inquiry with the Directors and with respect to our understanding of the Group and our own sector experience of approaches to setting the margin and the level of margin held by the Group’s peers.
In addition to the above the audit team performed procedures to assess the completeness and accuracy of the data used in the calculations to estimate insurance liabilities: • Control observation and operation: Evaluation and testing of key controls designed to ensure the integrity of the data used in the actuarial reserving process (including both current and prior year case reserve data). The controls included reconciliations between data in the actuarial reserving systems and data in the policy administration systems. We tested controls through inspecting or re-performing the Group’s reconciliations.
• Tests of detail: Re-performance of 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.
Our results • We found the valuation of the insurance liabilities to be acceptable.
With the assistance of our own IT audit specialists, our procedures included: • Controls design and observation: Testing general IT controls around system access, change management and computer operations within specific applications pertinent to the financial statements by assessing if appropriate policies are in place and adhered to by inspecting supporting evidence. Where general IT controls are not operating effectively, we addressed the increased risk of financial statement misstatement by extending the scope of our work. This included assessing the operation of controls over changes or transactions being recorded in the systems and testing manual compensating controls, such as reconciliations between systems and other information sources, through re-performance or inspection.
Our results • Our testing identified deficiencies in the design and operation of certain controls. We compensated for this by extending our detailed testing over and above that originally planned, and this work was completed satisfactorily.
Subjective valuation Small changes in the assumptions and estimates used can have significant effect on the valuation of the Group’s pension obligations and therefore the amount of the pension and post retirement obligations and the Group’s financial position.
• Benchmarking assumptions: Comparing the key assumptions such as discount rate, inflation rate and life expectancy against externally derived data.
• Assessing valuer’s credentials: Evaluating the Group’s external valuer’s competence, objectivity, capability and scope of work.
Our results • We found the valuation of the pension and post-retirement obligations to be acceptable.
Forecast-based valuation The recoverability of the recognised deferred tax asset is dependent on the future profitability of the UK business, and RSAI plc as the taxable legal entity, in particular. There is inherent uncertainty involved in developing the operational plan upon which forecast future taxable profits are based. These forecasts determine the extent to which deferred tax assets are or are not recognised.
Our procedures included: • Control design and observation: Evaluating the internal review and challenge process the Group undertakes during the development of the operational plan and by the Group Risk Function during the approval process, and the extent to which the Group considered alternative outcomes.
• Assessing transparency: Assessing adequacy of the Group’s disclosures in respect of the assumptions supporting the deferred tax asset valuation and recognition.
Refer to page 182 (accounting policy, Investment in Subsidiaries) and page 184 (financial disclosures). Amount should be the full investment balance
Financial statements 3) Our application of materiality and an overview of the scope of our audit
Materiality for the Parent Company financial statements as a whole was set at £31.5m (2016: £35m), determined with reference to a benchmark of net assets and chosen to be lower than materiality for the Group financial statements as a whole. It represents 0.5% of the stated benchmark (2016: 0.6%).
Audits for Group reporting purposes were performed by component auditors for four (2016: four) of the Group’s nine (2016: nine) reporting components, being those located within the UK, Ireland, Canada and Scandinavia. The Group’s central functions were not individually significant enough to require a full scope audit for group reporting purposes, but did present specific individual risks that needed to be addressed. As such, specified risk-focused procedures were performed on investments, treasury and reinsurance, which included agreeing financial information to supporting documentation. For the residual four components, we performed analysis at an aggregated group level to re-examine our assessment that there were no significant risks of material misstatement within these.
The Group team instructed component auditors as to the significant areas to be covered, including the relevant risks detailed above and the information to be reported back. The Group team approved the component materialities, which ranged from £15m to £28m (2016: £15m to £28m), having regard to the mix of size and risk profile of the Group across the components. All (2016: all) of the audits of reporting components were performed by the component auditors.
The Group audit team visited four (2016: five) component locations, being those in the UK, Ireland, Canada and Denmark (2016: UK, Ireland, Canada, Denmark and Sweden) to assess the audit risk and planned audit approach. Instead of a site visit, the Swedish team came and met with the Group audit team in Denmark.
Telephone conference meetings were also held with these component auditors and with others that were not physically visited, being those which are out of scope. At these visits and meetings, the findings reported to the Group audit team were discussed in more detail and the Group audit team reviewed key elements of the component auditors’ work papers. Any further work required by the Group audit team was then performed by the component auditor
• The related statement under the Listing Rules set out on page 94 is materially inconsistent with our audit knowledge.
5) We have nothing to report on the other information in the Annual Report
Under the Listing Rules we are required to review the Company’s viability statement. We have nothing to report in this respect.
Corporate governance disclosures We are required to report to you if: • we have identified material inconsistencies between the knowledge we acquired during our financial statements audit and the directors’ statement that they consider that the annual report and financial 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
• the section of the annual report describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee.
6) We have nothing to report on the other matters on which we are required to report by exception
Directors’ responsibilities As explained more fully in their statement set out on page 98, the directors are responsible for: the preparation of the financial statements including being satisfied that they give a true and fair view; such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; assessing the Group and parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and using the going concern basis of accounting unless they either intend to liquidate the Group or the parent Company or to cease operations, or have no realistic alternative but to do so.
A fuller description of our responsibilities is provided on the FRC’s website at www.frc.org.uk/auditorsresponsibilities.
Irregularities – ability to detect Our audit aimed to detect non-compliance with relevant laws and regulations (irregularities) that could have a material effect on the financial statements. We identified relevant areas of laws and regulations from our sector experience, through discussion with the directors and other management (as required by auditing standards), and from inspection of the Group’s regulatory and legal correspondence.
We had regard to laws and regulations in areas that directly affect the financial statements including financial reporting (including related company legislation) and taxation legislation. We considered the extent of compliance with those laws and regulations as part of our procedures on the related financial statement items.
8) The purpose of our audit work and to whom we owe our responsibilities
Earnings per share on profit attributable to the ordinary shareholders of the Parent Company
Items from continuing operations that will not be reclassified to the income statement: Pension – remeasurement of net defined benefit asset/liability net of tax 21 44 (316)
Movement in property revaluation surplus net of tax 21 2 1
Other comprehensive income for the year from discontinued operations 6(i) – 120
Total comprehensive income for the year from discontinued operations 6(i) – 93
Attributable to: Equity holders of the Parent Company from continuing operations 117 98 from discontinued operations – 94
Consolidated Statement of Comprehensive Income for the year ended 31 December 2017
Shares issued for cash (note 32) 2 3 – – – – – – 5 – – 5 Share based payments (note 18/32) 1 – – – – – – 15 16 – – 16 Other reserve transfer – – – – 28 – – (28) – – – –
Total comprehensive income Profit for the year – – – – – – – 289 289 – 33 322 Other comprehensive income/(expense) (note 21) – – – – (192) – (24) 44 (172) – (15) (187)
Net cash flows from investing activities – continuing operations 422 32
Net cash flows from investing activities – discontinued operations – 333
Net cash flows from financing activities – continuing operations (814) (237)
Net cash flows from financing activities – discontinued operations – –
The assets and liabilities considered as non-current include: investments in associates, deferred tax assets, property and equipment, intangible assets, goodwill, deferred tax liabilities, outstanding debt including loan capital and elements of financial investments, insurance contract liabilities and reinsurers’ share of insurance contract liabilities.
The Group has completed its initial impact assessment and is using these results to inform a detailed planning phase which is underway. During this phase decisions will be made on appropriate policies to adopt and the required change to finance systems and processes. The Group intends to start implementation activities in 2018 and intends to parallel run systems and reporting during 2020 to assure reporting compliance by 1 January 2021.
The Group, in line with peers, will take advantage of the exemption available to entities whose activities are predominantly insurance related to defer applying IFRS 9 ‘Financial Instruments’ (which would otherwise be applicable for annual reporting periods beginning on or after 1 January 2018) until 1 January 2021 which will coincide with the expected implementation of IFRS 17. This will enable accounting policy choices to consider the interrelationships of IFRS 17 and 9 particularly with regards to asset and liability management. Assessment and implementation of IFRS 9 will therefore run alongside IFRS 17 activity.
IFRS 16 ‘Leases’ IFRS 16 ‘Leases’ replaces the existing standard IAS 17 ‘Leases’ and standardises lessee treatment of leases and becomes effective at the latest for periods beginning on or after 1 January 2019. The standard requires a lessee to recognise a right-of-use asset representing its right to use the underlying asset and a lease liability representing the corresponding obligation to make lease payments. In addition, the nature of expenses related to those leases will now change; IFRS 16 replaces the straight line operating lease expense with a depreciation charge for the right-of-use assets and interest expense on the lease liabilities,
Premium income 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.
At the end of each reporting period tests are performed to ensure the adequacy of the Group’s insurance contract liabilities by considering the cash flows associated with the provision for unearned premium net of related DAC. In performing these tests, best estimates of future contractual cash flows, including loss adjustment and administrative expenses as well as investment income on financial assets backing such liabilities are used. Any deficiency is charged to the consolidated income statement immediately by establishing a provision for liability adequacy known as the unexpired risk provision. The 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.
Transaction costs that are directly attributable to the acquisition of financial assets and financial liabilities that are not FVTPL are added to their fair value in their initial measurement.
Held for trading Derivative assets/ (liabilities) not designated as hedging instruments
Income statement – net investment gains/ (losses) when realised or impaired
Category Financial instrument Description Subsequent Measurement Recognition of change in fair value
Financial liabilities Other borrowings Financial liabilities with fixed or determinable payments
Impairment of financial instruments The Group determines, at each reporting date, whether there is evidence that the value of a financial asset or a group of financial assets, other than those measured as FVTPL are impaired. A financial asset is impaired if there is objective evidence that indicates that an event has occurred after the initial recognition of the asset that may have resulted in a loss of value as a result of having a negative effect on the estimated future cash flows generated by that asset which can be estimated reliably.
The amounts charged (or credited where relevant) in the consolidated income statement relating to post-retirement defined benefit schemes are as follows: • The current service cost: this is the present value of additional benefits payable for employees’ services provided during the reporting period; • The past service costs and gains or losses on settlement: these are changes to the obligations already established for past service costs that have arisen from an amendment to the terms of the scheme or a curtailment of the benefits payable by the scheme. These are recognised at the earlier of when the terms of the scheme are amended or the curtailment occurs or, where applicable, when the Group recognises related restructuring costs or termination benefits; • Net interest on the net defined benefit liability/asset: this is determined by applying the discount rate applied to the defined benefit obligation for the period to the net defined benefit liability/asset, and results in a net interest expense/income; • The administration costs of operating the pension schemes.
Remeasurements of the net defined benefit 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 defined benefit obligation, and return on scheme assets excluding interest. The most significant of these is the selection of the discount rate used to calculate the defined benefit obligation, details of which are set out in note 38.
Where the carrying amount is more than the recoverable amount, impairment of goodwill or intangible assets is recognised in the consolidated income statement. Impairment losses previously recognised on other intangible assets may be reversed in subsequent periods provided that the revised carrying amount does not exceed the value that would have been determined (net of amortisation) had no impairment loss been recognised. An impairment loss recognised for goodwill is not reversed in a subsequent period.
A) Underwriting risk 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.
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 notified claims as well as estimating the number and value of claims that are still to be notified.
• The views of internal peer reviewers of the reserves and of other parties including actuaries, legal counsel, risk directors, underwriters and claims managers; • The outcome from independent assurance reviews performed by the Group actuarial function to assess the reasonableness of regional actuarial indication estimates; • How previous actuarial indications have developed.
Financial risk Financial risk refers to the risk of financial 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.
The Group Reinsurance Credit Committee oversees the management of credit risk arising from the reinsurer failing to settle its liability to the Group. Group standards are set such that reinsurers that have a financial strength rating of less than ‘A-’ with Standard & Poor’s, or a comparable rating, are removed from the Group’s authorised list of approved reinsurers unless the Group’s internal review discovers exceptional circumstances in favour of the reinsurer. Collateral is taken, where appropriate, to mitigate exposures to acceptable levels. At 31 December 2017 the extent of collateral held by the Group against reinsurers’ share of insurance contract liabilities was £585m (2016: £159m), which in the event of a default would be called and recognised on the balance sheet. The increase reflects the UK Legacy reinsurance arrangement announced on 7 February 2017 which is fully collateralised.
The Group’s use of reinsurance is sufficiently diversified that it is not concentrated on a single reinsurer, or any single reinsurance contract. The Group regularly monitors its aggregate exposures by reinsurer group against predetermined reinsurer Group limits, in accordance with the methodology agreed by the BRC. The Group’s largest reinsurance exposures to active reinsurance groups are Berkshire Hathaway, Lloyd’s of London and Talanx. At 31 December 2017 the reinsurance asset recoverable from these groups does not exceed 3.9% (2016: 2.4%) of the Group’s total financial assets. Stress tests are performed by reinsurer counterparty and the limits are set such that in a catastrophic event, the exposure to a single reinsurer is estimated not to exceed 6.4% (2016: 6.1%) of the Group’s total financial assets.
Reinsurers’ share of insurance contract liabilities – 605 1,577 90 20 51 2,343 96 2,247
Ageing of financial assets that are past due but not impaired The following table provides information regarding the carrying value of financial assets that have been impaired and the ageing of financial assets that are past due but not impaired as at 2017, excluding those assets that have been classified as held for sale.
Cash and cash equivalents 985 – – – – – 985 –
Market risk Market risk is the risk of adverse financial impact resulting, directly or indirectly, from fluctuations of equity and property prices, interest rates and foreign currency exchange rates. Market risk arises in our operations due to the possibility that fluctuations in the value of liabilities are not offset by fluctuations in the value of investments held. At Group level, it also arises in relation to the overall portfolio of international businesses. Market risk is subject to the Board Risk Committee risk management framework, which is subject to review and approval by the Board.
Market risk can be further broken down into three key components: i. Equity and property risk The Group classifies its investment portfolio in debt securities and equity securities in accordance with the accounting definitions under IFRS.
At 31 December 2017 the Group held investments classified as equity securities of £764m (2016: £692m). These include interests in structured entities (as disclosed in note 27) and other investments where the price risk arises from interest rate risk rather than from equity market price risk. The Group considers that within equity securities, investments with a fair value of £242m (2016: £170m) may be more affected by equity index market price risk than by interest rate risk. On this basis a 15% fall in the value of equity index prices would result in the recognition of losses of £36m (2016: £26m) in other comprehensive income.
In addition the Group holds investments in properties and in group occupied properties which are subject to property price risk. A decrease of 15% in property prices would result in the recognition of losses of £46m (2016: £50m) in the income statement and £5m (2016: £5m) in other comprehensive income.
Changes in the income statement and other comprehensive income (OCI): Increase in income statement
Increase in interest rate markets: Impact on fixed income securities and cash of an increase in interest rates of 100bps 18 20 (412) (452)
Movement in shareholders’ equity at 31 December 2017 (38) 46 (46) 56 (18) 22
Movement in Shareholders’ equity at 31 December 2016 (25) 31 (43) 53 (21) 26
Guaranteed subordinated notes due 2045 – – – – – 400 – 400 396
Perpetual guaranteed subordinated capital securities 375 – – – – – – 375 369
Regulatory solvency position during 2017 The Group’s Solvency II Internal Model was approved by the PRA in December 2015 and forms the basis of the primary Solvency II solvency capital ratio (SCR) measure.
At 31 December 2017, the estimated SCR and corresponding eligible own funds were as follows: Unaudited £bn £bn
Movement in tangible net asset value (TNAV) TNAV is one of many capital metrics used by the Group and is based on IFRS net assets excluding the value of goodwill and intangible assets.
Notes: 1. Profit after tax excludes amortisation and impairment of intangible assets. 2. Dividends includes £9m (2016: £9m) paid in relation to preference shares and £11m (2016: £nil) coupon payment on the Group’s Tier 1 notes.
Own risk and solvency assessment (ORSA) The Solvency II directive introduced a requirement for undertakings to conduct an ORSA.
The Group defines its ORSA as a series of inter-related activities by which it establishes: • The quantity and quality of the risks which it seeks to assume or to which it is exposed; • The level of capital required to support those risks; • The actions it will take to achieve and maintain the desired levels of risk and capital.
Financial statements 6(i) Discontinued operations and disposals The Group classified the following operations as discontinued because they have been sold and represent a separate geographical area of operation.
The total loss on the sale of discontinued operations disposed of during 2016 after tax was £29m.
Discontinued Statement of Comprehensive Income for the year ended 31 December 2017 £m £m
Items from discontinuing operations that may be reclassified to the income statement: Exchange losses recycled on disposal of discontinued operations net of tax – 111
Fair value gains on available for sale financial assets net of tax – 3
Discontinued operations disposed of during the year There were no discontinued operations disposed of during 2017.
Gains on sale before recycling of items from other comprehensive income 93 1 94
Financial statements 6(ii) Held for sale disposal groups The assets (including any goodwill allocated to the business) and the liabilities of the businesses held for sale are shown below.
Assets classified as held for sale: Reinsurers’ share of insurance contract liabilities 90 546 636
Net assets of operations classified as held for sale – – –
Assets classified as held for sale: Property and equipment – – 4 4
Assets of operations classified as held for sale 685 117 5 807
Liabilities of operations classified as held for sale 685 65 – 750
Net assets of operations classified as held for sale – 52 5 57
Each operating segment is managed by a member of the Group Executive Committee who is directly accountable to the Group Chief Executive and Board of Directors, who together form the central decision making function in respect of the operating activities of the Group. The UK is the Group’s country of domicile and one of its principal markets.
During 2017, no further operations have been classified as discontinued and as such, the 2016 comparatives do not require representation.
Profit on disposal of business and realised gains on held for sale assets 69
9) Net investment return A summary of the net investment return in the income statement is given below: Investment income
Direct operating expenses (including repairs and maintenance) arising from investment properties were not material in 2017 or 2016.
Note: 1. Net realised gains transferred to the income statement in 2017 of £105m includes £81m gains on disposal of the UK Legacy business.
Note: 1. Impairment of intangible assets and similar charges includes a £20m impairment charge on internally generated software and a £3m charge for related deferred acquisition costs.
14) Employee expenses Staff costs for all employees comprise: £m £m
15) Related party transactions The following transactions were carried out with key management: £m £m
Included in salaries and other short term employee benefits and bonus awards is £4,625,000 (2016: £5,239,000) 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 and its associates for other services: The audit of the Company’s subsidiaries, pursuant to legislation 3.9 3.9
The net current tax and deferred tax charged directly to equity is £nil (2016: £nil).
Tax rates The table below provides a summary of the current tax and deferred tax rates for the year in respect of the core tax jurisdictions in which the Group operates.
If an employee resigns from the Group, then performance shares and restricted shares lapse at the date of leaving the Group. Deferred Bonus Shares awards are generally retained by the employee to whom the award was granted if they leave the Group, unless the employee is dismissed for cause.
Adjustments for share options and contingently issuable shares (thousands) 7,081 6,275
Diluted earnings per share (p) relating to continuing operations 26.1 4.4
Ordinary dividend: Final paid in respect of prior year 11.0 7.0 112 71
The Tier 1 notes coupon payment relates to the two floating rate notes issued on 27 March 2017 (note 33).
Amortisation Amortisation expense of £79m (2016: £72m) has been charged to underwriting and policy acquisition costs with the remainder recognised in other operating expenses.
Impairments During 2017 the software impairment charge was £20m (2016: £1m), none of which was charged to underwriting and policy acquisition costs (2016: £nil). The impairment relates to software in the UK where business volumes have been lower than anticipated £11m and a Scandinavian IT system where certain older elements have been rendered obsolete £9m.
When testing for goodwill impairment, the carrying value of the Cash Generating Unit (CGU) to which goodwill has been allocated is compared to the recoverable amount as determined by a value in use calculation. These calculations use cash flow projections based on operating plans approved by management covering a three year period and using the best estimates of future premiums, operating expenses and taxes using historical trends, general geographical market conditions, industry trends and forecasts and other available information as discussed in more detail in the strategic report section. Cash flows beyond this period are extrapolated using the estimated growth rates which management deem appropriate for the CGU. The cash flow forecasts are adjusted by appropriate discount rates. Where a sales price has been agreed for a CGU, the sales proceeds less costs to sell are considered the best estimate of the value in use.
Where the value in use is less than the current carrying value of the CGU in the statement of financial position, the goodwill is impaired in order to ensure that the CGU carrying value is not greater than its future value to the Group.
Goodwill is allocated to the Group’s CGUs, which are contained within the following operating segments: £m £m
Change to each year of the planning period (2018 to 2020)
Financial statements 23) Property and equipment Group occupied property-land and buildings £m
Revaluation adjustments credited to other comprehensive income – – – 1 – 1
Depreciation expenses of £20m (2016: £20m) have been charged to underwriting costs and policy acquisition costs.
Investment properties are included in the Group’s investment portfolio to provide investment returns over the longer term in accordance with the Group’s investment strategy. Investment properties are managed by external managers.
25) Financial assets The following table analyses the Group’s financial assets by classification as at 31 December 2017 and 31 December 2016.
Total financial assets net of held for sale 25 12,212 88 12,325
The following table analyses the cost/amortised cost, gross unrealised gains and losses and fair value of financial assets.
Financial assets measured at fair value 11,096 483 (155) 11,424 13,013
At 31 December 2017, the Group has accepted £31m (2016: £101m) in collateral. The assets accepted are included within the balance sheet. The Group is permitted to sell or repledge collateral held in the event of default by the owner. The fair value of the collateral accepted is £31m (2016: £101m). The terms and conditions of the collateral held are market standard. The assets held as collateral are readily convertible into cash.
Cross currency interest swaps (fair value/cash flow) 4 159 181 344 3 (44)
Cross currency interest swaps (fair value/cash flow) 17 264 261 542 2 (109)
The Group applies hedge accounting to derivatives acquired to reduce foreign exchange risk in its net investment in certain major overseas subsidiaries. There was no ineffectiveness recognised in the income statement in respect of these hedges during 2017 or 2016.
The total losses on the fair value hedge instruments recognised in the income statement were £45m (2016: £50m) and the offsetting gains related to the hedged risk were £50m (2016: £45m).
Reverse repurchase arrangements and other similar secured lending 119 – 119 (119) – –
Repurchase arrangements and other similar secured borrowing 249 – 249 (249) – –
26) Fair value measurement Fair value is used to value a number of assets within the statement of financial position and represents its market value at the reporting date.
Investment properties are valued using discounted cash flow models which take into account the net present value of cash flows to be generated from the properties. The cash flow streams reflect 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.
Loan capital 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 financial 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 hierarchy 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 significant inputs for the asset or liability valuation that are not based on observable market data (unobservable inputs).
The Group uses prices received from external providers who calculate these prices from quotes available at the reporting date for the particular investment being valued. For investments that are actively traded the Group determines whether the prices meet the criteria for classification as a level 1 valuation. The price provided is classified as a level 1 valuation when it represents the price at which the investment traded at the reporting date taking into account the frequency and volume of trading of the individual investment together with the spread of prices that are quoted at the reporting date for such trades. Typically investments in frequently traded government debt would meet the criteria for classification in the level 1 category. Where the prices provided do not meet the criteria for classification in the level 1 category, the prices are classified in the level 2 category.
In limited circumstances, the Group does not receive pricing information from an external provider for its financial investments. In such circumstances the Group calculates fair value which may use input parameters that are not based on observable market data. Unobservable inputs are based on assumptions that are neither supported by prices from observable current market transactions for the same instrument nor based on available market data. In these cases, judgment is required to establish fair values. Valuations that require the significant use of unobservable data are classified as level 3 valuations. In addition, the valuations used for investment properties and for Group occupied properties are classified in the level 3 category.
Total assets measured at fair value 4,118 6,681 1,038 – 11,837
Total liabilities measured at fair value – 88 – – 88
Group occupied property – land and buildings – – 38 4 34
Available for sale financial assets: Financial assets at FVTPL: Equity securities – – 6 – 6
Total assets measured at fair value 4,579 7,812 1,049 780 12,660
Total liabilities measured at fair value – 167 – – 167
Total value of liabilities not measured at fair value – 1,129 8 – 1,137
The movement in the fair value measurements of level 3 financial assets is shown in the table below: Available for sale investments Investments at FVTPL
Level 3 available for sale financial assets: Equity securities2 Cash flows; discount rate 350 (10) 363 (14)
2. The Group’s investments in financial assets classified at level 3 in the hierarchy are primarily investments in various private fund structures investing in debt instruments where the valuation includes estimates of the credit spreads on the underlying holdings. The estimates of the credit spread are based upon market observable credit spreads for what are considered to be assets with similar credit risk. Reasonably possible alternative valuations have been determined using an increase of 100bps in the credit spread used in the valuation.
27) Interests in structured entities A structured entity is an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements.
In addition, the Group has commitments for future undrawn subscriptions limited to the amounts set out in the subscription agreements. The Group has no obligations to provide any other additional funding or other financial support to these entities. The Group has determined that its maximum exposure to structured entities is the sum of the carrying value and the undrawn commitments. These exposures at 31 December 2017 are summarised in the table below: Class of investments Nature of the underlying investments of the vehicle
Structured debt security backed by bonds 260 – 260 203 – 203
Other Mainly consist of property funds 343 66 409 361 106 467
Cash and cash equivalents 332 436 28) Reinsurers’ share of insurance contract liabilities £m £m
Reinsurers’ share of provisions for losses and loss adjustment expenses 1,523 1,436
Reinsurers’ share of provision for unearned premiums at 1 January 818 961
Reinsurers’ share of portfolio transfers and disposals of subsidiaries – (356)
Reinsurers’ share of provisions for losses and loss adjustment expenses at 31 December 2,159 1,530
Total reinsurers’ share of provisions for losses and loss adjustment expenses at 31 December net of held for sale 1,523 1,436 29) Current and Deferred Tax
Net current tax position at 31 December 43 65 24 36
Net current tax position at 31 December net of held for sale 43 65 24 32
Net deferred tax position at 31 December 276 270 56 54
The movement in the net deferred tax assets recognised by the continuing Group was as follows: £m £m
Net arising on acquisition/disposal of subsidiaries and other transfers – 10
Effect of change in tax rates - income statement – (8)
At the end of the reporting period, the Group’s continuing operations have unused tax losses of £2,326m (2016: £1,629m) for which no deferred tax asset is being recognised. This includes capital losses of £1,189m (2016: £1,194m) for which it is unlikely that a deferred tax asset would be recognised as most UK capital gains are exempt from tax. None of these losses are subject to expiry. In addition, the Group has deductible temporary differences of £198m (2016: £654m) for which no deferred tax has been recognised.
Of the £220m (2016: £216m) net deferred tax asset recognised by the Group’s continuing operations, £233m (2016: £179m) relate to tax jurisdictions in which the Group has suffered a loss in either the current or preceding period. The assets have been recognised on the basis that future taxable profits will be available against which these deferred tax assets can be utilised. The evidence for the future taxable profits is a forecast consistent with the three year operational plans prepared by the relevant businesses, which are subject to internal review and challenge. Where relevant, the forecast includes extrapolations of the operational plans using assumptions consistent with those used in the plans.
Total insurance and reinsurance debtors net of held for sale 2,923 2,823
Total other debtors and assets net of held for sale 559 430
Total cash and cash equivalents (consolidated statement of financial position) 1,048 985 32) Share capital The issued share capital of the Parent Company is fully paid and consists of two classes; Ordinary Shares with a nominal value of £1 each and Preference Shares with a nominal value of £1 each. The issued share capital at 31 December 2017 is: £m £m
Issued and fully paid 1,022,835,039 Ordinary Shares of £1 each (2016: 1,019,554,986 Ordinary Shares of £1 each) 1,023 1,020 125,000,000 Preference Shares of £1 each (2016: 125,000,000 Preference Shares of £1 each) 125 125
During 2017, the Company issued a total of 3,280,053 new Ordinary Shares of £1 each ranking pari passu with Ordinary Shares in issue (2016: 2,495,144 new Ordinary Shares of £1 each), on the exercise of employee share options and in respect of employee share awards. The number of Ordinary Shares in issue, their nominal value and the associated share premiums are as follows: Number of shares
Issued in respect of employee share options and employee share awards 3,280,053 3 3
At 31 December 2017, the total number of options over Ordinary Shares outstanding under the Group employee share option plans is 4,996,149 (2016: 5,047,441) and the total number of potential shares outstanding under the long term incentive plan and under the Sharebuild is 11,940,129 Ordinary Shares (2016: 12,638,394 Ordinary Shares). Further information on the employee share schemes is provided in note 18 and in the Directors’ Remuneration Report within the Directors’ and Corporate Governance Report.
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 SAOC, a company operating in the Sultanate of Oman. During the third quarter of 2017 an initial public offering reduced Royal & Sun Alliance Insurance (Middle East) BSC (c)’s share in Al Ahlia Insurance Company SAOC from 70% to 52.5%
During 2017 the dividends paid to the non-controlling interests in the Middle East were £4m (2016: £3m) and British Aviation Insurance Company £6m (2016: £nil).
Estimation techniques and uncertainties 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.
Claims on certain classes of business (excluding annuities) have been discounted as follows: Category
As at 31 December 2017, the value of the discount on net claims liability reserves is £111m (2016: £388m) excluding held for sale, annuities and periodic payment orders. All other factors remaining constant, a decrease of 1% in the discount rates would reduce the value of the discount by approximately £70m (2016: £120m).
Gross insurance contract liabilities and the reinsurers’ share of insurance contract liabilities The Group accounting policies in respect of insurance contract liabilities are described in note 4.
The gross insurance contract liabilities and the reinsurers’ share of insurance contract liabilities presented in the statement of financial position are comprised as follows: Gross RI Net £m £m £m
Less: Held for sale provisions for losses and loss adjustment expenses 718 (94) 624
Total insurance contract liabilities excluding held for sale 12,676 (2,252) 10,424
Provision for unearned premiums (gross of acquisition costs) at 1 January 3,994 4,200
Total claims payments made in the year net of salvage and other recoveries (5,093) (5,001)
Provision for losses and loss adjustment expenses at 31 December 10,113 10,083
The lower triangle of the tables presents the amounts paid against those provisions in each subsequent accounting period.
At end of accident year 9,388 2,623 2,524 2,802 2,999 2,854 3,181 2,857 2,850 2,844 3,088
Present value recognised in the consolidated statement of financial position 9,477
Consolidated claims development table net of reinsurance prior £m 2008 £m 2009 £m 2010 £m 2011 £m 2012 £m 2013 £m 2014 £m 2015 £m 2016 £m 2017 £m
Defined contribution pension schemes Costs of £63m (2016: £51m) were recognised in respect of defined contribution schemes by the Group. The Group’s Swedish subsidiaries are part of a multi-employer defined benefit scheme along with other financial institutions in Sweden. As it is not possible to determine the assets and liabilities in respect of any one employer under this scheme, it is included in these accounts as a defined contribution scheme. Contributions of £8m (2016: £8m) were paid to this scheme during 2017 and are included in the costs shown above. The expected contributions in 2018 are £7m. Total estimated contributions to the scheme from all employers in 2017 were £66m. The latest information regarding the funding of this scheme is taken from the interim report for the first half of 2017, when the scheme funding rate was 121% (2016: 111%).
Defined benefit pension schemes and other post-retirement benefits The amounts recognised in the consolidated statement of financial position are as follows: UK £m
Present value of unfunded obligations (7) (111) (118) (7) (112) (119)
Fair value of plan assets 8,344 455 8,799 8,184 457 8,641
If actual experience differs from the assumptions used, the expected obligation could increase or decrease in future years. Due to the complexity of the valuation and its long-term nature, the defined benefit obligation is highly sensitive to changes in the assumptions. Assumptions are reviewed at each reporting date. As such, the valuation of the liability is highly sensitive to changes in bond rates and will also be impacted by changes in equity markets.
UK Schemes The major defined benefit pension schemes are located in the UK. The assets of these schemes are mainly held in separate trustee administered funds. The UK defined benefit schemes were effectively closed to new entrants in 2002 and subsequently closed to future accruals with effect from 31 March 2017. UK schemes in surplus have been reduced for the tax cost of an authorised return of surplus, classified as ‘Other net surplus remeasurements’. Our judgement is that the authorised refund tax charge is not an income tax within the meaning of IAS12 and so the surplus is recognised net of this tax charge rather than the tax charge being included within deferred taxation.
The profile of the members of the two main UK schemes at 30 September 2017 (the latest date at which full information is available) is as follows: Number
The UK schemes are managed through trusts with independent trustees responsible for the safeguard of the interests of all members. The trustees meet regularly with Group management to discuss the funding position and any proposed changes to the schemes. The schemes are regulated by The Pensions Regulator.
Each scheme is subject to triennial valuations, which are used to determine the future funding of the schemes by the Group including funding to repair any funding deficit. The funding valuations, which determine the level of cash contributions payable into the schemes and which must be agreed between the Trustees and the Group, are typically based on a prudent assessment of future experience with the discount rate reflecting a prudent expectation of returns based on actual investment strategy. This differs from IAS 19, which requires that future benefit cash flows are projected on the basis of best-estimate assumptions and discounted in line with high-quality corporate bond yields. The Trustees’ funding assumptions are updated only every three years, following completion of the triennial funding valuations. The effective date of the most recent valuations of the main UK funds is 31 March 2015.
For the two main UK defined benefit schemes, the level of contributions in 2017 was £82m (2016: £96m) of which £65m (2016: £66m) were additional contributions in line with the plan to reduce funding deficits. Expected contributions to the two schemes for the year ending 31 December 2018 are approximately £73m including £65m of additional contributions to reduce the deficit.
The maturity profile of the undiscounted cash flows of the two main UK schemes is shown below: £m
The weighted average duration of the defined benefit obligation of the two main UK schemes at the end of the reporting period is 18 years (2016: 18.5 years).
All schemes The estimated discounted present values of the accumulated obligations are calculated in accordance with the advice of independent, qualified actuaries.
Other (including infrastructure, commodities, hedge funds, loans) – 545 545 – 511 511
Value of asset and longevity swaps – (2,387) (2,387) – (2,232) (2,232)
Sensitivity analysis Sensitivities for the defined benefit obligations of the two main UK schemes are shown below: Changes in assumption £m £m
Other provisions includes £12m (2016: £12m) held relating to vacant property leases, dilapidations and refurbishments, the costs relating to which will be borne across the period over which the leases expire, which is up to 20 years.
Additional provisions during the year 53 39 40) Other liabilities £m £m
Financial statements 41) Reconciliation of cash flows from operating activities The reconciliation of net profit before tax to cash flows from operating activities is as follows: Note £m £m
(Profit) on disposal of business and realised gains on held for sale assets (69) –
Operating lease commitments where the Group is the lessor The future aggregate minimum lease receipts under non-cancellable operating leases are as follows: Land and buildings £m £m
Changes in the ownership interests of a subsidiary between shareholders of the Group and shareholders holding a non-controlling interest are accounted for as transactions between equity holders of the Group. Any difference between the fair value of the consideration given by the transferee and the carrying value of the ownership interest transferred is recognised directly in equity.
The Group’s shares of its associates’ profits or losses are recognised in the consolidated income statement and its share of comprehensive income is recognised in the consolidated statement of comprehensive income. The cumulative post acquisition movements are adjusted in the carrying amount of the investment. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate.
Translation of foreign operations The results and financial position of subsidiaries and associates whose functional currency is not Sterling are translated into Sterling as follows: • Assets and liabilities for each statement of financial position presented are translated at closing exchange rates at the end of the period
Internal loans Where non-sterling loans are provided by RSA Insurance Group plc to its subsidiaries, the settlement of which is neither planned nor likely to occur in the foreseeable future, they are treated as part of its net investment in subsidiary which results in foreign exchange gains and losses being recognised in revaluation reserves.
Earnings per share Basic earnings per share are calculated by dividing the profit attributable to the ordinary shareholders of the Parent Company by the weighted average number of ordinary shares in issue during the period, excluding ordinary shares purchased by various share trusts of the Group and held as own shares.
Diluted earnings per share is calculated by increasing the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares, notably those related to the employee share schemes.
• The hedge is expected to be highly effective in achieving offsetting changes in fair value or cash flows attributable to the hedged risk, consistent with the originally documented risk management strategy for that particular hedging relationship
Hedge of future cash flows Where a derivative is designated as a hedging instrument against the cash flows from a fixed interest security, the gains and losses arising from the change in fair value of the derivative are recognised initially in other comprehensive income in the cash flow hedge reserve. This amount is adjusted to be the lesser of the cumulative gain or loss on the derivative and the cumulative change in fair value of the expected future cash flows of the security, both since the inception of the hedge.
The accumulated amount in the cash flow hedge reserve, is reclassified to the consolidated income statement in the period in which the hedged cash flows affect profit or loss.
All other plant and equipment is stated at cost less accumulated depreciation and accumulated impairment loss. Cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset only when it is probable that the expenditure will result directly in future economic benefits to the Group, and the cost can be measured reliably.
Contingent liabilities A contingent liability is recognised if the Group has a possible future obligation as a result of past events, and either the amount of the expected future outflow of economic resources or the likelihood of payment cannot be reliably estimated.
Other operating income Other operating income is comprised principally of: • Administration fee income: is received from policyholders in order for certain changes to their policy or policyholder details within their period of cover and is recognised in full on the date that the change is made.
• Introductory commission income is received from third parties for introducing business to them and is recognised when the introduction is made.
• Service income refers to income received for operating a settlement function primarily for the Group and its Global Network Partners which is recognised over the period in which the relevant business is earned.
• Reinsurance commissions are recognised over the same period in which relevant expenses are recognised.
Appendix B: Subsidiaries and associates Unless otherwise stated, the share capital disclosed comprises ordinary shares (or equivalent) which are 100% held within the Group. All of the subsidiaries listed are wholly owned within the Group and included in the consolidated accounts.
Class of shares held % Held 555 West Hastings Street, Suite 1900, Vancouver BC V6B 4N6, Canada
Quebec Assurance Company 1800 – 401 West Georgia Street, Vancouver BC V6B 5A1, Canada
Third Floor, Exchange House, 54/62 Athol Street, Douglas, IM1 1JD, Isle of Man
Office No.203, 2nd Floor, Home Centre Building, Tahlia Street, Suleymaniyah, Riyadh, Kingdom of Saudi Arabia
The Westminster Fire Office Limited 82 King Street, Manchester, M2 4WQ, United Kingdom
Law Society House, 90-106 Victoria Street, Belfast, BT1 3GN, Northern Ireland
Wall Street Plaza, 88 Pine Street, 31st Floor, New York, NY 10005, United States
Group plc. 3. Indicates that the holding represents an Investment or is an Associate of the Group.
4. Indicates ownership of non-voting shares. 5. There is no subsidiary where the Group holds less than 50% of the voting rights. There are no entities where the Group holds more than 50% of the voting rights which are not subsidiaries other than Punchbowl.
Parent Company Statement of Comprehensive Income for the year ended 31 December 2017 £m £m
Parent Company Statement of Changes in Equity for the year ended 31 December 2017
Dividends – paid (note 5) – – – – – – (131) – (131)
These separate financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) as endorsed by the European Union (EU) and the Companies Act 2006 where applicable.
Dividend income Dividend income from investments in subsidiaries is recognised when the right to receive payment is established.
IFRS 15 ‘Revenue Recognition’ IFRS 15 ‘Revenue Recognition’ is effective from 1 January 2018 which if adopted in 2017 would not have had a significant impact on the Company’s result for the year or its financial position.
2) Risk and capital management The risks faced by the Company are derived from its investment in subsidiaries and are therefore the same as those of the RSA Group of companies. Details of the key risks to the Group and the steps taken to manage them are disclosed in the risk and capital management section of the consolidated financial statements.
3) Related party transactions The following transactions were carried out with related parties: RSA Insurance Group plc provides services and benefits to its subsidiary companies operating within the UK and overseas as follows: • Provision of technical support in relation to risk management, information technology and reinsurance services. Services are charged for annually on a cost plus basis, allowing for a margin of 6% (2016: 5%).
Other transactions Year end balances with related parties are set out below: £m £m
Royal & Sun Alliance Insurance plc (RSAI), a subsidiary of the Company, has provided guarantees to the Company’s creditors for amounts arising from its loan capital agreements (as set out in note 35 to the consolidated financial statements) and for amounts arising from its committed credit facilities (as set out in note 36 to the consolidated financial statements). The guarantees relating to the loan capital agreements are subordinated to all other creditors of RSAI.
4) Share based payments Full details of share based compensation plans are provided in note 18 to the consolidated financial statements.
Notes to the Parent Company Financial Statements continued 6) Investments £m £m
Deferred Tax Deferred tax for the current year is based on a rate of 17% (2016: 17%). The following are the major deferred tax assets recognised by the Company and movements during the year: £m £m
No deferred tax has been recognised in respect of £7m (2016: £47m) of deferred tax reliefs due to the unpredictability of future profits streams.
11) Loan capital Full details of the loan capital of the Company are set out in note 35 to the consolidated financial statements.
The Company is registered in England and Wales under Company No. 2339826. Its registered office address is 20 Fenchurch Street, London EC3M 3AU (Telephone: +44(0) 20 7111 7000).
When contacting Equiniti, please quote your shareholder reference number which can be found on your share certificate or dividend tax voucher. Telephone lines are open 8.30am to 5.30pm (UK time), Monday to Friday, excluding public holidays in England and Wales. Overseas callers should use +44(0) 121 415 7064. Shareholders with a text phone facility should use +44(0) 371 384 2255 or alternatively use the Text Relay service by dialling 18001 0121 415 7064 directly from the text phone. To securely email Equiniti with an enquiry visit www.help.shareview.co.uk.
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