introduCtion 01 Highlights 02 rsa at a glance 04 chairman’s statement 06 Group ceo’s review
combined operating ratio (coR): the ratio of claims costs and expenses (including commissions) to premiums.
MArKet PoSItIon We are the uK’s second largest commercial insurer with a reputation for technical excellence. outside of lloyd’s we are the uK’s leading marine insurer and second in both commercial property and motor.
on the question of the annual election of the chairman and/or boards, it could have the result that a chairman appointed before an Agm could face two votes in 15 months or even less. if we compare what takes place within government, the combined chair and chief executive of uK plc face elections at his or her choosing. for reasons of continuity and an opportunity to address difficult problems which take time to resolve, there would be opposition to even three-year re-elections. in public companies, we face lesser but similar issues. maybe leaving company chairmen to be re-elected every two years and non-executives every three would be a reasonable compromise, unless those advocating such change within, or at least at the behest of government, feel the benefits are so great they would be prepared to apply the same principles to their own areas of responsibility, be it in uK plc or the great ministries of State whose annual reporting standards are well below those of public companies.
the combined operating ratio (coR) for the group was excellent at 94.6% and the underwriting result increased by 1% to £386m.
We saw a contrasting performance in italy, where i’m proud of our response to the l’Aquila earthquake. the new management team dealt with the move to direct indemnification and during the second half of the year we continued to take action on the motor portfolio. We expect to start seeing the benefit of these actions in the underwriting result going forward.
uK the uK remains a tough market and premiums were stable at £2.6bn. We maintained our focus on underwriting discipline, withdrawing capacity where we could not achieve our returns and targeting growth in Specialty lines.
We remain committed to our customers and our success in improving our levels of services was recognised in the 2009 survey by the Association of British insurers which awarded
In 2009, whilst the Scandinavian economies contracted, premiums increased by 4% to £1,669m (down 1% at constant exchange). The COR improved by 2.1 points to an excellent 86.2%, primarily driven by strong performances in Personal Motor, Personal Accident and Marine.
In Italy, premiums are up 2% (down 9% at constant exchange) reflecting the impact of reduced Motor premiums following actions on rate and discount management.
In 2009, we won the Training Award at the British Insurance Awards in recognition of our Underwriting Excellence course.
Key StRAtegieS Emerging Markets remains focused on delivering profitable growth through expanding distribution, disciplined underwriting and improving operational performance. We continue to focus on markets where we can establish a meaningful presence, either in overall market share or in segments where we have a competitive advantage. We are committed to strong governance and control, as well as close co-operation across the businesses to develop customer solutions which can be replicated cost effectively.
We continue to focus on the four key segments of Large and Complex Risks, Motor, Small and Medium Enterprises (SME) and Affinity, developing and improving single solutions which can be rolled out across all our regions, increasing our speed to market and reducing investment requirements.
On 27 February 2010, an earthquake measuring 8.8 on the Richter scale hit Chile, causing large scale damage. All our employees are safe and the majority of our network was up and running within hours, supporting our customers, despite a lack of power in some branch offices. I would like to thank all our staff for their dedication in such trying circumstances.
cAShFlow Operating cashflows are £490m and, as we reported at the half year, have been adversely impacted by Direct Indemnification and performance in Italy and the reorganisation costs in the UK. As mentioned last year, 2008 also benefitted from the sale of group occupied properties, primarily Codanhus in Denmark. The increase in tax paid to £180m follows the lower allocation to the Swedish Security Fund in 2008. Interest paid is down by £11m to £96m, as the new Sterling notes only pay interest once a year, starting in May 2010.
RiSK MAnAgeMent The Board is responsible for the Group’s systems of risk management. Executive management is responsible for establishing and implementing appropriate systems and controls. The Group Risk Management Framework provides the mechanism through which risk management and control is embedded throughout the Group. Each Group business is required to follow a consistent process to identify, assess, manage and monitor their key risks.
gRouP RiSK APPetite The Group risk appetite is set and monitored at both a Group and regional level and is annually reviewed and signed off by the Board Risk Committee and Group Board. It sets business volumes for certain higher risk insurance classes, stipulates loss retention limits, reinsurance protection, targets for credit rating and solvency margins and other measures. There is a formal escalation process for potential or emerging risks that are outside the risk appetite.
RePoRting The Board updated the Group risk appetite to cover key strategic relationships, and extend liquidity, cashflow and debtor management.
The Group maintains a high quality, low risk investment • strategy, and Action taken to mitigate falling yields, including increased holding in • non-government bonds, equities and property and extended duration.
The Group operates under a clear risk appetite set by the Board • which is monitored at Group and regional level Underwriters are licensed only to write risks within specified limits • based on their own experience, and Reviews assess each portfolio against key performance and risk • indicators. Portfolios that trigger key risk indicators are investigated. Corrective measures are implemented where required.
Our approach is practical and focused on three key themes: road safety, social inclusion and the environment. These issues have been identified as important by our customers, investors and employees. Forum for the Future, the sustainability charity, agree that we are focusing on the right issues.
Social inclusion RSA employees from all over the Group get involved with poverty alleviation, education and crime reduction initiatives. Across Latin America, staff made donations to orphanages and helped build homes for the homeless. In the UK, employees help to mentor teenagers aspiring to a career in business and launched a new youth-focused crime prevention scheme.
For further details of CR progress please see the full Corporate Responsibility Report, available in April on our website.
Imagine living in a city where your health, like Anna’s, is threatened by circumstances beyond your control.
Whilst this wasn’t a typical insurance problem it was clear to us that many of our clients’ businesses, and their health, were being affected.
2. Andy hASte Age 48. Andy joined the Board as Group Chief Executive in April 2003 and is a member of the Group Executive Team, Investment Committee and Board Risk Committee. Andy has been a member of the Board of the Association of British Insurers since 2003. Andy’s previous roles include Chief Executive of AxA Sun Life plc and Director of AxA UK plc (life and pensions). He is the former President and Chief Executive Officer of Global Consumer Finance Europe at GE Capital UK, Western Europe and Eastern Europe (financial services) and is the former President of National Westminster Bank’s US Consumer Credit Business (retail banking). He was appointed as a Non-Executive Director of ITV plc (media) in August 2008.
9. JohAnnA wAteRouS Age 52. Johanna joined the Group as a Non-Executive Director in May 2008 and is a member of the Group Audit and Investment Committees. She is also a Director of the RBG Kew Foundation, Enterprises Limited, English National Opera and is Chairman of Britt Lintner Limited. Johanna has previously been Chairman of Tate Enterprises and spent over 20 years with McKinsey & Company, with roles including Co-leader, Global Marketing and Sales Practice and Leader of their UK Consumer Practice and the European Retail Practice.
Financial statements 67 Responsibility statement 68 Independent auditors’ report to the members of RSA Insurance Group plc 69 Consolidated income statement 70 Consolidated statement of comprehensive income 70 Consolidated statement of changes in equity 71 Consolidated statement of financial position 72 Consolidated statement of cashflows 73 Significant accounting policies 82 Estimation techniques, risks, uncertainties and contingencies 85 Risk management 96 Notes to the financial statements 134 Independent auditors’ report to the members of RSA Insurance Group plc 135 Parent Company statement of comprehensive income 135 Parent Company statement of changes in equity 136 Parent Company statement of financial position 137 Parent Company statement of cashflows 138 Notes to the separate financial statements other inFormation 142 Shareholder information 144 Financial calendar
In line with other companies, we are asking shareholders to approve the adoption of new articles of association primarily to reflect the implementation of the Shareholder Rights Directive in the UK in August 2009 and the remaining provisions of the Companies Act 2006 in October 2009. We have also taken the opportunity to revise the current articles of association in order to update language, style and approach in line with best practice. An explanation of the main changes between the current articles of association and the new articles of association is set out in the Appendix to the AGM Notice sent to shareholders and is available at www.rsagroup.com.
The Directors and the Company (by ordinary resolution) may appoint a person who is willing to be a director either to fill a casual vacancy or as an additional director. A Director who is appointed by the Directors shall retire at the following AGM and will put himself forward to be elected by the ordinary shareholders. In accordance with the Articles and the Combined Code, the Directors submit themselves for reappointment at the first AGM after their appointment and for re-election every three years thereafter. Resolutions to reappoint Directors at the AGM are subject to the approval of the Board, taking into account the recommendations of the Nomination Committee. The Directors proposed for re-election by rotation at the 2010 AGM are George Culmer, Simon Lee, Noel Harwerth, Malcolm Le May, Edward Lea and John Maxwell. The Company may (by ordinary resolution of which special notice has been given) remove any Director before the expiration of his period of office.
remuneration Details of the Directors’ remuneration and the Group’s policies on remuneration are set out in the remuneration report on pages 53 to 66.
In addition, the Group includes a number of regulated entities which rely on various licences to carry out their business. Accordingly, maintaining effective relationships with the Group’s regulators is integral to the success of the Group’s strategies and its long term value.
The terms of reference for key committees of the Board explaining their role and the authority delegated to them are available on the Company’s website www.rsagroup.com.
The Executive Directors and the Executive Team participate in an annual bonus plan. If the stretching targets required to achieve on target level are achieved, Executive Directors receive a cash bonus of up to 60% of base salary and Deferred Shares worth up to 30% of base salary. For outstanding performance, a cash bonus of up to 120% of base salary and Deferred Shares worth up to 60% of base salary are achievable. Deferred Shares are described in the section headed share based long term incentive awards on page 57.
For the purposes of the charts, the bonus value is based on the cash bonus plus the fair value of the compulsory Deferred Shares. The LTI value is based on the fair value of awards of Performance Shares and half of the maximum potential number of Matching Shares that may vest (subject to performance) relating to voluntary and compulsory Deferred Shares under the LTIP. Details of how the fair values have been calculated are set out in note 27 on page 124 to 128.
Andy Haste’s service contract expires under normal circumstances in January 2024. The service contracts for George Culmer and Simon Lee terminate under normal circumstances in October 2024 and March 2023 respectively. These service contracts may all be terminated earlier by the Company, or the individual, on 12 months’ notice.
RSA FTSE W Europe Non Life Insurance Index FSTE 100 Index
All Non-Executive Directors (including the Chairman) are subject to a three year rolling period of appointment in accordance with the Articles.
Annual Report and Accounts 2009 | rsa | 63 shareholdings (non audited part) The interests of Directors in ordinary shares of 27.5p each of the Company, as declared and recorded in accordance with the FSA Listing Rules, are as follows: Notes shares held at 31 December
matters on which we are required to report by exception We have nothing to report in respect of the following: Under the Companies Act 2006 we are required to report to you if, in our opinion: The part of the directors’ remuneration report described as having • been audited are not in agreement with the accounting records and returns or Certain disclosures of directors’ remuneration specified by law are • not made or We have not received all the information and explanations we require • for our audit.
The Group designates investments in equity and debt securities in accordance with its investment strategy on the basis on which the investment return is managed and the performance is evaluated internally. Where the investment return is managed on the basis of the periodic cashflows arising from the investment, a financial asset is designated as an available for sale financial asset. Where the investment return is managed on the basis of the total return on the investment (including unrealised investment gains), the financial asset is designated as at fair value through the income statement. Other investments comprising loans, reinsurance deposits and other deposits are classified as loans and receivables.
Insurance contracts product classification Insurance contracts are those contracts that transfer significant insurance risk at the inception of the contract. Insurance risk is transferred when the Group agrees to compensate a policyholder if a specified uncertain future event (other than a change in a financial variable) adversely affects the policyholder. Any contracts not meeting the definition of an insurance contract under IFRS are classified as investment contracts or derivative contracts, as appropriate.
treasury shares Treasury shares are deducted from equity. No gain or loss is recognised on the purchase, sale, issue or cancellation of the treasury shares. Any consideration paid or received is recognised directly in equity.
post retirement benefits (including pension schemes and post retirement health schemes) Contributions to defined contribution pension schemes are charged in the income statement in the period in which the employment
On 12 November 2009 the IASB issued IFRS 9 ‘Financial Instruments’. This standard represents the completion of the first part of a three-part project to replace IAS 39 ‘Financial Instruments: Recognition and Measurement’. The new standard reduces the complexity by replacing the many different rules in IAS 39. The key features for the new standard are as follows: A business model test is applied first in determining whether • a financial asset is eligible for amortised cost measurement. The business model objective is based on holding financial assets in order to collect contractual cashflows rather than realising cashflows from the sale of the financial assets In order to be eligible for amortised cost measurement an asset • must have contractual cashflow characteristics representing principal and interest All other financial assets are measured at fair value in the statement • of financial position. Subject to an optional treatment for an equity investment, changes in fair value during the reporting period are recognised in the income statement. The option in IAS 39 allowing entities to classify financial instruments as available for sale is not available in IFRS 9 An entity can elect on initial recognition to present the fair value • changes on an equity investment that is not held for trading directly in other comprehensive income. The dividends on such investments must be recognised in the income statement but gains or losses are not recycled when the equity investment is derecognised If a financial asset is eligible for amortised cost measurement, • an entity can elect to measure it at fair value if it eliminates or significantly reduces an accounting mismatch.
The Group manages its financial assets within a framework that has been developed to seek to ensure the ability to meet its obligations under insurance and investment contracts. A key principle behind this process is to hold assets of sufficient credit quality and currency that provide a broad match against the liabilities arising from insurance and investment contracts.
property and casualty insurance risks The Group manages these risks through its underwriting strategy, adequate reinsurance arrangements and proactive claims handling. The underwriting strategy aims to ensure that the underwritten risks are well diversified in terms of type and amount of risk, industry and geography.
The following table provides information regarding the aggregated credit risk exposure for financial assets of the Group as at 31 December 2009.
Segment assets and capital expenditure Year ended 31 December 2009 uk £m
The average number of employees during the year was as follows: number
Reinsurers’ share of portfolio transfers and acquisitions of subsidiaries 6 2
Issued and fully paid 3,420,173,187 ordinary shares of 27.5p each (2008: 3,329,435,791 ordinary shares of 27.5p each) 941 915 125,000,000 preference shares of £1 each (2008: 125,000,000 preference shares of £1 each) 125 125
net pension and post retirement (deficit)/surplus at 31 december (262) 363 noteS to the fInAncIAl StAtementS contInued
The amounts recognised in the income statement are as follows: uk £m other £m total £m
Potential Matching Shares awards – 10,148,444 12,850,187 – 22,998,631 total potential share awards outstanding 31 december 11,828,733 12,491,484 17,990,284 15,137,344 57,447,845
operating lease commitments The Group leases various outlets and offices under non cancellable operating lease agreements. The leases have varying terms, escalation clauses and renewal rights.
The profit for the year net of tax includes a tax charge of £12m (2008: £3m). There is no tax relating to fair value gains.
Dividends – paid (note 7) – – – – – (273) (273) Issued by scrip 18 60 – – – – 78 Issued for cash (note 4) 4 7 – – – – 11 Share based payments 4 – – – – 24 28
Record date for the ordinary final dividend for 2009 and the first preference dividend for 2010