The Board believes that through its stakeholder engagement programme it gains a meaningful insight into the views, priorities and issues facing its key stakeholder groups and helps us to reflect these in our decision making and planning.
In 2019, the directors and senior management engaged with key stakeholder groups across our geographic regions and different lines of business through a number of forums, from informal meetings and social events to presentations and leadership events.
We understand that the views and priorities of institutional investors and private shareholders are not necessarily the same. With this in mind, the Board looks to engage with both groups to determine their areas of focus.
To keep the Board up to date, the Investor Relations team presents to the Board semi-annually on investor sentiment, competitor trends and comparisons, and details of any roadshows or shareholder meetings.
The Board engages regularly with the Group’s regulators and in 2019 the PRA hosted a meeting for our regulators from across the globe. Representatives from the Board attended this regulatory college and have also met separately with the FCA and PRA and our regulators in Denmark, Ireland and Luxembourg. The FCA and the PRA also attended Board meetings in 2019 to discuss regulatory priorities.
Further information on the Board’s activities in respect of monitoring and assessing corporate culture and workforce engagement is included on pages 8 to 11.
In 2019, the Nomination and Governance Committee decided that the appointment of an additional non-executive director with significant financial expertise would contribute to the long-term success of the Group. Following a rigorous selection procedure which highlighted her extensive experience in audit and finance, and considerable technical knowledge of the insurance industry, Clare Bousfield was appointed to the Board with effect from 1 April 2020.
In response to this and feedback from customers, employees and shareholders, the Board and the Group Investment Committee have taken a number of steps during the year to ensure that ESG matters are properly considered and integrated into strategic decisions. In particular: · The Board received updates on the implementation and development of our Confident Futures strategy and approved the priority actions going forward, including driving increased stakeholder engagement with the strategy
Meanwhile, urbanisation and an ageing population are changing the demographics and needs of insurance customers. The asset ownership model is being challenged through the rise of the ‘sharing economy’, and insurance products will need to respond accordingly.
· We have a framework in place to understand potential threats, as well as to manage and mitigate potential risks to customer data.
2019 was a pleasing year for RSA with total Group profits up on all measures.
2. At constant FX and ex. changes in reinsurance. See page 210 for further details.
Data is the key to an increasingly sophisticated understanding of risk and, therefore, more accurate pricing models. In Ireland, we rolled out a new Irish Motor gradient boosting machine pricing model, which identifies higher risk rating areas using postcode analytics.
KPIs are linked to executive remuneration. To read more about executive variable remuneration, including the set of financial and non-financial performance measures on which it is based, please see pages 72 to 103.
Premiums grew 3% in Canada at constant FX. This was driven by 6%2 growth in Personal Lines led by Johnson. We achieved high single-digit rate, and hard market conditions meant that retention remained strong at c.90% for Johnson. Overall, policies-in-force (PIFs) were up 4% in Johnson, with continued organic growth supplemented by our new partnership with Scotiabank commencing in the spring. Premiums in Commercial Lines decreased by 4%2 where a reduction in volumes was partly offset by strong rate. Lower volumes were driven by targeted lapses and were in line with our plans.
Group prior year profit of £45m provided a 0.8 point benefit excluding exits to the combined ratio (0.6 points inc. exits; 2018: 2.6 points). This included positive development from each of our three regions (ex. exits), although negative development in UK Personal Lines, driven mainly by Ogden, dampened this in the UK & International. Overall Group PYD for the year was impacted by a flat first quarter which included negative prior year development in Commercial Lines arising from refinements to loss estimates relating to the 2018 accident year.
Group FTE2 was 12,378 at 31 December 2019, down 25% (excluding disposals) since the beginning of 2014.
Strategic report Governance Financials comprises tax payable on overseas profits. The Group’s ETR of 22% is higher than the UK statutory rate of 19% mainly due to higher tax rates in some of the Group’s core overseas jurisdictions and withholding taxes. The Group underlying tax rate for 2019 was 20% (2018: 20%). Excluding UK&I exited business, the Group underlying tax rate for 2019 was 19%.
Outlook There is scope for medium-term growth based on the stability of the regional economies, especially if we continue to improve the appeal of our brand, customer service levels, operational excellence and underwriting.
Net written premiums of £1,735m were up 3% at constant FX or 3%2 on an underlying basis. Personal Lines reported growth of 6%2 driven by Johnson, our direct business. The rating environment was strong in 2019, and we applied rate increases of c.8% in Personal Auto and c.11% in Household. This helped to combat ongoing and significant claims inflation and build an allowance for heavier weather losses expected as a result of climate change. Despite these conditions, retention in Johnson remained strong at c.90% while Personal Broker reported a 6 point decrease to 83% reflecting targeted actions to improve profitability.
UK market context and risk profile The UK market is extremely competitive, with aggregators driving both high price transparency and low switching costs for customers. This has also led to an influx of digital-only players and margin contraction in some areas. In addition, growing customer expectations around service have led incumbents to upgrade their digital offerings to keep pace.
· Compliance has reviewed its structure and approach. This allows greater alignment between compliance and operational risk teams, and the right distinction between the responsibilities and activities of business areas (1st line) and Risk and Compliance (2nd line).
Risk culture – culture of accountability and openness We consider the foundation of an effective risk management framework to be the cultivation of a risk culture that promotes accountability and openness (a willingness to admit mistakes and learn from the past). At RSA, the senior management team has 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.
Our HR policies and procedures ensure that human rights are respected. This year, we conducted refresher training with our procurement teams to ensure that they are aware of the signs of modern slavery, alert to the risks and able to ask the right questions of suppliers, or know where to go for further support.
· Achieved a 15% reduction in carbon emissions; set a new carbon emissions reduction target for our direct operations, aligned to a 1.5ºC emissions pathway.
Strategy As an insurer, the risks and demands of a changing climate are of critical importance to our business, customers and stakeholders. Climate change is integrated into strategic decisions covering: · Underwriting strategy and portfolio management – particularly in relation to physical risks and reinsurance decisions
Regular management attendees at committee meetings were also asked to complete the online survey to provide an external view on the performance and effectiveness of the Board and relevant committees.
The results of the Chairman’s review were shared with the Senior Independent Director, who facilitated a separate discussion of the Chairman’s performance with the non-executive directors only.
Goodwill and intangible asset valuation The Committee reviewed management’s assessment of the carrying value of goodwill and intangibles. This included the key assumptions, in particular the reasonableness of future cash flow and profit projections and the appropriateness of the discount rate used.
In December 2019, the Group Chief Auditor also provided the Committee with an assessment of the skills and capabilities required to conduct the audit work for 2020, and whether the budget is sufficient to recruit and retain staff with the expertise and experience necessary to provide effective challenge throughout the Group and to executive management.
Standards for the Professional Practice of Internal Audit, UK CIIA Guidance on Effective Internal Audit in Financial Services and the Solvency II requirements. Deloitte concluded that GIA generally conformed (the highest rating attainable) with all relevant standards, guidelines and regulatory requirements. The Committee remained satisfied that GIA was operating effectively, sufficiently resourced and that the risk to their independence and objectivity was low.
· The rotation of the lead engagement partner at least every five years. Daniel Cazeaux, the lead audit partner from the 2019 year end, will be required to rotate off after the conclusion of the 2023 year-end process
In line with FRC guidance, the non-audit services policy caps such fees at 70% of the average total audit fee paid in the previous three years calculated. The Committee is satisfied that the auditor’s independence and objectivity was not compromised by providing non-audit services.
The non-executive directors participated in a self-assessment survey to determine the overall range and level of skills, knowledge and experience on the Board. The survey highlighted insurance, financial services, compliance and regulatory, risk management and remuneration experience as being key strengths of the current Board. The Committee considered the results of the skills review and the areas for strengthening together with the tenure of Directors, diversity of members and the size and combination of the Board and its committees as part of succession planning discussions.
· The Committee considered and approved the annual stress and scenario testing process which this year focused on market themed events and critical infrastructure and included a reverse stress test.
Bonds and cash continued to represent the substantial majority of assets (c.90%) while equities and property represent just 4%. Bond investments continue to be managed and monitored to ensure that they provide an appropriate match against both the currency and term of the underlying insurance liabilities. The commitment to high-quality assets has been maintained with c.69% of bonds having credit ratings of AA or higher and just 2% rated lower than BBB. The Group has continued to monitor its investment exposures in relation to Brexit developments and has taken actions viewed as appropriate to mitigate risks.
Market review Global economies continued to expand during 2019 although at a declining rate compared with the previous year. Domestic demand in most western economies remained resilient, underpinned by strong labour markets with unemployment levels close to record lows in many countries. Growing trade tensions largely driven by US tariff actions did, however, negatively impact activity. This was most visible within more export-oriented economies, including
The total 2019 remuneration for the Group CEO and CEO UK & International is similar to 2018. Reflecting the achievements noted above, the Group CEO, CFO, and CEO UK&I will receive awards under the 2019 Annual Bonus Plan of 93%, 83% and 88% respectively. However, the long-term incentive vesting is lower due to 2018’s performance and will vest at 50% of the maximum. The Committee was satisfied that, overall, these outcomes fairly reflected performance over the period, taking account of both financial performance and the experience of shareholders.
∙ Ireland flexible benefits program launched, with medical, dental, health screening and pension augmentation options.
Open and transparent ∙ We aim to explain our pay framework clearly and ask leaders to dedicate time to communicating their decisions to their team members.
Notes: 1. For the period 1 Jan – 4 Feb 2019 as Group CFO. 2. For the period 5 Feb – 31 Dec 2019 as CEO UK & International.
50% as cash award in 2021 (clawback may apply up to March 2023)
On the following pages 76 to 84 the Policy covers: · How decisions on Directors’ remuneration will be made at RSA, and the philosophy and strategy which underpin these decisions; · How remuneration packages will be structured for current, newly appointed and departing directors; · What impact business and individual performance will have on the potential value of Executive Directors’ remuneration; · What key contractual terms will apply to current and newly appointed directors; and
Alignment to culture The Committee reviewed the balance of financial and non-financial incentive measures, and the approach to assessing individual performance (which places emphasis on both ‘what’ is delivered, and ‘how’ goals are met in the context of RSA’s values). It concluded the Policy is aligned to RSA’s business values and desired culture. Page 50 of the Annual Report discusses culture more fully.
RSA Annual Report and Accounts 201978 rsagroup.com 4. Remuneration Policy for Executive Directors The following table sets out the components of the Executive Directors’ remuneration package and how they operate.
Note: 1. Stephen Hester’s rate will reduce from 27% of salary to 24% from 1 April 2020, 21% from 1 April 2021, 18% from 1 April 2022 and 10% from 31 December 2022.
Strategic report Governance Financials 6. Approach to recruitment remuneration The Committee ensures a consistent and transparent approach is taken when appointing Executive Directors to the Board, as shown in the following table. When a new Executive Director is recruited, the Committee will provide details of how the Policy has been implemented in respect of their appointment terms in the relevant Directors’ Remuneration Report.
· 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.
· Director fees will not exceed the limit stated in the Company’s Articles of Association, as approved by shareholders.
Annual Report on Remuneration 1. Introduction This Annual Report on Remuneration details how the approved Remuneration Policy has been implemented for Directors in the financial year ended 31 December 2019, and how the Group intends to implement its Policy in 2020.
The Committee reviews the Group’s employee remuneration arrangements overall, and the alignment of incentives with culture, and takes these into account in its decision-making.
2. Bonus: Awards in respect of performance measures relating to the financial year shown, as described on pages 87 to 91. 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 as detailed on page 83.
Annual Bonus Plan 2019 The Executive Directors’ 2019 Annual Bonus Plan consisted of financial and business targets aligned to the Group’s operational plans, with 2019 financial targets set materially higher than the 2018 results. In the case of the Group CEO and CFO these included: Group underlying Return on Tangible Equity (ROTE), Group underlying profit before tax (PBT), Group combined operating ratio (COR), a Business Scorecard and role-specific personal objectives. The measures for the CEO UK & International emphasised the performance of his region as well as the Group. 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 83. In determining 2019 bonus awards under this Plan, the Committee considered how goals had been met and took account of key risk factors.
Bonus Business Scorecard: CEO UK & International 2018 Actual 2019 Target1 2019 Actual1
Underlying Performance: UK & Intl controllable expense ratio 21.4% 22.9% 22.5%
· New 2019-21 Plan, signed off by Board consistent with progress and ambition. · Defined and implemented the exit of underperforming lines of business, a decision validated by exit losses and competitor results in comparable portfolios. · Progress on digital, enhancing our customer service through policy re-platforming. Major upgrades in process or completed (Unity platform in the UK, tia in Scandinavia and GuideWire claims in Canada).
· Continued to proactively manage stakeholder relationships, e.g. >150 investor meetings in the year.
· Leadership: Embody key leadership attributes, contribute to ESG goals, drive to achieve world class Finance function in terms of cost, service quality and control effectiveness.
Group underlying ROTE, UK & Intl Underwriting Result, UK & Intl COR – 38.1% – –
Group underlying ROTE (33.3% weighting – achieved 17.0%) The Group underlying ROTE three-year average achieved was 14.7%. The 12-18% target range was set 1% point wider either side of RSA’s stated mid term goal of 13-17%, as communicated at the start of 2017. The average required for an on-target vesting (62.5% vesting) was 15.9%, a level significantly in excess of the Group’s cost of equity. This average was set based on RSA’s original operating plan for the period, and therefore was not automatically the mid-point of the range.
Top line growth3 Improvement vs 2016 base year of £6,281m £6,400m4
In addition to the rules governing RSA share awards, the buyout awards are subject to repayment terms in the event of resignation or termination for gross misconduct within two years of appointment. Charlotte must build her RSA shareholding to the required 200% of salary level prior to the sale of any shares, excluding those sold to cover statutory deductions.
3. Deferred Bonus Shares granted to Stephen Hester in 2016 vested during the year and 11,261 accrued dividend equivalent shares were added to the number of vesting awards shown above. A portion of the shares were sold to cover statutory deductions, the rest were retained.
Notes: 1. Martin Scicluna was appointed Executive Chairman effective 13 December 2013 until 4 February 2014. 2. Stephen Hester was appointed Group Chief Executive effective 5 February 2014 and did not have any long-term incentive awards in the 2012-14 and 2013-15 cycles. 3. Details of the 2018 and 2019 figures are given on pages 86 to 93.
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 149. 2. Includes the figures as shown in the notes to the Financial Statements on page 153.
Annual Bonus Plan 2020 The Annual Bonus Plan is aligned with the core priorities for focus in 2020. The Executive Directors will be expected to deliver against stretching targets, which are geared towards making continued performance improvement. The Group Chief Executive and CFO are targeted against the performance of the entire Group, taking into account their contribution thereto. The CEO UK & International will be targeted against a combination of the performance of his region and the Group, taking into account his contribution thereto.
For the 2020 grant, performance measures will be assessed against a performance period of 1 January 2020 to 31 December 2022, taking into account underlying business performance and material risk factors.
Director is shown on page 95. 5. Joseph Streppel resigned as a Non-Executive Director effective 9 May 2019. The table above shows his shareholding as at that date and not 31 December 2019. 6. 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.
11. Statement of voting at Annual General Meeting The following voting was recorded at the AGM on 10 May 2019: Resolution Votes for Votes against Total votes cast Votes witheld1
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.
The Remuneration Report also sets out how the performance for the year impacted remuneration overall (pages 87 to 93).
of its issued share capital as at 20 March 2019), was passed at the 2019 AGM. This authority will expire at the conclusion of the 2020 AGM and a new authority will be sought. The authority was not exercised during 2019. Other than the standard compulsory transfer provisions in respect of US shareholders contained in the Company’s Articles of Association, there are no specific restrictions on the size of a shareholding nor on the transfer of shares, which are both governed by the general provisions of the Articles of Association and legislation.
As part of assessing the Group’s prospects reliance is placed on the operational planning process. 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.
Of the Group's nine (2018: nine) reporting components, we subjected four (2018: four), being those located within the UK, Ireland, Canada and Scandinavia to full scope audits for Group purposes and one (2018: one), being the Group’s central functions, to specified riskfocused audit procedures. The latter was not individually financially significant enough to require a full scope audit for Group purposes, but did present specific individual risks that needed to be addressed. As such, specified risk-focused procedures were performed on investments, treasury and reinsurance, which included agreeing financial information to supporting documentation. Within the Scandinavia reporting component, audits were performed by local audit teams in Denmark, Sweden and Norway.
In line with industry practice, the Group’s statement of financial position is not presented using current and non-current classifications, but broadly in increasing order of liquidity.
The most significant estimates are as follows. Additional information on estimation techniques and assumptions is presented in the relevant note in order to provide context to the figures presented.
Strategic report Governance Financials 4) Significant accounting policies continued Assets and liabilities held for sale Assets and liabilities are classified as held for sale if it is considered highly probable that the carrying amount of the assets and directly associated liabilities will be recovered principally through a sale, rather than through continuing operations. This includes the expectation that the sale will be completed within 12 months of the classification date as held for sale, subject to extension in certain circumstances, including where disposals have been committed to subject to regulatory and legal approval.
The Group is also exposed to credit risk from the use of reinsurance in the event that a reinsurer fails to settle its liability to the Group.
Risk and capital management continued 5) Risk and capital management continued 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 2019 the reinsurance asset recoverable from these groups does not exceed 4.1% (2018: 3.9%) 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 6.6% (2018: 6.5%) of the Group’s total financial assets.
Reinsurers’ share of insurance contract liabilities 28 2,326 – – – – – 2,326 –
Reinsurers’ share of insurance contract liabilities 28 2,266 – – – – 5 2,271 –
At 31 December 2019, the Group’s total shareholders’ equity deployed by currency was: Pounds Sterling £m
Total other operating income 140 138 12) Other operating expenses £m £m
Tax assets and liabilities are recognised based on tax rates that have been enacted or substantively enacted at the balance sheet date. The Conservative Party manifesto at the recent general election included a commitment to cancel the reduction in the UK corporate tax rate from 19% to 17% in April 2020. Under IAS 12 only rate changes that have been substantively enacted at the reporting date can be used for calculating deferred tax.
Total other comprehensive income/(expense) for the year 114 1 (8) 107 (64) (86) (43) (6) (49)
25) Financial assets The following tables analyse the Group’s financial assets by classification as at 31 December 2019 and 31 December 2018.
1. The Group’s property portfolio (including the Group occupied properties) is almost exclusively located in the UK. Reasonably possible alternative valuations have been determined using an increase of 100bps in the discount rate used in the valuation.
RSA Annual Report and Accounts 2019166 rsagroup.com 28) Reinsurers’ share of insurance contract liabilities £m £m
The following changes have occurred in the reinsurers’ share of provision for losses and loss adjustment expenses during the year: 2019 £m 2018 £m
At the end of the reporting period, the Group had the following unrecognised tax assets/(liabilities): Gross amount £m Tax effect £m
Royal & Sun Alliance Insurance (Middle East) BSC (c) owns 50% of the ordinary share capital of Al Alamiya for Cooperative Insurance Company, a company operating in the Kingdom of Saudi Arabia and 52.5% of Al Ahlia Insurance Company SAOG, a company operating in the Sultanate of Oman. They are valued in its statement of financial position at share of net assets, which are as follows: 2019 Share of net assets £m 2018 Share of net assets £m
The level of provision carried by the Group targets the inclusion of a total margin of 5% for the Group on top of the actuarial indication outlined above. The appropriateness of the 5% target is subject to regular review as part of the Group reserving process at Group Corporate Centre.
As at 31 December 2019, the value of the discount on UK and Scandinavia annuities is £451m (2018: 466m). A decrease of 0.5% in the real discount rate would reduce the value of the discount by approximately £50m (2018: £50m). The sensitivity calculation has taken into consideration the undiscounted provisions for each class of business and the respective average settlement period.
Provision for unearned premiums (gross of acquisition costs) at 31 December 3,812 3,919
The split of post-employment liabilities across other countries is shown below: Non-UK liability split by country
Long-term future improvements to mortality rates 1. The impact shown is for the appropriate increase in the revaluation of deferred pensions and the increases to pensions in payment resulting from the specified increase in RPI and CPI.
The Group also leases office equipment such as laptops and printers and for which certain leases are short term (1 year or less) and/or for low value items. The Group has elected to apply recognition exemptions as permitted by IFRS 16 for these leases (see note 2 for accounting policy).
Total 115 1. 2018 comparatives have been presented on an IAS 17 ‘Leases’ basis.
Investment property and rental income Investment property is stated at fair value. The fair value methodology is set out in more detail in note 26. Unrealised gains and unrealised losses are recognised in net investment return in the consolidated income statement. Rental income from operating leases on investment property is recognised in the consolidated income statement on a straight line basis over the length of the lease.
Roysun Limited8 St Mark’s Court, Chart Way, Horsham, West Sussex, RH12 1XL, United Kingdom
RSA Finance8 St Mark’s Court, Chart Way, Horsham, West Sussex, RH12 1XL, United Kingdom
Adoption of new and revised accounting standards IFRS 16 Leases IFRS 16 ‘Leases’ which replaces the previous standard IAS 17, became effective on 1 January 2019 and did not have any impact on the Company.
The investments in subsidiaries are recognised in the statement of financial position at fair value measured in accordance with the Company’s accounting policies. The Company’s investments in subsidiaries are classified as level 2 financial assets. Fair value of the Company’s significant subsidiary, Royal Insurance Holdings Limited, is determined by reference to the market value (derived from relevant indices) of the Company’s ordinary shares and issued debt instruments at the end of the reporting period, being the most transparent independent available indicator. The market value is adjusted for the fair value of the Company’s preference shares, assets and liabilities, excluding directly owned subsidiaries. The adjusting items have been fair valued by determining the present value of future cash flow projections including projected central costs, using an appropriate arm’s length discount rate. The remaining subsidiaries are held at fair value which has been determined to be net asset value.
Current Year Underwriting Result The profit or loss earned from business for which insurance cover has been provided during the current financial period. This does not include performance impacts recognised in the current reporting period relating to prior accident years.
To allow assessment of performance excluding impact of a change in economic assumptions.
Underwriting Result Net earned premium less net claims and underwriting and policy acquisition costs. ◊ 1 Z Underlying Profit before Tax Profit before tax adjusted for the add back of all other charges except finance costs. ◊ 6 B Underlying Tax Rate The Group underlying tax rate mainly comprising the local statutory tax rates in the Group’s territories applied to underlying regional profits (operating profits less finance costs).
Note 32 D Shares in issue at the period end 1,032 1,027