INTERMEDIARIES We work with brokers of all sizes. Through our strategic partnerships with the global brokers we write complex international covers. We also work on a more intimate basis with our smaller brokers, assisting their development through direct marketing, training and support. We also distribute our products and services through agents across Emerging Markets and within Scandinavia and Italy.
A GOOD RESULT IN 2011 In 2011, we delivered a good performance in really tough economic and market conditions, with the industry experiencing a record level of natural catastrophes and continued low investment yields. I am confident that we are well positioned to outperform in the short term and really well placed as economic growth returns.
Scandinavia In Scandinavia, premiums were up by 6% to £1.8bn. Personal was up by 5% with growth in Household, Personal Accident and Danish Motor offset by Norway, where the focus was on improving the profitability of the book. Commercial was up by 6%, driven by Marine, Renewable Energy and Norway, which offset the non-renewal of a small number of large accounts in Property and targeted reductions in Workers Compensation in the first six months of the year.
We delivered a record underwriting result, up by 45% to £116m and our COR was 91.6% despite the Slave Lake fire in May, which was the second largest insured loss in Canada’s history.
“ With the action we are taking, I’m confident that the UK and Western Europe will come to deliver greater levels of profitability.”
Annual Report and Accounts 2011 | RSA | 23 visit www.rsagroup.com
In contrast, economic recovery in Central and Eastern Europe is expected to slow down in 2012 as a consequence of the Eurozone crisis. We will look to build on our leading positions in this market.
ASIA AND THE MIDDLE EAST • Asia Middle East grew by 14%
• Direct businesses across Poland, Russia and the Czech Republic grew by 9% and we now insure over 400,000 vehicles.
Compensation, as well as UK Marine. Across the other years, together with Scandinavia, we’ve seen consistent positive contributions from UK Commercial lines and Canadian Motor and General Liability.
The average underlying yield on the portfolio (excluding the yield on the ADC funds withheld account) was 3.9% (2010: 3.8%). Excluding one-offs, the average underlying yield was 3.6% with a 1.3% return on cash assets and 3.8% on the remainder of the portfolio.
Our overall bank debt portfolio totalled £2.0bn and comprised around £200m of subordinated debt, of which 80% relates to Canadian banks, and around £1.8bn of senior debt. The senior debt exposure was well diversified over 76 names in 24 countries with a single largest holding of just over £100m.
ORGANISATION AND CULTURE • Visible Executive ownership of risk management principles and practices, as demonstrated in the Board Risk Committee and Regional Risk Committees, which have clearly defined terms of reference and agendas
• Monitoring of the reinsurance markets • Reinsurance counterparties approved by the Group Reinsurance Credit Committee.
We have completed various Group-wide assessments and roll-out activities to strengthen our operations.
Our progress in 2011 was recognised by our inclusion in the Dow Jones Sustainability Investor Index, retaining ‘Platinum’ in the Times Top 100 Companies, being upgraded to a Super Sector Leader in the FTSE4Good Index and being listed on the Sunday Times Best Green Companies Award 2011.
In the UK, we are one of the first employers to comply with the Living Wage campaign nationally for our employees and suppliers. The campaign encourages employers to pay employees on the minimum wage a rate in accordance with the cost of living.
As this sector has evolved, so have we. With the recent emergence of the Renewable Energy industry, RSA was the first insurer to launch a global Renewable Energy business to support their insurance needs, and today we are the market leaders.
Within the Renewable Energy sector, RSA provides insurance across the full lifecycle, from start up and shipment of material, to construction and then operational cover once the facility is up and running. We provide insurance covers for the breadth of Renewable Energy technologies, including wind energy (onshore and offshore), solar energy, small hydro, bio energy and wave & tidal.
Skills and experience Alastair Barbour was appointed as a Non-Executive Director in October 2011. 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.
This Report is structured in line with the headings in The UK Corporate Governance Code (the Code) of Leadership; Effectiveness; Accountability and Relations with Shareholders. Remuneration is covered in the separate Remuneration Report on pages 57 to 71.
The Board and each of its committees: Group Audit, Remuneration, Nomination, Board Risk and Investment have written terms of reference explaining their role and the authority delegated to them. Each of the committees’ terms of reference are available on the Company’s website. Further details on the principal duties of each of the Board committees can be found under Accountability on page 47.
During the year, the BRC has received regular updates from the Solvency II Steering Committee on the Group’s preparation for the implementation of Solvency II and its impact on the business. Solvency II is a fundamental overhaul of the regulatory capital adequacy regime for insurers and reinsurers within the EU. The deadline for compliance with Solvency II has been postponed and the FSA is working towards an implementation date of January 2014. Solvency II also requires regulated insurers and reinsurers to have an effective system of governance in place which provides for sound and prudent management of the business. This includes ensuring that Board members possess sufficient relevant professional qualifications, knowledge and experience to ensure that, collectively, they provide sound and prudent management. There is an ongoing programme to document the governance policy and processes within each EU-regulated Group company to ensure that a consistent and high standard of governance is maintained throughout the Group, which includes training Directors on Solvency II and RSA’s Internal Model.
and the Senior Independent Director and recommended their re-election to the Board at the 2011 AGM
Annual General Meeting The AGM will be held at the Queen Elizabeth II Conference Centre, Broad Sanctuary, Westminster, London SW1P 3EE on Monday, 14 May 2012 at 11.00am. A letter from the Chairman and the notice convening the AGM (Notice) is available to all ordinary shareholders (and preference shareholders when applicable) at least 20 working days before the meeting and is available at www.rsagroup.com/agm2012.
Blackrock, Inc 188,217,284 5.46 Indirect 188,217,284 5.46 Indirect Schroders plc 170,851,201 4.95 Direct and Indirect 170,851,201 4.95 Direct and Indirect Newton Investment Management Ltd
Every September we run a global engagement survey of employees using the Gallup Q12 questions, which measure the key drivers of engagement. The survey is completed by circa three million people globally and is open to all employees across the Group. We have amongst the highest participation of any client Gallup works with and in 2011, saw our highest participation ever, with 94% completing the survey.
There are no specific restrictions on the size of a holding nor on the transfer of shares, which are both governed by the general provisions of the Articles and legislation. The Directors are not aware of any agreements between the Company’s shareholders that may result in restrictions on the transfer of securities or on voting rights. The Company may purchase any of its own shares (including any redeemable shares). An authority from ordinary shareholders for the Company to purchase up to 349,818,708 of its own ordinary shares (representing 10% of its issued share capital as at 21 March 2011) remained in force at 31 December 2011.
All Committee members are independent non-executive directors except for John Napier, Board Chairman, who was judged to be independent on the date of his appointment to the Board. Fees for serving as a Committee member and chairing Committees of the Board are described in the Non-Executive Directors’ section of this Report on page 66. Malcolm Le May was also a member of the Board Risk Committee during the year. This is to help ensure that decisionmaking on remuneration matters properly takes into account the Group’s risk appetite. Members’ attendance at the Committee meetings held in 2011 was as follows: Regular Additional
• To have regard to any concerns raised by the Board on the implications of the remuneration policy for risk and risk management
• To provide a draft of the Remuneration Report to be included in the Company’s Annual Report and Accounts to members of the Board Risk Committee for review in respect of risk and risk management (to the extent not reviewed by the Board as a whole).
• Review and approval of the remuneration applying to Adrian Brown, following his appointment to the Board.
Entry into the LTIP is discretionary – award levels and participation are reviewed annually.
The Committee agreed that it would apply discretion to award a cash bonus to Andy Haste in recognition of his leadership during the year and taking into account the strong financial results that the Company has delivered. He will not, however, receive any deferred shares arising from performance in 2011. George Culmer forfeited the bonus award that would have been made to him in respect of 2011 when he tendered his resignation from the Company.
For performance in 2012, bonus awards will be subject to the achievement of stretching COR and NWP targets and role- specific measures.
ROE has been selected as the measure of financial performance as it is one of the key measures of overall business performance and is visible externally to shareholders. The TSR performance condition has been designed to provide alignment between executive remuneration and shareholder interests and to ensure that an element of the package is linked directly to share price performance. The comparator group has been selected to ensure that performance is compared fairly against a group of similar companies operating in a similar competitive environment. The use of ROE and TSR in combination provides a balanced approach to the measurement of Company performance over the longer term.
6. Simon Lee’s allowances include 25% of basic salary as a retirement allowance, paid monthly. During 2011, the amount paid to him was £104k. He also received car benefits and additional taxable travel benefits worth £17k and medical benefits worth £1k.
8. John Napier is entitled to receive an accommodation allowance of £33k (gross) per annum.
Respective responsibilities of Directors and auditor As explained more fully in the Directors’ Responsibilities Statement, the Directors are responsible for the preparation of the consolidated financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the consolidated financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.
• Have been properly prepared in accordance with IFRS as adopted by the European Union and
• The information given in the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the Group financial statements.
fair value by using valuation techniques. These include the use of recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cashflow analysis and option pricing models
For disclosure purposes, fair value measurements are classified as Level 1, 2 or 3 based on the degree to which fair value is observable: • Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities
• Amendment to IAS 12 ‘Income Taxes – Deferred Tax – Recovery of Underlying Assets’ (issued December 2010)
Where possible, the Group adopts multiple techniques to estimate the required level of provisions. This assists in giving greater understanding of the trends inherent in the data being projected. The Group’s estimates of losses and loss expenses are reached after a review of several commonly accepted actuarial projection methodologies and a number of different bases to determine these provisions. These include methods based upon the following: • The development of previously settled claims, where payments to date are extrapolated for each prior year
Credit risk includes the non performance of contractual payment obligations on invested assets and adverse changes in the credit worthiness of invested assets including exposures to issuers or counterparties for bonds, equities, deposits and derivatives. Limits are set at both a portfolio and counterparty level based on likelihood of default to manage the Group’s overall credit profile and specific concentrations within risk appetite. The Group’s insurance investment portfolios are concentrated in listed securities with very low levels of exposure to assets without quoted market prices. The Group uses model based analysis to verify asset values when market values are not readily available.
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 Group is exposed to credit and concentrations of risk with individual reinsurers, due to the nature of the reinsurance market and the restricted range of reinsurers that have acceptable credit ratings. Reinsurance counterparties are subject to a rigorous internal assessment process on an ongoing basis to ensure that their creditworthiness continues to be satisfactory and the potential impact from reinsurer default is measured regularly and managed accordingly. The Group Reinsurance Credit Committee oversees the management of these risks. 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 unless the Group’s internal review discovers exceptional circumstances in favour of the reinsurer. Collateral is taken to mitigate exposures, where appropriate, to acceptable levels or the size or credit quality of the exposure. At 31 December 2011 the Group held collateral against £115m (2010: £116m) of reinsurers’ share of insurance contract liabilities.
Equity securities: At fair value through the income statement 5 3 (1) (1) 2 9 – – 6 11
Ordinary dividend: Final paid in respect of prior year 5.70 5.33 198 182
Interim paid in respect of current year 3.34 3.12 118 108
At the Annual General Meeting (AGM) on 14 May 2012, a final dividend in respect of the year ended 31 December 2011 of 5.82p per share amounting to a total dividend of £206m is to be proposed. The proposed dividend will be paid and accounted for in shareholders’ equity as an appropriation of retained earnings in the year ending 31 December 2012.
Reinsurers’ share of provisions for losses and loss adjustment expenses 1,771 2,353
Reinsurers’ share of provisions for losses and loss adjustment expenses at 31 December 1,771 2,353 14. INSURANCE AND REINSURANCE DEBTORS
Present value of obligations not covered by insurance arrangement 4,030 462 4,492 4,036
Notes: 1. This note only lists principal subsidiaries in the Group to avoid providing particulars of excessive length. None of the subsidiaries omitted from this note materially affects the results or assets of the Group. 2. A full list of Group subsidiaries is attached to the Company’s latest Annual Return, available from Companies House. 3. Except where indicated all of the subsidiaries listed are wholly owned within the Group. In all cases the proportion of voting power held equals the proportion of ownership interest. 4. The general insurance business of Royal International Insurance Holdings Limited will be legally transferred to Royal & Sun Alliance plc on 1 January 2012. Following this transfer, the principal activity of Royal International Insurance Holdings Limited will be as a holding company.
Respective responsibilities of Directors and auditor As explained more fully in the Directors’ responsibilities statement, the Directors are responsible for the preparation of the Parent Company financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the Parent Company financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.
Opinion on financial statements In our opinion the Parent Company financial statements: • Give a true and fair view of the state of the Parent Company’s affairs as at 31 December 2011 and of its profit for the year then ended • Have been properly prepared in accordance with IFRS as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006 • Have been prepared in accordance with the requirements of the Companies Act 2006.
PARENT COMPANY STATEMENT OF CASHFLOWS for the year ended 31 December 2011
The current tax relating to items that are credited to equity is £2m (2010: £2m).