Other information Shareholder information 179 Financial calendar 181 Jargon buster 182
This Annual Report and Accounts contains ‘forward-looking statements’ with respect to certain of the Group’s plans and its current goals and expectations relating to its future financial condition, performance, results, strategic initiatives and objectives. For further details, reference should be made to the ‘important disclaimer’ on the inside back cover. Pages 2 to 39 constitute the Strategic Report of RSA and are incorporated by reference into the Directors’ and Corporate Governance Report set out on pages 40 to 96. The Directors’ and corporate governance report has been drawn up and presented in accordance with and in reliance upon applicable English company law and the liabilities of the Directors in connection with that report shall be subject to the limitations and restrictions provided by such law.
Source: a. Personal Motor 19% b. Household 24% c. Personal Other 10% d. Com. Property 20% e. Com. Motor 9% f. Liability 9% g. Marine & Other 9%
Read about how we respond in a crisis on page 29 £6.8bn Net written premiums in 2015
2015 was a significant year for the industry in terms of capital regulation as it finalised preparations for Solvency II – Europe’s new insurance capital regime – which came into force on 1 January 2016. I am delighted to report that in December we were successful in gaining regulatory approval to use our own ‘internal model’ for calculating our capital requirements under Solvency II.
Intellectual Technical expertise is crucial to gaining competitive advantage in insurance. Our intellectual capital is stored in the underwriting expertise of our people that has built over our history and is enhanced through our technical academies.
Notes: 1. Payments to charities, fundraising and value of volunteering. Direct payments to charities £1,282,336. 2. RSA has insured 89.8% of global operational offshore wind farms (by capacity) at some point in the project’s lifetime.
During the summer we received the unsolicited takeover approach from Zurich which was negotiated into a potential 550p/share cash offer that they subsequently did not pursue. Given the uncertainties of markets and our own turnaround at that time, the Board felt responding to the short term shareholder value of this proposal was our duty. However, notwithstanding the assessment at that moment, we believe strongly that RSA can prosper independently, indefinitely into the future; and that we can exceed this valuation on a standalone basis. Our strategy and plans support this view. Despite the distraction during summer, much has been accomplished since. Key risks have been successfully tackled. Performance plans have further improved. RSA is stronger, better and inherently more valuable today than six months ago.
RSA Annual Report and Accounts 201510 Strategic report – Group Chief Executive’s statement
Dividend We are pleased, in the light of our continued progress, to propose a final dividend of 7.0p per ordinary share.
Responding in a crisis When the worst happens customers rely on us to be there to help pick up the pieces. In 2015 major wind storms and floods struck Europe, leading to thousands of claims in the UK and across Scandinavia. Fortunately, RSA has dedicated Event Teams ready to respond, which meant Trygg-Hansa in Sweden maintained call availability for customers at 98%, well ahead of industry benchmarks.
Performance improvement The current year attritional loss ratio showed a strong improvement of 2.5 points from the prior year to 60.3% as the benefits of our underwriting and portfolio actions begin to build. The prior year effect on the loss ratio was a benefit of 5.8% with prior year profits arising from the Personal and Commercial Property, Personal Auto and General Liability books.
A month into the policy that claims proposition was tested, when a major flood occurred at Queen Elizabeth Hospital in Birmingham. RSA’s claims team responded quickly and Severn Trent’s nominated loss adjusters were on site to assess damages the same day, as were a dedicated clean-up team to help get the Hospital back to operations.
• The winter windstorms, Desmond, Eva and Frank represented significant catastrophes in the year but were well covered by our reinsurance programme
• RSA takes a relatively conservative approach to the investment portfolio, favouring a high quality fixed-income dominated portfolio to protect capital for both policyholders and shareholders
• A particularly cautious approach is taken to all IT change, including sunsetting of legacy systems
Effectiveness The Board has monitored progress with the actions it agreed from the 2014 self evaluation and is satisfied with the progress made. The Board and Committees’ effectiveness was evaluated internally again this year, with the results discussed by the Group Nomination and Governance Committee in late 2015. Key areas of focus identified for 2016 include the recruitment of two additional Non-
Accountability The Board Risk Committee and Group Audit Committee have monitored management’s implementation of the global programme to enhance the effectiveness of the Group’s internal control systems to ensure that this has been embedded, that the intended improvements have been achieved and that the ongoing changes are sustainable. The Board believes that the Group’s internal control systems are stronger as a result of this work.
Enrico has over 35 years’ global executive and non-executive experience across financial services including banking and insurance and a number of blue chip brands. He spent over 15 years at Allianz in a variety of international roles, including Head of Global P&C and Head of most of Europe, Latin America and Africa.
The Executive Committee comprises the two Executive Directors whose biographies are on page 42 and the following senior management:
Our System of Governance comprises the following elements: Element What it does Where to find more information
RSA Annual Report and Accounts 2015 47Directors’ and Corporate Governance Report – Corporate governance
• Know Your Client, Sanctions, Politically Exposed Persons and Anti-Money Laundering
RSA Annual Report and Accounts 2015 51Directors’ and Corporate Governance Report – Corporate governance
Review the pace and evidence of cultural change, in line with the new control and risk frameworks.
Additional informal meetings of the Chairman, Non-Executive and Executive Directors to discuss issues beyond the normal Board meeting agendas.
The business focuses on sustainably improving these metrics and specifically targets upper quartile NPS scores, by focusing on putting the customer first in everything that it does.
Skills and experience of the Board a. Insurance Industry b. Financial c. Strategic Management d. Sales/Marketing e. Risk and Governance a
• Ensuring that the material risks facing the Group have been identified, including emerging and potential risks, and where appropriate, actions have been implemented to maintain risks within appetite
The low interest rate environment has continued to dominate the behaviour of investment markets, with bond yields remaining close to record low levels. Low yields have placed a sustained downward pressure on the income of the Group as maturing bonds are reinvested at the prevailing low yield level. This economic and market backdrop continues to create a challenging environment for the investment portfolios of all insurance companies including the Group.
While the Group has taken measured steps to enhance returns, the core philosophy of maintaining a low risk and high quality investment structure remains in place. This is reflected both in the high allocation to bonds and cash and the very strong quality of the bond portfolio. In a year where there has been downward pressure on both yields and credit ratings the Group has maintained its very high quality credit rating structure.
The Committee held six scheduled meetings during the year and has held private meetings with the Group Chief Auditor, the Group & UK Regulatory Compliance Director and the external auditor 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 meeting.
• The Committee considered the new ‘viability statement’ requirement in the Code and concluded that the statement should cover a period of three years which aligns to the Group’s planning cycle.
Employee benefits and retirement obligations During 2015, 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 where appropriate benchmark data, and reported their findings to the Committee. The Committee supported the conclusion that the assumptions used were appropriate and in line with other companies with similar schemes. In addition, any non-standard changes in assumptions and judgements are reviewed by the Committee: management reviewed the methodology used to assess the fair value of the longevity arrangements and recommended a change to the basis on which underlying cashflows are valued.
regulatory and compliance requirements. In addition the Board, through the Board Risk Committee, considers reports from risk specialists across the Group and reviews Grouplevel risk management information. The systems are designed to identify and mitigate, rather than eliminate, the potential risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material financial misstatement or loss.
Semi-annually, GIA provides a formal assessment of the effectiveness of the risk management, control and governance processes. Quarterly, GIA reports on the outcome of its work and management’s progress in mitigating issues. Its report includes any thematic issues arising and root-causes identified.
Note: 1. 2015 salary figures reflect time served as directors during the year.
1. Introduction This section of the Directors’ Remuneration Report describes the way in which remuneration decisions have been made in the financial year ended 31 December 2015. There is a statement on how the Group intends to implement its Remuneration Policy in 2016 on pages 79 to 81. Any information contained in this section of the report that is subject to audit is highlighted.
7. Adrian Brown resigned from the Board effective 16 April 2014 and his employment ended effective 31 August 2014. The salary shown in the table for 2014 is the amount for the time he was a director, i.e. 1 January – 16 April 2014.
Group Chief Financial Officer compensatory award On leaving his previous employer, Scott Egan forfeited a number of cash-based awards. The Committee carefully reviewed these awards and determined compensatory awards should be made in line with the principles outlined in the Remuneration Policy. The following awards, which consist of a combination of cash and shares, have been made and are included in the ‘single figure’ remuneration table for 2015 on page 71: • Upon appointment, a cash payment of £1,104,647 was made to replace cash payments forfeited by Mr Egan or paid back by him to his previous employer upon resignation.
The table below shows the Executive Directors’ shareholding and their unvested scheme interests in the Company’s incentive plans. Stephen Hester joined RSA in February 2014 and continues to build up his shareholding to the target level shown below within the allotted five-year period. Scott Egan joined RSA in October 2015 and will be granted share awards in 2016 as detailed on page 73 and page 81, and start to build his shareholding to the target level shown below.
5. Simon Lee became Group Chief Executive effective 1 November 2011. The single figure of total remuneration above is pro-rated for his time in the position.
RSA Annual Report and Accounts 2015 79 11. Implementation of Remuneration Policy in 2016 This section outlines decisions taken by the Committee in respect of the 2016 financial year, and how the Committee intends to implement the Directors’ Remuneration Policy during 2016.
The table below sets out the structure of the Executive Directors’ bonus plan for 2016.
To maintain an appropriate degree of stretch in the targets, the three-year average required for an on-target level of vesting on the Group underlying ROTE element is set higher up the 11-16% target range compared to the 2015-17 cycle. This ensures account is taken of the turnaround progress made in the previous year. Underlying ROTE is defined in the Key Performance Indicator section on page 22. It will be measured on a simple average basis over the performance period.
Notes: 1. The TSR index of comparators for this cycle includes: ACE, Admiral, Allianz, Aviva, Direct Line, Gjensidige Forsikring, Hiscox, Intact, Mapfre, QBE,
• The tables on the following pages describe how these remuneration principles are applied in practice.
• The Executive Directors’ pension benefits for 2015 are detailed on pages 71 to 72.
• With exception to the Chairman, all Non-Executive Directors receive a base fee, further fees are then paid to reflect membership of more than one committee and for chairing a committee. A separate fee is paid to the Senior Independent Director. The Chairman receives a fee for his role and this is set by the Committee.
• Appointment salaries are set using the same approach as for the Directors’ salary reviews, as noted on pages 84 to 85 above. The Committee can exercise discretion on the timing and level of salary reviews for newly appointed Directors reflecting the individual’s development and performance in the role.
Note to table: The policy is largely consistent with the approach taken for senior executives across the Group.
Non-Executive Directors Non-Executive Directors are not employed by RSA but they are engaged on a contract for services basis. They are issued with an appointment letter for an initial three-year term, which can be extended with the Board’s agreement. The term of office can end prior to its expiry with either the individual or the Company serving one month’s notice, or three months in respect of the Chairman. No notice will be served by the Company in the event of gross misconduct.
Notes: The emissions for 2015 have been calculated using a different organisational scope to previous years, reporting all sources of emissions from operations with 50 or more full time equivalent (FTE) employees. In previous years, emissions from offices with less than 50 employees were estimated, but these have been removed from the scope of the 2015 reported emissions. Previously, some Scope 3 emissions were misreported as Scope 1 emissions. Therefore, we have restated our baseline year as 2015 for our carbon reduction target and amended our target accordingly.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Opinions and conclusions arising from our audit 1. Our opinion on the Group financial statements is unmodified We have audited the financial statements of RSA Insurance Group plc (‘RSA’) for the year ended 31 December 2015 set out on pages 103 to 178. In our opinion: • the financial statements give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at 31 December 2015 and of the Group’s profit for the year then ended; • the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union (‘IFRS as adopted by the EU’); • the Parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU and as applied in accordance with the provisions of the Companies Act 2006; and
Forecasting the future taxable profits against which deferred tax assets can be recognised is inherently uncertain. In making these forecasts, the Group must make assumptions about the future growth rate, profit margins and expense ratios of the business. The recognition of the deferred tax asset in the UK is particularly subjective given its sensitivity to expectations about the profitability of the UK and to a lesser extent the Irish businesses, which in turn both depend on the achievement of operating plans.
Many financial reporting controls depend on the correct functioning of operational and financial IT systems, for example interfaces between policy administration and financial reporting systems, or automated controls that prevent or detect inaccurate or incomplete transfers of financial information. If these systems or controls fail, a significant risk of error in reported financial information can arise from the failure to transfer data appropriately between systems or inappropriate changes being made to financial data or systems. This is an area of significant risk in our audit due to the complexity of the IT infrastructure, particularly in the UK and Scandinavia, where there are legacy systems which require increased manual inputs, relative to more automated processes.
Where general IT controls were not operating effectively and we were therefore unable to rely on the related automated IT controls, we addressed the increased risk that financial information was affected by extending the scope of our work. This included assessing the operation of controls over changes or transactions being recorded in the systems. We also tested manual compensating controls, such as reconciliations between systems and other information sources, and performed additional substantive testing, such as using extended sample sizes and performing data analysis routines over the full population of transactions.
Items from continuing operations that will not be reclassified to the income statement: Pension – re-measurement of net defined benefit asset/(liability) net of tax 22 65 (7)
Non-controlling interests from continuing operations 14 12 from discontinued operations (1) (5)
Shares issued for cash (note 33) 382 371 – – – – – – 753 – 753
Reinsurers’ share of insurance contract liabilities within the consolidated statement of financial position includes the reinsurers’ share of provisions for losses and loss adjustment expenses and unearned premiums. The Group reports thirdparty reinsurance balances on the consolidated balance sheets on a gross basis to indicate the extent of credit risk related to third-party reinsurance. The amount recoverable is reduced when there is an event arising after the initial recognition that provides objective evidence that the Group may not receive all amounts due under the reinsurance contract.
Where the investment return is managed on the basis of the total return on investment (including unrealised investment gains).
If the fair value of a previously impaired debt security increases and the increase can be objectively related to an event occurring after the impairment loss was recognised, the impairment loss is reversed and the reversal recognised in the consolidated income statement. Impairment losses on equity investments are not reversed. Further information can be found in note 10.
Deferred tax is provided in full using the liability method on temporary differences arising between the tax bases of assets and liabilities and the carrying amounts in the consolidated financial statements. However, if the deferred tax arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting, nor taxable profit or loss, it is not accounted for. Deferred tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the end of the reporting period and are expected to apply when the related deferred tax asset is realised or the related deferred tax liability is settled.
The profit from discontinued operations is shown separately on the face of the income statement as a single amount. It comprises the profit or loss after tax from discontinued operations together with the gain or loss after tax recognised on completed sales or the gain or loss after tax on the discontinued operations arising from revaluing the carrying value of a held for sale operation to its fair value less costs to sell. Further information can be found in note 7.
The Group remains primarily liable as the direct insurer on all risks reinsured, although the reinsurer is liable to the Group to the extent of the insurance risk it has contractually accepted responsibility for.
The Group seeks to reduce its reserving risk through the use of experienced regional actuaries who estimate the Actuarial Indication of the required reserves based on claims experience, business volume, anticipated change in the claims environment and claims cost. This information is used by local Reserving Committees to recommend to the Group Reserving Committee the appropriate level of reserves for each region – which will include adding a margin onto the Actuarial Indication as a provision for unforeseen developments such as future claims patterns differing from historical experience, future legislative changes and the emergence of latent exposures such as asbestosis. The Group Reserving Committee review these local submissions
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 31 December 2015, excluding those assets that have been classified as held for sale.
Changes in the income statement and equity: Decrease in income statement
The Group manages interest rate risk by holding investment assets (predominantly fixed income) that generate cashflows which broadly match the duration of expected claim settlements and other associated costs.
The table below illustrates the impact of a hypothetical 10% change in Danish Krone/Euro, Canadian Dollar or Swedish Krona exchange rates on shareholders’ equity when retranslating into sterling: in Pounds Sterling against Danish Krone/Euro £m 10% weakening in
Provisions for losses and loss adjustment expenses 3,256 1,576 1,069 747 536 1,242 2,120 10,546 9,084
Subordinated guaranteed US$ bonds – – – – – – 6 6 5
ORSA The Solvency II directive introduces a requirement for undertakings to conduct an ORSA. In anticipation of this requirement, the Group has updated its risk and capital management processes; and in the preparatory phase for Solvency II submitted to its regulators the Forward Looking Assessment of Own Risk, the precursor to the Solvency II ORSA.
Assessing segment performance The Group uses the following key measures to assess the performance of its operating segments: • Net written premiums; • Underwriting result; • Combined operating ratio (‘COR’); • Operating result.
Key management personnel comprise members of the Group Executive Committee, Executive Directors, and Non-Executive Directors.
Fair value gains and losses 49 (67) (33) 7 16 (60)
Profit for the calculation of earnings per share relating to discontinued operations 156 184
Pension – remeasurement of net defined benefit liability net of tax - - - - - (7) (7) - (7)
When testing for impairment, the carrying value of the CGU to which goodwill has been allocated is compared to the recoverable amount as determined by a value in use calculation. These calculations use cashflow projections based on operating plans approved by management covering a three year period and are based on 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. Cashflows beyond this period are extrapolated using the estimated growth rates which management deem appropriate for the CGU. The cashflow forecasts are adjusted by appropriate discount rates. Where a sales price has been agreed for CGU, the sales proceeds are considered the best estimate of the value in use.
Collateral At 31 December 2015, the Group has pledged £376m (2014: £769m) of financial assets as collateral for liabilities or contingent liabilities. The nature of the assets pledged as collateral comprises government securities of £314m (2014: £711m), cash and cash equivalents of £50m (2014: £26m) and debt securities of £12m (2014: £32m). The terms and conditions of the collateral pledged are market standard in relation to letter of credit facilities.
These cashflows are discounted at an appropriate rate of interest to determine their present value.
In both cases the estimated fair value would increase/(decrease) if: • The estimated rental value is higher/(lower)
28) 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.
Cash and cash equivalents and bank overdrafts (as reported within the Consolidated Statement of Cashflows) 902 1,135
As at 31 December 2015, the value of the discount on net claims liability reserves is £403m (2014: £444m) excluding 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 £127m.
Return on scheme assets less amounts included in pension net interest cost (343) 821
Group occupied property is stated at fair value, less subsequent depreciation for buildings. The fair value methodology is set out in note 27. Increases in the carrying amount arising on revaluation are recognised in other comprehensive income and credited to a separate revaluation reserve within equity. Decreases in the carrying amount arising on revaluation are recognised in other comprehensive income and reduce the revaluation reserve, to the extent they offset previous revaluation increases; further decreases are charged to the consolidated income statement. Buildings are depreciated to their residual value on a straight-line basis over the useful economic life of the building; depreciation is charged to the consolidated income statement except where a building has been revalued upwards, in which case the amount of the depreciation relating to the difference between the buildings revalued amount and the original cost is transferred from revaluation reserve to retained earnings. Land is not depreciated.
Other transactions Year-end balances with related parties are set out below: £m £m
Dividends Shareholders are encouraged to have their dividends paid directly into their bank account. It is a more secure and faster way to receive the dividend payment with cleared funds available to shareholders on the dividend payment date. Shareholders who have their dividends paid directly into their bank receive a consolidated tax voucher once a year, showing payments received in the respective tax year. Alternatively, individual tax vouchers are available upon request. To take advantage of this convenient method of payment visit www.shareview.co.uk or contact Equiniti. Details of 2016 dividend dates can be found at www.rsagroup.com/dividends.
• The tangible value of the Group calculated by subtracting our total liabilities including loan capital from our total tangible assets (total assets less goodwill and intangibles).