Chairman’s statementChairman’s statement terms to frontline workers and those out of work to make insurance easier to access and more affordable at a challenging time.
Throughout, we continued to be there for customers dealing with familiar but still impactful personal catastrophes, from the significant flooding in the UK at the start of the year to more “everyday” household emergencies, motor accidents and healthcare needs.
These developments are only possible with the foundation of a thriving business. Our results this year underlined our ability to drive performance in areas of historic strength and good profitability, particularly Personal Lines, while making substantial improvements in areas where our results have not been as consistent. Notably, our UK business made another step forward, excluding one-off exposures to business interruption claims, and our Canadian and Danish Commercial Lines portfolio showed significant progress thanks to strong underwriting actions.
Effective product distribution We need to reach our target customers effectively and efficiently to continue to develop as a business. Our products are distributed directly to customers, through brokers and affinity partnerships.
The Board considers that the most effective workforce engagement results from all Board members maximising engagement with the workforce through the wide range of activities described in this section.
The Board also requested further training on race, ethnicity, anti-racism and the challenges faced by Black, Asian and other ethnic minority colleagues.
How the Board engages The Board considers our Annual General Meeting (AGM) an important opportunity to engage with all shareholders, particularly private shareholders who might otherwise not have any direct engagement with the Board. When the Board was considering 2020 AGM arrangements in light of Covid-19, it reaffirmed its commitment to protect the health, safety and well-being of its shareholders. Accordingly, the 2020 AGM was held as a hybrid meeting, with shareholders able to attend and vote remotely and ask questions in advance and by telephone at the end of the meeting. Similar arrangements were made in respect of the court-sanctioned meeting and general meeting held on 18 January 2021 in connection with the recommended offer for the Company.
How the Board responds We believe that open and regular dialogue promotes transparency between the Group and its regulators and ensures that we are in a position to reflect the views of our regulators when setting strategy.
The Board has also been kept informed of the ways in which we have supported local communities, including through RSA’s charitable partnerships to help our customers mitigate risks and the provision of financial support during the pandemic. Despite restrictions impacting direct community engagement opportunities, the Board have been encouraged by the continuing commitment to community investment programmes in all regions.
UK Cost programme Last year, we established a simplification programme with the overarching goal of making our UK business simpler for customers and staff. Through a range of actions – including rethinking our physical office space, modernising our IT infrastructure and simplifying our products and services – RSA has committed to help secure the profitability and sustainability of the business for the future.
· The UK regulator, the FCA, is increasing its focus on conduct toward customers, especially with regard to treatment of vulnerable customers and pricing within General Insurance.
· Technology is also having an impact on claims patterns and risk management – for example, as a result of the shift to more automated vehicles, or through the use of smart technology within modern factories.
As noted, the other major feature of 2020 for RSA was the all cash takeover bid we negotiated, valuing our Company at a 52% premium over the undisturbed share price. The high value placed on our business was testimony to its strength and attractiveness. We were not looking to sell and RSA’s future was bright as an independent company. But in a liberal market based economy, shareholder value is rightly prized, forming the basis as it does of savings and pension returns and a well functioning economy. There is no doubt this bid offers our shareholders exceptional value. But the future for other stakeholders is also safeguarded. Our businesses will live on with their new owners, our people will have the opportunity of great careers and our customers will continue to be serviced well.
History and Inheritance RSA can trace its history back 300 years to the inception of the insurance industry after the Great Fire of London, though today’s company is the product of many mergers and acquisitions since that time. This proud history gave us a powerful business franchise with customer loyalty, goodwill and recognition going back decades. It also brought us expert staff, with longevity, and an ethos prizing customer service and teamwork. These business assets lie at the heart of what we have been able to accomplish.
RSA’s leadership, our top 100, has changed immensely in recent years, in lineup, in attitudes and in effectiveness. Our accomplishments are a team tribute to this group of people. And for that I am immensely grateful.
Definition Business operating result attributable to ordinary shareholders less finance costs and underlying tax, expressed in relation to opening tangible shareholders’ funds – that is, excluding goodwill and intangible assets.
· Underlying return on tangible equity of 18.2%1 (2019: 16.0%1), total Group underlying return on tangible equity of 16.7% (2019: 14.2%) versus 13-17% target range.
Current year underwriting profit for the Total Group was £509m (2019: £314m). The Group attritional loss ratio of 50.4%1 was 4.5 points better than 2019. Excluding the estimated impacts of Covid-19 the attritional loss ratio was 52.3%, a 2.6 points improvement. The ratio improved by 3.0 points in Scandinavia (of which Covid-19 provided an estimated 1.8 point benefit). In Canada, the attritional loss ratio improved by 8.5 points (of which Covid-19 provided an estimated 3.9 point benefit). The UK & International attritional loss ratio improved by 3.3 points1 (of which Covid-19 provided an estimated 1.4 point benefit).
Other items Interest costs were £33m (£49m including the Tier 1 issuance), up from £32m (£46m including the Tier 1 issuance) in 2019. Coupon costs of £16m (2019: £14m) for the 2017 Tier 1 issuance are presented at the bottom of the management basis: Income statement (shown in this section of the Annual Report) as ‘other equity costs’, as per accounting rules.
Our aim is to raise awareness of issues, ensure that procedures are in place to prevent breaches, and conduct appropriate due diligence. In 2020, we have embedded a more effective due diligence process to monitor suppliers’ approaches to managing human rights, and to track performance over time. We have also rolled out a new e-learning module covering modern slavery risks to supplier relationship managers to increase knowledge and awareness of this issue and the circumstances under which they should seek specialist advice. To date, 86% of UK suppliers are covered by our supplier due diligence assessments on environmental, social and ethical issues, with 70% of suppliers having policies in place that cover human rights issues. Our procurement team considers human rights when reviewing supplier tenders, as well as existing supplier contracts.
During 2020, we built on the findings of the GIST by undertaking climate scenario analysis focussed on physical risks designed to specifically address RSA’s risk profile and geographical exposure. We formed a dedicated working group, drawing together internal and external expertise to develop two physical risk scenarios linked to increasing concentrations of carbon emissions in the atmosphere covering all three major regions in the Group.
This remained true during the challenges presented by Covid-19 and, although the way we do things changed, there was strengthened determination to live our values through our People Principles of building high performance, sustaining diverse capabilities and working together effectively.
Sustaining diverse capabilities Providing vital services for our customers as well as taking care of colleagues’ well-being during Covid-19 was paramount. We equipped our leaders to manage remote teams, which included training, information and support for the practicalities of homeworking.
Supporting a healthy culture We use a dashboard of metrics and feedback from our colleagues, leaders and control functions to regularly monitor our culture, including by our Group Board. Our Board also stay in touch with our culture through engagement with our workforce, as described in the ‘our stakeholders’ section of this report (pages 6-9). In addition, we have formal relationships with unions and a works council to share and receive information about issues impacting on our people.
Covid-19 meant we had to adapt how we engage with each other and maintain a collective sense of purpose; feedback from our colleagues told us we achieved this.
We continue to be focused on business as usual. The Board is responsible for setting the Group’s strategy and overseeing the executive management team in the delivery of this ambition. It monitors the Group’s performance and the commitment to best-in-class with careful consideration of the interests of the Group’s shareholders, while having regard to the Company’s other stakeholders. See pages 6 to 9 for details of the Board’s engagement with our key stakeholders.
Skills and experience Stephen has over 35 years’ experience in financial services and general management. He has been CEO of three FTSE 100 companies over the last 16 years. He is responsible for leadership of the executive management team, along with leading strategy and business plan development and execution for the Company and its major operating subsidiaries, having regard to the requirements of the Company’s shareholders and other stakeholders.
· Received a view of the Group’s expected return on capital allocated (ROCA) based on the 2020–2022 operational plan. The analysis looked at returns by region and by line of business relative to capital allocated to provide a risk/capital adjusted lens to assess performance.
Finance, capital and investor relations · At each meeting, reviewed and challenged the monthly Group performance pack, which includes a discussion on capital.
The Committee reviewed the results of the internal reserving assurance programme, which provided independent validation of reserves set at a regional level and, in 2020, covered Denmark, Sweden, Norway and the Middle East. In addition, the Committee commissioned an external review of the Scandinavian business reserves and reserve adequacy, and concluded that the recorded reserves were within an acceptable range.
The sensitivities to key assumptions were also reviewed and challenged. The Committee was satisfied that the increased disclosures proposed were appropriate, particularly in relation to enhanced downside risks to the deferred tax asset in the current environment.
The Committee approved a full impairment of the carrying value of Norwegian business of £14m. The Committee also considered and approved the carrying value of other intangible assets, noting some small impairments of software no longer in use.
The Committee was satisfied that the correction of £32m to insurance debtors should be made in the current year.
· Monitored compliance with the Group’s reserving policy by each business to ensure that the Group’s reserve margin remained adequate and that the uncertainty considerations were appropriate.
· Reviewed and considered the arrangements for monitoring and reporting of whistleblowing activities. Clare Bousfield has oversight of whistleblowing arrangements in accordance with the PRA’s Senior Insurance Managers Regime and has also been appointed as the FCA Whistleblowing Champion.
· The Committee was subject to evaluation as part of the wider review of the Board and its committees during 2020, see page 47. The overall performance of the Committee was very highly rated.
Auditor tenure The Committee is responsible for overseeing relations with the external auditor, including the proposed external audit plan and the approval of fees, and makes recommendations to the Board on their appointment or re-appointment. KPMG was appointed as the Group’s external auditor in 2013 and has been re-appointed at each subsequent AGM.
Committee members have had dialogue with employees, for example through attending town hall meetings, and have received employee feedback on pay-related decisions and the wider actions taken to support our people during the pandemic. Through our internal social media network, I have shared information about the alignment of executive and employee reward, which provides an additional route for individuals to feed back their views.
Note: Financial measures, including ROTE, PBT and COR relate to the Group’s underlying performance which is the basis on which the Group’s plans and targets were set by the Board, in common with practice in prior years and which excludes exits.
To avoid conflict of interest, individuals are not part of discussions of their own remuneration.
4. LTIP 2019: Actual value of Performance Shares and accrued dividend equivalents under the 2017–19 LTIP cycle that vested on 3 March 2020. The vesting was as disclosed in the 2019 Annual Report and Accounts on pages 92 to 93. Valuation has been restated using the vesting date share price of £5.22.
Note: 1. Half of the bonus is awarded in Deferred Bonus Shares which vest three years from the grant date, and are subject to malus adjustment.
Bonus Business Scorecard: CEO UK & Intl 2019 Actual1 2020 Target1 2020 Actual1 Weighting (% of max) Achievement
· Contributed to embedding of the diversity and inclusion goal of increasing representation of women in Management Group roles.
The overall vesting outcome is shown in the table below, and details are set out on the following pages: Long-term incentive performance measures 2018–20 Threshold target: 25% vesting Maximum target: 100% vesting Actual Weighting
Vesting overview 2018–20 Long-term incentive vesting Granted number of shares Estimated vesting number of shares Estimated value (including dividend equivalents)
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 2019 and 2020 figures are given on pages 59 to 67.
Total remuneration 2020 The table below sets out the Non-Executive Directors’ total remuneration single figures for the financial year ended 31 December 2020. Non-Executive Directors do not receive variable remuneration.
Salaries are reviewed annually considering factors including: market positioning, internal pay relativities, levels of pay for other RSA employees, inflation, affordability, job scale and content, individual’s experience and expertise.
· Material error or financial misstatement of results which has resulted in an overpayment
Relevant disclosures contained in the Strategic Report pages 38 to 39
Scope 3: Emissions relating to RSA activities not within our direct control, including business travel, water supply, wastewater treatment, paper consumption and waste generated.
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 103,434,708 of its own Ordinary Shares (representing 10% of its issued share capital as at 20 March 2020), was passed at the 2020 AGM. This authority will expire at the close of business on 30 June 2021 and a new authority will be sought, as applicable. The authority was not exercised during 2020. 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.
Notes: 1. If the Company has not been informed that interests have changed, the last notification is included in this table.
Other commitments, contingent liabilities and events after the reporting period 47 Other commitments 166 48 Other contingent liabilities 166 49 Events after the reporting period 166
Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Parent Company and of the Group's profit or loss for that period. In preparing each of the Group and Parent Company financial statements, the directors are required to: · Select suitable accounting policies and then apply them consistently
· Use the going concern basis of accounting unless they either intend to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative but to do so
· The Strategic Report on pages ifc to 39 includes a fair review of the development and performance of the business and the position of the Parent Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
We were first appointed as auditor by the shareholders on 13 May 2013. The period of total uninterrupted engagement is for the eight financial years ended 31 December 2020. We have fulfilled our ethical responsibilities under, and we remain independent of the Group in accordance with, UK ethical requirements including the FRC Ethical Standard as applied to listed public interest entities. No non-audit services prohibited by that standard were provided.
Reinsurance recoveries are inherently linked to gross insurance liabilities. The extent of recoveries from the Group’s ‘Group Volatility Cover’ (‘GVC’) reinsurance contract is a key area of uncertainty due to the judgement applied in determining the value of individual claims eligible for the GVC and aggregation of eligible claims required to trigger a recovery.
Firstly, the Group is subject to laws and regulations that directly affect the financial statements including financial reporting legislation (including related companies legislation), distributable profits legislation, pension legislation and taxation legislation, and we assessed the extent of compliance with these laws and regulations as part of our procedures on the related financial statement items.
Based on those procedures, we have concluded that each of the following is materially consistent with the financial statements and our audit knowledge: · the directors’ statement that they consider that the annual report and financial statements taken as a whole is fair, balanced and understandable, and provides the information necessary for shareholders to assess the Group’s position and performance, business model and strategy; · the section of the annual report describing the work of the Audit Committee, including the significant issues that the audit committee considered in relation to the financial statements, and how these issues were addressed; and
Items that will not be reclassified to the income statement: Pension – remeasurement of net defined benefit asset/liability net of tax 22 (25) (86)
Effect of changes in foreign exchange on cash and cash equivalents 6 (11)
The assessment also considered the impact of the offer to buy RSA should the deal complete or fall away. If the deal completes the board expects restructuring of the Group to occur, but considers that the ability of the Parent Company and operating businesses to continue as a going concern will not be adversely affected.
The Group Audit Committee reviews the reasonableness of significant judgments and estimates. The issues considered by the Group Audit Committee are included within the Group Audit Committee Report on pages 49 and 50.
Implementation plans have been updated to reflect the amended effective date and are on track.
Remeasurements of the net defined benefit liability/asset recognised in other comprehensive income comprises actuarial gains and losses as a result of changes in assumptions and experience adjustments in the calculation of the defined benefit obligation, and return on scheme assets excluding interest during the year. The most significant of these is the selection of the discount rate used to calculate the defined benefit obligation, details of which are set out in note 41.
© 2020 Friend Studio Ltd File name: Notes_01_to_29_v26 Modification Date: 9 March 2021 11:26 am 6) Risk and capital management continued · The actuarial indication of ultimate losses together with an assessment of risks and possible favourable or adverse developments that may not have been fully reflected in calculating these indications. At the end of 2020, these risks and developments include: the possibility of future legislative change having a retrospective effect on open claims or changes in interpretation or regulatory application of existing legislation; changes in claims settlement procedures potentially leading to future claims payment patterns differing from historical experience; the possibility of new types of claim, such as disease claims, emerging from historical business; general uncertainty in the claims environment; the emergence of latent exposures; the outcome of litigation on claims received; failure to recover reinsurance as we expect and unanticipated changes in claims inflation.
Financial risk Financial risk refers to the risk of financial loss predominantly arising from investment transactions entered into by the Group, and also to a lesser extent arising from insurance contracts, and includes the following risks: · Credit risk
Of which would qualify as solely for payment of principal and interest (SPPI) under IFRS 91 4,977 2,006 2,065 1,159 91 4 10,302
Total financial assets that are neither past due nor impaired £m
Loans and receivables 26 429 – – – – – 429 –
2020 has seen significant market volatility and whilst financial markets have stabilised in the latter part of the year, longer term consequences remain unclear. However, RSA continues to prove resilient.
ii. Interest rate risk Interest rate risk arises primarily from the Group’s investments in long-term debt and fixed income securities and their movement relative to the value placed on insurance liabilities. This impacts both the fair value and amount of variable returns on existing assets as well as the cost of acquiring new fixed maturity investments.
Decrease in other comprehensive income 2021 £m 2020 £m 2021 £m 2020 £m
The above sensitivities have been considered in isolation and the impact of a combination of sensitivities may be different to the individual outcomes stated above. Where an IFRS valuation of a pension scheme surplus is restricted under Solvency II, downside pension sensitivities may be dampened relative to those shown. In particular, given the level of pension surplus at 31 December 2020, we would expect Group capital sensitivities to be broadly in line with the ex-pensions view above.
2. Transaction costs relate to central costs incurred in relation to the proposed takeover of RSA.
Reinsurers’ share of changes in provision for losses and loss adjustment expenses (37) (22)
Total net claims 3,890 4,332 12) Other operating income £m £m
Increase/(decrease) of deferred tax in respect of prior periods (other than losses) (2) –
The carrying value of intangible assets not yet available for use at 31 December 2020 is £188m (2019: £170m). This primarily relates to the implementation of strategic software assets across the Group, reported within internally generated software.
As at 31 December 2020 At fair value through profit and loss (FVTPL)
© 2020 Friend Studio Ltd File name: Notes_01_to_29_v26 Modification Date: 9 March 2021 11:26 am 27) Fair value measurement continued The movement in the fair value measurements of level 3 financial assets is shown in the table below: Available for sale investments Debt securities at FVTPL
Reinsurers’ share of provisions for losses and loss adjustment expenses 1,624 1,580
1. In respect of the extrapolated years four to seven only.
35) Other equity instruments – Tier 1 notes On 27 March 2017, the Company issued two floating rate Restricted Tier 1 (RT1) notes totalling £297m in aggregate size and with a blended coupon of c.4.7%. The notes are as follows: · Swedish Krona 2,500m at 3 month Stibor +525bps (equivalent to c.4.8% coupon on issue)
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: 2020 Share of net assets £m 2019 Share of net assets £m
The dated guaranteed subordinated notes were issued on 10 October 2014 at a fixed rate of 5.125%. The nominal £400m bonds have a redemption date of 10 October 2045. The Group has the right to repay the notes on specific dates from 10 October 2025. If the bonds are not repaid on that date, the applicable rate of interest would be reset at a rate of 3.852% plus the appropriate benchmark gilt for a further five year period.
In selecting the method and estimate appropriate to any one class of insurance business, the Group considers the appropriateness of the methods and bases to the individual circumstances of the class and accident period or underwriting year. A key assumption that is common to many classes of business is that historic experience is a good guide to what we can expect to see in the future. This depends on a variety of things such as consistent claims handling practise and mix of business, which we test as part of our analytic process to ensure that our assumptions are reasonable.
Individually large and significant claims are generally assessed separately, being measured either at the face value of the loss adjusters’ estimates, or projected separately in order to allow for the future development of large claims. Direct Covid-19 claims have been estimated using bespoke techniques that are primarily based upon granular exposure assessments, assumptions on how Covid-19 impacted businesses and societal behaviour, combined with early claims data and insight from the claims, underwriting and legal functions.
The level of provision carried by the Group targets the inclusion of a total margin of around 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.
Total claims payments made in the year net of salvage and other recoveries (4,556) (5,196)
© 2020 Friend Studio Ltd File name: Notes_30_to_end_NEW_v21 Modification Date: 9 March 2021 12:19 pm 39) Insurance contract liabilities continued Consolidated claims development table gross of reinsurance prior £m 2011 £m 2012 £m 2013 £m 2014 £m 2015 £m 2016 £m 2017 £m 2018 £m 2019 £m 2020 £m
After retirement, pensions in payment are increased each year based on the increases in the government indices for inflation. A cap of 2.5% applies to benefits accrued post 31 December 2005 (a cap of 5% applies to benefits in excess of Guaranteed Minimum Pension prior to this date).
· Identification of other relevant cash flows to include such as future service charges and insurance
Finance leases The Group has sub-let office floor space in Canada and the UK for which the head leases have been presented as part of the land and buildings right-of-use asset. The sub-leases have been classified as finance leases because the sub-lease is for the whole remaining term of the head lease. The net investments in the subleases have been reported within other debtors.
The following table sets out a maturity analysis of lease receivables, showing the undiscounted lease payments to be received after the reporting date.
© 2020 Friend Studio Ltd File name: Notes_30_to_end_NEW_v21 Modification Date: 9 March 2021 12:19 pm 45) Reconciliation of cash flows from operating activities The reconciliation of net profit before tax to cash flows from operating activities is as follows: Note £m £m
Hedge of changes in fair value Where a derivative is designated as a hedging instrument in a fair value hedge of the changes in value of a fixed interest security, the gains and losses arising from the change in fair value of the derivative are recognised in the consolidated income statement. The change in fair value of the hedged investments (classified as available for sale) that are attributable to the hedged risk is transferred from the revaluation reserve to the consolidated income statement.
Appendix A: Other accounting policies continued Dividends The final dividend is recognised as a liability when approved at the Annual General Meeting.
RSA Isle of Man No.1 Limited8 33-37 Athol Street, Douglas, IM1 1LB, Isle of Man
RSA Overseas (Netherlands) B.V.8 20 Fenchurch Street, London, EC3M 3AU, United Kingdom
4. Indicates ownership of non-voting shares. 5. There is no subsidiary where the Group holds less than 50% of the voting rights.
7. Johnson Inc. holds all of the voting shares in 2029974 Ontario Inc. through the following share classes: Class A Common (0.0016% voting), Class B Common (0.0033% voting), Class V Special (99.9950% voting).
Interest is payable on interest bearing loans from subsidiaries, which are repayable on 24 hours written notice. The rates of interest charged during the period are at three months LIBOR plus margins ranging from 0.40% to 2.00%.
Notes to the Parent Company financial statements continued 10) Current and deferred tax Current tax
The current tax relating to items that are (charged)/credited directly to equity is £nil (2019: £nil).
Deferred tax Deferred tax for the current year is based on a rate of 19% (2019: 17%). The following are the major deferred tax assets recognised by the Company and movements during the year: 2020 £m 2019 £m
14) Issued debt Full details of the issued debt of the Company are set out in note 37 to the consolidated financial statements.
Occasionally management may also report additional or adjusted APMs when circumstance requires. Reasons for doing so, definitions and reconciliations are provided in this appendix. In Q4 2018 targeted portfolio exits were announced as part of an ongoing strategic review of the UK & International business which concluded in 2019. The Group continues to be impacted by exits in 2020 due to the ongoing run-off of exposures. Therefore, APMs, continue to be reported both including and excluding the impacts of the UK&I exited portfolios to provide measures that allow users to assess the future performance of UK&I and the Group.
Available for Sale (AFS) A class of financial asset that is neither held for trading nor held to maturity. Business Operating Result Business operating result represents profit before tax adjusted to add back other charges. ◊ 1 AC Claims Frequency Average number of claims per policy over the year. Claims Handling Expenses The administrative cost of processing a claim (such as salary costs, costs of running claims centres, allocated share of the costs of head office units) which are separate to the cost of settling the claim itself with the policyholder.
B/C E Tangible net asset value per share 316p 282p 4. Net written premium movement and constant exchange £m £m