2. In the UK, we provide PA insurance to 25% of FTSE100 companies.
RISING MIDDLE CLASS RESPONSE There are an estimated two billion middle class people in the world today, and this is expected to rise to over three billion by 2020. This growth will give rise to increasing demand in the faster growing economies for insurable assets such as cars, homes, electronics and valuables. Our exposure to regions such as Latin America put us in a strong position to benefit from this growth.
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 8 to 43 constitute the Strategic Report of RSA and are incorporated by reference into the Directors’ and corporate governance report set out on pages 50 to 63. 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.
WE KNOW FROM EXPERIENCE THE PEACE OF MIND CHILD SICKNESS AND ACCIDENT INSURANCE CAN BRING. SO WE’RE CONTINUING TO DEVELOP OUR OFFER, HELPING TO PROTECT THE NEXT GENERATION – AND THE ONE AFTER THAT TOO!
BY SHARING OUR UNIQUE CUSTOMER INSIGHTS, AND A COFFEE OR TWO, WE’RE HELPING BROKERS IN THE UK CREATE THE RIGHT PRODUCTS AND SERVICES, WHEREVER OUR CUSTOMERS ARE.
CONFIDENCE THAT A CLAIM WILL BE PAID Our substantial reserves which are invested in low volatility assets means that customers can be confident that we will pay claims when they are due.
In Italy, the economy shrank in 2013, but is forecast to return to modest growth in 2014 as the government tackles the significant budget deficit. In Ireland, the economy has emerged strongly from recession following the wide ranging austerity measures and is forecast to grow in excess of 2.5% in 2014.
At the end of February 2014, this review had progressed well, and has and will lead to a number of changes to the Group’s portfolio and structure. At the time of writing, selected business disposals are already underway, and we are shrinking our exposure to less profitable markets. We have also taken other actions to strengthen our capital position, such as the sale of most of our equities portfolio and the purchase of additional reinsurance protection. Finally, at our Preliminary Results Announcement on 27 February 2014 we announced our intention to raise capital through a rights issue. It is a difficult decision to ask shareholders for additional financial commitment and the Board did not take this decision lightly. The Board firmly believes that this is in the best interests of RSA and all of its shareholders and other stakeholders.
1. As a result of a routine internal audit, the terms of which were informed by the outcome of a Central Bank of Ireland review, we identified financial impacts of £37m primarily due to irregularities within our Irish claims and finance functions, and £35m primarily due to inappropriate accounting for net earned premiums and pipeline earnings. The irregularities involved inappropriate collaboration on large loss and claims accounting.
We operate across three dimensions: • Customers are our lifeblood. Serving them well is our purpose. Across RSA our businesses are in good shape based on the confidence and trust of the 19 million customers we serve. But we aspire to keep improving, and our industry is tough, competitive and evolving. To improve and to succeed is a constant battle. It will require a tighter focus on what we do best; a more disciplined and effective use of technology; a tougher approach to cost efficiency; and a greater focus on improving the returns on capital across more of our business lines.
OUR STRATEGIC PRIORITIES INSURANCE IS OFTEN PERCEIVED AS COMPLEX TO UNDERSTAND. UNDERPINNING OUR STRATEGY ARE A NUMBER OF PRINCIPLES WHICH AIM TO ADDRESS THE CONCERNS INVESTORS AND OTHER STAKEHOLDERS HAVE ABOUT THE INSURANCE SECTOR.
In 2013, we launched a new programme to re-engage all our people to ‘Think Customer’. We want to ensure that all our people remain highly focused on innovation and continuous improvement of the customer experience, using timely and relevant customer insight. Our new customer programme works hard to ensure this. The programme includes rolling out a new set of values which underpin how we will deliver for our customers now, and in the future. This programme will continue to roll out during 2014.
Natural Catastrophes Providing good customer service Financial inclusion Crime and Safety
Robust governance, control and reporting • Comprehensive policies, procedures and controls • Clear delegation of authorities • Robust lines of defence • Regular and relevant reporting and assurance processes.
3 The digital society • Pricing transparency by aggregators spreading to other producers • Expansion of e-commerce competitors into all areas of commerce • Increased availability of consumer data: Human genome project, Telematics, etc • Social media and increased use of mobile smart devices fuelling access to instant information • Rise of radio-frequency identification (RFID) and sensor networks enabling tracking, data gathering, etc.
THE GROUP FACED A VERY CHALLENGING YEAR IN 2013. DESPITE THIS, THE UNDERLYING PERFORMANCE OF THE BUSINESSES REMAINS ENCOURAGING.
1 The normalised performance for 2013 includes the following non-recurring adjustments: £52m for the normalisation of the weather loss ratio to a long-term average of 2.9% (2009–13); £200m in respect of the financial irregularities and reserve strengthening in Ireland; £63m in respect of the change of discount rate in the UK from 5% to 4%; reorganisation costs of £356m mainly reflecting goodwill impairments in Poland and Argentina, together with the write down of certain IT software assets mainly in the UK.
Tax The Group has recognised a tax charge of £94m despite a loss before tax for the year. The charge represented tax on profits in overseas territories, such as Canada and Sweden. In addition losses have arisen in territories, such as the UK and Ireland, where a tax benefit was either not recognised, not available or accrued at a lower rate.
CANADA 2013 was a record year for weather events in Canada. Despite this, our Canadian business delivered an underwriting profit of £10m with a combined ratio of 99.3% which included a weather loss ratio of 8.0% which was significantly above the long-term average. The underlying performance of our Canadian business remains strong.
The combined ratio was 99.3% (2012: 93.6%). Excluding the impact of adverse weather underlying performance was strong with an improving operating expense ratio (down from 14.2% in 2012 to 13.4% in 2013) as we realise synergies from the ongoing integration of UC. After including investment returns of £67m (2012: £61m), the insurance result was £77m (2012: £162m).
A Household B Personal Motor C Commercial Property D Liability E Commercial Motor F Marine and other
LEADERSHIP DIRECTORS The names of the directors together with their biographical and Committee membership details are set out on page 47. In addition, Noel Harwerth and John Maxwell served as directors until their resignation on 31 March 2013 and Simon Lee until his resignation on 12 December 2013. Stephen Hester was appointed as a director and Group Chief Executive on 5 February 2014.
• Compliance with legal and regulatory requirements of the relevant regulatory bodies
Directors’ induction programme A typical directors’ induction programme includes an update on the following business areas: • Overview of each region and business function • Meetings with the individual Board and Executive
• The Chairman, the new Group Chief Executive, Group CFO and Committee Chairmen will have particular roles to play in communicating with stakeholders, including regulators, shareholders and the media, as well as employees, as confidence is rebuilt. The ability to work together to identify priorities and integrate into the Group’s evolving executive culture should be a particular focus by the Board in the future. Ensuring Board members sit on several Committees and that new Board members attend each Committee at least once during their induction was encouraged. This will increase directors’ knowledge of the various Committees and their functions
The directors’ are responsible for preparing the Annual Report and Accounts and consider the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s performance, business model and strategy.
The Company has the authority to offer a Scrip Dividend Scheme to shareholders wishing to receive new ordinary shares of 27.5p each instead of cash dividends. The Scrip Dividend Scheme was originally established in 2004 and applies to both interim and final dividends. Under Article 130 of the Company’s Articles of Association, the Scrip Dividend Scheme requires shareholder approval and the authority currently in place is due to expire on 17 May 2014. The Company is proposing to renew the authority for the Scrip Dividend Scheme at this year’s AGM.
Schroders plc 170,851,201 4.953% Direct & Indirect 170,851,201 4.953% Direct & Indirect
I took on the role of Chairman of the Group Nomination Committee in February 2013, and I am supported on this Committee by Alastair Barbour, Edward Lea, Hugh Mitchell and Johanna Waterous. Attendance at Committee meetings is shown in the table above.
MWM Consulting Limited, an external search agency, were engaged during the year by the Committee to assist the Company in recruiting directors including the appointment of Kath Cates as a Non-Executive Director, and search for Group Chief Executive resulting in the appointment of Stephen Hester as a director. A description of the role and the capabilities required for each appointment are provided to the agency. Reports on potential appointees are provided to the Committee members who, after careful consideration, made a recommendation to the Board. MWM Consulting Limited is independent and has no other relationship with the Company.
• No performance-based long-term incentive plan (LTIP) awards will vest arising from the 2011–13 cycle.
• How RSA has engaged with its shareholders and employees on the subject of executive remuneration during 2013, and its plans for continuing to engage with them in the future.
• Committee can change the constituents of the benchmark peer group or the basis upon which market information is obtained at its discretion to ensure that the data remains robust and relevant.
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.
• Approval of the terms of the LTIP grant 2013 and Directors’ associated conditional share awards
• Approval of design of new LTIP (2014 Performance Share Plan)
5. Pension related benefits: these benefits are detailed on page 83. 6. Other remuneration: includes gains made from RSA’s HMRC-approved all-employee share plans, i.e. gains on maturing Sharesave options and Sharebuild matching shares granted during the year (detailed on page 87). These other items in the nature of remuneration are available to all qualifying UK staff and are non taxable. 7. George Culmer resigned as a Director with effect from 14 May 2012. 8. Richard Houghton was appointed as a Director effective 12 June 2012 on an annual salary of £480,000. The salary value shown in the table for 2012 is the pro-rated amount based on his appointment date.
The vesting of these awards was contingent on RSA achieving targets for Group underlying Return on Equity (ROE) and relative Total Shareholder Return (TSR), measured over a three-year performance period. The table below shows the outcome of the 2010–12 and 2011–13 LTIP cycles, as tested by the Committee and independently verified. Details of the Directors’ Compulsory Deferred Shares and the Voluntarily Invested Deferred Shares for the 2011–13 cycle are noted in the table on page 88.
Shareholdings The interests of Directors in ordinary shares of 27.5p each of the Company were as follows: Director Shares held at 1 January 2013
Long-term Incentive Plan 2006 (LTIP) The Directors’ interests in the LTIP were as follows: Share awards held at 1 January 2013
The table below shows the total remuneration for the incumbents appointed as the most senior Executive Director in the Group over the last five years. The percentages show the proportion of bonuses and LTIPs that were received. Bonuses include both cash and Compulsory Deferred Shares.
Annual Bonus Plan Opportunity of 16% of salary at threshold, rising to 80% of salary for on-target performance and 160% of salary at maximum.
14. EXTERNAL DIRECTORSHIPS Stephen Hester, Richard Houghton and Adrian Brown do not hold outside directorships of FTSE100 (or any other listed) companies but would be allowed to have one such appointment, subject to the approval of the Group Nomination Committee. In accordance with the Remuneration Policy, they would be permitted to retain any fees or expenses arising from such an appointment.
15. DIRECTORS’ CONTRACTS The Executive Directors’ service agreements became effective on the following dates: Executive Director Effective date
Items that may be reclassified to the income statement: Exchange losses net of tax 18 (130) (70)
Fair value (losses)/gains on available for sale financial assets net of tax 18 (257) 111
• All resulting exchange differences are recognised as a component of equity as set out below
PROPERTY AND EQUIPMENT Property and equipment comprise Group occupied land and buildings, fixtures, fittings and equipment (including computer hardware and motor vehicles). These assets are depreciated over their estimated useful life after taking into account residual values.
Reinsurance ceded Premiums payable in respect of insurance ceded are recognised in the period in which the reinsurance contract is entered into and include estimates where the amounts are not determined at the end of the reporting period. Premiums are expensed over the period of the reinsurance contract, calculated principally on a daily pro rata basis.
Past service costs arise from a plan amendment or curtailment. Past service costs are recognised in the income statement at the earlier of when the plan amendment or curtailment occurs and, where applicable, when the Group recognises related restructuring costs or termination benefits.
The uncertainty inherent in insurance is inevitably reflected in the financial statements of insurance companies. The uncertainty in the financial statements principally arises in respect of the insurance contract liabilities of the company.
Interest rate risk The fair value of the Group’s portfolio of fixed income securities is inversely correlated to changes in the market interest rates. Thus if interest rates fall, the fair value of the portfolio would tend to rise and vice versa as set out in the sensitivity analysis on page 122.
The analysis aggregates the Danish Krone exposure and the Euro exposure as the Danish Krone continues to be pegged closely to the Euro. The Group considers the aggregate exposures when reviewing its hedging strategy.
Movement in shareholders’ equity at 31 December 2013 (55) 67 (45) 55 (36) 44
At 31 December 2013 there are derivative contracts in place to protect the value of the UK, Canadian, European, and US equity portfolios of the Group. These provide limited protection against declines in market levels whilst also capping participation in any appreciation of the market. In total, this strategy covers an underlying equity value up to approximately £379m (2012: £348m). If UK, Canadian, European and US equity markets decreased by 15%, the impact of these derivatives as at 31 December 2013, would be to decrease the impact of the decline by £28m (2012: £26m).
In addition the Group has committed credit facilities available as set out in note 23.
Economic capital (unaudited) Economic capital is the Group’s preferred measure of capital sufficiency. It is the Group’s own assessment of the amount of capital it needs to hold to meet its obligations given the Group’s risk appetite.
Ordinary dividend: Final paid in respect of prior year 3.90 5.82 140 206
When testing for impairment, the recoverable amount of a CGU is determined based on value in use calculations. These calculations use cashflow projections based on operating plans approved by management covering a three year period. Cashflows beyond this period are extrapolated using the estimated growth rates which management deem appropriate for the CGU.
Syn Mun Kong Public Limited Company is listed on the Stock Exchange of Thailand. The fair value of the Group’s holding at 31 December 2013 is £34m (2012: £28m).
Fair value measurements The following table provides an analysis of financial instruments and other items that are measured subsequent to initial recognition at fair value as well as financial liabilities not measured at fair value, grouped into Levels 1 to 3 based on the degree to which the fair value is observable, as explained more fully in Significant Accounting Policies. The table does not include items not measured at fair value if the carrying value is a reasonable approximation of fair value.
The fair value measurement of the Level 3 financial liabilities is also obtained from a range of financial intermediaries and is an indicative valuation based on the applicable risk free rate and appropriate credit risk spreads.
Reserve Transfer A transfer between share premium and retained profit has been made as a result of retrospectively treating scrip dividends as bonus issues of shares in order to bring the Group into line with current market practice for such transactions.
Present value recognised in the consolidated statement of financial position 11,148
At end of accident year 8,357 2,313 2,484 2,511 2,611 2,671 2,551 2,705 2,967 3,096 3,192
Effect of change in tax rates – income statement (21) (6)
Other provisions includes £18m (2012: £28m) relating to vacant property leases, dilapidations and refurbishments, the costs relating to which will be borne across the period over which the leases expire, which is up to 20 years, and Motor Insurance Bureau provisions of £15m (2012: £18m).
The UK defined benefit schemes were effectively closed to new entrants in 2002.
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.
Changes in operating assets/liabilities: Movement in insurance contract liabilities: Losses and loss adjustment expenses 340 8
3. OTHER DEBTORS AND OTHER ASSETS – TO BE SETTLED WITHIN 12 MONTHS
Receivable from related parties: Receivable from subsidiaries, interest bearing loans 728 567
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 2014 dividend dates can be found in the Financial Calendar on page 175.