Notes: 1. Includes central functions. 2. Proforma for share of aggregate reinsurance recoveries and excludes the impact of the Ogden rate change. For more information see page 197.
Around 70 percent of RSA operates outside the UK, and the Group is relatively insulated from the potential impact of Brexit, with separate, locally regulated, European subsidiaries. We have created a subsidiary in Luxembourg as the headquarters of our European Union (EU) branch business, thereby allowing our businesses to concentrate on their core offering without experiencing any disruption from the UK’s exit from the EU.
Dear shareholders, 2017 has been another year of excellent progress for RSA. Our twin goals are to deliver for customers and for shareholders. In 2017 RSA achieved both, though we are determined to do better again in future years.
NEW TECHNOLOGY Technology is affecting the insurance value chain: • Fintech investment has been high for a number of years and arguably UK Personal Lines have already been disrupted by aggregators over the last 10 years. High distribution costs may continue to be a target for disruption
Thriving communities Giving back to our communities through education, employability, enterprise and entrepreneurship.
Strategy and focus RSA is a focused international insurer. We have complementary leadership positions in the major general insurance markets of the UK, Scandinavia and Canada, together with supporting ‘London market’ and international business. The Group is well balanced between personal and business customers, across our geographies, product lines and distribution channels.
Our business strategy is to sustain a disciplined focus on RSA’s existing areas of market leadership, whilst driving intense operating improvement in pursuit of best-in-class performance levels.
• 21.5 percent earned controllable cost ratio, down 4.41 points since the start of 2014
• Footprint optimisation and site consolidation continue: 50 percent less office space in Toronto, 60 percent in Stockholm, and 25 percent in London. Swedish call centre consolidation to Malmö announced and will be in full effect mid year 2018
Definition This is the underlying loss ratio (net incurred claims and claims handling expense as a proportion of net earned premiums) of our business prior to volatile impacts from weather, large losses and prior year reserve development.
Commentary A key measure of the underlying earnings power of the Group as it excludes shorter-term and temporary changes, such as restructuring costs, which we expect to cease after 2017.
Definition Gross tonnes of carbon dioxide equivalent per full-time equivalent (FTE) employee.
Commentary The Solvency II coverage ratio is a measure of the capital adequacy of insurance companies. Our SCR is calculated on our risk profile using the Group’s internal capital model.
Outlook We target a Solvency II coverage ratio in the range of 130-160 percent.
Premiums Group net written premiums of £6.7bn were up 63 percent at reported FX and up 23 percent at constant FX.
Canada delivered year-on-year ‘real’ cost reductions of 9 percent, with 6 percent in the UK and 5 percent in Scandinavia.
Investment result The investment result of £284m (2016: £298m) with investment income of £331m (2016: £369m), investment expenses of £13m (2016: £12m) and the liability discount unwind of £34m (2016: £59m).
Tax strategy and contribution Our tax strategy supports our Group objective to be a responsible business with a positive impact on society. We pay and collect tax in the markets where we operate and comply with all statutory obligations. We understand the importance of transparency and seek to have an open relationship with the tax authorities.
We maintain a measured approach to capital management, targeting a single ‘A’ credit rating (the Group’s S&P rating is A ‘stable outlook’ and its Moody’s rating is ‘A2 stable’). This involves considering a range of indicators relating to capital, to operating results, and to qualitative factors.
Pensions The IAS 19 pension valuation generated a gain of £44m. The annual update to mortality tables more than offset negative movements, including narrower ‘AA’ corporate bond spreads. Further details on RSA’s pension schemes and movements in the year can be found in Note 38 to the accounts.
Similarly, in underwriting we are making use of digital servicing and automation to support customer improvements and drive business benefit. In our Trygg-Hansa business, we have been able to move smaller, simpler requests for quotations to an automated system so that specialist underwriter time can be diverted to cases of higher value and complexity. We have seen benefits in renewal rates and customer experience, and reduced the manual workload associated with renewal by 65 percent.
STRATEGY & OUTLOOK Our strategy Since 2015, Scandinavia has come a long way in ‘fixing the basics’. Our current three-year plan focuses on moving from average to great, and is built on becoming best-in-class in areas that will drive further value improvement. At this stage, the key areas for development are digitisation and customer journey; strengthening claims and underwriting functions; increasing process efficiency; and securing technology uplifts. These are designed to future-proof RSA Scandinavia and enable us to pursue our best-in-class ambition.
In achieving this, we continue to see the benefits of our emphasis on building strong relationships with partners. In December, we successfully launched our new distribution partnership with Nationwide Building Society, making us one of the largest writers of home insurance business in the UK. We also secured renewals with other key partners and signed new long term distribution relationships.
STRATEGY & OUTLOOK Our strategy Our strategy in the UK market has been to invest in the business, develop our technical insurance capability, enhance our customer proposition and improve cost efficiency to enable RSA to compete in the top quartile of our competitor set.
4. Regional Risk and Control Committees track actions for risks outside of appetite, and escalate to local & Group boards.
Catastrophe risk Arises from the risk of large natural disasters with our main exposure being to European windstorms and Canadian earthquakes.
Group Recovery and Resolution Plans – The risk team have engaged subject matter experts and external advisors to develop group recovery and resolution plans which provide valuable insights into how the Group would be able to effectively respond to an exceptional loss event with careful consideration of entities, particularly the top operating company.
In 2017, we reached millions of people through media and online campaigns focused on raising awareness of preventable risks across our markets. We use insight, data, communications and our product development expertise to help keep people safer in their homes, on the roads and in their businesses.
Our Anti-Corruption, Conflicts of Interest, Gifts and Hospitality Policies apply Group-wide and are supported by extensive resources and guidance, including our anti-bribery toolkit, which is available to all our businesses. Our mandatory Group-wide Anti-bribery and Corruption (ABC) training is supplemented by targeted training for staff in higher risk roles, and all employees are required to complete training on whistleblowing. As a result, our employees are equipped to identify and escalate issues and behaviours which may constitute corruption. We seek to maintain the right culture by regular reminders of our expectations.
All operating countries must complete regular anti-corruption risk assessments covering all aspects of their businesses, including procedures and HR matters and the high expectations we have of our partners. Our operating countries are all given guidance to support them to continuously improve their anti-corruption controls.
RSA leaders are driven and determined We expect our leaders to be role models for what it means to be best-in-class. That means that they need to win for our customers and shareholders and be determined in the pursuit of high performance, resilient and willing to innovate.
The Group Nomination and Governance Committee monitors compliance with the Code. Throughout the year, the Company has complied with the Code. Key features of the Group’s compliance are set out below. There is more detail throughout the Directors’ and Corporate Governance report, the reports from each of the Board committees and in the Strategic Report, demonstrating how the Principles and Provisions of the Code have been applied.
External appointments: Chairman of National House Building Council and Non-Executive Director of BT plc.
Non-Executive Directors are initially appointed for a three-year term with an expectation that they will continue for at least a further three years. Details of the directors’ service contracts and terms of appointment, together with their interests in the Company’s shares, are shown in the Directors’ Remuneration Report on pages 68 to 92 and are incorporated into this Report by reference.
The Chairman, assisted by the Company Secretary, has responsibility for the induction programme, training schedules and professional development of the directors. Directors have attended training sessions and seminars during the course of the year on topics such as Solvency II and Audit and Risk updates to keep their knowledge current and enhance their experience. Each director has an individual training plan, which is reviewed annually by the Chairman.
Board Committee Structure and Membership The following diagram sets out the composition of the Board Committees as at 21 February 2018.
The purpose of the System of Governance is to ensure the safety and soundness of the Group and its key entities. Through the Corporate Governance Framework, effective decision-making, good procedures and strong internal reporting are embedded into the business processes, which align to the Group’s strategy of ‘focused, stronger and better.’
The Board Risk Committee has responsibility for reviewing and recommending the System of Governance to the Board and has specific responsibilities for the Group’s Risk Management System, including the Internal Model and Solvency II capital ratios, setting the Group’s overall risk strategy and risk appetite, and for approving the risk management policies. For further details, refer to the Board Risk Committee report on pages 60 to 61.
• Onward delegation to senior management through ‘Executive Licences’ which set out specific limits of authority to ensure all employees execute their responsibilities within clearly defined limits in compliance with relevant regulatory and statutory requirements
• Each executive is responsible for ensuring a similar process of delegation is in place within his or her area of responsibility
• Mitigates risk of the Group being exposed or committed to material financial, operational, legal, reputational, regulatory risk and/or loss and provides clarity on who can make what type and level of decisions.
The Group remains committed to maintaining high levels of transparency and disclosure to investors to aid understanding of the Company’s investment case. The Group continually monitors and evaluates its disclosures to ensure they remain informative and relevant.
Public affairs The Group contributes to public policy debates on issues relevant to the business, either individually or through industry bodies such as the Investment Association, the Association of British Insurers and the Confederation of British Industry. The Group engages with policymakers to improve understanding of the broad role the insurance industry plays in society and the economy, as well as offering views and insights on specific issues such as data protection, fraud, compensation, and financial regulation. Employees apply the principles of openness, transparency, honesty and integrity to all of their activities with policymakers. The Group adheres to principles of best practice, declaring the interests which it represents and ensuring that, to the best of its knowledge, information provided is unbiased, complete, up to date and not misleading.
The Committee continues to maintain a focus on capital sensitivities and buffers, and how capital levels have responded to developments during the year.
The Committee comprises four independent Non-Executive Directors and the Board is satisfied that the Committee has recent and relevant financial experience as required by the UK Corporate Governance Code. The members possess diverse experience, knowledge and skills, which enables them collectively to act as an effective Committee. Members’ biographies are available on pages 44 to 47.
The Committee satisfied itself that management reflected available and reliable information when setting the reserves and that an appropriate margin for uncertainties was maintained.
Separately, the FRC issued three thematic reviews in 2017, including one concerning APMs. The FRC’s Financial Reporting Lab also issued their project report on ‘Risk and viability reporting’. The Committee reviewed this material and, where considered appropriate, recommended changes to support high quality financial reporting disclosure.
Whistleblowing The Group takes whistleblowing extremely seriously and the Committee has taken responsibility for oversight of the Group’s whistleblowing arrangements. In addition, Alastair Barbour has nominated responsibility for oversight of whistleblowing arrangements in compliance with the PRA’s Senior Insurance Managers Regime. A senior manager in Group Human Resources has also been appointed as the FCA Whistleblowing Champion.
On a semi-annual basis, the Group Chief Auditor provides the Group Audit Committee with an assessment of the effectiveness of the governance, risk and control framework in each Region. Quarterly, GIA reports on the outcome of its work and management’s progress in mitigating current issues as well as identifying any thematic issues arising together with underlying causes.
On an annual basis, the Group Chief Auditor provides the Group Audit Committee with an assessment of the skills and capabilities required to conduct the work needed, and whether budget is sufficient to allow the function to recruit and retain staff with the expertise and experience necessary to provide effective challenge throughout the Group.
In October 2017, GIA was presented with two Audit & Risk Awards by the Chartered Institute of Internal Auditors; ‘Winner Outstanding Team Financial Services Sector’ and ‘Winner Best Innovation in Learning and Development’.
Shareholding at 31 Dec 2017 (details on pages 78 to 79)
At the 2018 AGM, this report on pages 71 to 85, together with the Committee Chairman’s letter on pages 68 to 69, will be put to an advisory vote.
Committee members The Committee comprises a number of independent Non-Executive Directors who are called upon to exercise judgement on the setting and management of executive remuneration. The Committee’s members in 2017 were: Hugh Mitchell, Kath Cates (from 1 December 2017), Enrico Cucchiani, Isabel Hudson, Joseph Streppel, Martin Strobel and Johanna Waterous (from 1 January to 5 May 2017). Kath Cates succeeded Hugh Mitchell as chair of the Committee on 1 December 2017, having previously served as a member of the Committee from May 2014 to June 2016. The number of meetings attended by each Director is shown on page 53.
• Testing of the performance conditions underpinning the Annual Bonus Plan 2016 and the LTIP cycle 2014-16; approval of the level of Directors’ awards.
2. Deferred Bonus Shares vest three years from the date of grant, and are subject to malus adjustment as detailed on page 78. 3. Performance Shares granted to Stephen Hester in 2014 partially vested during the year and 13,718 accrued dividend equivalent shares were added to the number of vesting awards shown above. A portion of the shares were sold to cover statutory deductions during the year, the rest were retained in line with the shareholding requirements.
• LTIP 230% of salary (this assumes 100% vesting of the award in the 2018-20 grant)
Annual Bonus Plan 2018 The Annual Bonus Plan is aligned with the core priorities for focus in 2018. The Executive Directors will be expected to deliver against stretching targets, which are geared towards making continued performance improvement. They are targeted against the performance of the entire Group, taking into account their contribution thereto.
12. Statement of voting at General Meeting The following voting was recorded at the AGM on 5 May 2017: Resolution Votes for Votes against Total votes cast Votes witheld1
This element is designed to attract and retain high calibre executives, essential for ensuring RSA’s ongoing success.
A two-year retention period applies to vested Performance Shares, excluding any sold to satisfy statutory deductions. This applies while the Director remains in employment.
Base salary • Set using the same approach as for existing Directors’ salary reviews. 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.
The Committee’s approach to incentive treatment for Executive Director leavers is set out in the following table. Based on the leaving circumstances and having regard of shareholders’ interests, the Committee can exercise discretion to reduce or lapse awards or enable a proportion of awards to be received but only in highly exceptional circumstances and where appropriate. Shareholders will be informed if discretion is applied, and details will be provided wherever possible.
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. Appointment letters are available for inspection by shareholders at the Company’s registered office.
The directors recommend a final dividend (subject always to the dividend being cancelled, withheld or deferred) of 13 pence per Ordinary Share (2016: 11 pence) to be paid on 18 May 2018 to holders of Ordinary Shares on the register at the close of business on 2 March 2018, subject to Ordinary Shareholder approval. An interim dividend of 6.6 pence was paid during 2017, making the total proposed dividend for the year 19.6 pence (2016: 16 pence).
Directors’ indemnity Article 140 of the Articles of Association provides that, among other things and insofar as permitted by law, the Company may indemnify its directors against any liability and may purchase and maintain insurance against any liability. The Company has granted an indemnity to each of the directors pursuant to the power conferred by Article 140 of the Articles of Association. The indemnities granted constitute qualifying thirdparty indemnity provisions, as defined by section 234 of the Companies Act 2006 and is in addition to appropriate insurance cover. The Company believes that it promotes the success of the Company to provide this indemnity to its directors in order to ensure that the Group attracts and retains high calibre directors through competitive terms of employment in line with market standards. The directors and officers of the Company and its subsidiaries also have the benefit of insurance which provides suitable cover in respect of legal actions brought against them. In addition, the Company also maintains a pension trustee liability indemnity policy for the directors of SAL Pension Fund Limited and Royal & Sun Alliance Pension Trustee Limited, subsidiaries of the Group, in relation to such company’s role as a trustee of an occupational pension scheme. This indemnity constitutes a qualifying pension scheme indemnity provision under section 235 of the Companies Act 2006. These indemnities were in force during the year ending 31 December 2017 and remain in force as at the date of this Report.
Notes to the Parent Company Financial Statements 1 Significant accounting policies 182 2 Risk and capital management 182 3 Related party transactions 182 4 Share based payments 183 5 Dividends paid and proposed 183 7 Current and deferred tax 184 8 Other debtors and other assets 185 9 Share capital 185 11 Loan capital 185
• Sensitivity testing: Sensitivity testing of taxable profits to assumptions such as the Combined Operating Ratio.
Strategic report and directors’ report Based solely on our work on the other information: • we have not identified material misstatements in the Strategic Report and the Directors’ Report; • in our opinion the information given in those reports for the financial year is consistent with the financial statements; and
1) Basis of preparation The consolidated financial statements have been prepared on a going concern basis and in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU) and the Companies Act 2006 where applicable. The consolidated financial statements are prepared on an historical cost basis. Where other bases are applied, these are identified in the relevant accounting policy.
Accounting policies that are significant to understanding the performance, financial position and cash flows of the Group are set out in note 4 with other policies presented in Appendix A. The notes are grouped together by their nature. Estimation techniques and assumptions are presented in the relevant note in order to provide context to the figures presented. The most significant estimates and judgements are those used in determining insurance contract liabilities (note 37), deferred tax (note 29) and defined benefit pension scheme liabilities (note 38).
Where the asset or liability comprises a separate business operation (e.g. a subsidiary, an associate or a branch), the assets (including any goodwill allocated to the business) and the directly associated liabilities of the business are considered together as one disposal group. In the period when assets are recognised as held for sale on the face of the consolidated statement of financial position for the first time, the comparative prior period is not re-presented.
Decisions on how much insurance risk to pass on to other insurers through the use of reinsurance is another key strategy employed in managing the Group’s exposure to insurance risk. The Group Board determines a maximum and the Group Corporate Centre determines a minimum level of risk to be retained by the Group as a whole and, therefore, the amount of central reinsurance cover purchased. This is then distributed across the Group in accordance with deemed risk appetite. Local operations may also purchase additional reinsurance within agreed local reinsurance appetite parameters.
In defining its appetite for credit risk the Group looks at exposures at both an aggregate and business unit level, distinguishing between credit risks incurred as a result of offsetting insurance risks or operating in the insurance market (e.g. reinsurance credit risks and risks to receiving premiums due from policyholders and intermediaries) and credit risks incurred for the purposes of generating a return (e.g. invested assets credit risk).
Notes: 1. The increase in BBB reinsurers’ share of insurance contract liabilities reflects the UK Legacy reinsurance arrangement announced in 2017 which is fully collateralised.
Given the composition of the Group’s investments as at 31 December 2017, the table below illustrates the impact to the income statement and other comprehensive income of a hypothetical 100bps change in interest rates on fixed income securities and cash that are subject to interest rate risk.
6(iv) Remeasurment of disposal groups In 2016, the assets and liabilities of the Oman and UK Legacy business were classified as held for sale. Upon classification as held for sale, the net assets were measured at the lower of carrying amount and fair value less costs to sell. This valuation adjustment resulted in a £234m loss which was recognised in the continuing income statement.
Disposals Disposals are categorised between disposals of continuing operations and discontinued operations: Disposals of continuing operations On 7 February 2017, the Group’s UK Legacy liabilities were disposed of to Enstar Group Limited. The transaction initially takes the form of a reinsurance agreement, effective from 31 December 2016, which substantially effects economic transfer, to be followed by completion of a subsequent legal transfer of the business. The Group’s UK Legacy business is managed as part of the UK operations. It is not presented as a discontinued operation as it is neither a separate geographical area nor a major line of business.
Discontinued operations During 2015, the Group classified the Latin American and Russian operations as discontinued as they were held for sale at 31 December 2015 and represented a separate geographical area of operation. The sale of these operations completed in the first six months of 2016 and they were therefore classified as discontinued at 31 December 2016 (see note 6(i) for further details).
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.
Fees payable to the auditor for audit of the Company’s annual accounts 0.8 0.7
Weighted average number of ordinary shares in issue (thousands) 1,021,418 – 1,018,174 1,018,174
The range of pre-tax discount rates used for goodwill impairment testing, which reflect specific risks relating to the CGU at the date of evaluation and weighted average growth rates used in 2017 for the CGUs within each operating segment are shown below. The growth rates include improvements in trade performance, where these are forecast in the three year operational plan for the CGU.
The Group also applies hedge accounting to specified fixed interest assets in its investment portfolio. In order to remove exchange risk from these assets the Group may also acquire cross currency interest rate swaps to swap the cash flows from the portfolio into cash flows denominated in pounds sterling or the functional currency of the entity acquiring the asset. The Group applies fair value hedge accounting when using ‘fixed to floating’ interest rate swaps and cash flow hedge accounting when using ‘fixed to fixed’ interest rate swaps. The interest rate swaps exactly offset the timing and amounts expected to be received on the underlying investments. The investments have a remaining term of between four months and 38 years, with the substantial majority having a term of less than eight years. There have been no default and no defaults are expected on the hedged investments.
The following table shows the level 3 available for sale financial assets, investment properties and Group occupied property carried at fair value as at the balance sheet date, the valuation basis, main assumptions used in the valuation of these instruments and reasonably possible decreases in fair value based on reasonably possible alternative assumptions.
Mainly consists of mortgages in Scandinavia and Canada 35 – 35 10 – 10
The line items in the statement of financial position in which the investments above are included are as follows: £m £m
Interest on the Notes is due and payable only at the sole and absolute discretion of the Company, subject to certain additional restrictions set out in the terms and conditions, and is non-cumulative. In addition the terms and conditions of the Notes will require the Company to cancel interest payments in certain circumstances. The Notes are redeemable (subject to certain conditions) at the option of the Company in whole but not in part on the first call date, being the fifth anniversary of the issue date, or any interest payment date thereafter or in the event of certain changes in the tax, regulatory or ratings treatment of the Notes. Any redemption is subject, inter alia, to the Company giving notice to the relevant regulator and the regulator granting permission to redeem. The Notes convert into ordinary shares of the Company, at a pre-determined price in the event that certain solvency capital requirements are breached, as more fully set out in the terms and conditions of the Notes. Accordingly, the Notes are treated as a separate category within Equity and coupon payments are recognised as distributions, similar to the treatment of preference share dividends.
The perpetual guaranteed subordinated capital securities issued on 12 May 2006 have a nominal value of £375m and the rate of interest payable is 6.701% of the nominal value. On 29 March 2017, the Group bought back £347m of the outstanding principal amount. The remaining £28m balance was settled in July 2017.
A decrease of 1% in the real discount rate for UK and Scandinavia annuities would reduce the value of the discount by approximately £100m (2016: £110m). The sensitivity calculation has taken into consideration the undiscounted provisions for each class of business and the respective average settlement period.
Provision for unearned premiums (gross of acquisition costs) at 31 December 3,986 3,994
Total assets in the schemes 8,344 455 8,799 8,184 457 8,641
The Group receives liability claims and may also become involved in actual or threatened litigation, during the ordinary course of its business operations. The Group reviews and, in the opinion of the directors, maintains sufficient provisions, capital and reserves in respect of such claims.
Share based payments The fair value of the employee share options and other equity settled share based payments is calculated at the grant date and recognised as an expense over the vesting period. The vesting of share awards is dependent on service and performance conditions, as well as market conditions. The assumption of the number of shares expected to vest is revised at the end of each reporting period, with the corresponding credit or charge recognised immediately in the income statement. Where an option is cancelled by an employee, the full value of the option (less any value previously recognised) is recognised at the cancellation date. The proceeds received by RSA upon exercise of share options, net of any transaction costs, are credited to share capital (nominal value) and share premium when the options are exercised, with a corresponding increase in equity.
Canada 18 York Street, Suite 800, Toronto ON M5J 2T8, Canada 3342484 Canada Limited 8301140 Canada Limited
6. The percentage held relates to the actual percentage of the share capital held and not the effective percentage held (85.42%).
Shares issued for cash (note 9) 2 3 – – – – – – 5
Notes to the Parent Company Financial Statements 1) Significant accounting policies RSA Insurance Group plc, (‘the Company’), incorporated in England and Wales, is the ultimate Parent Company of the RSA group of companies. The principal activity of the Company is to hold investments in its subsidiaries and the receipt and payment of dividends.
IFRS 9 ‘Financial Instruments’ is applicable for annual reporting periods beginning on or after 1 January 2018 and will be adopted by the Company from that date. It is intended that the Company will elect for its investment in subsidiaries at fair value through other comprehensive income, which if adopted in 2017 would not have had a significant impact on the Company’s result for the year or its financial position.
The regulatory authority with responsibility for the conduct of the UK financial services industry.
The proportion of premium written, net of the cost of associated reinsurance, which represents the consideration charged to policyholders for providing insurance cover during the reporting period.
C+J+L+N P 109 PY Underwriting Z – P Q 271 CY Underwriting