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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Rsa Insurance Group Ld | LSE:RSA | London | Ordinary Share | GB00BKKMKR23 | ORD GBP1.00 |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 684.20 | 684.20 | 684.40 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
From Apr 2019 to Apr 2024
TIDMRSA
RNS Number : 2312I
RSA Insurance Group PLC
23 March 2015
23 March 2015
RSA INSURANCE GROUP PLC
(THE "COMPANY")
2014 ANNUAL FINANCIAL REPORT ANNOUNCEMENT
In accordance with Listing Rule 9.6 and Disclosure and Transparency Rule ("DTR") 4.1, the Company announces that the following documents have been posted to shareholders and have today been submitted to the UK Listing Authority via the National Storage Mechanism:
-- Annual Report and Accounts for the year ended 31 December 2014 -- Notice of the 2015 Annual General Meeting to be held on 8 May 2015 -- Proxy form for the 2015 Annual General Meeting -- Scrip Dividend Terms and Conditions Brochure
The above mentioned documents (except for the Proxy form) are available on our website at www.rsagroup.com/ar2014 and www.rsagroup.com/agm2015 and will shortly be made available for inspection at www.morningstar.co.uk/uk/NSM. Shareholders can obtain additional copies of the Proxy form from our Registrar, Equiniti Limited at Aspect House, Spencer Road, Lancing, West Sussex BN99 6DA or view online at www.shareview.co.uk.
This announcement should be read in conjunction with the Company's announcement issued on 26 February 2015. Together these constitute the material required by DTR 6.3 to be communicated to the media in full unedited text through a Regulatory Information Service. This material is not a substitute for reading the Company's 2014 Annual Report and Accounts.
An indication of the important events that occurred in 2014 and their impact on the condensed consolidated financial statements, the condensed consolidated financial statements themselves and the responsibility statement were announced to the London Stock Exchange on 26 February 2015, forming part of the Preliminary Results announcement for the year ended 31 December 2014. Additional content forming part of the management report is in the Appendix below.
Enquiries:
Elinor Bell
Deputy Group Company Secretary
RSA Insurance Group plc
Tel: +44 (0) 20 7111 7000
IMPORTANT DISCLAIMER
Visit www.rsagroup.com for more information.
This press release (together with the Annual Report and Accounts referred to herein) has been prepared in accordance with the requirements of English company law and the liabilities of the directors in connection with this press release (together with the Annual Report and Accounts referred to herein) shall be subject to the limitations and restrictions provided by such law. This press release may contain '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. Generally, words such as "may", "could", "will", "expect", "intend", "estimate", "anticipate", "aim", "outlook", "believe", "plan", "seek", "continue" or similar expressions identify forward-looking statements. These forward-looking statements are not guarantees of future performance. By their nature, all forward-looking statements involve risk and uncertainty because they relate to future events and circumstances which are beyond the Group's control, including amongst other things, UK domestic and global economic business conditions, market-related risks such as fluctuations in interest rates and exchange rates, the policies and actions of regulatory authorities (including changes related to capital and solvency requirements), the impact of competition, inflation, deflation, the timing impact and other uncertainties of future acquisitions or combinations within relevant industries, as well as the impact of tax and other legislation or regulations in the jurisdictions in which the Group and its affiliates operate. As a result, the Group's actual future financial condition, performance and results may differ materially from the plans, goals and expectations set forth in the Group's forward-looking statements. The Group undertakes no obligation to update any forward-looking statements, save in respect of any requirement under applicable law or regulation. Nothing in this press release (together with the Annual Report and Accounts referred to herein) should be construed as a profit forecast.
APPENDIX
References to page numbers and notes to the accounts made in this Appendix refer to page numbers and notes to the accounts in the 2014 Annual Report and Accounts.
Risk Management
The future success of the Group is underpinned by our conservative risk profile and clear risk appetite.
RISK MANAGEMENT APPROACH
We take a broad view of the scope of risk management, which is taken to include the risk of underperformance as well as adverse events and the failure of processes.
This approach is reflected in our risk appetite statement and key risk indicators, which cover all aspects of our strategic objectives. The risk appetite statement is updated annually in line with the strategic review. It is supported by more granular portfolio strategy statements for each of our underwriting portfolios, setting out our preferred segments and products as well as those that are outside the core appetite.
The Board is closely involved in risk management via the Board Risk Committee which meets quarterly (see pages 73 to 74). The quarterly risk reports monitor the status of all risks and forms an integral part of our ORSA process.
More detail on how we manage different types of risk is set out in pages 137 to 150.
PRINCIPLES
Simple objectives
-- Create value for all stakeholders
-- Focus on general insurance in our selected markets
-- Commitment to sustainable, profitable performance.
Clear risk appetite
-- Underwriting and operating excellence
-- Strong control environment
-- Tight financial management
-- Protecting and managing the Group's reputation.
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.
OUR RISK MANAGEMENT IN PRACTICE
1. MAJOR EVENT ROOT CAUSE ANALYSIS
The Group Risk team use a cause event risk map to identify the root causes of material risk events and learn the lessons from them.
This goes beyond identifying process failures and traces further back to identify the underlying internal management causes of significant events such as culture, leadership behaviour and reporting lines. The major event root cause analysis process helps to embed learnings across the organisation to ensure that similar events do not reoccur.
2. CULTURAL HEALTH INDEX
The Group Risk and HR teams worked together to create an index of positive and negative indicators to help senior leaders spot the early warning signs of cultural risk.
The index is based around the levers that determine culture, including leadership, communication, and decision making. The index is brought to life through a quarterly process which involves senior HR, Audit and Risk leaders working together to discuss their assessments on the health of the culture and agree mitigating actions. Importantly, the index and process gives people the language to name the behaviours that they may intuitively feel, a permission to flag concerns, and a framework for ensuring these conversations take place regularly.
RISK STRATEGY AND SUMMARY RISK APPETITE
The RSA GROUP STRATEGY AND ACTION PLAN can be viewed by clicking on the following link
http://www.rns-pdf.londonstockexchange.com/rns/2312I_1-2015-3-23.pdf
OUR RISK MANAGEMENT IN PRACTICE: REVIEW OF INTERNAL CONTROL SYSTEM
In 2013, RSA found financial and claims irregularities in its Irish business.
Following these an independent review by PWC was commissioned to satisfy the Board and shareholders that the problems in Ireland were not to be found elsewhere in the Group.
In January 2014, the results of the PWC review were published. This described the Group System of Governance, which includes the Control Framework, as appropriate in terms of structure and design for an international insurance group of RSA's size and complexity, and elements of its design compare favourably across the market. The effectiveness of the framework as it related to Ireland was weakened due to independent controls not operating effectively.
PWC confirmed that the framework is built on the good market practice of three lines of defence, is designed to have multiple reinforcing layers with a comprehensive network of policies, clear accountability including through self-certification, a framework of business controls and a range of additional assurance processes.
This notwithstanding, the Group Audit Committee and Board Risk Committee Chairmen set up a Global programme, led by the Group Risk function, to enhance the effectiveness of the Internal Control System.
This programme has enhanced control and assurance processes across eight key functions in our business. This involved improving the clarity of our risk policies, as well as advancing the organisation's understanding of the control framework and how the three lines of defence operate. We have made explicit the minimum requirements expected in each business with regard to controls and the first line checking that must take place. We have also strengthened our second line assurance processes that are independent of first line regional management. We have restructured our Group and Regional Risk teams to make sure there is focus on both enterprise risk management and oversight of the internal control framework.
Group Strategic Risk Profile
The Group Strategic Risk Profile can be viewed by clicking on the following link
http://www.rns-pdf.londonstockexchange.com/rns/2312I_2-2015-3-23.pdf
DISTRIBUTION OF QUANTIFIABLE RISKS
Our internal model provides a quantification of the total amount of risk borne by the Group, expressed as the amount of capital required to enable it to meet all liabilities to a confidence level consistent with the Group's target 'A' rating.
By analysing the cashflows in our model, we can assess the extent to which the overall level of risk is attributable to broad categories of risk.
Consistent with our strategy and appetite, the majority of the Group's risks relate to insurance, comprising higher than anticipated underwriting losses, net catastrophe losses and reserve deterioration.
Our conservative investment strategy means that investment risk forms a relatively small proportion of our overall risk compared with the industry. This indicates exposure to financial market risks arising from unhedged inflation, and currency and other exposures in our insurance operations.
Within our defined-benefit pension schemes we have progressively reduced risk over a number of years through a succession of significant de-risking actions; however, due to the large size of the schemes relative to the business, they still present a material exposure, currently exacerbated by the economic environment producing a prolonged period of low real-yields.
ECONOMIC CAPITAL BY TYPE OF RISK can be viewed by clicking on the following link
http://www.rns-pdf.londonstockexchange.com/rns/2312I_3-2015-3-23.pdf
Hot Features
Premium
Risk ID/Owner Risk Description Controls/key mitigants/actions Likelihood
change
in year
--------------- -------------------------- ------------------------------- -----------
01 Impact of negative -- Geographic diversification Constant
long-term macro-economic
trends, financial
market volatility
and/or persistent
low yields, including
impact on pension
scheme position
particularly
of low real yields
(R Houghton) -- High quality,
low-risk investment
strategy and portfolio
-- Pension de-risking
actions taken, and
ongoing Trustee dialogue
on future action
-- Tactical actions
to mitigate reduction
in yields
-- Defensive positioning
to challenged Eurozone
economies
--------------- -------------------------- ------------------------------- -----------
02 Systemic failure -- Granular MI on Down
in, or obsolescence rating and claims
of, pricing, trends
underwriting
and claims processes
(D Coughlan) -- Underwriting
strategy statements,
licence and controls
-- Ongoing development
of portfolio classification
and pricing tools
-- Quarterly Business
Reviews and BRC governance
-- Accumulation
management and large
loss review actions
--------------- -------------------------- ------------------------------- -----------
03 Insufficient -- Delivery of UK Constant
capital generation strategy and other
over medium term regions' operational
to support dividend plans
and strategy
or to cover any
increase in capital
requirement
(R Houghton/ -- Capital and risk
reduction actions
taken in Q1 2014
and ongoing business
review including
disposals
Regional -- M&A moratorium
CEOs)
-- Achieving Internal
Model approval
--------------- -------------------------- ------------------------------- -----------
04 RSA fails to -- Ongoing dialogue N/A
secure Solvency with regulators to
II internal model resolve questions
approval, all
or in part, by
Q4 2015, resulting
in a requirement
to enter SII
regime on a Standard
formula basis
for a material
additional capital
requirement
(R Houghton/ -- Model governance
and validation processes
D Weymouth/ -- Maintain core
P Bergander) Solvency II programme
-- Continue to work
with local teams
to deliver Group
and local Internal
Model Approval work
plan
--------------- -------------------------- ------------------------------- -----------
05 Failure of reward -- Remuneration committee Constant
systems to align governance
with corporate
aspirations and
external stakeholder
expectations
(V Evans) -- Review of remuneration
system
-- Investor and
media relations
--------------- -------------------------- ------------------------------- -----------
06 Failure to align -- Robust strategic Constant
shareholder expectations and operational planning
with strategy, processes
execution and
financial performance
(R Houghton/ -- Delivery of operational
plans
Regional -- Robust management
CEOs) of underperforming
businesses
-- Management of
corporate governance
requirements
-- Investor and
media relations
--------------- -------------------------- ------------------------------- -----------
07 Further restrictions -- Internal dividend Down
on fungibility policy
of capital following
tighter regulatory
measures
(R Houghton) -- Simplification
of entity structure
(e.g. Scandinavia)
-- Regulatory dialogue
(and clarity from
PRA on UK targets)
--------------- -------------------------- ------------------------------- -----------
08 Failure to deliver -- Programme is made Down
on the IS transformation up of small, incremental
programme, including investments
stability issues
or business disruption
during implementation
(D Price) -- Commenced uplift
of regional capability
and recruitment of
new IT Leaders
-- Implemented a
transparent governance
and assurance model
-- Specific focus
and capability uplift
on design, partner
selection and contracting
-- Implementation
costs and benefits
reviewed and benchmarked
by advisors
-- Better alignment
and joint ownership
of execution with
the business across
all regions
--------------- -------------------------- ------------------------------- -----------
09 Failure to create -- Retention strategies Up
and sustain a targeted at key senior
culture and working leaders and critical
environment that skill
engages, attracts
and retains diverse
and talented
staff with appropriate
capabilities
and experience
to deliver the
Group strategy
(V Evans/ -- Market mapping
of key areas to develop
talent and succession
pipeline
Regional -- Engaging our
CEOs) people in the Group
strategic narrative
-- People expectations
roll-out as part
of Brand refresh
--------------- -------------------------- ------------------------------- -----------
10 Failure of reinsurance -- Board, Exco and Constant
programme to BRC governance
deliver planned
benefits through,
e.g. counterparty
failure, operational
error or failed
recovery processes
(D Coughlan) -- Reinsurance recovery
processes
-- Group-wide reinsurance
placement management
-- Reinsurance Security
controls and processes
--------------- -------------------------- ------------------------------- -----------
INVESTMENT RISK
The Group is exposed to market risk and credit risk on its invested assets. Market risk includes the risk of potential losses from adverse movements in market rates and prices including interest rates, equity prices, property prices and foreign exchange rates. The Group's exposure to market risks is controlled by the setting of investment limits in line with the Group's risk appetite. From time to time the Group also makes use of derivative financial instruments to reduce exposure to adverse fluctuations in foreign exchange rates and equity markets. The Group has strict controls over the use of derivative instruments.
Credit risk includes the non performance of contractual payment obligations on invested assets and adverse changes in the creditworthiness of invested assets including exposures to issuers or counterparties for bonds, equities, deposits and derivatives. Limits are set at both a portfolio and counterparty level based on likelihood of default to manage the Group's overall credit profile and specific concentrations within risk appetite. The Group's insurance investment portfolios are concentrated in listed securities with very low levels of exposure to assets without quoted market prices. The Group uses model based analysis to verify asset values when market values are not readily available.
FOREIGN EXCHANGE RISK
The Group publishes consolidated financial statements in Pounds Sterling. Therefore, fluctuations in exchange rates used to translate other currencies, particularly the Danish Krone and Swedish Krona, the Euro and the Canadian Dollar, into Pounds Sterling will impact the reported consolidated financial position, results of operations and cashflows from period to period. These fluctuations in exchange rates will also impact the Pound Sterling value of, and the return on, the Group's investments.
Risk Management
As an insurance company, the Group is in the business of actively seeking risk with a view to adding value by managing it. This section summarises the key risks to the Group and the steps taken to manage them.
As set out in the corporate governance report, the Group's Board of Directors (the 'Board') defines the risk appetite of the organisation.
The Group employs a comprehensive Risk Management System that includes a full range of risk policies, procedures, measurement, reporting and monitoring techniques and a series of stress tests and scenario analyses to ensure that the risk exposures that arise from operating the Group's business are managed appropriately.
For the purposes of managing risks, the Group classifies risks into the following categories:
-- Insurance -- Credit -- Market -- Liquidity -- Operational -- Capital management.
INSURANCE RISK
Underwriting and claims risks
The Group manages these risks through its underwriting strategy, adequate reinsurance arrangements and proactive claims handling. The underwriting strategy aims to ensure that the underwritten risks are well diversified in terms of type and amount of risk, industry and geography.
Pricing for the Group's products is generally based upon historical claims frequencies and claims severity averages, adjusted for inflation and modelled catastrophes trended forward to recognise anticipated changes in claims patterns. While claims remain the Group's principal cost, the Group also makes allowance in the pricing procedures for acquisition expenses, administration expenses, investment income, the cost of reinsurance and for a profit loading that adequately covers the cost of the capital.
Underwriting limits are in place to enforce appropriate risk selection criteria. The Group generally has the right not to renew individual policies, it can impose deductibles and it has the right to reject the payment of a fraudulent claim. In certain territories, legislation imposes a minimum amount for which employers can be liable for claims for compensation from employees injured at work. These liabilities are usually insured under an employer's liability (or similar) insurance policy.
All policies issued by the Group comply with minimum statutory requirements.
All of the Group's underwriters have specific licences that set clear parameters for the business they can underwrite, based on the experience of the individual underwriter. Additionally, the Group has a centrally managed forum looking at Group underwriting issues, reviewing and agreeing underwriting direction and setting policy and directives where appropriate.
The Group has a quarterly portfolio management process across all its business units, which provides a consistent assessment of each portfolio performance against a set of key performance indicators. Under the portfolio management system, key risk indicators are tracked to monitor emerging trends, opportunities and risks and, on an annual basis, a review forum of business and underwriting leaders undertake a detailed review of each portfolio utilising data from the quarterly reviews.
The Group has developed enhanced methods of recording exposures and concentrations of risk. This means there is greater control of exposures in high risk areas and enables a prompt response to claims from policyholders should there be a catastrophic event such as an earthquake.
Reinsurance arrangements in place include proportional, excess of loss, stop loss and catastrophe coverage. The effect of such reinsurance arrangements is that the Group should not suffer total net insurance losses beyond the Group's risk appetite in any one year.
Reserve risk
The Group establishes loss reserves to account for the anticipated ultimate costs of all losses and related loss adjustment expenses (LAE) on losses that have already occurred. The Group establishes reserves for reported losses and LAE, as well as for incurred but not yet reported (IBNR) losses and unallocated loss adjustment expenses (ULAE). Loss reserve estimates are based on known facts and on interpretation of circumstances including the Group's experience with similar cases and historical claims payment trends. The Group also considers the development of loss payment trends, levels of unpaid claims, judicial decisions and economic conditions.
The Group has a Group Reserving Committee chaired by the Group Chief Financial Officer and consisting of the Group Chief Executive, Group Underwriting Director, Group Chief Actuary and Group Chief Risk Officer. A similar committee has been established in each of the Group's major operating segments. The Group Reserving Committee monitors the decisions and judgements made by the business units as to the level of reserves to be held and recommends to the Group Chief Executive and Group Chief Financial Officer who recommend to the Group Board via the Group Audit Committee for the final decision on the level of reserves to be included within the consolidated financial statements. In forming its collective judgement, the Committee considers the following information:
-- An 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 2014 these risks and developments include: the possibility of future legislative change having retrospective effect on open claims: 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 business written several years ago: general uncertainty in the claims environment: the emergence of latent exposures such as asbestos: the outcome of litigation on claims received: failure to recover reinsurance and unanticipated changes in claims inflation
-- The views of internal peer reviewers of the reserves and of other parties including actuaries, legal counsel, risk directors, underwriters and claims managers
-- How previous actuarial indications have developed.
USE OF REINSURANCE
The Group is exposed to both multiple insured losses and losses arising out of a single occurrence, for example a natural peril event such as a hurricane, flood or earthquake.
All of the Group's operations are required to purchase reinsurance within agreed local reinsurance appetite parameters. The Group Corporate Centre authorises the operations' proposed treaty purchases to check that they at least meet the Group's appetite, for example the '1 in 200 year' standard for catastrophe events. Group Corporate Centre also checks to see that total Group exposures are within the limits set out above and also are consistent with the required risk based capital.
In addition, local facultative arrangements may be purchased where deemed appropriate.
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 ceded.
CREDIT RISK
Credit risk is the risk of loss of due to counterparties failing to meet all or part of their obligations. The Board Risk Committee (BRC) is responsible for ensuring that the Board approved Group credit risk appetite is not exceeded. This is done through the setting and imposition of Group policies, procedures and limits. 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).
Limits are set at both a portfolio and counterparty level based on likelihood of default, derived from the rating of the counterparty, to ensure that the Group's overall credit profile and specific concentrations are managed and controlled within risk appetite. Financial assets are graded according to company standards. AAA is the highest possible rating. Investment grade financial assets are classified within the range of AAA to BBB ratings. For invested assets, restrictions are placed on each of the Group's investment managers as to the level of exposure to various rating categories including unrated securities.
Local operations are responsible for assessing and monitoring the creditworthiness of their counterparties (e.g. brokers and policyholders). Local credit committees are responsible for ensuring these exposures are within the risk appetite of the local operations. Exposure monitoring and reporting is embedded throughout the organisation with aggregate credit positions reported and monitored at Group level.
The following table provides information regarding the aggregated credit risk exposure for financial assets of the Group as at 31 December 2014:
Credit rating relating to financial assets that are neither past due nor impaired
Total
of financial
assets
that
Less: are
Value Amounts neither
including classified past
held as held due
Not for for nor
AAA AA A BBB <BBB rated sale sale impaired
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------ ------- ------- ------- ------- ------- -------- ------------ ------------ --------------
Debt
securities 6,068 2,122 3,331 893 94 141 12,649 (401) 12,248
------------------ ------- ------- ------- ------- ------- -------- ------------ ------------ --------------
Loans
and receivables 36 1 1 - 3 56 97 - 97
------------------ ------- ------- ------- ------- ------- -------- ------------ ------------ --------------
Reinsurers'
share
of insurance
contract
liabilities - 447 1,313 172 56 33 2,021 (129) 1,892
------------------ ------- ------- ------- ------- ------- -------- ------------ ------------ --------------
Insurance
and reinsurance
debtors 281 38 591 101 106 2,013 3,130 (143) 2,987
------------------ ------- ------- ------- ------- ------- -------- ------------ ------------ --------------
Derivative
assets 6 7 20 - - 13 46 - 46
------------------ ------- ------- ------- ------- ------- -------- ------------ ------------ --------------
Other
debtors - - - - - 343 343 (4) 339
------------------ ------- ------- ------- ------- ------- -------- ------------ ------------ --------------
Cash
and cash
equivalents 302 140 449 67 24 153 1,135 (124) 1,011
------------------ ------- ------- ------- ------- ------- -------- ------------ ------------ --------------
Notes:
1. The insurance and reinsurance debtors classified as not rated comprise personal policyholders and small corporate customers that do not have individual credit ratings. The overall credit risk to the Group is deemed to be low as the cover could be cancelled if payment were not received on a timely basis.
As at 31 December 2013
Credit rating relating to financial assets that are neither past due nor impaired
Total
of financial
assets
that
Less: are
Value Amounts neither
including classified past
held as held due
Not for for nor
AAA AA A BBB <BBB rated sale sale impaired
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------- ------ ------ ------ ------ ------ ------- ----------- ----------- -------------
Debt securities 5,448 2,323 2,401 856 99 124 11,251 - 11,251
---------------------- ------ ------ ------ ------ ------ ------- ----------- ----------- -------------
Loans and receivables 27 - 44 - 2 73 146 - 146
---------------------- ------ ------ ------ ------ ------ ------- ----------- ----------- -------------
Reinsurers'
share of insurance
contract liabilities 538 1,235 202 44 1 2,020 2,020
---------------------- ------ ------ ------ ------ ------ ------- ----------- ----------- -------------
Insurance and
reinsurance
debtors 236 38 631 140 113 2,289 3,447 3,447
---------------------- ------ ------ ------ ------ ------ ------- ----------- ----------- -------------
Derivative
assets - 28 - - - 30 58 - 58
---------------------- ------ ------ ------ ------ ------ ------- ----------- ----------- -------------
Other debtors - - - - - 313 313 - 313
---------------------- ------ ------ ------ ------ ------ ------- ----------- ----------- -------------
Cash and cash
equivalents 184 321 374 106 23 154 1,162 - 1,162
---------------------- ------ ------ ------ ------ ------ ------- ----------- ----------- -------------
With the exception of AAA rated government debt securities, the largest aggregate credit exposure does not exceed 3% of the Group's total financial assets. Holdings of government bonds in Greece, Italy, Ireland, Spain and Portugal are GBP129m at 31 December 2014 and comprise around 1% of the total bond portfolio (2013: around 1%). In addition to this the Group holds GBP164m of senior and subordinated bank debt and GBP111m of other corporate holdings in these countries.
The Group is exposed to credit and concentrations of risk with individual reinsurers, due to the nature of the reinsurance market and the restricted range of reinsurers that have acceptable credit ratings. The reinsurance strategy is to purchase reinsurance in the most effective manner from reinsurers who meet the Group's security standards. Reinsurance counterparties are subject to a rigorous internal assessment process on an ongoing basis to ensure that their creditworthiness continues to be satisfactory and the potential impact from reinsurer default is measured regularly and managed accordingly. The Group Reinsurance Credit Committee oversees the management of these risks. Group standards are set such that reinsurers that have a financial strength rating of less than 'A-' with Standard & Poor's, or a comparable rating, are removed from the Group's authorised list of approved reinsurers unless the Group's internal review discovers exceptional circumstances in favour of the reinsurer. Collateral is taken to mitigate exposures, where appropriate, to acceptable levels or the size or credit quality of the exposure. At 31 December 2014 the Group held collateral against GBP165m (2013: GBP165m) of reinsurers' share of insurance contract liabilities.
The Group regularly monitors its aggregate exposures by reinsurer group against predetermined reinsurer group limits, in accordance with the methodology agreed by the BRC. The Group's largest reinsurance exposures to active reinsurance groups are Lloyd's, Swiss Re and Berskhire Hathaway Inc. At 31 December 2014 the reinsurance asset recoverable from these groups does not exceed 7% of the Group's total financial assets. Stress tests are performed by reinsurer counterparty and the limits are set such that in a catastrophic event, the exposure to a single reinsurer is estimated not to exceed 4% of the Group's total financial assets. Certain of the Group's subsidiaries are members of government mandated pools in various parts of the world. As of 31 December 2014 the largest pool (by premium volume) is Pool Re operated by the UK Government to provide terrorism cover.
There are no material financial assets that would have been past due or impaired had the terms not been renegotiated.
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 2014, excluding those assets that have been classified as held for sale.
Financial assets that are past due but not impaired
Financial Carrying Impairment
Neither assets value losses
past Six Greater that in the charged
due Up to Three months than have statement to the
nor three to six to one one been of financial income
impaired months months year year impaired position statement
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------- ---------- -------- -------- -------- -------- --------- ------------- ----------
Debt securities 12,248 - - - - - 12,248 -
---------------------- ---------- -------- -------- -------- -------- --------- ------------- ----------
Loans and
receivables 97 - - - - - 97 -
---------------------- ---------- -------- -------- -------- -------- --------- ------------- ----------
Reinsurers'
share of insurance
contract liabilities 1,892 - - - - 5 1,897 (3)
---------------------- ---------- -------- -------- -------- -------- --------- ------------- ----------
Insurance
and reinsurance
debtors 2,987 140 20 10 17 - 3,174 (11)
---------------------- ---------- -------- -------- -------- -------- --------- ------------- ----------
Derivative
assets 46 - - - - - 46 -
---------------------- ---------- -------- -------- -------- -------- --------- ------------- ----------
Other debtors 339 3 - 1 7 - 350 -
---------------------- ---------- -------- -------- -------- -------- --------- ------------- ----------
Cash and cash
equivalents 1,011 - - - - - 1,011 -
---------------------- ---------- -------- -------- -------- -------- --------- ------------- ----------
As at 31 December 2013
Financial assets that are past due but not impaired
Financial Carrying Impairment
Neither assets value losses
past Six Greater that in the charged
due Up to Three months than have statement to the
nor three to six to one one been of financial income
impaired months months year year impaired position statement
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------- ---------- -------- -------- -------- -------- --------- ------------- ----------
Debt securities 11,251 - - - - - 11,251 -
---------------------- ---------- -------- -------- -------- -------- --------- ------------- ----------
Loans and
receivables 146 - - - - - 146 (6)
---------------------- ---------- -------- -------- -------- -------- --------- ------------- ----------
Reinsurers'
share of insurance
contract liabilities 2,020 - - - - 6 2,026 (4)
---------------------- ---------- -------- -------- -------- -------- --------- ------------- ----------
Insurance
and reinsurance
debtors 3,447 97 20 15 13 1 3,593 (7)
---------------------- ---------- -------- -------- -------- -------- --------- ------------- ----------
Derivative
assets 58 - - - - - 58 -
---------------------- ---------- -------- -------- -------- -------- --------- ------------- ----------
Other debtors 313 8 2 11 8 - 342 -
---------------------- ---------- -------- -------- -------- -------- --------- ------------- ----------
Cash and cash
equivalents 1,162 - - - - - 1,162 -
---------------------- ---------- -------- -------- -------- -------- --------- ------------- ----------
The Group's investments comprise a broad range of financial investments issued principally in the UK, Canada and Scandinavia.
At 31 December 2014, the Group had pledged GBP769m (2013: GBP871m) of financial assets as collateral for liabilities or contingent liabilities. The nature of the assets pledged as collateral comprises government securities of GBP711m (2013: GBP801m), cash and cash equivalents of GBP26m (2013: GBP37m) and debt securities of GBP32m (2013: GBP33m). The terms and conditions of the collateral pledged are market standard in relation to letter of credit facilities.
In addition to the collateral accepted from reinsurers, the Group has accepted GBP429m (2013: GBP463m) in collateral. The Group is permitted to sell or repledge collateral held in the event of default by the owner. The fair value of the collateral accepted is GBP429m (2013: GBP463m). The terms and conditions of the collateral held are market standard. The assets held as collateral are readily convertible into cash.
At 31 December 2014, the Group had entered into short term sale and repurchase agreements for UK government securities. The Group continues to recognise the debt securities in the statement of financial position as the Group remains exposed to the risks and rewards of ownership. The carrying value of these debt securities recognised in the statement of financial position is GBP300m (2013: GBP300m) and the carrying value of the associated liabilities is GBP299m (2013: GBP300m).
The Group enters into derivative transactions under International Swaps and Derivatives Association (ISDA) master netting arrangements. In general, under such agreements the amounts owned by each counterparty on a single day in respect of all transactions outstanding in the same currency are aggregated into a single net amount that is payable by one counterparty to the other. In certain circumstances, such as a credit default, all outstanding transactions under the agreement are terminated, the termination value is assessed and only a single net amount is payable in settlement of all transactions.
The ISDA agreements do not meet the criteria for offsetting in the statement of financial position. This is because the Group does not have any current legally enforceable right to offset recognised amounts, because the right to offset is enforceable only on the occurrence of future events.
The following table sets out the carrying amounts of recognised financial instruments that are subject to the above agreements:
At 31 December 2014
Amounts subject to enforceable netting arrangements
Effect of offsetting
in statement
of financial Related items not
position offset
------------------------ ------------------------------ -------------------------------------
Net
Gross Amounts amounts Financial Financial Net
amounts offset reported instruments collateral amount
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------ --------- -------- --------- ------------- ------------ --------
Derivative financial
assets 18 - 18 (6) - 12
------------------------ --------- -------- --------- ------------- ------------ --------
Total assets 18 - 18 (6) - 12
------------------------ --------- -------- --------- ------------- ------------ --------
Derivative financial
liabilities 51 - 51 (28) (25) (2)
------------------------ --------- -------- --------- ------------- ------------ --------
Repurchase arrangements
and other similar
secured borrowing 299 - 299 (299) - -
------------------------ --------- -------- --------- ------------- ------------ --------
Total liabilities 350 - 350 (327) (25) (2)
------------------------ --------- -------- --------- ------------- ------------ --------
At 31 December 2013
Amounts subject to enforceable netting arrangements
Effect of offsetting
in statement
of financial Related items not
position offset
------------------------ ---------------------------- ----------------------------------
Net
Gross Amounts amounts Financial Financial Net
amounts offset reported instruments collateral amount
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------ -------- ------- --------- ------------ ----------- -------
Derivative financial
assets 52 - 52 (7) (5) 40
------------------------ -------- ------- --------- ------------ ----------- -------
Total assets 52 - 52 (7) (5) 40
------------------------ -------- ------- --------- ------------ ----------- -------
Derivative financial
liabilities 22 - 22 (6) (36) (20)
------------------------ -------- ------- --------- ------------ ----------- -------
Repurchase arrangements
and other similar
secured borrowing 300 - 300 (300) - -
------------------------ -------- ------- --------- ------------ ----------- -------
Total liabilities 322 - 322 (306) (36) (20)
------------------------ -------- ------- --------- ------------ ----------- -------
Notes:
The Group's equity derivatives are exchange traded instruments and as such the Group treats the respective intermediary are one counterparty in the above table.
Investments in structured entities
Under IFRS, 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.
The Group does not securitise any of its investments in financial instruments and does not create, promote or administer structured entities on behalf of third-party investors. The Group therefore considers that it does not act as a sponsor for any structured entity.
However, the Group invests in unleveraged entities created by and managed by external specialist investment managers where investments are pooled within an investment vehicle to provide a diversified exposure to particular classes of underlying investments. The use of these products allows the Group to broaden the diversification of its investment portfolio in a cost-efficient manner. The Group limits its exposures in individual structured entities to less than 20% of the total capital of the entity.
The Group is exposed to the risks of the underlying investments of the investment vehicles. The investment return from the structured entities is expected to reflect the returns from the underlying investments of the underlying vehicles.
In addition, the Group has commitments for future undrawn subscriptions limited to the amounts set out in the subscription agreements. The Group has no obligations to provide any additional funding or other financial support to these entities. The Group has determined that its maximum exposure to structured entities is the sum of the carrying value and the undrawn commitments. These exposures at 31 December 2014 are summarised in the table below:
Nature of the underlying Carrying Undrawn
investments of the value commitments Exposure
Class of investments vehicle GBPm GBPm GBPm
--------------------- -------------------------- -------- ------------ --------
Domestic mortgage Mainly residential
backed securities mortgages in Scandinavia 2,110 - 2,110
--------------------- -------------------------- -------- ------------ --------
Commercial mortgage Mainly commercial
backed securities mortgages in Canada 82 - 82
--------------------- -------------------------- -------- ------------ --------
Collateralised Structured debt security
debt obligations backed by bonds 136 - 136
--------------------- -------------------------- -------- ------------ --------
Cash Money Market
funds Short term cash deposits 365 - 365
--------------------- -------------------------- -------- ------------ --------
Mainly consist of
Other property funds 122 204 326
--------------------- -------------------------- -------- ------------ --------
2,815 204 3,019
------------------------------------------------ -------- ------------ --------
The line items in the statement of financial position in which the items above are included are as follows:
GBPm
-------------------------------- -----
Investments - financials assets
- equity securities 160
-------------------------------- -----
Investments - financial assets
- debt securities 2,216
-------------------------------- -----
Cash and cash equivalents 365
-------------------------------- -----
Other 74
-------------------------------- -----
2,815
-------------------------------- -----
MARKET RISK
The Group is exposed to the risk of potential losses from adverse movements in market prices including those of interest rates, equities, property, exchange rates and derivatives.
Exposures are controlled by the setting of investment limits and managing asset-liability matching in line with the Group's risk appetite.
The Group Investment Committee (GIC), on behalf of the Group Board, is responsible for reviewing and approving the investment strategy for the Group's investment portfolios. It provides approval for all major changes of the Group's investment strategy and, in particular, approves any substantive changes to the balance of the Group's funds between the major asset classes. Importantly the GIC also approves the terms of reference of the Group's main operational investment committee, the Group Asset Management Committee (GAMC). The BRC issues GAMC with investment risk limits.
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 146.
Equity price risk
The Group's portfolio of equity securities is subject to equity risk arising from changes in market price. Thus if the value of equities rise, so will the fair value of its portfolio and vice versa as set out in the sensitivity analysis on page 146.
The Group sets appropriate risk limits to ensure that no significant concentrations in individual companies arise. The Group takes a long-term view in selecting shares and looks to build value over a sustained period of time rather than utilising high level of purchase and sales in order to generate short-term gains from its equity holdings.
Property price risk
The Group's portfolio of properties is subject to property price risk arising from changes in the market value of properties. Further information on the valuation approach is included in significant accounting policies on page 123. Thus if the value of property falls so will the fair value of the portfolio as set out in the sensitivity analysis on page 146.
A number of the Group's property holdings are Group occupied and therefore are reported within property and equipment.
The Group's investment in investment property is recorded as such, and these investments are held as part of an efficient portfolio management strategy.
Currency risk
The Group operates in 27 countries. Accordingly, its net assets are subject to foreign exchange rate movements. The Group's primary foreign currency exposures are to the Danish Krone, Euro, Canadian Dollar and the Swedish Krona. If the value of Sterling strengthens then the value of non-Sterling net assets will decline when translated into Sterling and consolidated.
The Group incurs exposure to currency risk in two ways:
- Operational currency risk - by holding investments and other assets and by underwriting liabilities in currencies other than the currency of the primary environment in which the business units operate (non-functional currencies)
- Structural currency risk - by investing in overseas subsidiaries and operating an international insurance group.
Operational currency risk is managed within the Group's individual operations by broadly matching assets and liabilities by currency.
Structural currency risk is managed at a Group level through currency forward and foreign exchange option contracts within the limits that have been set. In managing structural currency risk, the needs of the Group's subsidiaries to maintain net assets in local currencies to satisfy local regulatory solvency and internal risk based capital requirements are taken into account. These assets should prove adequate to support local insurance activities irrespective of exchange rate movements. Consequently, this may affect the value of the consolidated shareholders' equity expressed in Sterling.
At 31 December 2014, the Group's total shareholders' equity analysed by currency is:
Pounds Danish Canadian Swedish
Sterling Krone/Euro Dollar krona Other Total
GBPm GBPm GBPm GBPm GBPm GBPm
--------------- ---------- ------------ --------- -------- ------ ----------
Shareholders'
equity at
31 December
2014 1,629 415 671 379 731 3,825
--------------- ---------- ------------ --------- -------- ------ ----------
Shareholders'
equity at
31 December
2013 482 610 494 393 914 2,893
--------------- ---------- ------------ --------- -------- ------ ----------
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.
Shareholders' equity is stated after taking account of the effect of currency forward contracts and foreign exchange options. On this basis, a 10% change in Sterling against Danish Krone/Euro, Canadian Dollar or Swedish Krona would have the following impact on shareholders' equity:
10%
strengthening 10% weakening 10%
in Pounds in Pounds 10% strengthening weakening 10% strengthening 10% weakening
Sterling Sterling in Pounds in Pounds in Pounds in Pounds
against against Sterling Sterling Sterling Sterling
Danish Danish against against against against
Krone Krone Canadian Canadian Swedish Swedish
/ Euro / Euro Dollar Dollar Krona Krona
GBPm GBPm GBPm GBPm GBPm GBPm
---------------- --------------- -------------- ------------------ ----------- ------------------ --------------
Movement
in
shareholders'
equity at
31 December
2014 (37) 46 (61) 75 (34) 42
---------------- --------------- -------------- ------------------ ----------- ------------------ --------------
Movement
in
shareholders'
equity at
31 December
2013 (55) 67 (45) 55 (36) 44
---------------- --------------- -------------- ------------------ ----------- ------------------ --------------
Apart from the impact on derivative financial instruments covered below, the changes arise from retranslation of foreign subsidiaries' net asset positions from their functional currencies into Pounds Sterling, with movements being taken through the translation reserve. These movements in exchange rates therefore have no impact on profit.
Derivatives
The Group may use derivative financial instruments for the purpose of reducing its exposure to adverse fluctuations in interest rates, foreign exchange rates, equity prices and long term inflation. The Group does not use derivatives to leverage its exposure to markets and does not hold or issue derivative financials instruments for speculative purposes. The policy on use of derivatives is approved by the Board Risk Committee.
The table below sets out the fair valuation and nominal principal amount of derivatives held at 31 December.
Remaining life Fair value Notional principal
amounts
----------- -------------------------- -------------- ---------------------
Less More
than One than
one to five five
year years years 2014 2013 2014 2013
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------- ------ --------- ------- ------ ------ ---------- ---------
Cross Currency
------------------------------------------------------------------------------
Asset 18 - - 18 43 1,764 1,974
----------- ------ --------- ------- ------ ------ ---------- ---------
Liability 8 10 10 28 1
----------- ------ --------- ------- ------ ------ ---------- ---------
Inflation
----------- -----------------------------------------------------------------
See See
Asset - - 28 28 9 below below
----------- ------ --------- ------- ------ ------ ---------- ---------
See See
Liability - - 29 29 7 below below
----------- ------ --------- ------- ------ ------ ---------- ---------
Equity
index
----------- -----------------------------------------------------------------
Asset - - - - 6 See See
below below
----------- ------ --------- ------- ------ ------ ---------- ---------
Liability - - - - 21 See See
below below
----------- ------ --------- ------- ------ ------ ---------- ---------
The use of derivatives can result in accounting mismatches when gains and losses arising on the derivatives are presented in the income statement in accordance with the Group's accounting policies and corresponding losses and gains on the risks being mitigated are not included in the income statement. In such circumstances the Group may apply hedge accounting in accordance with IFRS and the Group accounting policy on hedging.
The Group applies hedge accounting to derivatives acquired to reduce foreign exchange risk in its net investment in certain major overseas subsidiaries. There was no ineffectiveness recognised in the income statement in respect of these hedges during 2014 or 2013.
The Group also applies hedge accounting to specified fixed interest assets in its investment portfolio. During 2014, the Group invested in a portfolio of high investment grade corporate bonds denominated in US dollars to allow it to invest in a more diversified range of issuers. These investments are used to cover the insurance liabilities in the UK business, in order to remove exchange risk from this portfolio of investments the Group also acquired cross currency interest rate swaps to swap the cashflows from the portfolio into cashflows denominated in pounds sterling. The Group applies fair value hedge accounting when using 'fixed to floating' interest rate swaps and cashflow 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 two and eight years. There have been no default and no defaults are expected on the hedged investments.
The total losses on the fair value hedge instruments during 2014 and the offsetting gains on the hedged investments related to the hedged risk that were recognised in the income statement totalled GBP11m and GBP8m respectively.
The total losses recognised on the cashflow hedge instruments during 2014 in other comprehensive income was GBP4m and the amount reclassified to the income statement was GBPnil. The ineffectiveness recognised in the income statement is GBPnil.
The fair value of the derivatives included in the table above and used as hedging instruments at 31 December 2014 are an asset of GBP15m (2013: GBP31m) and a liability of GBP22m (2013: GBP1m).
The Group is party to a series of swap contracts which collectively provide limited cover against a sharp increase in long term claims inflation. In total the swap contracts provide inflation cover over a nominal value of GBP180m (2013: GBP180m) and are split over different contract terms.
At 31 December 2013 there were derivative contracts in place to protect the value of the UK, Canadian, European, and US equity portfolios of the Group. These derivatives were closed during 2014. These derivatives provided limited protection against declines in market levels whilst also capping participation in any appreciation of the market. In total, this strategy covered an underlying equity value up to approximately GBP379m at 31 December 2013. If UK, Canadian, European and US equity markets decreased by 15%, the impact of these derivatives as at 31 December 2013, would have been to decrease the impact of the decline by GBP28m.
Sensitivity analysis
The Group uses a number of sensitivity or stress test-based risk management tools to understand the impact of the above risks on earnings and capital in both normal and stressed conditions. These stress tests combine deterministic shocks, analysis of historical scenarios and stochastic modelling using the internal capital model to inform the Group's decision making and planning process and also for identification and management of risks within the business units.
The following table provides an indication of how some of the single factor changes impact the Group.
Changes in the income statement and equity:
Increase/(decrease)
in income statement Decrease in other
comprehensive
income
---------------------- ----------------------- ---------------------
2014 2013 2014 2013
GBPm GBPm GBPm GBPm
---------------------- ----------- ---------- ---------- ---------
Interest rate markets:(2)
----------------------------------------------------------------------
Impact on fixed
interest securities
of increase
in interest
rates of 100bps
(3) - - (481) (427)
---------------------- ----------- ---------- ---------- ---------
Decrease of equity markets:(4)
----------------------------------------------------------------------
Direct impact
on equities
of a 15% fall
in equity markets (3) (6) (21) (87)
---------------------- ----------- ---------- ---------- ---------
Mitigating - 28 - -
impact arising
from derivatives
held
---------------------- ----------- ---------- ---------- ---------
Property markets:(4)
----------------------------------------------------------------------
Decrease of
property markets
of 15% (52) (50) (8) (10)
---------------------- ----------- ---------- ---------- ---------
Notes:
1. This analysis assumes that there is no correlation between equity price, interest rate and property market rate risks. It also assumes that all other assets and liabilities remain unchanged and that no management action is taken. This analysis does not represent management's view of future market change, but reflects management's view of key sensitivities.
2. The sensitivity of the fixed interest securities of the Group has been modelled by reference to a reasonable approximation of the average interest rate sensitivity of the investments held within each of the portfolios. The effect of movement in interest rates is reflected as a one time rise of 100bps on 1 January 2015 and 1 January 2014.
3. The impact on the fair value of the loan capital is a decrease of GBP66m (2013: GBP42m).
4. The effect of movements in equity and property markets is reflected as a one time decrease of worldwide equity shares and property markets on 1 January 2015 and 1 January 2014 which results in a 15% decline in the value of the Group's carrying value of these assets.
5. This analysis has not considered the impact of the above market changes on the valuation of the Group's insurance contract liabilities or retirement benefit obligations.
6. This analysis is presented gross of the corresponding tax credits/ (charges). 7. This analysis excludes the sensitivities in respect of any assets held for sale.
LIQUIDITY RISK
Liquidity risk is the risk that the Group may be unable to pay obligations when due as a result of assets not being available in a form that can immediately be converted into cash. The investment risk limits set by the BRC ensure that a large part of the Group's portfolio is kept in highly liquid marketable securities sufficient to meet its liabilities as they fall due based on actuarial assessment and allowing for contingencies. The limits are monitored at a Group level as part of the Group Risk exposure monitoring and BRC reporting process.
In addition the Group has committed credit facilities available as set out in note 25.
Maturity periods or contractual repricing
The following table summarises the contractual repricing or maturity dates (whichever is earlier) for financial liabilities that are subject to fixed and variable interest rates. Insurance contract liabilities are also presented and are analysed by remaining estimated duration until settlement.
As at 31 December 2014
Carrying
value
Less One Two Three Four Five Greater in
than to to to to to than the
one two three four five ten ten statement
year years years years years years years Total of financial
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm position
------------------------ ------ ------ ------ ------ ------ ------ ------- ------- -------------
Subordinated
guaranteed US$
bonds - - - - - - 6 6 5
------------------------ ------ ------ ------ ------ ------ ------ ------- ------- -------------
Perpetual guaranteed
subordinated
capital securities - - 375 - - - - 375 349
------------------------ ------ ------ ------ ------ ------ ------ ------- ------- -------------
Guaranteed subordinated
notes
due 2045 - - - - - - 400 400 394
------------------------ ------ ------ ------ ------ ------ ------ ------- ------- -------------
Guaranteed subordinated
step-up notes
due 2039 - - - - 500 - - 500 495
------------------------ ------ ------ ------ ------ ------ ------ ------- ------- -------------
Provision for
unearned premium 3,036 276 87 13 6 20 - 3,438 3,438
------------------------ ------ ------ ------ ------ ------ ------ ------- ------- -------------
Provisions for
losses and loss
adjustment expenses 3,755 1,719 1,104 736 516 1,204 2,040 11,074 9,828
------------------------ ------ ------ ------ ------ ------ ------ ------- ------- -------------
Direct insurance
creditors 275 2 - - - - - 277 277
------------------------ ------ ------ ------ ------ ------ ------ ------- ------- -------------
Reinsurance creditors 484 102 41 - - - - 627 627
------------------------ ------ ------ ------ ------ ------ ------ ------- ------- -------------
Borrowings 299 - - - - - - 299 299
------------------------ ------ ------ ------ ------ ------ ------ ------- ------- -------------
Deposits received
from reinsurers 25 - - - - - - 25 25
------------------------ ------ ------ ------ ------ ------ ------ ------- ------- -------------
Derivative liabilities 38 - 1 - 8 10 - 57 57
------------------------ ------ ------ ------ ------ ------ ------ ------- ------- -------------
Total 7,912 2,099 1,608 749 1,030 1,234 2,446 17,078 15,794
------------------------ ------ ------ ------ ------ ------ ------ ------- ------- -------------
Interest on perpetual
bonds and notes 93 93 82 68 39 105 18 498
------------------------ ------ ------ ------ ------ ------ ------ ------- ------- -------------
As at 31 December 2013
Carrying
Less Greater value
than One Two Three Four Five than in the
one to two to three to four to five to ten ten statement
year years years years years years years Total of financial
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm position
----------------- ----- ------- --------- -------- -------- ------- ------- ------ -------------
Subordinated
guaranteed
US$ bonds - - - - - - 15 15 13
----------------- ----- ------- --------- -------- -------- ------- ------- ------ -------------
Perpetual
guaranteed
subordinated
capital
securities - - - 375 - - - 375 342
----------------- ----- ------- --------- -------- -------- ------- ------- ------ -------------
Subordinated
guaranteed
perpetual
notes 450 - - - - - - 450 460
----------------- ----- ------- --------- -------- -------- ------- ------- ------ -------------
Guaranteed
subordinated
step-up
notes due
2039 - - - - - 500 - 500 494
----------------- ----- ------- --------- -------- -------- ------- ------- ------ -------------
Provision
for unearned
premium 3,482 265 66 10 15 15 - 3,853 3,853
----------------- ----- ------- --------- -------- -------- ------- ------- ------ -------------
Provisions
for losses
and loss
adjustment
expenses 4,096 1,916 1,243 840 584 1,397 2,218 12,294 11,148
----------------- ----- ------- --------- -------- -------- ------- ------- ------ -------------
Direct insurance
creditors 295 1 - - - - - 296 296
----------------- ----- ------- --------- -------- -------- ------- ------- ------ -------------
Reinsurance
creditors 341 5 1 - - - - 347 347
----------------- ----- ------- --------- -------- -------- ------- ------- ------ -------------
Borrowings 300 - - - - 1 - 301 301
----------------- ----- ------- --------- -------- -------- ------- ------- ------ -------------
Deposits
received
from reinsurers 41 - - - - - - 41 41
----------------- ----- ------- --------- -------- -------- ------- ------- ------ -------------
Derivative
liabilities 27 2 - - - - - 29 29
----------------- ----- ------- --------- -------- -------- ------- ------- ------ -------------
Total 9,032 2,189 1,310 1,225 599 1,913 2,233 18,501 17,324
----------------- ----- ------- --------- -------- -------- ------- ------- ------ -------------
Interest
on perpetual
bonds and
notes 109 73 73 62 48 24 7 396
----------------- ----- ------- --------- -------- -------- ------- ------- ------ -------------
The duration analysis above is presented on an undiscounted basis. The carrying values in the statement of financial position are discounted where appropriate in accordance with Group accounting policy.
The capital and interest payable on the bonds and notes have been included until the dates on which the Group has the option to call the instruments and the interest rates are reset. For further information on the terms of the bonds and notes, see note 21 to the financial statements.
Undiscounted interest payments are calculated based on underlying fixed interest (as detailed in note 21). Year end exchange rates have been used for interest projections on loans in foreign currencies.
OPERATIONAL RISK
Operational risk is the risk of direct or indirect losses resulting from human factors, external events and inadequate or failed internal processes and systems. Operational risks are inherent in the Group's operations and are typical of any large enterprise. Major sources of operational risk can include operational process reliability, information security, outsourcing of operations, dependence on key suppliers, implementation of strategic and operational change, integration of acquisitions, fraud, human error, customer service quality, inadequacy of business continuity arrangements, recruitment, training and retention of staff, and social and environmental impacts.
The Group manages operational risk using a range of techniques and tools to identify, monitor and mitigate its operational risk in accordance with Group's risk appetite. These tools include Risk and Control Self Assessments, Key Risk Indicators (e.g. fraud and service indicators), Scenario Analyses and Loss Reporting. In addition, the Group has developed a number of contingency plans including Incident Management and Business Continuity Plans. Quantitative analysis of operational risk exposures material to the Group is used to inform decisions on the overall amount of capital held and the adequacy of contingency arrangements.
CAPITAL MANAGEMENT
Own Risk and Solvency Assessment (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.
The Group defines its ORSA as a series of inter-related activities by which it establishes:
-- The quantity and quality of the risks which it seeks to assume -- The level of capital required to support those risks -- The actions it will take to achieve and maintain the desired levels of risk and capital.
The assessments of how much risk to assume and how much capital to hold are inextricably linked. In some situations, it may be desirable to increase the amount of risk assumed or retained in order to make the most efficient use of capital available or else to return excess capital to capital providers. In other situations, where the risks assumed give rise to a capital requirement that is greater than the capital immediately available to support those risks, it will be necessary either to reduce the risk assumed or to obtain additional capital.
The assessment of risk and solvency needs is in principle carried out continuously. In practice, the assessment consists of a range of specific activities and decisions carried out at different times of the year as part of an annual cycle, supplemented as necessary by ad hoc assessments of the impact of external events and developments and of internal business proposals.
Papers are presented to the Board throughout the year dealing with individual elements that make up the ORSA. The information contained in those papers and the associated decisions taken are summarised in an annual ORSA report.
Capital appetite
The Group's objective is to maintain sufficient capital, which comprises shareholders' equity and subordinated loan capital, to meet its plan and objectives. This represents sufficient surpluses for both regulatory and economic capital, as well as sufficient capital to support the Group's aim of maintaining single 'A' ratings. To assist in managing its capital position, the Group has set internal target coverage ratios for each of the principal capital measures.
The Group's regulated entities hold appropriate levels of capital to satisfy applicable local regulations. In certain instances this could restrict the subsidiaries' ability to transfer funds to the UK parent where retained earnings form part of the local required regulatory capital. Additionally, regulation in certain countries in which the Group's subsidiaries operate may also impose other limitations such as foreign exchange control restrictions.
Economic capital
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.
The economic capital analysis compares available capital with the economic capital assessment (ECA). Available capital is the capital (over and above the IFRS insurance liabilities) that is available to absorb losses. It includes subordinated debt, but excludes items such as goodwill and other intangible assets, deferred tax items and pension scheme surpluses and deficits. ECA is the capital required to meet liabilities at a confidence level equivalent to Standard & Poor's long-term
A rated bond default curve.
Unaudited Unaudited
2014 2013
GBPbn GBPbn
------------------- ---------- ----------
Available capital 4.3 3.1
------------------- ---------- ----------
ECA 3.4 2.4
------------------- ---------- ----------
ECA surplus 0.9 0.7
------------------- ---------- ----------
The position was favourably impacted in the year by the rights issue, capital generated including disposal gains and an improvement in expected future retained profits. This is partially offset by falling yields, strengthening sterling and model calibrations.
The economic capital model is used to support, inform and improve the Group's decision making across the Group. It is used to determine the Group's optimum capital structure, its investment strategy, its reinsurance programme and to determine the pricing and target returns for each portfolio. The economic capital model is also used for the Group's Individual Capital Assessment (ICA).
REGULATORY SOLVENCY POSITION
The Group remains compliant with both the PRA's risk based ICA methodology and Solvency I, which is used to calculate the Insurance Groups Directive (IGD) requirement.
For the Group's senior regulated insurance company, Royal & Sun Alliance Insurance plc, the capital position continues to be reported under Solvency I.
As at 31 December 2014 the Group has an IGD surplus of approximately GBP1.8bn (unaudited) (2013: GBP0.2bn). The IGD surplus as at 31 December 2014 has benefited from the rights issue capital generated including, disposal gains, the reversal of the gearing restriction, and a decrease in estimated requirement resulting from lower business volumes. The coverage ratio stood at 2.2 times (unaudited) at 31 December 2014 (2013: 1.1 times).
The Group received its latest Individual Capital Guidance (based on its ICA submission) from the PRA in early 2014 and at the request of the PRA remains confidential. The ICA is a forward looking, economic assessment of the capital requirements of the Group based on its assessment of the risks to which it is exposed. The models used to determine the ICA have been integrated into the Group's business processes and are used to enhance the management of the Group.
New Solvency II, framework is discussed under the Regulatory Environment heading of the Estimation Techniques, Risks, Uncertainties and Contingencies sections of this report.
NOTES TO THE FINANCIAL STATEMENTS
33. RELATED PARTY TRANSACTIONS
The ultimate Parent Company of the Group is RSA Insurance Group plc which is incorporated in England and Wales.
The following transactions were carried out with related parties:
Key management compensation
2014 2013
GBPm GBPm
------------------------------- ------ ------
Salaries and other short-term
employee benefits 7 7
------------------------------- ------ ------
Share based payments 1 -
------------------------------- ------ ------
Bonus awards 3 1
------------------------------- ------ ------
Pension benefits - 1
------------------------------- ------ ------
Total 11 9
------------------------------- ------ ------
Key management personnel comprise members of the Group Executive Committee, Executive Directors, and Non-Executive Directors.
Included in salaries and other short term employee benefits and bonus awards is GBP3,899,000 (2013: GBP3,116,000) paid in respect of directors. These amounts exclude the value of share options granted to directors and gains made on the exercise of such options, Group contributions paid in respect of pension schemes and cash or other assets received or receivable under long-term incentive schemes. The total value of the directors' remuneration (including values for these excluded items) and other details are disclosed in the remuneration report.
A number of the Directors, other key managers, their close families and entities under their control have general insurance policies with subsidiary companies of the Group. Such policies are available at discounted rates to all employees including Executive Directors.
At 31 December 2013, there was an interest free loan totalling GBP5,000 outstanding to a member of the key management team under the standard terms of the Group's UK Car Ownership Scheme, which is open to all UK managers within a qualifying salary band. The balance was repaid during 2014.
RESPONSIBILITY STATEMENT
We confirm to the best of our knowledge:
-- The financial statements on pages 115 to 207, prepared in accordance with IFRS as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group and Parent Company:
-- The business review on pages 26 to 39, which is incorporated into the Directors' report, includes a fair review of the development and performance of the business and the position of the Group: and
-- The risk review section on pages 44 to 47, which is incorporated into the Directors' report, includes a description of the principal risks and uncertainties faced by the Group.
Signed by order of the Board
STEPHEN HESTER RICHARD HOUGHTON
Group Chief Executive Group Chief Financial Officer
25 February 2015 25 February 2015
This information is provided by RNS
The company news service from the London Stock Exchange
END
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