TIDMRSA
2014 PRELIMINARY RESULTS
26 February 2015
2014 pre-tax profit of GBP275 million, up from GBP244 million
loss in 2013
Good progress on implementing new strategy and laying
foundations for stronger future performance
Medium-term performance targets reaffirmed. Dividend
recommencing
Stephen Hester, RSA Group Chief Executive, commented:
"2014 was an important year for RSA. The Company made good
progress in the face of some tough realities. We can look to the
coming years with much sounder strategic and financial foundations.
We have created far reaching and detailed plans for operational
improvement. Actions are well underway and beginning to benefit
both the underlying potential and performance of our
businesses.
"RSA returned to profit in 2014 and to paying a dividend. Our
customer franchises proved resilient. Current year underwriting
profit (ex-Ireland) was improved to record levels. Successful
disposals realised strong gains. Costs were cut and savings targets
increased. However, the clean-up of past weaknesses was also
expensive; and market headwinds, especially from exchange rate
changes and low interest rates, are a drag on results.
"RSA is much better positioned than before to make continued
good progress. We are determined to do just that in 2015 and
beyond."
Trading results
-- Tangible equity up 74% to GBP2.9bn (31 December 2013: GBP1.7bn).
-- Net written premiums of GBP7.5bn down 8%1 (down 2% underlying2)
reflecting disposals, our portfolio action plan and competitive
market
conditions.
-- Foreign exchange movements, notably the weakening of key currencies
against Sterling, translated reported premiums down 14%.
-- Group operating profit was GBP365m (2013: GBP349m) with core business
operating profit of GBP367m up 17% from 2013 GBP315m).
Scandinavia GBP251m;
Canada GBP107m; and UK GBP147m.
-- Headline Group underwriting profit was GBP90m (2013: GBP57m), comprising
strong current year results reduced by losses in Ireland and
UK
charges for prior year reserve strengthening. The combined
ratio3
was 98.8% (2013: 99.4%).
-- Current year core business underwriting profit improved sharply to a
record GBP190m excluding Ireland (2013: GBP97m); underlying
current year
loss ratio of 56.2%, 1.0pts better than prior year (2013:
57.2%).
-- Prior year underwriting loss was GBP31m. Excluding Ireland and non-core
operations, prior year profit was GBP25m (2013: GBP150m profit
ex
Ireland). This reflected various adjustments, particularly
reserve
additions in the UK, but also the unsustainable level of past
reserve
releases.
-- Ireland underwriting loss of GBP107m as remediation continued. Our goal
is to return Ireland to underwriting profitability in 2016
with
significant loss reduction in 2015.
-- Net gains of GBP476m include GBP342m from completed disposals. Gains were
partly offset by GBP405m charges including GBP99m write down of
goodwill
and intangibles and GBP73m redundancy costs.
-- Pre-tax profit was GBP275m (2013: GBP244m loss). Post tax profit of GBP76m
(2013: GBP338m loss) after tax charge that included a deferred
tax asset
write down of GBP92m.
-- Capital metrics at 31 December 2014: IGD surplus c.GBP1.8bn with
coverage of 2.2 times; ECA surplus c.GBP0.9bn with coverage of
1.3 times.
-- Reserve margin for the core Group is unchanged at 5% of booked
reserves.
-- Return on tangible equity 3.6% (2013: (16.7)%). Underlying return on
tangible equity4 of 9.7% (2013: 6.9%).
-- Dividend payments are proposed to recommence with a final dividend
recommendation of 2p per ordinary share.
Strategic update
-- Good progress in executing our Action Plan; to tighten strategic
focus, build capital strength, and put in place the foundations
to
improve business performance.
-- Completed disposals of the Baltics, Poland, Noraxis and Thailand.
Sales agreed for China, Hong Kong, Singapore, Italy and
India
businesses.
-- Total announced disposal proceeds to date of GBP800m; expected disposal
gains of c.GBP500m (GBP342m booked from disposals already
completed).
-- Successfully completed GBP773m rights issue in April, and GBP400m
subordinated bond issue refinancing in early October with a
coupon of
5.1%.
-- Tangible equity to premiums ratio of 39% (31 December 2013: 19%).
-- Detailed plans for operational improvement now in place across the
business, including activity to sustain and improve our
customer
franchises, to improve underwriting, to reduce costs, and to
invest in
technology, product and service initiatives.
-- Controllable costs are down 6% at constant exchange to GBP2.1bn. Core
business costs were down 4% (comprising 6% cost reductions
offset by
2% inflation).
-- Existing 2016 annualised cost reduction target is increased to greater
than GBP210m (up from greater than GBP180m) and a new target of
greater
than GBP250m set for 2017.
-- Medium term performance targets reaffirmed: underlying return on
tangible equity of 12-15%; tangible equity to be 35-45%5 of
net written premiums; dividend payout ratio of 40-50% in
time.
1 At constant FX2 At constant FX & excluding Motability,
Group ADC and completed disposals3 Stated on an 'earned' basis,
please refer to the appendix for further details4 Please refer to
the appendix for a detailed calculation of underlying return on
tangible equity5 Capital target to be updated at end 2015 once
Solvency II impacts are assessedNote: On an IFRS basis, pre-tax
profit of GBP275m comprises profits from both continuing and
discontinued operations.Please refer to page 42 for further
details.
MANAGEMENT REPORT - KEY FINANCIAL PERFORMANCE DATA
Management basis
FY 2014 FY 2014 FY 2013 FY 2013
GBPm GBPm GBPm GBPm
Constant FX Reported FX
Net Written Premiums Personal Commercial Total Total Total
Scandinavia 969 790 1,759 1,713 1,863
Canada 1,039 471 1,510 1,553 1,755
UK 1,176 1,393 2,569 3,034 3,041
Ireland 194 101 295 312 327
Latin America 259 431 690 662 837
Group Re1 - (42) (42) 54 54
Total Core Group 3,637 3,144 6,781 7,328 7,877
Discontinued 328 356 684 743 787
& non-core2
Total Group net 3,965 3,500 7,465 8,071 8,664
written
premiums
Combined operating ratio (%)3 FY 2014 FY 2013 FY 2013
GBPm GBPm GBPm
Underwriting FY 2014 FY 2013 Constant FX Reported FX
performance
Scandinavia 89.4 88.1 187 207 225
Canada (ex Noraxis) 98.0 100.7 30 (12) (13)
UK (ex Legacy) 99.5 99.6 15 15 13
Ireland 132.3 166.2 (107) (209) (220)
Latin America 100.3 97.5 (2) 12 20
Group Re1 - - (15) 2 2
Total Core Group 98.6 99.6 108 15 27
Discontinued - - (18) 26 30
& non-core2
Total 98.8 99.4 90 41 57
Grp underwriting
performance
Investment result 327 365
Insurance result 417 422
Operating result 365 349
Profit / (Loss) 275 (244)
before tax
Profit / (Loss) 76 (338)
after tax
Earnings per share 6.2p (43.7)p
- basic (pence)
Recommended dividend 2.0p 10.2p
per share (pence)
Return on tangible 3.6% (16.7)%
equity (%)
Underlying return on 9.7 6.9
tangible equity (%)4
31 Dec 2014 31 Dec 2013
Net asset value (GBPm) 3,825 2,893
Tangible net asset 2,900 1,665
value (GBPm)
Net asset value per 365 335
share (pence)
Tangible net 286 202
asset value
per share (pence)
IGD surplus (GBPbn) 1.8 0.2
IGD coverage ratio 2.2 1.1
(times)
ECA surplus (S&P 0.9 0.7
'A' curve
calibration) (GBPbn)
ECA coverage ratio 1.3 1.3
(times)
1 Includes Adverse Development Cover written premium of GBP67m2
Discontinued operations include Poland, Baltics, Italy, Hong Kong,
Singapore, China, Italy and Thailand.Non-core operations include
Noraxis, UK Legacy, Russia, Middle East and India3 The combined
ratio calculation methodology is presented on an 'earned' basis,
please refer to the appendix for further details4 Refer to the
appendix for detailed calculation
CHIEF EXECUTIVE'S STATEMENT
2014 was an important year for RSA. The Company made good
progress in the face of some tough realities. We can look to the
coming years with much sounder strategic and financial foundations.
We have created far reaching and detailed plans for operational
improvement. Actions are well underway and beginning to benefit
both the underlying potential and performance of our
businesses.
Strategy and Focus
RSA is a leading international insurer. Our refocused business
has leadership positions in Scandinavia, Canada, UK/Ireland and
parts of Latin America. Where we do business, we are determined to
do it well and be known for our service and appeal to customers. In
volatile and competitive markets, our balance of geography,
customer, product and distribution channels are valuable and
distinctive attributes.
We have three interrelated priorities. Customers are our
lifeblood; serving them well is our purpose. We need to operate
with financial strength and transparency; and have the discipline
to sustain it. Our shareholders own the Company; we are
concentrating intensely on building strong, long-term performance
to make RSA the best investment proposition we can achieve.
Industry Conditions
We operate in relatively mature, stable and consolidated
markets. These continue to underpin our ambition of good and
improving customer service - offering vital risk management and
value for money. We see continued evolution as digital and other
trends are harnessed to improve the scope of how we operate.
Despite economic challenges, industry conditions also allow us to
realistically target a cash generative business, returning greater
than the cost of capital for shareholders.
RSA's diversity helps protect our performance potential.
However, like industry competitors and many other businesses, low
interest rates, exchange rate moves and modest growth rates create
significant performance headwinds. Strong price competition,
intensified by third party capital seeking alternative outlets from
stock and bond markets, has led to sharper price/volume trade-offs
than before in a number of segments. As a result, in each of our
larger markets there are some competitors reporting falls in or
static like-for-like premium income. Five year bond yields are down
a further 0.8-1.6% since the start of 2014 across our principal
markets, impacting the outlook for investment returns. Around two
thirds of RSA's premiums lie outside the UK. January 2015 month-end
spot exchange rates would imply a c.3% reduction in the reported
Sterling figures versus the premiums reported for 2014, with the
impact being larger in profitability terms.
2014 Actions
I joined RSA in February 2014 with a mandate to lead the Company
in three urgent tasks. These were: to thoroughly identify the
sources of RSA's performance weaknesses; to devise plans to fix
these and address internal and external challenges to realising
RSA's potential; and then to implement those plans. The first two
tasks are largely done. The third is well in hand, but with much
tough and disciplined work ahead to follow through.
As so often in corporate turnarounds, the cost of remediation
has proven greater than we hoped, especially in the form of
reserving and non-cash charges. But we have been able to pay for
this through outperformance in divestment proceeds. We have
refocused RSA on its most important businesses, with a well
executed divestment programme already substantially completed.
We raised GBP773m in May thanks to shareholder support via a
rights issue and a further GBP810m of proceeds from announced
divestments to date (of which GBP550m already completed) at prices
well above tangible book value. We also successfully refinanced
GBP400m of long-term subordinated debt and saw credit ratings
restored.
Across our core business, determined action has set a course for
improved underwriting results with current year loss ratios
(ex-volatile items) improving versus 2013, overall and in most
major business units, and expected to do so again in 2015.
Alongside this is activity across our business to sustain and
improve the health of our customer franchise and to invest in
technology, product and service initiatives. These efforts
mitigated the customer impact of RSA's 2013/14 problems and are
expected to improve performance further in coming years, also
returning us to moderate top line growth.
The cost base is being tackled vigorously and investment plans
to facilitate this and improve customer capabilities have been set
out for the next five years. Total controllable costs are down 12%
to GBP2.1bn versus 2013 (down 6% in real terms ex disposals and
FX). Our 2016 target of greater than GBP180m underlying cost
reduction has been raised to greater than GBP210m and a new target
of greater than GBP250m set for 2017. Our linked ambition is to
lift productivity measures (Premiums:FTE) by 15-20% by the end of
2017 versus 2013 numbers.
RSA needed a substantial financial overhaul. This has focused on
improving both the quality and the health of its balance sheet and
profits. The on-going drag of costs below the underwriting line is
also being addressed through reducing central overhead, interest
and non-cash amortisation. Intangible assets and deferred
acquisition costs have been written down where no longer well
supported, with action on booked values of discounted liabilities
and deferred tax assets to better reflect current circumstances,
though both are still potentially vulnerable to future economic
conditions and business performance. We still have significant
volatile accounting items in the form of unrealised bond gains as
well as off-balance sheet pension liabilities (which are now
reporting a surplus under IFRS for the UK, but with latent
risk).
Financial Results
Headline profits at GBP275m pre-tax compare to a GBP244m pre-tax
loss in 2013, yet still represent a fraction of what we seek to
achieve as RSA improves performance in coming years.
Net tangible assets have improved by GBP1.2bn (74%) to GBP2.9bn
in 2014 (from 19% to 39% of net written premiums) and now lie
within our target range from a capital perspective, though still at
the lower end. We are pleased to recommence dividend payments with
a final dividend recommendation of 2p per share. This is a modest
level reflecting the work remaining on profit and capital build. We
reiterate a medium term ambition of 40-50% dividend payouts plus
further capital distributions if excess capital arises.
Behind the 2014 headline figures are many moving parts,
reflecting market movements and the actions we have taken.
Premium income is down 2% on an underlying level at constant
exchange (8% headline including completed disposals, Motability
changes and the Group ADC). Scandinavia did well (up 3%), UK saw
most portfolio restructuring (down 6% underlying) with Canada also
down a little (down 3%). At reported exchange rates premiums were
down 14%.
Current year core business underwriting profit (ex-Ireland) was
a record GBP190m (2013 GBP97m) reflecting a one point improvement
in underlying loss ratios, and after a relatively normal weather
and large loss charge. The core business current year underlying
loss ratio (ex-Ireland) was 56.2% (2013: 57.2%) and has improved in
each quarter during 2014.
Total underwriting profit was GBP90m (2013 GBP57m). The figure
was depressed by significant reserve strengthening which impacted
prior year profits (prior year underwriting profit ex Ireland
GBP14m; 2013: GBP172m) and an Irish underwriting loss of GBP107m.
The latter mainly relates to the development of issues from 2013
and prior. Both items have proven more costly than was estimated at
the start of the year. We expect them to improve sharply in
2015.
Disposal gains of GBP342m were offset by the charges outlined
above, albeit much of the latter being non-cash items.
Plans for the Future
RSA's new and focused strategy was set out a year ago. We
believe it is the right one. Our medium-term performance targets
are also unchanged; 12-15% underlying return on net tangible
assets, 35-45% tangible equity/net premiums, though the latter is
sensitive to Solvency II outcomes as well as market factors and may
need to be updated at the end of 2015.
Thanks
Managing major transformations is not easy. Sincere thanks and
appreciation are due to all our stakeholders; customers and brokers
for their support in the uncertainties of early 2014; shareholders
for support through disappointing past news and equity fundraising;
and of equally vital importance, my RSA colleagues. The steadfast
and dedicated service of our 19,000 staff towards customers and to
improving our Company is hugely appreciated. There have been
significant changes to our executive management team, and talented
people have stepped up internally and have joined us from
elsewhere. To all I am grateful.
We know where we want to take RSA and how to do it. We will face
challenges and setbacks. But we believe in this Company, in its
place in our industry and its performance potential.
Stephen HesterGroup Chief Executive25 February 2015
MANAGEMENT REPORT
INCOME STATEMENT
Management basis - year ended 31 December 2014
Total 'non-core'
Group Core5 'Non-core'6 Discontinuedoperations6 Group
FY 2014 FY 2013
GBPm GBPm GBPm GBPm GBPm
Net Written 7,465 6,781 186 498 8,664
Premiums
Net Earned 7,874 7,183 178 513 8,594
Premiums
Net Incurred (5,381) (4,896) (174) (311) (5,970)
Claims1
Commissions7 (1,195) (1,097) (20) (78) (1,218)
Operating (1,208) (1,082) (31) (95) (1,349)
expenses7
Underwriting 90 108 (47) 29 57
result
Investment income 439 397 28 14 493
Investment (29) (27) - (2) (31)
expenses
Unwind of discount (83) (60) (23) - (97)
Investment result 327 310 5 12 365
Insurance result 417 418 (42) 41 422
Central expenses (52) (51) (6) 5 (73)
Operating result 365 367 (48) 46 349
Net 476 32
gains/losses/exchange
Interest (119) (117)
Non-operating (42) (57)
charges2
Non-recurring (405) (451)
charges3
Profit before tax 275 (244)
Tax (199) (94)
Profit after tax 76 (338)
Loss ratio (%) 68.3 68.2 69.5
Weather loss ratio 3.2 3.3 3.5
Large loss ratio 7.4 7.7 7.9
Current year 57.6 57.2 58.7
underlying
loss ratio4
Prior year effect 0.1 - (0.6)
on loss ratio
Commission 15.2 15.3 14.2
ratio (%)7
Expense ratio (%)7 15.3 15.1 15.7
Combined ratio (%) 98.8 98.6 99.4
Reported ROTE 3.6% (16.7)%
Underlying ROTE 9.7% 6.9%
Notes:
1Of which: claims (460) 484
handling costs
2Amortisation (32) (42)
2Pension net (10) (15)
interest
costs
3Solvency II costs (25) (20)
3Reorganisation (276) (356)
costs
3Transaction costs (6) (12)
3Economic (98) (63)
assumption
changes
4 Current year underlying loss ratio excludes weather and large
losses.5 'Core' comprises Scandinavia, Canada (ex Noraxis), UK (ex
Legacy), Ireland, Latin America and central functions.6
Discontinued operations include Poland, Baltics, Italy, Hong Kong,
Singapore, China and Thailand.Non-core operations include Noraxis,
UK Legacy, Middle East, India and Russia7 The combined ratio
calculation methodology is presented on an 'earned' basis, please
refer to the appendix for further detailsNote: please refer to
appendix for FY 2013 comparatives
SEGMENTAL ANALYSIS
Management basis - year ended 31 December 2014
Scandinavia Canada4 UK5 Ireland LatinAmerica Centralfunctions Total 'non-core'1 GroupFY 2014
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Net Written 1,759 1,510 2,569 295 690 (42) 684 7,465
Premiums
Net Earned 1,752 1,536 2,850 328 700 17 691 7,874
Premiums
Net Incurred (1,219) (1,056) (1,861) (340) (400) (20) (485) (5,381)
Claims
Commissions2 (68) (215) (587) (42) (178) (7) (98) (1,195)
Operating (278) (235) (387) (53) (124) (5) (126) (1,208)
expenses2
Underwriting 187 30 15 (107) (2) (15) (18) 90
result
Investment 112 82 144 11 46 2 42 439
income
Investment (11) (3) (7) (1) (5) - (2) (29)
expenses
Unwind of (37) (2) (5) - (14) (2) (23) (83)
discount
Investment 64 77 132 10 27 - 17 327
result
Insurance result 251 107 147 (97) 25 (15) (1) 417
Central expenses - - - - - (51) (1) (52)
Operating result 251 107 147 (97) 25 (66) (2) 365
Net 476
gains/losses/exchange
Interest (119)
Non-operating (42)
charges
Non-recurring (405)
charges
Profit before 275
tax
Tax (199)
Profit after tax 76
Loss ratio (%) 69.6 68.7 65.3 103.5 57.2 68.3
Weather loss 1.6 5.0 3.8 5.8 0.3 3.2
ratio
Large loss ratio 4.7 3.6 12.9 3.4 3.6 7.4
Current year 64.8 62.8 49.0 80.3 52.2 57.6
underlying
loss ratio3
Prior year (1.5) (2.7) (0.4) 14.0 1.1 0.1
effect
on loss ratio
Commission 3.9 14.0 20.6 12.6 25.5 15.2
ratio (%)2
Expense ratio 15.9 15.3 13.6 16.2 17.6 15.3
(%)2
Combined ratio 89.4 98.0 99.5 132.3 100.3 98.8
(%)
1 Total 'non-core' comprises discontinued operations of Poland,
Baltics, Italy, Hong Kong, Singapore, China and Thailand and other
non-core operations of Noraxis, UK Legacy, Middle East, India and
Russia2 The combined ratio calculation methodology is presented on
an 'earned' basis, please refer to the appendix for further
details3 Current year underlying loss ratio excludes weather and
large losses4 Excluding Noraxis5 Excluding LegacyNote: please refer
to appendix for FY 2013 comparatives
Market conditions
Insurance market conditions during 2014 remained competitive.
Low interest rates, exchange rate moves and modest economic growth
rates continue to create headwinds for our industry.
Price competition, intensified by third party capital seeking
alternative outlets from stock and bond markets, has led to sharper
price/volume trade-offs than before in a number of segments. As a
result, in each of our larger markets there are some major
competitors reporting falls in or static like-for-like premium
income.
Five-year bond yields are down a further 0.8-1.6% since the
start of 2014 across our principal markets. This impacts the
outlook for investment returns, discount rates on liabilities and
inflates certain elements of capital requirement.
Around two thirds of RSA's core premiums lie outside the UK
(more in profitability terms). Foreign exchange movements, notably
the strengthening of Sterling during 2014, have impacted reported
results, with premiums down 8% on a constant exchange rate basis
(2% underlying), but down 14% at reported exchange rates. January
2015 month-end spot exchange rates would imply a c.3% reduction in
the reported Sterling figures versus the premiums reported for
2014, with the impact being larger in profitability terms.
Premiums
2014 net written premiums were down 8% from 2013 at constant
exchange rates and down 2% on an underlying basis, with the key
movements being:
% Scandi-navia Canada UK Ireland LatinAmerica Total
Volume - (5) (8) (10) 1 (4)
change
including
portfolio
actions
Rate 3 2 2 5 3 2
increases
Underlying 3 (3) (6) (5) 4 (2)
movement
at CFX
Group - - - - - (1)
Adverse
Development
cover
Changes - - (9) - - (4)
to
Motability
contract
Completed - - - - - (1)
disposals
Total 3 (3) (15) (5) 4 (8)
2014
movement
at constant
FX
Regional highlights (at constant FX) include:
-- Premiums in Scandinavia were up 3%, with good focus on increasing
rates across the book;
-- Canadian premiums were down 3% driven by a 5% reduction in Commercial
premiums due to the underwriting actions we have been taking on
the
portfolio;
-- UK premiums were down 6% (down 15% including Motability). During 2014
we have taken significant portfolio actions in the UK, with
particular
focus on UK Personal Motor where premiums were down 26% as we
remain
focused on achieving our target returns;
-- Ireland premiums were down 5% following strong rate increases during
the year in key lines requiring remediation, which affected
retention
rates; and
-- Latin American premiums grew 4% at constant exchange with
inflation-led growth in Argentina partly offset by the impact
of
restructuring actions elsewhere in the region.
Customer sentiment has remained supportive in 2014 across our
core regions as reflected in our customer satisfaction scores.
Accordingly, retention trends have remained broadly stable with
overall retention across the Group of around 80%.
Underwriting result
2014 has been a year to rebuild quality foundations from which
our Action Plan can deliver future improvements. Group underwriting
profit of GBP90m (2013: GBP57m) comprised GBP108m from core
operations, and a GBP18m loss from discontinued and non-core
operations. Excluding Ireland, the core operations delivered
GBP215m of underwriting profit.
Total UW result Current Year UW Prior Year UW
GBPm 2014 2013 2014 2013 2014 2013
Scandinavia 187 225 166 102 21 123
Canada (ex 30 (13) (8) (32) 38 19
Noraxis)
UK (ex Legacy) 15 13 17 2 (2) 11
Ireland (107) (220) (62) (93) (45) (127)
Latin America (2) 20 6 17 (8) 3
Group Re (15) 2 9 8 (24) (6)
Total Core 108 27 128 4 (20) 23
Memo: total 215 247 190 97 25 150
core
ex Ireland
Non-core (18) 30 (7) 8 (11) 22
& discontinued
Total Group 90 57 121 12 (31) 45
Current year profit of GBP121m (2013: GBP12m):
-- Excluding Ireland, current year profits were up 96% to GBP190m (2013:
GBP97m);
-- The current year underlying loss ratio was 57.6% (2013: 58.7%) and has
improved in each quarter during 2014. Excluding Ireland the
underlying
current year loss ratio was 56.2% which is 1.0 points better
than 2013;
-- Total weather costs for 2014 were GBP253m representing a weather loss
ratio of 3.2% (2013: GBP303m or 3.5%; five year average: 3.0%).
Weather
was worse than trend following the impact of flooding and storms
in
the UK (weather ratio 3.8%) and Ireland (5.8%) in Q1, and
severe
winter weather in Canada (5.0%) also in Q1; and
-- The large loss ratio of 7.4% (2013: 7.8%) was lower than the five year
average of 8.4%1, reflecting business mix improvements and
relatively benign experience in Scandinavia, partly offset by
the
earthquake in Chile which impacted the Latin America and Group
Re
result.
Prior year loss of GBP31m includes the following specific
items:
-- Ireland prior year underwriting loss of GBP45m;
-- UK Legacy reserve additions of GBP32m for asbestos, abuse and deafness
claims;
-- UK Professional Indemnity reserve additions of GBP46m; and
-- GBP30m for further UK 2013 weather claims and Marine premiums.
We expect sustainable prior year releases to be generally below
1% of premiums, but there is the potential for volatility given our
commitment to transparent reserve margins.
1 The 5 year large loss average has been restated to include UK
Professional Indemnity large losses which were previously reported
within underlying.
Investment result
The investment result, which now includes investment expenses of
GBP29m (previously reported below the insurance result), was
GBP327m (2013: GBP365m).
Investment income of GBP439m (2013: GBP493m) was offset by
investment expenses of GBP29m (2013: GBP31m) and the liability
discount unwind of GBP83m (2013: GBP97m). The liability discount
unwind was lower than 2013 following the reduction in UK discount
rates from 5% to 4% at FY 2013. The discount unwind will fall
further in 2015 following the reduction in Scandinavian discount
rates (see page 12 for further details).
Investment income of GBP439m is in line with our expectations
but down 11% on prior year, primarily reflecting the continued
impact of the low bond yield environment.
Average book yield across the whole portfolio fell from 3.5% to
3.1% year on year.
Total controllable costs
Total Group controllable costs were down 12% in 2014 (down 6% at
constant exchange) to GBP2.1bn. Core business controllable costs
were down 4% at constant exchange to GBP1.85bn (comprising 6% cost
reductions, offset by 2% inflation).
The majority of the 2014 core business cost reduction has come
from our UK business, with good progress in headcount reductions
(510 (7%) UK FTE reduction in 2014). Further detailed cost
reduction plans are in place for our core businesses. Group FTE was
down 16% in 2014 to 19,006 (2013: 22,664), and within our core
businesses FTE was down 7% to 17,509 (2013: 18,801).
Central expenses were GBP52m. Going forward we intend to
allocate significantly more central and investment expenses to the
underwriting result to allow for more transparent market
comparisons.
We have raised our 2016 target of greater than GBP180m
underlying cost reduction1 to greater than GBP210m. We have also
set a new target of greater than GBP250m reduction by 2017. Our
linked ambition is to lift productivity measures (Premiums:FTE) by
15-20% by the end of 2017 versus 2013 (GBP363k2 NWP per FTE).
1 Core business pre disposals, FX and inflation2 Adjusted to
remove the impact of the changes to the Motability contract
Non-operating items
Net gains of GBP476m include:
-- GBP342m of disposal gains (comprising Noraxis GBP164m; Baltics GBP124m;
Poland GBP29m; Thailand GBP21m; Scandinavian Agriculture book
GBP4 m);
-- GBP69m of gains in respect of the sale of equities mainly in January;
-- GBP25m relating to the sale and leaseback of our Swedish head office; and
-- GBP30m of unrealised gains on property assets.
Non-operating charges of GBP42m comprise GBP32m of customer list
amortisation and GBP10m of pension net interest costs.
Non-recurring charges of GBP405m include:
-- Reorganisation costs of GBP276m as follows:
GBP55m goodwill write downs (GBP44m in Ireland and GBP11m in
Russia);
GBP44m intangible asset write downs mainly relating to
software
write downs in the UK, Ireland and Scandinavia;
GBP110m of redundancy and restructuring costs (GBP73m relating
to
redundancy); and
A further GBP67m primarily relating to the revision of
estimates.
This includes the re-estimation of deferred acquisition costs
and
dilapidation provisions in respect of leasehold properties,
resulting in charges of GBP17m and GBP5m respectively. A review
of the
Group's reinsurance accounting resulted in a charge of
GBP22m.
Finally, as a result of a remediation process, better
information
has become available which has resulted in revisions to
certain
accounting estimates and a charge of GBP23m which
predominately
relates to Ireland.
-- Economic assumption changes - GBP98m charge relating to a change in the
rate used to discount long-tail liabilities in Sweden and
Denmark. The
decline in market yields for the assets we hold backing
these
liabilities has required this adjustment. As a result, the
discount
rate has been lowered in Sweden and Denmark (see table below
for
changes). The full year impact of this on Scandinavia is
expected to
be around a GBP6-7m reduction in underwriting profit, with a
GBP12m
benefit to the discount unwind.The UK discount rate of 4%
(lowered from 5% at FY 2013) remains unchanged as this remains
broadly
matched by the yields on the assets backing these
liabilities.The
assumptions will be re-examined bi-annually going forward
and
necessary changes made. Discount rates for our major long
term
portfolios (total net discounted reserves: GBP2,008m at 31
December
2014) are as follows:
31 Dec2014 31 Dec2013
UK 4.00% 4.00%
Sweden Personal Accident 1.25% 3.75%
Sweden annuities1 1.00% 1.50%
Denmark Workers Compensation 1.75% 3.70%
Canada 3.50% 3.50%
1 real discount rate (i.e. net of indexation)
-- Solvency II implementation costs of GBP25m (2013: GBP20m), and transaction
costs of GBP6m (2013: GBP12m).
Tax
The Group has recognised a tax charge of GBP199m for the
year.
Included in this is a deferred tax asset impairment charge of
GBP92m (GBP84m relating to the UK and GBP8m relating to Ireland).
This follows the conclusion that the carrying value of the deferred
tax assets in the UK and Ireland are no long fully supportable
following the re-setting of the Group strategy in 2014 together
with the issues faced in Ireland. This accounting charge has no
economic consequences as the tax losses remain available to us.
The carrying value of the remaining deferred tax asset in the UK
is GBP95m, and in Ireland is GBP5m.
Dividend
We are pleased to recommence dividend payments with a final
dividend recommendation of 2p per ordinary share. This is a modest
absolute level reflecting 2014 profitability still depressed as
well as the work remaining on capital build. We reiterate a medium
term ambition of 40-50% dividend payouts.
BALANCE SHEET
Movement in Net Assets
Shareholders'funds Noncontrollinginterests Loancapital Equity plusloancapital TNAV
GBPm GBPm GBPm GBPm GBPm
Balance at 1 2,893 121 1,309 4,323 1,665
January 2014
Profit/(loss) 69 7 - 76 403
after tax
Exchange (139) 2 - (137) (85)
gains/(losses)
net of tax
Fair 255 (2) - 253 255
value gains/(losses)
net of tax
Pension (7) - - (7) (7)
fund gains/(losses)
net of tax
Debt issue - - 385 385 -
Repayment - - (451) (451) -
& amortisation
of loan capital
Share issue 753 - - 753 753
Changes - (14) - (14) -
in shareholders'
interests
in subsidiaries
Share based payments 10 - - 10 10
Prior year final - (6) - (6) -
dividend
Preference dividend (9) - - (9) (9)
Goodwill and - - - - (85)
intangible
additions
Balance at 31 December 3,825 108 1,243 5,176 2,900
2014
Per share (pence)
At 1 January 20141 335 202
At 31 December 2014 365 286
1 Restated to include the bonus element of the subsequent rights
issue in accordance with IAS 33, and the impact of the share
consolidation.
Tangible net assets have increased by 74% to GBP2.9bn during
2014. The most significant driver of this is the proceeds from the
rights issue (GBP747m net of costs). There were also GBP474m of
post-tax disposal benefit and GBP255m of fair value gains on
available for sale assets. Foreign exchange movements on the
retranslation of the balance sheets of non-sterling denominated
operations gave rise to foreign exchange losses of GBP85m.
CAPITAL POSITION
Requirement Surplus Coverage
GBPbn GBPbn (times)
Insurance 31 December 2014 1.4 1.8 2.2
GroupsDirective1
31 December 1.4 2.0 2.4
2014 (plus
announced
disposals)
31 December 2013 1.5 0.2 1.1
Economic Capital2(S&P 31 December 2014 3.4 0.9 1.3
'A' curve)
31 December 3.4 1.1 1.3
2014 (plus
announced
disposals)
31 December 2013 2.4 0.7 1.3
1 The IGD position at 31 December 2014 is estimated.2 The
economic capital position at 31 December 2014 is estimated, pending
the outcome of the next full model run.
Preliminary reconciliation of IFRS capital to IGD and ECA
capital
IGD ECA
GBPbn GBPbn
Total IFRS equity plus loan capital at 31 December 2014 5.2 5.2
Adjust for:
Non-controlling interests (0.1) -
Goodwill and intangibles (0.8) (0.8)
Deferred tax (0.2) (0.1)
Discounting (0.5) -
Claims equalisation reserve (0.3) -
IAS 19 pension accounting - 0.1
Other (0.1) (0.1)
Total available capital at 31 December 2014 3.2 4.3
At 31 December 2014 the Group's estimated IGD surplus was
GBP1.8bn giving coverage of 2.2 times the capital requirement. The
GBP1.6bn increase in the surplus during 2014 mainly reflects the
impact of capital financing (including the rights issue) of
GBP0.7bn, capital generated (including disposal gains) of GBP0.5bn,
the reversal of a hybrid debt restriction of GBP0.3bn which took
effect at the end of 2013, and mark-to-market gains of GBP0.2bn,
partly offset by GBP(0.1)bn of adverse foreign exchange
movements.
The Group's estimated economic capital surplus was GBP0.9bn at
31 December 2014 giving coverage of 1.3 times the capital
requirement. The movement in the year was driven by capital
generated including disposal gains of GBP0.3bn and capital
financing of GBP0.7bn, partly offset by the impact of lower yields
GBP(0.4)bn, adverse foreign exchange movements GBP(0.2)bn, and
pension and other movements of GBP(0.2)bn. Allowing for announced
disposals, the surplus was GBP1.1bn with coverage of 1.3 times.
During the year the economic capital requirement has increased
by GBP1.0bn to GBP3.4bn with available capital up by GBP1.2bn to
GBP4.3bn. The movement in the requirement was driven mainly by the
impact of lower yields, adverse foreign exchange movements, and the
removal of a credit for the modelled disposal value of Noraxis from
our capital assessment.
Diversification provides a significant credit to RSA within our
economic capital model. We analyse our main modelled risks,
including underwriting, catastrophe, reserve, market, credit and
currency, pension and operational risks. On this basis, the level
of diversification generated within our capital model, resulting
from the nature of the different types of business written,
geographic spread of our business, and the non-correlation of risk
events affecting the Group, is around 40% of the undiversified
capital requirement. This level of diversification is broadly
consistent with the credit that the Group receives under other
internally modelled Group measures.
GROUP OUTLOOK
In 2015 we aim to substantially complete the Group's strategic
restructuring and related 'inorganic' capital improvements. Focus
will continue on actions to improve core business performance on a
sustainable basis.
Our operational improvement programmes set a long-term ambition
of upper quartile / 'best in class' underwriting results versus
comparable companies. This targets improving customer metrics,
profitability measures and building solid capital and related
foundations.
Foreign exchange moves will continue to impact Sterling reported
results. Market conditions permitting, in 2015 we target an end to
the shrinkage of core business written premiums. Underlying loss
ratios should improve again and costs continue to reduce. Weather
and large loss items will remain unpredictable but volatility
should be below that of extreme prior years due to reinsurance
actions. We expect sustainable prior year releases to be below 1%
of premiums, but potentially volatile given our commitment to
transparent reserve margins.
We hope to report combined ratios, on an underlying basis,
closer to 'market' performance than in recent times. Investment
income should trend downwards reflecting market conditions. We
anticipate disposal profits from completing non-core transactions,
broadly offset by on-going restructuring and cost programme
expenses.
Our medium term 12-15% underlying return on tangible equity
target remains in place. Foreign exchange and interest rate impacts
from the last 12 months suggest it is more likely to be met in 2017
than 2016 despite a broadly unchanged ambition for combined
ratios.
BUSINESS REVIEW - INVESTMENT PERFORMANCE
Management basis
Investment 2014 2013 Change
result GBPm GBPm %
Bonds 354 381 (7)
Equities 23 47 (51)
Cash and 29 26 12
cash
equivalents
Property 28 28 -
Other 5 11 (55)
Investment 439 493 (11)
income
Investment (29) (31) 6
expenses
Unwind of (83) (97) 14
discount
Investment 327 365 (10)
result
Balance 31 Dec2014 (GBPm) 31 Dec2013 Change%
sheet (GBPm)
unrealised
gains
Bonds 634 299 112
Equities 35 86 (59)
Other 3 7 (57)
Total 672 392 71
Investment Value31 Dec2013 Foreignexchange Mark tomarket Othermovements Transfer Value 31 Dec2014
portfolio toassets
heldfor sale
GBPm GBPm GBPm GBPm GBPm GBPm
Government 4,168 (230) 141 195 (111) 4,163
bonds
Non-Government 7,083 (325) 152 1,526 (351) 8,085
bonds
Cash 1,162 (61) - 34 (124) 1,011
Equities 582 (26) 19 (415) - 160
Property 331 (2) 32 (15) - 346
Prefs & 280 (5) (9) 69 - 335
CIVs
Other 146 (5) - (44) - 97
Total 13,752 (654) 335 1,350 (586) 14,197
Split
by
currency:
Sterling 3,493 4,466
Danish 1,302 1,229
Krone
Swedish 2,287 2,344
Krona
Canadian 2,947 3,128
Dollar
Euro 1,763 1,308
Other 1,960 1,722
Total 13,752 14,197
Credit quality Non-government Government
-
bond
portfolio
31 Dec2014% 31 Dec2013% 31 Dec2014% 31 Dec2013%
AAA 31 34 81 74
AA 21 24 10 14
A 38 33 3 2
BBB 8 7 5 9
< BBB 1 1 1 1
Non rated 1 1 - -
Total 100 100 100 100
Investment income of GBP439m (2013: GBP493m) was offset by
investment expenses of GBP29m (2013: GBP31m) and the liability
discount unwind of GBP83m (2013: GBP97m). Investment income of
GBP439m is in line with our expectations but down 11% on prior
year, primarily reflecting the continued impact of the low bond
yield environment.
The average book yield on the total portfolio was 3.1% (2013:
3.5%), with average yield on the bond portfolios of 3.0% (2013:
3.3%). Reinvestment rates in the Group's major bond portfolios at
31 December 2014 were approximately 1.3%.
Average duration is 4.0 years (31 December 2013: 3.8 years).
The investment portfolio grew 3% during 2014 to GBP14.2bn. The
movement was driven by the rights issue proceeds, other net cash
inflows including disposal proceeds, and positive mark-to-market
movements, partly offset by foreign exchange translation losses and
transfers into assets held for sale relating to the announced
disposals of our Hong Kong, Singapore, China, Thailand, and Italy
businesses.
At 31 December 2014, high quality widely diversified fixed
income securities represented 86% of the portfolio (31 December
2013: 82%). As reported at our 2013 Preliminary Results, we reduced
our exposure to equities during the first quarter of 2014 with
equities now representing 1% of the total portfolio (31 December
2013: 4%). We also agreed the sale and leaseback of our Swedish
head office. These proceeds together with the rights issue and
disposal proceeds have been invested into high quality fixed income
assets. Cash accounts for 7% of the total portfolio (31 December
2013: 8%).
The quality of the bond portfolio remains very high with 98%
investment grade and 66% rated AA or above. We remain well
diversified by sector and geography.
Balance sheet unrealised gains of GBP672m (pre-tax) increased by
GBP280m during the year (31 December 2013: GBP392m); an increase in
bond unrealised gains driven by lower yields was partly offset by a
reduction in unrealised equity gains as we crystalised these by
reducing our exposure to equities during the first quarter.
Assuming yields at 2014 year end remained constant, the unrealised
gains would 'pull to par' at a rate of around GBP150m per annum
(over the next three years).
Outlook
Based on current forward bond yields and foreign exchange rates,
it is estimated that investment income will be in the order of
GBP380m for 2015, falling to around GBP350m in 2016 and 2017.
However, with yields at historic lows, these income numbers are
sensitive to market changes. This outlook reflects the combined
impact of sharply lower bond yields and depreciation of our major
overseas operating currencies compared to 2014, together with the
ongoing impact of maturing high yield bond positions.
REGIONAL REVIEW - SCANDINAVIA
Management basis
Net written premiums Change Underwriting result
2014 2013 Constant 2014 2013
GBPm GBPm FX (%) GBPm GBPm
Split by
country
Sweden 956 1,032 2 138 153
Denmark 633 656 1 47 63
Norway 170 175 9 2 9
Total 1,759 1,863 3 187 225
Scandinavia
Split by
class
Household 307 320 4 3 10
Personal 360 398 (1) 55 108
Motor
Personal 302 310 7 104 118
Accident
& Other
Total 969 1,028 3 162 236
Scandinavia
Personal
Property 306 310 6 (2) (28)
Liability 133 134 7 29 22
Commercial 206 224 - - (13)
Motor
Marine & 145 167 (6) (2) 8
Other
Total 790 835 2 25 (11)
Scandinavia
Commercial
Total 1,759 1,863 3 187 225
Scandinavia
Investment 64 85
result
Scandinavia 251 310
insurance
result
Operating Claims Commission Op Expenses Combined
Ratios1(%)
2014 2013 2014 2013 2014 2013 2014 2013
Household 99.0 97.0
Personal 84.8 73.3
Motor
Personal 64.7 60.9
Accident
& Other
Total 66.3 61.0 3.4 2.8 13.3 13.1 83.0 76.9
Scandinavia
Personal
Property 100.4 108.4
Liability 78.2 83.1
Commercial 99.9 105.8
Motor
Marine & 101.9 95.7
Other
Total 73.5 78.5 4.5 3.8 18.9 19.0 96.9 101.3
Scandinavia
Commercial
Total 69.6 69.0 3.9 3.3 15.9 15.8 89.4 88.1
Scandinavia
Of which: 5yr ave
Weather loss 1.6 1.8 1.6
ratio
Large loss 4.7 6.6 5.6
ratio
Current year 64.8 67.5
underlying
loss ratio
Prior year (1.5) (6.9)
effect
on loss ratio
YTD At Dec 2014 At Sept 2014 At June 2014 At March 2014
rate
increases2(%)
Personal 4 4 4 3
Household
Personal 3 3 2 1
Motor
Commercial 2 4 5 5
Property
Commercial 4 4 4 3
Liability
Commercial 4 4 4 4
Motor
1 The combined ratio calculation methodology is presented on an
'earned' basis, please refer to the appendix for further details2
Rating increases reflect rate movements achieved for risks renewing
in the year-to-date versus comparable risks renewing in the same
period the previous year
SCANDINAVIA
Our Scandinavian business performed strongly at an underlying
level in 2014. Underwriting profits were GBP187m (2013: GBP225m)
and the combined ratio was 89.4% (2013: 88.1%).
Net written premiums of GBP1,759m were up 3% at constant
exchange (2013: GBP1,863m as reported; GBP1,713m at constant
exchange), with volumes flat across the region and rate increases
contributing 3% growth.
Personal premiums were up 3% with strong growth of 6% in Swedish
Personal driven by Household and Personal Accident due to a
combination of good new business levels and rate increases. Danish
Personal premiums were down 4% as we continued our work in 2014 to
return that business to stronger profitability. Norway Personal
premiums were up 2%.
Commercial premiums were up 2% with growth of 5% in Denmark
reflecting strong retention across the portfolio, good new business
levels in Workers Compensation and good growth in Renewable Energy.
Our strategic partnership in Norwegian Hospital Care insurance
continues strongly, and as a result Norway Commercial premiums were
up 16% in the year. In Sweden, premiums were down 4% as we
continued to take actions to rationalise our Commercial portfolio
and increase rate.
The Scandinavian underwriting result was a profit of GBP187m
(2013: GBP225m) with a current year profit of GBP166m (2013:
GBP102m) and a prior year profit of GBP21m (2013: GBP123m). After
including investment returns net of discount unwind of GBP64m
(2013: GBP85m), the insurance result was GBP251m (2013:
GBP310m).
In Personal, underwriting profits were GBP162m with a combined
ratio of 83.0%. This mainly reflects a strong performance in
Swedish Personal Accident following product enhancements and rate
actions. Personal Motor profitability was lower than 2013, partly
reflecting an increase in H1 to prior year Swedish Motor annuity
reserves of GBP19m in anticipation of an upcoming market review of
longevity assumptions. Scandinavia Commercial made a 2014
underwriting profit of GBP25m and a combined ratio of 96.9%, with
good underlying performances across our Danish business and in
Swedish Liability and Motor.
The combined ratio in 2014 was 89.4% (2013: 88.1%). Weather and
large loss experience was broadly in line with expectations. The
weather ratio of 1.6% is in line with the five year average, whilst
large losses of 4.7% compare to a long term average of 5.6% and in
part benefit from a change in underwriting mix. The underlying
current year loss ratio was noticeably improved in 2014 at 64.8%,
2.7 points better than 2013, and there were good improvements in
both Sweden and Denmark. Prior year claims were 1.5%, significantly
below 2013 levels but now more normalised for likely future
outlook. Controllable expenses are in line with our expectations,
and in 2014 we reduced FTE by around 5%.
Scandinavia - Outlook
We expect the Scandinavian P&C markets to grow in line with
local GDP growth, and we target top line performance broadly in
line with the market. Our focus is on sustaining strong Personal
lines results in Sweden and improving Commercial lines
profitability; achieving significant cost improvements in Denmark;
and focusing on profitable growth in Norway.
REGIONAL REVIEW - CANADA
Management basis
Net written premiums Change Underwriting result
2014 2013 Constant 2014 2013
GBPm GBPm FX (%) GBPm GBPm
Household 433 464 5 (7) (18)
Personal 606 729 (6) 18 47
Motor
Total Canada 1,039 1,193 (2) 11 29
Personal
Property 211 252 (5) (23) (64)
Liability 114 143 (10) 2 -
Commercial 92 108 (3) 28 12
Motor
Marine & 54 59 4 12 10
Other
Total Canada 471 562 (5) 19 (42)
Commercial
Total Canada 1,510 1,755 (3) 30 (13)
Investment 77 93
result
Canada 107 80
insurance
result
Operating Claims Commission Op Expense Combined
Ratios1(%)
2014 2013 2014 2013 2014 2013 2014 2013
Household 101.5 104.3
Personal 97.2 93.7
Motor
Total 73.3 72.5 11.6 11.5 14.1 13.6 99.0 97.6
Canada
Personal
Property 110.4 125.8
Liability 98.1 99.7
Commercial 70.2 88.1
Motor
Marine & 78.3 82.9
Other
Total 59.0 70.1 19.1 19.8 17.9 17.6 96.0 107.5
Canada
Commercial
Total 68.7 71.7 14.0 14.1 15.3 14.9 98.0 100.7
Canada
Of 5yr ave
which:
Weather 5.0 8.0 4.3
loss
ratio
Large 3.6 3.3 3.0
loss
ratio
Current 62.8 62.1
year
underlying
loss
ratio
Prior (2.7) (1.7)
year
effect
on loss
ratio
YTD At Dec 2014 At Sept 2014 At June 2014 At March 2014
rate
increases2(%)
Personal 10 10 9 9
Household
Personal (2) (1) (1) -
Motor
Commercial 5 4 4 4
Property
Commercial 3 3 3 3
Liability
Commercial 1 2 1 1
Motor
1 The combined ratio calculation methodology is presented on an
'earned' basis, please refer to the appendix for further details2
Rating increases reflect rate movements achieved for risks renewing
in the year-to-date versus comparable risks renewing in the same
period the previous year
CANADA
After a record bad year for weather events in Canada in 2013,
adverse weather conditions continued into the first quarter of
2014. As a result, 2014 has been challenging for our Canadian
business. However, the underlying performance of our Canadian
business remains supportive of improved future results.
Net written premiums in Canada were down 3% on a constant
exchange rate basis to GBP1,510m (2013: GBP1,755m as reported;
GBP1,553m at constant exchange) with 5% volume reductions partly
offset by 2% rate growth.
Personal premiums were down 2%, with a 6% reduction in Motor
partly offset by growth of 5% in Household. Household premiums
included double digit rate increases (on renewal business) as the
market responded to the weather events of 2013 and early 2014;
volumes were down 3%. In Motor, premium reductions reflected the
exit of certain broker relationships, lower new business and rate
in Ontario, and competitive conditions in Quebec.
In Commercial, premiums were down 5% driven mainly by the
actions we have been taking on the portfolio, particularly where we
have been re-underwriting or exiting poorer performing accounts.
Property reductions of 5% are mainly driven by underwriting actions
taken in Quebec, and Liability reductions of 10% are due to the
exit of unprofitable programs and market leading rating action.
Underwriting profit was GBP30m (2013: GBP13m loss) with a
current year loss of GBP8m and a prior year profit of GBP38m. The
combined ratio was 98.0% (2013: 100.7%). After including investment
returns of GBP77m (2013: GBP93m), the insurance result was GBP107m
(2013: GBP80m). Ongoing balance sheet work across the Group has
included in Canada a more granular segmentation of the portfolio
for reserving purposes. This has led to a reallocation of reserves
(as reported in August) to better reflect the risk profile of the
book, and a GBP19m release of margin.
The level of weather losses, although lower than 2013, was
higher than trend, impacting profitability. The weather loss ratio
of 5.0% for the year compares to a five year average for our
Canadian business of 4.3%. Personal Household and Motor were both
affected by the weather, with Motor experiencing elevated claims
frequency as a result of severe driving conditions in the first
quarter.
In Commercial, the reallocation of reserves in H1 resulted in an
increase in Liability reserves and a release in Motor, impacting
their respective results. Property profitability remains under
pressure given a highly competitive market, with adverse weather
and large loss experience impacting results. At a total Canadian
level, the large loss ratio was 3.6% in 2014 compared to a five
year average of 3.0% and a 2013 ratio of 3.3%. The current year
underlying loss ratio was 62.8% (2013: 62.1%).
Canada - Outlook
2014 has been a challenging year for RSA in Canada. However, we
anticipate the business returning to better performance patterns,
subject to volatile items such as weather trends. Our focus will be
on delivering operational improvement, particularly underwriting
and claims improvements, process simplification and modernisation
of technology and infrastructure.
REGIONAL REVIEW - UK (excluding Legacy)
Management basis
Net written premiums Change Underwriting result
2014 2013 Constant 2014 2013
GBPm GBPm FX (%) GBPm GBPm
Household 644 665 (3) 65 82
Personal Motor 270 366 (26) (7) (41)
Pet 262 226 16 (9) 3
Total UK 1,176 1,257 (6) 49 44
Personal
Property 611 628 (2) (8) 58
Liability 296 303 (2) (43) (104)
Commercial 214 532 (60) 25 8
Motor
Marine & Other 272 321 (15) (8) 7
Total 1,393 1,784 (22) (34) (31)
UK Commercial
Total UK 2,569 3,041 (15) 15 13
Investment 132 128
result
UK insurance 147 141
result
Operating Claims Commission Op Expenses Combined
Ratios1(%)
2014 2013 2014 2013 2014 2013 2014 2013
Household 90.1 87.0
Personal 102.4 110.6
Motor
Pet 103.5 98.6
Total UK 58.5 59.4 22.0 20.4 15.4 16.6 95.9 96.4
Personal
Property 101.5 90.8
Liability 115.1 134.3
Commercial 94.7 98.6
Motor
Marine & 102.9 97.7
Other
Total 70.4 70.6 19.5 17.2 12.2 13.9 102.1 101.7
UK
Commercial
Total UK 65.3 66.1 20.6 18.5 13.6 15.0 99.5 99.6
Of 5yr ave
which:
Weather 3.8 3.0 3.3
loss
ratio
Large 12.9 13.2 14.9
loss
ratio
Current 49.0 50.2
year
underlying
loss
ratio
Prior (0.4) (0.3)
year
effect
on loss
ratio
YTD At Dec 2014 At Sept 2014 At June 2014 At March 2014
rate
increases2(%)
Personal (1) - - -
Household
Personal 2 3 3 2
Motor
Commercial 2 3 3 3
Property
Commercial 4 5 5 4
Liability
Commercial 2 3 3 5
Motor
1 The combined ratio calculation methodology is presented on an
'earned' basis, please refer to the appendix for further details2
Rating increases reflect rate movements achieved for risks renewing
in the year-to-date versus comparable risks renewing in the same
period the previous year
UK
In the UK we have made progress with management action on
pricing and underwriting that included both planned exits and
focused growth. Adverse weather in the first quarter together with
reserve additions in Commercial have affected profitability.
However, expenses are coming down and the good progress made with
cost reductions in the first half has continued into the second
half, including a reduction of over 500 (7%) FTE during the
year.
At a headline level, UK premiums of GBP2,569m were down 15%.
However, premiums excluding Motability were down 6% with Personal
down 6% and Commercial down 6%.
Household premiums were down 3% reflecting competitive
conditions and a softening rate environment. In Personal Motor,
premiums were down 26% as a result of our portfolio actions and
pricing discipline, although the steep declines seen in the first
half have now begun to slow. Excluding planned exits, Motor
premiums were down 11%. In 2014 we launched our MORE TH>N Smart
Wheels 'black box' telematics product aimed at young drivers and
MORE TH>N Drive, an app that allows drivers to track their
driving behaviour, which are showing promising growth. Pet premiums
were up 16% although the underlying movement after removing prior
period accounting premium adjustments was 9%, mainly driven by rate
increases.
Across Commercial we have maintained underwriting discipline in
a competitive market and a soft rate environment. Reported premiums
were down 22% to GBP1,393m primarily driven by a reduction in
Motability premiums as a result of our new contract terms which
took effect from 1 October 2013 (Motability net written premiums in
2014 were GBP57m versus GBP351m in 2013) and a reduction in Marine
mainly due to adjustments to prior year premiums after the change
in accounting methodology we have reported previously. We ceased
writing Specialty Lines business in Germany with effect from 1
October 2014, but continue to actively write and grow our Marine
business there. SME, one of our areas of focused growth, grew 9%
over last year and targeted activity in Engineering delivered 4%
growth.
The UK underwriting result was a profit of GBP15m (2013: GBP13m
loss). The current year profit of GBP17m represents our strongest
current year result in the UK since 2005, and includes a Personal
profit of GBP26m and a Commercial loss of GBP9m. The prior year
loss of GBP2m includes a loss of GBP25m in Commercial and a profit
of GBP23m in Personal.
Household continued to perform strongly with a GBP65m profit
despite adverse weather in the first quarter, while a GBP7m loss in
Motor reflected a highly competitive market but nevertheless a
significant improvement from the 2013 loss of GBP41m. Pet
profitability was disappointing due to higher than expected claims
inflation, for which we have implemented rating and indemnity
actions to address.
The UK Commercial underwriting loss of GBP34m is driven by the
adverse development of the prior year Professional Indemnity book
(GBP46m) which we reported on at both H1 and Q3. Our Property book
suffered an underwriting loss of GBP8m driven by heavy weather
losses, following storms in January/February and also in June in
Europe, plus marginally elevated large losses. Commercial Motor
produced a significantly improved COR of 94.7% reflecting better
performance across the book.
The UK combined ratio was 99.5% (2013: 99.6%). The weather ratio
of 3.8% was 0.8 points higher than 2013 and 0.5 points higher than
the five year average for the UK business. The large loss ratio of
12.9% was 0.3 points lower than 2013 and 2.0 points lower than the
five year average. The current year underlying loss ratio improved
by 1.2 points against the same period last year to 49.0%.
UK - Outlook
Continuing improvements in our core UK trading performance
together with ongoing cost actions give us confidence as we look
out to 2015. We target improving profitability and a return to
modest top line growth.
REGIONAL REVIEW - IRELAND
Management basis
Net written premiums Change Underwriting result
2014 2013 Constant 2014 2013
GBPm GBPm FX (%) GBPm GBPm
Personal 194 210 (3) (58) (139)
Commercial 101 117 (11) (49) (81)
Total 295 327 (5) (107) (220)
Ireland
Investment 10 14
result
Ireland (97) (206)
insurance
result
Operating Claims Commission Op Expenses Combined
Ratios1(%)
2014 2013 2014 2013 2014 2013 2014 2013
Personal 126.5 163.2
Commercial 144.1 172.2
Total 103.5 132.1 12.6 17.1 16.2 17.0 132.3 166.2
Ireland
Of 5yr ave
which:
Weather 5.8 4.2 5.8
loss
ratio
Large 3.4 5.7 2.3
loss
ratio
Current 80.3 84.2
year
underlying
loss
ratio
Prior 14.0 38.0
year
effect
on loss
ratio
YTD At Dec 2014 At Sept 2014 At June 2014 At March 2014
rate
increases2(%)
Personal - - - (2)
Household
Personal 14 14 13 6
Motor
Commercial 1 1 2 -
Property
Commercial 13 14 15 9
Liability
Commercial 8 5 3 1
Motor
1 The combined ratio calculation methodology is presented on an
'earned' basis, please refer to the appendix for further details2
Rating increases reflect rate movements achieved for risks renewing
in the year-to-date versus comparable risks renewing in the same
period the previous year
IRELAND
In Ireland, it has been a difficult year for RSA in recognising
further losses for events announced in 2013 and beginning the
recovery process. The 2014 underwriting loss was GBP107m, recorded
as a current year loss of GBP62m and a prior year loss of
GBP45m.
No substantive new issues were found in 2014, however the cost
of remediation, reserve strengthening and the level of required
underwriting improvement has been greater than that expected at the
start of the year.
The current year loss of GBP62m reflects the ongoing impact of
the issues identified in 2013, in particular inadequate pricing on
pre-remediation business that came through in earned premiums. Once
claims reserving was more fully remediated during 2014, it became
apparent that in key portfolios loss ratios were higher than
expected and loss patterns have remained volatile as data is
cleansed and new patterns established. Pricing and underwriting
action taken in 2014 should earn through into significant further
loss ratio improvement in 2015.
The 2014 weather ratio of 5.8% was in line with long term trends
but marginally worse than plan, while the large loss ratio of 3.4%
was 1.1points worse than trend.
The prior year loss of GBP45m reflects a combination of updated
reserving judgements from 2013 events in light of the latest
development experience, and some specific factors including the
remediation of a specific delegated authority scheme, changes to
reinsurance retentions, and the impact of lower discount rates
following a High Court ruling in December.
Our remediation work is ongoing, and we remain confident that
the actions we are taking will restore the business to
profitability.
The Irish executive management team has been completely
restructured and we have made good progress in filling critical
management vacancies with a new CEO, CFO, COO and Chief
Underwriting Officer now in place.
Cost reduction plans are in place, and underwriting actions
should improve current year underwriting performance to a profit in
2016. Reserving actions are now largely complete, although some
2015 impact remains possible.
On pricing we have applied strong rate increases during 2014 in
key lines requiring remediation, with year-on-year rate increases
of c.25% in Motor and c.15% in Liability. As a result of this
focus, premiums for the year were down 5% at constant exchange.
As reported at our half year results in August, we have
undertaken an impairment review of the carrying value of Irish
goodwill and intangible assets. In 2014 we have written down GBP44m
relating to goodwill and GBP17m relating to software and customer
lists. This leaves GBP48m of goodwill and intangible assets in the
Irish business. In addition to this we have also written down our
Irish deferred tax asset by GBP8m leaving a remaining tax asset of
GBP5m.
Ireland - Outlook
Our goal remains to return the business to profitability in 2016
through underwriting improvement and cost reduction, and from there
to return to greater than cost of capital returns in the
future.
REGIONAL REVIEW - LATIN AMERICA
Management basis
Net written premiums Change Underwriting result
2014 2013 Constant 2014 2013
GBPm GBPm FX (%) GBPm GBPm
Chile 166 205 - (4) 17
Argentina 210 248 32 10 (1)
Brazil 119 134 2 (13) 3
Mexico 88 102 (4) 2 3
Colombia 61 100 (31) 1 (1)
Uruguay 46 48 15 2 (1)
Total Latin 690 837 4 (2) 20
America
Investment 27 26
result
Latin 25 46
America
insurance
result
Operating Claims Commission Op Expenses Combined
Ratios1(%)
2014 2013 2014 2013 2014 2013 2014 2013
Chile 102.4 90.8
Argentina 94.9 100.4
Brazil 110.9 97.5
Mexico 97.2 96.8
Colombia 99.1 101.2
Uruguay 94.7 102.5
Total Latin 57.2 55.2 25.5 24.2 17.6 18.1 100.3 97.5
America
Of which: 5yr ave
Weather loss 0.3 0.4 0.9
ratio
Large loss 3.6 2.7 2.4
ratio
Current year 52.2 51.5
underlying
loss ratio
Prior year 1.1 0.6
effect
on loss ratio
1 The combined ratio calculation methodology is presented on an
'earned' basis, please refer to the appendix for further
details
LATIN AMERICA
Net written premiums in Latin America were up 4% on a constant
exchange rate basis to GBP690m (2013: GBP837m as reported; GBP662m
at constant exchange) with 1% volume growth and 3% rate growth. The
impact of foreign exchange has been significant, with premiums down
18% at reported exchange rates.
There was strong growth in Argentina of 32% driven by the high
inflation environment, and growth of 15% (or GBP6m) in Uruguay.
Brazil premiums were up 2% in a competitive market. We have also
taken action to restructure the business which include the exit of
Risk Managed Property, Construction & Engineering and
Liability. In Chile premiums were flat due to soft market
conditions and actions taken on our Motor portfolio.
During the year we have restructured our business in Colombia.
We have announced the exit of Personal and Commercial Motor, and
intend to pursue profitable growth in non-Motor Commercial lines
and affinity schemes. As a result, premiums were down 31% in the
year.
The underwriting loss of GBP2m includes GBP10m in respect of the
Chile earthquake in April (a further GBP8m is included in the Group
Re result bringing the total event cost to GBP18m) and several
other large losses. The large loss ratio of 3.6% is 1.2pts higher
than the five year average, while weather losses of 0.3% are better
than the five year average of 0.9%.
Latin America - Outlook
In Latin America, the markets we operate in continue to be
attractive on a fundamental basis, though competitive, driven by
low insurance penetration and a growing middle class across the
region. Given the softer economic outlook, we anticipate growth
continuing at a more subdued pace than historical levels, with
improving profitability targeted.
DISCONTINUED & NON-CORE OPERATIONS
Net written premiums Underwriting result
2014 2013 2014 2013
GBPm GBPm GBPm GBPm
Asia 145 151 5 7
CEE&ME 343 415 4 20
Italy 196 221 10 (1)
Noraxis - - 11 23
UK Legacy - - (48) (19)
Total Discontinued 684 787 (18) 30
& Non-Core
Note: Non-core operations also include our Indian associate,
which generated 2014 NWP of GBP130m (2013: GBP141m) at 100% level,
and our Thailand associate holding, which generated 2014 NWP of
GBP179m (2013: GBP176m) at 100% level.
Disposal programme
In 2014, the Group adopted a fresh strategy, one element of
which was to tighten the strategic focus of the Group in order to
concentrate more effectively on performing sustainably well in core
businesses. During the year we commenced a disposal programme with
the intention of divesting our non-core businesses. Significant
progress has been, as follows:
Completed disposals:
-- Baltics (Lithuania, Latvia, Estonia): announced 17 April 2014,
completed 30 June 2014 Latvia, 31 October 2014 Lithuania and
Estonia.
Total proceeds: GBP215m. Gain on sale: GBP124m.
-- Poland: announced 17 April 2014, completed 15 September 2014.
Total proceeds: GBP74m. Gain on sale: GBP29m.
-- Noraxis: announced 19 May 2014, completed 2 July 2014. Total
proceeds: GBP220m. Gain on sale: GBP164m.
-- Thailand associate: announced and completed 19 December 2014.
Total proceeds: GBP37m. Gain on sale: GBP21m.
Announced disposals pending completion:
-- China: announced 3 July 2014. Expected total proceeds: GBP71m.
-- Hong Kong & Singapore: announced 21 August 2014. Expected
total proceeds: GBP130m.
-- Italy: announced 17 October 2014. Expected total proceeds: GBP19m.
-- India associate: announced 18 February 2015. Expected total
proceeds: GBP46m.
Remaining discontinued and non-core operations1:
-- Middle East
-- Russia
-- UK Legacy
1 Not all will necessarily be disposed
UK Legacy
The UK Legacy underwriting result for 2014 was a loss of GBP48m
(2013: GBP19m loss) and was primarily driven by a combination of
asbestos, deafness and 'abuse' reserve additions. The asbestos
additions are mainly due to revisions to estimates of reinsurance
recoveries to reflect the latest experience of claims across
accident years.
Asbestos
The technical provisions (before discounting) include GBP829m
(31 December 2013: GBP831m) for asbestos in the UK comprising
GBP778m (31 December 2013: GBP778m) for UK risks and GBP50m (31
December 2013: GBP52m) for US risks written in the UK. As in
previous years, and as a standard part of our reserving practices,
these asbestos provisions have been reviewed by external
consultants. These provisions can be analysed by survival ratio.
Survival ratio is an industry standard measure of a company's
reserves, expressing the number of years that carried reserves will
be available if the recent year payment or notification levels
continue. The following table outlines the asbestos provisions as
at 31 December 2014 analysed by risk and survival ratio:
Total UK risks writtenin US risks writtenin
the UK the UK
Provisions in GBPm
Net of reinsurance 829 778 50
Net of discount 506 465 41
Survival ratios(Gross of
discount) - On payment
One year 29 32 12
Three year average 30 32 14
Survival ratios(Gross
of discount)
- On notifications
One year 25 25 18
Three year average 23 25 10
One year average ratios are inherently more volatile and
impacted by the size and timing of payments or notifications in the
year, with the three year average providing a more stable
benchmark. For UK risks written in the UK, the paid survival ratios
have remained stable, with the incurred survival ratio impacted by
changes in the level of notifications from year to year. We
continue to monitor notification levels closely. For US risks
written in the UK, the remaining reserves are relatively small in
total and will therefore be particularly sensitive to changes in
notifications or the size and timing of claims payments and
settlements during the year.
APPENDIX
RATIOS, DEFINITIONS AND OTHER INFORMATION
Changes to management basis reporting
During 2014 the Group has made certain changes to enhance and
improve the transparency of its financial disclosure.
The presentation of the Group's financial performance has been
separated between its 'core' operations and its 'discontinued &
non-core' operations. 'Core' operations comprise Scandinavia,
Canada (excluding Noraxis), UK (excluding Legacy), Ireland, Latin
America and Group Re. 'Discontinued & non-core' operations
comprise the Baltics, Poland, Noraxis, Hong Kong, Singapore, China,
Italy, Middle East, Russia, UK Legacy, and associate holdings in
Thailand and India.
The combined ratio is now stated on an 'earned' basis. See below
for further details
Investment expenses have been reclassified from Other Activities
into the Investment Result. The Investment Result now includes
investment income, investment expenses and the discount unwind.
Other Activities has been renamed as Central Expenses.
Below the Operating Result, amortisation and pension costs have
been grouped into 'non-operating charges' whilst Solvency II costs,
reorganisation costs, transaction costs, and economic assumption
changes have been grouped into 'non-recurring charges'.
Economic assumption changes is a new line item in management
basis reporting and in 2014 captures the impact following the
changes to discount rates.
European Specialty Lines (ESL) previously reported within
Western Europe, has been reclassified into UK Commercial in order
to better reflect the way in which the ESL businesses are
managed.
Combined operating ratio
The Group's combined operating ratio (COR) is now calculated on
an 'earned' basis, as follows:
COR = loss ratio + commission ratio + expense ratio
Where:
Loss ratio = net incurred claims / net earned premiums
Commission ratio = earned commissions / net earned premiums
Expense ratio = earned operating expenses / net earned
premiums
Net asset value and tangible net asset value per share
Net asset value per share data at 31 December 2014 was based on
total shareholders' funds of GBP3,825m, adjusted by GBP125m for
preference shares. Tangible net asset value per share was based on
a tangible book value of GBP2,900m.
Earnings per share
The earnings per share is calculated by reference to the result
attributable to the ordinary shareholders of the Parent Company and
the weighted average number of shares in issue during the period.
These were 961,657,975 on both a basic and diluted basis (net of
RSA owned shares). The number of shares in issue at 31 December
2014 was 1,014,264,898 (net of RSA owned shares).
Return on equity and tangible equity
2014 20131
GBPm GBPm
Profit/(loss) after tax 76 (338)
Less: non-controlling interest (7) (9)
Less: preference dividend (9) (9)
A Profit/(loss) attributable 60 (356)
to ordinary shareholders
Operating profit/(loss) before tax 365 349
Less: interest costs (119) (117)
Underlying profit/(loss) before tax 246 232
Less: tax2 (69) (67)
Less: non-controlling interest (7) (9)
Less: preference dividend (9) (9)
B Underlying profit/(loss) 161 147
after tax attributable
to ordinary shareholders
Opening shareholders' funds 2,893 3,750
Less: preference share capital (125) (125)
C Opening ordinary shareholders' funds 2,768 3,625
Less: goodwill & intangibles (1,103) (1,489)
D Opening tangible ordinary shareholders' funds 1,665 2,136
Return on equity
A/C Reported 2.2% (9.8)%
B/C Underlying 5.8% 4.0%
Return on tangible equity
A/D Reported 3.6% (16.7)%
B/D Underlying 9.7% 6.9%
1 restated for 2014 methodology2 using underlying assumed tax
rate of 28% for 2014 and 29% for 2013
RSA reports return on tangible equity on both a 'reported' and
an 'underlying' basis to aid stakeholder review. In the light of
market feedback and to achieve consistency of treatment of charges
and gains reported beneath the Operating Profit line, the
definition of 'underlying' set out above shows a change from past
years and now excludes non-cash customer list amortisation, for
which in past years the corresponding intangible asset had already
been excluded. By 2017 this is expected to be immaterial in
financial results terms. Incentive plans will adjust targets to
exclude any benefit from this change.
Related party transactions
In 2014, there have been no related party transactions that have
materially affected the financial position of the Group.
NET EARNED PREMIUMS BY CLASS
Management basis
2014 2013 Change asreported Change atconstant
fx
GBPm GBPm % %
Scandinavia
Household 303 315 (4) 4
Personal Motor 357 401 (11) (2)
Personal 297 305 (3) 6
Accident
& Other
Total Personal 957 1,021 (6) 2
Property 311 328 (5) 2
Liability 131 131 - 7
Commercial 207 227 (9) -
Motor
Marine & Other 146 174 (16) (9)
Total 795 860 (8) -
Commercial
Total 1,752 1,881 (7) 1
Scandinavia
Canada
Household 424 431 (2) 11
Personal Motor 626 735 (15) (4)
Total Personal 1,050 1,166 (10) 2
Property 217 248 (13) (1)
Liability 120 143 (16) (5)
Commercial 94 105 (10) 1
Motor
Marine & Other 55 58 (5) 8
Total 486 554 (12) (1)
Commercial
Total Core 1,536 1,720 (11) 1
Canada
UK
Household 659 631 4 4
Personal Motor 306 390 (22) (22)
Pet 254 217 17 17
Total Personal 1,219 1,238 (2) (2)
Property 597 645 (7) (7)
Liability 286 305 (6) (6)
Commercial 479 567 (16) (16)
Motor
Marine 269 301 (11) (11)
Total 1,631 1,818 (10) (10)
Commercial
Total Core UK 2,850 3,056 (7) (7)
Ireland
Personal 217 220 (1) 4
Commercial 111 113 (2) 4
Total Ireland 328 333 (2) 4
Latin America
Chile 170 187 (9) 13
Argentina 198 235 (16) 32
Brazil 124 133 (7) 7
Mexico 90 96 (6) 3
Uruguay 44 46 (4) 16
Colombia 74 98 (24) (15)
Total Latin 700 795 (12) 11
America
Group Re 17 38 (55) (55)
Total Core 7,183 7,823 (8) (1)
Group
Discontinued 691 771 (10) (5)
& non-core
Total Group 7,874 8,594 (8) (2)
LOSS DEVELOPMENT TABLES & RESERVE MARGIN
The table below (for continuing operations) presents the general
insurance claims provisions net of reinsurance for the accident
years 2004 and prior through to 2014. The top half of the table
shows the estimate of cumulative claims at the end of the initial
accident year and how these have developed over time. The bottom
half of the table shows the value of claims paid for each accident
year in each subsequent year. The current year provision for each
accident year is calculated as the estimate of cumulative claims at
the end of the current year less the cumulative claims paid.
GBPm 2004andprior 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Total
Estimate of Cumulative claims
At end of accident year 8,034 2,210 2,242 2,282 2,360 2,222 2,311 2,575 2,636 2,769 2,556
1 year later 7,860 2,088 2,213 2,282 2,340 2,253 2,329 2,571 2,660 2,863
2 years later 7,981 2,011 2,121 2,254 2,327 2,219 2,320 2,560 2,644
3 years later 7,768 1,938 2,045 2,192 2,291 2,192 2,351 2,511
4 years later 7,540 1,860 1,997 2,150 2,273 2,214 2,360
5 years later 7,409 1,804 1,975 2,132 2,247 2,221
6 years later 7,253 1,780 1,943 2,132 2,228
7 years later 7,073 1,755 1,919 2,121
8 years later 6,971 1,730 1,904
9 years later 6,960 1,727
10 years later 7,024
2014 movement (64) 3 15 11 19 (7) (9) 49 16 (94) (61)
Less: margin release/(build) 21 2 15 7 11 6 2 23 (5) (89) (7)
Discounting (19) - - (1) (1) (1) - 2 - (2) (22)
2014 movement ex margin (62) 1 - 3 7 (14) (11) 28 21 (7) (34)
Claims paid
1 year later 1,687 840 872 992 1,136 1,116 1,207 1,196 1,238 1,347
2 years later 976 263 318 328 339 348 380 401 408
3 years later 608 150 171 238 230 232 231 261
4 years later 557 127 160 146 173 183 181
5 years later 407 96 106 124 103 126
6 years later 320 74 77 67 68
7 years later 190 37 54 36
8 years later 177 22 30
9 years later 253 11
10 years later 222
Cumulative claims paid 5,397 1,620 1,788 1,931 2,049 2,005 1,999 1,858 1,646 1,347
Current year provision 1,627 107 116 190 179 216 361 653 998 1,516 2,556 8,519
before discounting
Exchange adjustment to closing rates (146)
Discounting (444)
Annuities 673
Present value recognised in the statement 8,602
of financial position
Held for sale 417
Total Group 9,019
In terms of accident year, 2011 and 2012 have shown positive
development across most major lines in Scandinavia, UK Commercial
Property, UK Personal lines and Canada. 2009 and 2010 have been
impacted by UK Professional Indemnity strengthening. 2004 &
prior includes strengthening for UK Deafness reserves and also in
UK Asbestos, relating to revisions to estimates of reinsurance
recoveries to reflect the latest experience of claims across
accident years.
Reconciliation to prior year underwriting result:
GBPm
2014 net loss development (61)
Discounting 22
Annuities 18
Held for sale entities 30
Other 4
Prior year net incurred claims 13
Prior year premiums (33)
Prior year commissions (4)
Prior year expenses (7)
Prior year underwriting result (31)
Reserve margin
Our own assessment of the margin in reserves for the core Group
(the difference between our actuarial indication and the booked
reserves in the financial statements) is unchanged at 5% of booked
claims reserves, though there have been movements between regional
businesses during the year. This reserve margin effectively acts as
a cushion against stressed claims movements in capital models.
PENSIONS
The table below provides a reconciliation of the movement in the
Group's pension fund position under IAS 19 (net of tax) from 1
January 2014 to 31 December 2014.
UK Other Group
GBPm GBPm GBPm
Pension fund surplus/(deficit) at 1 January 2014 (58) (67) (125)
Actuarial gains/(losses)1 35 (39) (4)
Deficit funding 52 - 52
Other movements2 4 1 5
Pension fund surplus/(deficit) at 31 December 2014 33 (105) (72)
1 Actuarial gains/(losses) include pension investment expenses,
variance against expected returns, change in actuarial assumptions
and experience losses.2 Other movements include regular
contributions, service/volume costs, expected returns and interest
costs.
The IAS 19 pension has improved during the year from a deficit
of GBP125m to a deficit of GBP72m. The UK pension position has
improved by GBP91m during the year to a surplus of GBP33m, driven
by greater than expected return on assets and contributions, partly
offset by changes to actuarial assumptions (the pension inflation
rate fell from 3.2% to 2.9% in the year, whilst the discount rate
fell from 4.6% to 3.7%), experience losses and service costs. The
overseas pension position deteriorated from a deficit of GBP67m to
a deficit of GBP105m driven primarily by lower discount rates.
At the most recent funding valuations as of 31 March 2012, the
three main UK funds had an aggregate funding deficit of GBP477m,
equivalent to a funding level of 93%. The Group and the Trustees
agreed funding plans at that time to eliminate the funding deficits
by 2022. The funding plans will be reviewed following the next
triannual funding valuations, which will have an effective date of
31 March 2015.
The Scheme Actuaries also carry out interim assessments on an
annual basis and at the last update as at 31 March 2014 the funding
level was estimated to have increased to 97%. This update is not
formally agreed between the Group and the Trustees but reflects
changes in market conditions and the deficit contributions
paid.
For completeness, in addition to calculating the funding
valuation, the Scheme Actuaries also provide an estimate of the
cost of full risk removal by purchasing annuities from an insurance
company to meet the existing retirement obligations. This is a
theoretical calculation and does not reflect what we expect to pay
into the schemes. In common with most UK defined benefit
arrangements, the liabilities and hence deficit on this basis are
materially higher than on an ongoing funding basis and as at 31
March 2014 there was estimated to be a shortfall of approximately
GBP3.1bn. This is largely due to the use of more conservative
assumptions in relation to future investment return and to a lesser
extent, how long members will live. However, the cost of purchasing
annuities will also reflect insurers' reserving requirements, cost
of capital, profit margins and supply and demand dynamics.
The purchase of annuities would effectively result in full
removal of all economic and demographic risks associated with
provision of the liabilities. Alternatively, full removal of
investment and economic risk on expected benefit payments could
also be achieved through the use of a fully matched swaps based
investment strategy. This effectively eliminates the assumed return
benefits in the funding basis of equity and credit investments
which form part of the asset mix of the funds. The Trustee's
investment advisers have estimated that as at 31 March 2014 this
would have resulted in a shortfall of GBP2.4bn, however under this
approach the funds would remain exposed to longevity and other
behavioural and demographic risks.
REINSURANCE
For 2015 we have made some changes to our reinsurance
programme.
We have purchased a Group aggregate reinsurance cover, the key
terms of which are:
-- Events or individual net losses greater than GBP10m are added together
across our financial year (when a loss exceeds GBP10m it is
included in
full);
-- Cover attaches when total of these retained losses is greater than
GBP180m;
-- Limit of cover is GBP150m in any year;
-- 3 year deal with maximum recovery available during that period of
GBP300m;
-- GBP150m limit can also be used if Cat cover is exceeded;
-- Profit commission and no claims bonus arrangements in place; and
-- Counterparties are high credit quality reinsurers (80% AA- and 20% A
or better).
Retentions for our existing Cat and Risk treaties have therefore
been adjusted accordingly. The key changes are to increase non-UK
Cat retentions from GBP25m to GBP50m (Canada C$30m to C$50m), and
to increase Property Risk retentions from GBP25m to GBP50m. UK Cat
retention remains unchanged at GBP75m.
INCOME STATEMENT
Management basis - year ended 31 December 2013 (re-presented for
core, non-core and discontinued split)
Total 'non-core'
GroupFY 2013 Core5 'Non-core'6 Discontinuedoperations6
GBPm GBPm GBPm GBPm
Net Written 8,664 7,877 188 599
Premiums
Net Earned 8,594 7,823 172 599
Premiums
Net Incurred (5,970) (5,461) (138) (371)
Claims1
Commissions7 (1,218) (1,122) (10) (86)
Operating (1,349) (1,213) (14) (122)
expenses7
Underwriting 57 27 10 20
result
Investment income 493 443 30 20
Investment (31) (28) (1) (2)
expenses
Unwind of discount (97) (69) (27) (1)
Investment result 365 346 2 17
Insurance result 422 373 12 37
Central expenses (73) (58) (18) 3
Operating result 349 315 (6) 40
Net 32
gains/losses/exchange
Interest (117)
Non-operating (57)
charges2
Non-recurring (451)
charges3
Profit before tax (244)
Tax (94)
Profit after tax (338)
Loss ratio (%) 69.5 69.8
Weather loss ratio 3.5 3.7
Large loss ratio 7.9 8.2
Current year 58.7 58.3
underlying
loss ratio4
Prior year effect (0.6) (0.4)
on loss ratio
Commission 14.2 14.3
ratio (%)7
Expense ratio (%)7 15.7 15.5
Combined ratio (%) 99.4
Reported ROTE (16.7)%
Underlying ROTE 6.9%
Notes:
1Of which: claims 484
handling costs
2Amortisation (42)
2Pension net (15)
interest
costs
3Solvency II costs (20)
3Reorganisation (356)
costs
3Transaction costs (12)
3Economic (63)
assumption
changes
4 Current year underlying loss ratio excludes weather and large
losses.5 'Core' comprises Scandinavia, Canada (ex Noraxis), UK (ex
Legacy), Ireland, Latin America and central functions.6
Discontinued operations include Poland, Baltics, Italy, Hong Kong,
Singapore, China and Thailand.Non-core operations include Noraxis,
UK Legacy, Middle East, India and Russia7 The combined ratio
calculation methodology is presented on an 'earned' basis, please
refer to the appendix for further details
SEGMENTAL ANALYSIS
Management basis - year ended 31 December 2013 (re-presented
onto 2014 segmental split)
Scandinavia Canada4 UK5 Ireland LatinAmerica Centralfunctions Total 'non-core'1 GroupFY 2013
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Net Written 1,863 1,755 3,041 327 837 54 787 8,664
Premiums
Net Earned 1,881 1,720 3,056 333 795 38 771 8,594
Premiums
Net Incurred (1,298) (1,233) (2,019) (439) (439) (33) (509) (5,970)
Claims
Commissions2 (61) (244) (565) (57) (192) (3) (96) (1,218)
Operating (297) (256) (459) (57) (144) - (136) (1,349)
expenses2
Underwriting 225 (13) 13 (220) 20 2 30 57
result
Investment 134 100 144 14 42 9 50 493
income
Investment (9) (4) (9) - (6) - (3) (31)
expenses
Unwind of (40) (3) (7) - (10) (9) (28) (97)
discount
Investment 85 93 128 14 26 - 19 365
result
Insurance result 310 80 141 (206) 46 2 49 422
Central expenses - - - - - (58) (15) (73)
Operating result 310 80 141 (206) 46 (56) 34 349
Net 32
gains/losses/exchange
Interest (117)
Non-operating (57)
charges
Non-recurring (451)
charges
Profit before (244)
tax
Tax (94)
Profit after tax (338)
Loss ratio (%) 69.0 71.7 66.1 132.1 55.2 69.5
Weather loss 1.8 8.0 3.0 4.2 0.4 3.5
ratio
Large loss ratio 6.6 3.3 13.2 5.7 2.7 7.9
Current year 67.5 62.1 50.2 84.2 51.5 58.7
underlying
loss ratio3
Prior year (6.9) (1.7) (0.3) 38.0 0.6 (0.6)
effect
on loss ratio
Commission 3.3 14.1 18.5 17.1 24.2 14.2
ratio (%)2
Expense ratio 15.8 14.9 15.0 17.0 18.1 15.7
(%)2
Combined ratio 88.1 100.7 99.6 166.2 97.5 99.4
(%)
1 Total 'non-core' comprises discontinued operations of Poland,
Baltics, Italy, Hong Kong, Singapore, China and Thailand and other
non-core operations of Noraxis, UK Legacy, Middle East, India and
Russia2 The combined ratio calculation methodology is presented on
an 'earned' basis, please refer to the appendix for further
details3 Current year underlying loss ratio excludes weather and
large losses4 Excluding Noraxis5 Excluding Legacy
SUMMARY CONSOLIDATED STATEMENT OF FINANCIAL POSITION
Management basis - year ended 31 December 2014
31 December 31 December
2014 2013
GBPm GBPm
Assets
Goodwill and other intangible assets 800 1,103
Property and equipment 151 160
Investment property 346 331
Investment in associates 31 44
Financial assets 12,840 12,259
Total investments 13,217 12,634
Reinsurers' share of insurance 1,897 2,026
contract liabilities
Insurance and reinsurance debtors 3,174 3,593
Deferred tax assets 180 302
Current tax assets 21 60
Other debtors and other assets 759 787
Other assets 960 1,149
Cash and cash equivalents 1,011 1,162
Assets associated with continuing operations 21,210 21,827
Assets held for sale 808 103
Total assets 22,018 21,930
Equity and liabilities
Equity and loan capital
Shareholders' funds 3,825 2,893
Non-controlling interests 108 121
Total equity 3,933 3,014
Loan capital 1,243 1,309
Total equity and loan capital 5,176 4,323
Liabilities (excluding loan capital)
Insurance contract liabilities 13,266 15,001
Insurance and reinsurance liabilities 904 643
Borrowings 299 301
Deferred tax liabilities 62 82
Current tax liabilities 83 57
Provisions 338 366
Other liabilities 1,160 1,157
Provisions and other liabilities 1,643 1,662
Liabilities associated with 16,112 17,607
continuing operations
Liabilities held for sale 730 -
Total liabilities (excluding loan capital) 16,842 17,607
Total equity, loan capital and liabilities 22,018 21,930
SUMMARY CASH FLOW FOR CONTINUING OPERATIONS
Management basis
2014 2013
GBPm GBPm
Current year underwriting profit/(loss) 121 12
Adjustment for non-cash items, claims payments/receipts 2 182
Underwriting cash 123 194
Investment cash 469 534
Underlying operating cash flow 592 728
Non-operating cash flow (including reorganisation costs) (187) (120)
Operating cash flow 405 608
Tax paid (83) (102)
Interest paid (119) (117)
Pension deficit funding (65) (73)
Cash generation 138 316
Group dividends (9) (157)
Dividend to non-controlling interests (6) (14)
Issue of share capital 753 7
Net movement of debt (66) 4
Corporate activity 678 (42)
Cash movement 1,488 114
Represented by:
Increase/(decrease) in cash and cash equivalents 34 (111)
Purchase/(sale) of other investments 1,454 225
Cash movement 1,488 114
RECONCILIATION: MANAGEMENT BASIS TO STATUTORY REPORTING
Management basis Discontinuedoperations Add backotherincome Statutory basis
Net written premiums 7,465 (498) 6,967 Net written premiums
Net earned premiums 7,874 (513) 7,361 Net earned premiums
Net incurred claims (5,381) 311 (5,070) Net claims and benefits
Commissions (1,195) (2,403) 173 (180) (2,410) Underwriting and policy acquisition costs
Operating expenses (1,208)
Underwriting result 90
Profit before tax 275 (215) 60 Profit before tax
Tax (199) 17 (182) Tax
Profit from discontinued operations - 198 198 Profit from discontinued operations
Profit after tax 76 - 76 Profit after tax
REPORTING AND DIVIDEND
TIMETABLE
5 March Ex dividend date for the 2014 final dividend
2015
5 March Ex dividend date for the first preference dividend for 2015
2015
6 March Record date for the 2014 final dividend
2015
6 March Record date for the record preference dividend for 2015
2015
1 April Payment date for the first preference dividend for 2015
2015
7 May Q1 2015 Interim Management Statement
2015
8 May Annual General Meeting
2015
15 May Payment date for the 2014 final dividend
2015
6 August 2015 Interim Results
2015
Note: the scrip dividend alternative is not being
offered for the 2014 final dividend payment
Enquiries:
Investors & analysts Press
Rupert Taylor Rea Louise Shield
Head of Investor Relations Director of External
Communications
Tel: +44 (0) 20 7111 7140 Tel: +44 (0) 20 7111 7047
Email: Email:
rupert.taylorrea@gcc.rsagroup.com louise.shield@gcc.rsagroup.com
Ryan Jones Kaidee Sibborn
Investor Relations Manager Media Relations Manager
Tel: +44 (0) 20 7111 7243 Tel: +44 (0) 20 7111 7137
Email: ryan.jones@gcc.rsagroup.com Email:
kaidee.sibborn@gcc.rsagroup.com
Further information
A live webcast of the analyst presentation, including the
question and answer session, will be broadcast on the website at
09:00am today and is available via a listen only conference call by
dialling +44 (0) 20 3427 1900. Participants should use access code
6917899. A webcast of the call will be available via the company
website (www.rsagroup.com).
Important disclaimer
This press release and the associated conference call 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 are
inherently predictive and speculative and 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,
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. Forward-looking statements in this
press release are current only as of the date on which such
statements are made. 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
shall be construed as a profit forecast.
This information is provided by Business Wire
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