TIDMRSA
RNS Number : 2239A
RSA Insurance Group PLC
22 March 2017
22 March 2017
RSA INSURANCE GROUP PLC
(THE "COMPANY")
2016 ANNUAL FINANCIAL REPORT ANNOUNCEMENT
In accordance with Listing Rule 9.6 and Disclosure and
Transparency Rule ("DTR") 4.1, the Company announces that the
following documents have been posted to shareholders and have today
been submitted to the UK Listing Authority via the National Storage
Mechanism:
-- Annual Report and Accounts for the year ended 31 December 2016
-- Notice of the 2017 Annual General Meeting to be held on 5 May 2017
-- Proxy form for the 2017 Annual General Meeting
The above mentioned documents (except for the Proxy form) are
available on our website at www.rsagroup.com and
www.rsagroup.com/agm2017 and will shortly be made available for
inspection at www.morningstar.co.uk/uk/NSM. Shareholders can obtain
additional copies of the Proxy form from our Registrar, Equiniti
Limited, at Aspect House, Spencer Road, Lancing, West Sussex BN99
6DA or view online at www.shareview.co.uk.
This announcement should be read in conjunction with the
Company's announcement issued on 23 February 2017. Together these
constitute the material required by DTR 6.3 to be communicated to
the media in full unedited text through a Regulatory Information
Service. This material is not a substitute for reading the
Company's 2016 Annual Report and Accounts.
An indication of the important events that occurred in 2016 and
their impact on the condensed consolidated financial statements,
the condensed consolidated financial statements themselves and the
responsibility statement were announced to the London Stock
Exchange on 23 February 2017, forming part of the Preliminary
Results announcement for the year ended 31 December 2016.
Additional content forming part of the management report is in the
Appendix below.
Enquiries:
Elinor Bell
Deputy Group Company Secretary
RSA Insurance Group plc
Tel: +44 (0) 20 7111 7000
IMPORTANT DISCLAIMER
Visit www.rsagroup.com for more information.
This press release (together with the Annual Report and Accounts
referred to herein) has been prepared in accordance with the
requirements of English company law and the liabilities of the
directors in connection with this press release (together with the
Annual Report and Accounts referred to herein) shall be subject to
the limitations and restrictions provided by such law. This press
release may contain 'forward-looking statements' with respect to
certain of the Group's plans and its current goals and expectations
relating to its future financial condition, performance, results,
strategic initiatives and objectives. Generally, words such as
"may", "could", "will", "expect", "intend", "estimate",
"anticipate", "aim", "outlook", "believe", "plan", "seek",
"continue" or similar expressions identify forward-looking
statements. These forward-looking statements are not guarantees of
future performance. By their nature, all forward-looking statements
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
(including changes related to capital and solvency requirements),
the impact of competition, inflation, deflation, the timing impact
and other uncertainties of future acquisitions or combinations
within relevant industries, as well as the impact of tax and other
legislation or regulations in the jurisdictions in which the Group
and its affiliates operate. As a result, the Group's actual future
financial condition, performance and results may differ materially
from the plans, goals and expectations set forth in the Group's
forward-looking statements. The Group undertakes no obligation to
update any forward-looking statements, save in respect of any
requirement under applicable law or regulation. Nothing in this
press release (together with the Annual Report and Accounts
referred to herein) should be construed as a profit forecast.
APPIX
References to page numbers and notes to the accounts made in
this Appendix refer to page numbers and notes to the accounts in
the 2016 Annual Report and Accounts.
KEY PERFORMANCE INDICATORS
We consider the following nine key performance indicators
important in measuring the delivery of our strategic
priorities.
Click on or paste the following link into your web browser to
view the key performance indicators
http://www.rns-pdf.londonstockexchange.com/rns/2239A_1-2017-3-22.pdf
Combined operating ratio(1) (%)*
Definition: A measure of underwriting performance - the ratio of
underwriting costs (claims, commissions and expenses) expressed in
relation to earned premiums.
Commentary: The COR is used as a measure of underwriting
efficiency across the industry. The aim is to achieve a COR as
sustainably low as possible - that is without uncompetitive pricing
or compromising reserves.
Outlook: We target further improvements in combined ratio.
Core Group attritional loss ratio (%)*
Definition: This is the underlying loss ratio (net incurred
claims and claims handling expense as a proportion of net earned
premiums) of our business prior to volatile impacts from weather,
large
losses and prior-year reserve developments.
Commentary: Attritional loss ratios are a key lever in the
Group's turnaround of financial performance. Improvements in the
business mix together with investments in digitally enabled
underwriting and claims excellence are targeted at reducing the
attritional loss ratio.
Outlook: We target improving attritional loss ratios in the
medium term in line with our ambition of best-in-class
performance.
Underlying earnings per share (p)
Definition: Operating profit less interest cost, tax,
non-controlling interests and preference dividends, per share.
Commentary: A key measure of the underlying earnings power of
the Group as it excludes shorter-term and temporary changes, such
as restructuring costs which we have indicated will cease from
2018.
Outlook: We target continued growth in underlying EPS as
performance improvement actions take effect.
Underlying return on tangible equity (%)*
Definition: Operating profit attributable to ordinary
shareholders less interest costs and underlying tax, expressed in
relation to opening tangible shareholders' funds, i.e. excluding
goodwill and intangible assets.
Commentary: A key measure of shareholder value and one that
informs overall valuation in the insurance sector.
Outlook: We have upgraded our target to 13-17 percent in the
medium term.
TNAV per share (p)*
Definition: The value of tangible shareholders' funds per share,
i.e. excluding goodwill and intangible assets.
Commentary: Growing TNAV generally indicates improving capital
metrics. It also represents the underlying asset value of the
business, although it is sensitive to external market
movements.
Outlook: We expect TNAV per share to increase through retained
earnings.
Solvency II coverage ratio(2) (%)*
Definition: The Solvency II coverage ratio represents total
eligible capital as a proportion of the Solvency Capital
Requirement (SCR) under Solvency II.
Commentary: The Solvency II coverage ratio is a measure of the
capital adequacy of insurance companies. Our SCR is calculated on
our risk profile using the Group's internal capital model.
Outlook: We target a Solvency II coverage ratio in the range of
130-160 percent.
Controllable expenses (GBPbn)*
Definition: Operating expenses incurred by the Group in
undertaking business activities.
Commentary: Reduction of controllable expenses is a key element
of the Group's turnaround strategy. We monitor both the absolute
level of expense and the expense ratio as part of the turnaround
and ongoing performance focus.
Outlook: We have upgraded our target to >GBP400m reduction in
gross controllable expenses by 2018 and aim to improve expense
ratios in the medium term, in line with our ambition of
best-in-class performance.
Customer retention (%)
Definition: We use direct measures of satisfaction, such as NPS
and indirect measures, including retention.
Commentary: Strong customer satisfaction translates to improved
underwriting results. By ensuring customers are at the heart of
everything we do we can optimise business performance.
Outlook: Target a growing level of customer satisfaction and
improving retention over time.
Carbon emissions per FTE (t)
Definition: Gross tonnes of carbon dioxide equivalent per
full-time equivalent (FTE).
Commentary: We endeavour to reduce our emissions as far as
possible by operating efficiently, procuring sustainable
alternatives and promoting sustainable business practices.
Outlook: Having met our Group-wide carbon reduction target, we
will set a new one in 2017.
* This icon indicates those KPIs directly linked to executive
remuneration. To read more about executive variable remuneration,
including the set of financial and non-financial performance
measures on which it is based, please turn to pages 90 to 93.
Notes:
1. Combined ratios prior to 2014 restated onto like-for-like
basis, refer to page 190 for further detail.
2. Coverage ratio under Solvency II introduced in 2015.
RISK MANAGEMENT
Promoting a risk culture which protects the customer and
maximises shareholder risk-adjusted returns.
Risk management approach
As a 300-year-old insurance group we have developed considerable
expertise in how to manage risk, which allows us to be selective in
retaining risks within our core expertise whilst ensuring that we
manage, mitigate and avoid risks where we are not adequately
rewarded. As a pure play general insurer our key area of expertise
is underwriting property and casualty insurance risks, which means
we are able to provide our customers with competitive products that
protect them effectively against the uncertainty of future loss
events whilst ensuring that the risks we accept are collectively
managed to maximise risk-adjusted returns to our investors.
All insurance groups are faced with a number of different risks
which for example can range from adverse movements in asset prices,
external cyber-attacks and significant increases in claim trends to
large catastrophic events (details of all the key risk categories
are set out on page 40).
Our risk management and controls frameworks have been created to
ensure that we are able to identify, measure and effectively manage
these risks in all parts of the group before they adversely impact
the business. This information, together with the strength of the
Group's capital position, allows the Board to set a risk strategy
and appetite which sets out the level of risk the Board is prepared
to take in the delivery of its strategic objectives.
Click on or paste the following link into your web browser to
view the Operational Planning Cycle
http://www.rns-pdf.londonstockexchange.com/rns/2239A_1-2017-3-22.pdf
The risk appetite is refreshed at least annually to adapt to the
evolving risk, regulatory and economic environment, with an
increased focus on ensuring that the Group is adequately prepared
for evolving IT risks including cyber-attack. Once set, the
business regularly monitors compliance with the appetite, both at a
regional and group level, to ensure actions can be rapidly taken to
manage any risks considered to be outside of the risk appetite
tolerance levels.
Keeping our focus on the road ahead
One of the key roles of the risk team is to ensure that we
support the business by keeping abreast of the demands from a
dynamic and ever-changing risk environment. At RSA we perform an
annual deep-dive assessment of the emerging risks facing the
business, which is informed through the use of subject matter
experts, thematic brainstorming workshops, consulting a wide range
of key external documentation as well as participating in the CRO
Forum's emerging risks working group. The emerging risks set out in
the diagram below were presented to the Board Risk Committee for
consideration and a decision on which risks should be subject to
further deep-dive reviews including performance of appropriate
scenario analysis. The results from these reviews satisfied the
Board Risk Committee that the Group's risks and controls frameworks
were overall effective at managing future threats to the business
although it did highlight areas where further refinements could be
made, including expanding the scope of our horizon scanning to keep
abreast of new entrant and technological advancements.
Click on or paste the following link into your web browser to
view the Emerging risk analysis on
http://www.rns-pdf.londonstockexchange.com/rns/2239A_1-2017-3-22.pdf
Operational Planning Cycle:
Risk Management System underpins the Operational Planning
Cycle
1. Board sets the business strategy which is incorporated in the
three-year operational plan. Risk provide robust challenge of
validity and achievability of plan.
2. Risk Strategy creates the overarching principles for
establishing a set of indicators (Risk Appetite).
3. Comprehensive policy suite sets the required business
processes and controls to deliver the operational plan within
appetite. Robust control testing used to identify risks out of
appetite.
4. Regional Risk and Control Committees track actions for risks
outside of appetite, and escalate to Local & Group Boards.
5. Significant changes in risk assessments are considered by the
Internal Model Governance Committee and where appropriate, the
Group's internal model is updated.
6. Output from the model is sense checked against non-modelled
stress and scenario events to ensure it provides a reliable basis
for making business decisions, including capital planning,
reinsurance purchase, performance analysis and pricing.
7. The internal model is run regularly throughout the year in
order to assess the risks impacting the Group and determines how
much capital the Group needs to hold to remain solvent even after a
major stress event(s), which forms part of the ORSA process.
8. Output from the model is reported to the Board, so that
changes can be made to the three-year operational plan to ensure
the Group remains in Appetite. Cycle will continue until the Board
is satisfied with the future plan.
KEY RISKS AND MITIGANTS
Key risk and SII SCR Key mitigants and Commentary
exposures % controls
------------------- -------- ----------------------------------------------------------------- --------------------
Catastrophe 16 Consistent
risk * Our reinsurance programme significantly reduces our with our strategy
Arises from exposure to catastrophe risks with losses arising and appetite
the risk of from the 2016 Canadian wildfires being well covered of retaining
large natural by our programme. Programme is designed to cover at risks that
disasters with least 1 in 200 year events. reside within
our main exposure our core expertise,
being to European where we are
windstorms able to maximise
and Canadian risk-adjusted
earthquakes. returns, our
Solvency II
Capital Requirement
(SCR) is primarily
comprised
of
insurance-related
risks, including
higher than
anticipated
underwriting
losses, large
retained
catastrophe
losses and
deterioration
in our stock
of reserves
for future
claims.
------------------- -------- -----------------------------------------------------------------
Reserving risk 16 Whilst our
Is the risk * Reserves are reviewed and challenged at the Group investment
that the Group's Reserving Committee which is attended by the Group strategy remains
estimate of Chief Actuary, the CRO, CFO and CEO. deliberately
future claims conservative
is insufficient. we continue
Longer tail * Group has implemented a comprehensive reserve to look for
line of business assurance programme which has independently verified opportunities
present more >90 percent of the Group's net reserves by value over to increase
uncertainty a three year period. returns through
on the size the purchase
and timing of less liquid
of payments, * Economic transfer of the UK legacy insurance high quality
with our key liabilities, effective at 31 December 2016. assets as we
exposure being are able to
the Swedish match the cashflow
personal accident profile against
lines. that of our
liabilities.
Another key
SCR risk arises
from the Group's
defined benefit
pension schemes.
Although these
schemes are
well funded
(95 percent
per latest
triennial review).
Under the Solvency
II rules we
are required
to hold sufficient
capital to
withstand a
1 in 200 year
event. For
more information
on the pension
schemes see
note 37 of
the financial
statements.
------------------- -------- -----------------------------------------------------------------
Underwriting 14
and claims * Controlled through well-defined risk appetite
risk statements which are rigorously monitored at
This is the quarterly portfolio reviews, with remediation actions
risk that taken where deemed necessary.
underwritten
business is
less profitable * Claims case reserves are prudently set and reviewed
than planned at quarterly case reserving committees.
due to
insufficient
pricing and * Extensive control validation and assurance activities
setting of performed - with over 100 separate assurance reviews
claims case having been performed.
reserves. Key
exposures arise
from large
portfolios
where claims
trends are
slow to emerge
such as UK
Commercial
and Marine.
------------------- -------- -----------------------------------------------------------------
Market, credit 18
and currency * RSA adopts a prudent investment strategy with the
risk investment portfolio favouring high-quality fixed
Is the risk income bonds, which are closely duration and currenc
to our insurance y
funds arising matched with insurance liabilities to hedge
from movements volatility.
in macroeconomic
variables
including * Investment positions are regularly monitored to
widening credit ensure limits remain within appetite.
spreads, declining
bond yields
or currency
fluctuations,
the latter
having been
significantly
impacted
post Brexit.
------------------- -------- -----------------------------------------------------------------
Pension risk 26
We face longevity * Funding assets are well matched to liabilities in the
and in particular pension schemes, including the use of swap
market related arrangements.
risks which
arise from
our defined * Reduced more volatile growth assets exposures from
benefit pension c.25 percent to c.15 percent in the year.
schemes. The
largest exposures
arise from * Reaching a concluding agreement to close the UK
credit spread schemes to further accrual from 31 March 2017.
and equity
movements,
although these * RSA continues to work with the Trustees in order to
are partly further explore options to de-risk the pension funds.
hedged by
offsetting
movements in
the Insurance
Investment
Fund.
------------------- -------- -----------------------------------------------------------------
Operational 10
risk * Extensive Line 1, 2 & 3 challenge over the progress
These risks made in executing the Group's transformation
relate to customer programme.
and/or
reputational
damage arising * Significant progress in clearly articulating IT risk
from operational appetite and getting remediation plans and enhanced
failures such control testing under way.
as IT system
failure.
* Extensive control review and testing with >500
control gaps closed in the year.
------------------- -------- ----------------------------------------------------------------- --------------------
Risk culture
In our view the most important component to effectively
embedding the Group's risk management framework is ensuring that
senior management set the right 'tone from the top'. At RSA the
senior management team have remained committed to instilling a
culture which promotes openness, honesty, integrity and ethical
behaviour, which is further underpinned by the Group's continued
focus on our quarterly cultural health check.
A key part of our culture is ensuring that our customers are at
the heart of all we do, and our staff are passionate about
providing brilliant service to our customers. For example, in our
UK business we have embedded a Conduct Framework which identifies
and addresses conduct risks appropriately, considers the customer
impact of decisions we take, and ensures that our customers receive
good outcomes.
Risk management in action
As the business has continued to leverage technology to deliver
a more efficient customer offering the risk team have provided
significant support to the business to ensure risks arising through
the increased automation and digitalisation of processes remain
transparent and controllable throughout transformation.
-- The first step to implementing an appropriate risk and
control framework is to identify the key IT risks which can arise
with the key focus being on the risks that have the highest impact
and likelihood of occurrence.
-- The risk team supported the business in evaluating the risks
arising and helped prioritise resolution plans which focused on the
most significant risks, including ensuring that resourcing needs
had been appropriately allowed for in the Group's operating
plan.
-- All risk assessments together with resolution plans were
presented to the Board Risk Committee for approval to ensure
remediation plans were considered sufficient to bring risks within
appetite.
-- Monitoring of these risks will be performed through both a
set of key risk indicators which are linked to the risks and
provide an early warning if risks have moved outside of appetite as
well as the development of line 1 and line 2 control testing
frameworks which focus on testing the key controls.
Risk developments in 2016
Transformation risks - the risk teams have supported the
business to ensure appropriate level of control and governance over
the transformational changes being implemented by the Group. This
includes ensuring there is appropriate control over the planning,
testing and implementation stages of the programme as well as
taking an active role in providing high levels of scrutiny and
challenge at the regional and group transformation steering
committees.
Delivery of the operating plan - The Group's operating plan
provides the platform for ensuring the business remains focused on
achieving its key operational and strategic goals, including
delivery of profitable growth whilst maintaining a robust capital
base. It is therefore essential the plan meets the right balance of
achievable stretch targets with realistic assumptions and strategic
actions for how this can be achieved. Risk take an active role in
challenging the plan, including ensuring the validity of
assumptions when compared to economic projections, peer reviews,
past experience and current risk assessments, which delivery of
planned transformation activity.
Pension de-risking - The Group has continued to explore
opportunities for further reducing the volatility created by our
pension scheme exposures, including reducing our more volatile
growth asset exposures from c.25 percent to c.15 percent in the
year and reaching a concluding agreement to close the UK schemes to
further accrual from 31 March 2017.
Management of peripheral businesses - There has been an
increased focus in strengthening the control frameworks of the
Group's peripheral businesses, with all businesses having been
subjected to a detailed assessment.
IT risk monitoring framework - The Group has developed an IT
risk monitoring framework which links key IT risks to a set of key
risk indicators. This provides management with feedback on the
effectiveness of the IT control framework, which has been
strengthened through the appointment of Regional Chief Information
Security Officers (CISO), enhancing their teams and developing
robust control frameworks and remediation plans which are in
progress.
UK Legacy disposal - as described on page 33, the Group
materially reduced long-tail reserve risk through the economic
transfer of GBP834m of undiscounted UK legacy liabilities net of
reinsurance.
Solvency II and Solvency Capital Requirement (SCR)
Solvency II is the new EU-wide insurance regulatory regime that
became effective on 1 January 2016.
One of the key aims of Solvency II is to introduce a harmonised
prudential framework for insurers promoting transparency,
comparability and competitiveness amongst European insurers.
The Directive has three pillars that have impacted how RSA
manages risk and how it reports to both regulators and
shareholders: Pillar one relates to the quantitative requirements
and introduces a risk-based methodology to calculating the Group's
Solvency Capital Requirement (SCR). Insurers are required to
calculate the level of capital required based on their unique risk
profile. For RSA this is calculated using our own Internal Model
that was approved by the regulator in December 2015.
Pillar two incorporates qualitative governance requirements,
including the way the risk management function operates within the
business and how key systems and controls are documented and
reviewed.
Pillar three relates to enhanced and standardised disclosure
requirements, including increased transparency of the risk strategy
and risk appetite of the business. In 2017, RSA will publish its
first 'Solvency & Financial Condition Report'; these will
contain extensive information on how RSA manages its risks and
exposures and report on the financial position of the company using
Solvency II valuation principles.
Brexit
RSA has been actively monitoring the impact of the referendum
result and the potential impact on RSA's business. The vast
majority of business written within the '27 remaining countries' of
the EU is written by subsidiaries domiciled in these countries.
Plans are being evaluated for creating an appropriate structure for
the remaining business written through branches of our main UK
entity.
RISK AND CAPITAL MANAGEMENT
Insurance Risk
The Group is exposed to risks arising from insurance contracts
as set out below:
A) Underwriting risk
B) Reinsurance risk
C) Reserving risk
A) Underwriting risk
Underwriting risk refers to the risk that underwritten business
is less profitable than planned due to insufficient pricing.
The majority of underwriting risk to which the Group is exposed,
is of a short-term nature, and generally does not exceed 12 months.
The Group's underwriting strategy aims to ensure that the
underwritten risks are well diversified in terms of the type,
amount of risk, and geography in order to ensure that the Group is
not exposed to a concentration of risk which would result in a
volatile insurance result.
Underwriting limits are in place to enforce appropriate risk
selection criteria and pricing with all of the Group's underwriters
having specific licences that set clear parameters for the business
they can underwrite, based on their expertise.
The Group has developed enhanced methods of recording exposures
and concentrations of risk and has a centrally managed forum
looking at Group underwriting issues, reviewing and agreeing
underwriting direction and setting policy and directives where
appropriate. The Group has a quarterly portfolio management process
across all its business units where key risk indicators are tracked
to monitor emerging trends, opportunities and risks. This provides
greater control of exposures in high risk areas as well as enabling
a prompt response to claims from policyholders should there be a
catastrophic event such as an earthquake.
Pricing for the Group's products is generally based upon
historical claims frequencies and claims severity averages,
adjusted for inflation and modelled catastrophes, trended forward
to recognise anticipated changes in claims patterns after making
allowance for other costs incurred by the Group, conditions in the
insurance market and a profit loading that adequately covers the
cost of capital.
B) Reinsurance risk
Reinsurance risk refers to the risk of loss to the Group from
the failure to enforce payment under the contracts from one or more
of its reinsurers.
Decisions on how much insurance risk to pass on to other
insurers through the use of reinsurance is another key strategy
employed in managing the Group's exposure to insurance risk. The
Group Board determines a maximum and the Group Corporate Centre
determines a minimum level of risk to be retained by the Group as a
whole and, therefore, the amount of central reinsurance cover
purchased. This is then distributed across the Group in accordance
with deemed risk appetite. Local operations may also purchase
additional reinsurance within agreed local reinsurance appetite
parameters.
Reinsurance arrangements in place include proportional, excess
of loss, stop loss, catastrophe and adverse development coverage.
These arrangements ensure that the Group should not suffer total
net insurance losses beyond the Group's risk appetite in any one
year.
The Group remains primarily liable as the direct insurer on all
risks reinsured, although the reinsurer is liable to the Group to
the extent of the insurance risk it has contractually accepted
responsibility for.
C) Reserving risk
Reserving risk refers to the risk that the Group's estimates of
future claims will be insufficient.
The Group establishes a provision for losses and loss adjustment
expenses for the anticipated costs of all losses that have already
occurred but have not yet been paid. Such estimates are made for
losses already reported to the Group as well as for the losses that
have already occurred but are not yet reported losses together with
a provision for the future costs of handling and settling the
outstanding claims.
There is a risk to the Group from the inherent uncertainty in
estimating provisions at the end of the reporting period for the
eventual outcome of outstanding notified claims as well as
estimating the number and value of claims that are still to be
notified. In particular, the estimation of the provisions for the
ultimate costs of claims for asbestos and environmental pollution
is subject to a range of uncertainties that is generally greater
than those encountered for other classes of business due to the
slow emergence and longer settlement period for these claims.
The Group seeks to reduce its reserving risk through the use of
experienced regional actuaries who estimate the actuarial
indication of the required reserves based on claims experience,
business volume, anticipated change in the claims environment and
claims cost. This information is used by local reserving committees
to recommend to the Group Reserving Committee the appropriate level
of reserves for each region - which will include adding a margin
onto the actuarial indication as a provision for unforeseen
developments such as future claims patterns differing from
historical experience, future legislative changes and the emergence
of latent exposures such as asbestosis. The Group Reserving
Committee review these local submissions and recommend the final
level of reserves to be held by the Group. The Group has a Group
Reserving Committee which is chaired by the Group Chief Financial
Officer and includes the Group Chief Executive, Group Underwriting
Director, Group Chief Actuary and Group Chief Risk Officer. A
similar committee has been established in each of the Group's major
operating segments. The Group Reserving Committee monitors the
decisions and judgements made by the business units as to the level
of reserves to be held. It then recommends to the Group Board via
the Group Audit Committee for the final decision on the level of
reserves to be included within the consolidated financial
statements. In forming its collective judgement, the Committee
considers the following information:
-- The actuarial indication of ultimate losses together with an
assessment of risks and possible favourable or adverse developments
that may not have been fully reflected in calculating these
indications. At the end of 2016, these risks and developments
include: the possibility of future legislative change having
retrospective effect on open claims; changes in claims settlement
procedures potentially leading to future claims payment patterns
differing from historical experience; the possibility of new types
of claim, such as disease claims, emerging from business written
several years ago; general uncertainty in the claims environment;
the emergence of latent exposures such as asbestos; the outcome of
litigation on claims received; failure to recover reinsurance and
unanticipated changes in claims inflation;
-- The views of internal peer reviewers of the reserves and of
other parties including actuaries, legal counsel, risk directors,
underwriters and claims managers;
-- The outcome from independent assurance reviews performed by
the Group actuarial function to assess the reasonableness of
regional Actuarial Indication estimates;
-- How previous actuarial indications have developed.
Financial risk
Financial risk refers to the risk of financial loss
predominantly arising from investment transactions entered into by
the Group, and also to a lesser extent arising from insurance
contracts, and includes the following risks:
-- Credit risk;
-- Market risk including price, interest rate and currency rate risks;
-- Liquidity risk.
The Group undertakes a number of strategies to manage these
risks including the use of derivative financial instruments for the
purpose of reducing its exposure to adverse fluctuations in
interest rates, foreign exchange rates, and long term inflation.
The Group does not use derivatives to leverage its exposure to
markets and does not hold or issue derivative financial instruments
for speculative purposes. The policy on use of derivatives is
approved by the Board Risk Committee (BRC).
Credit risk
Credit risk is the risk of loss resulting from the failure of a
counterparty to honour its financial or contractual obligations to
the Group. The Group's credit risk exposure is largely concentrated
in its fixed income investment portfolio and to a lesser extent,
its premium receivables, and reinsurance assets.
Credit risk is managed at both a Group level and at a local
level. Local operations are responsible for assessing and
monitoring the creditworthiness of their counterparties (e.g.
brokers and policyholders). Local credit committees are responsible
for ensuring these exposures are within the risk appetite of the
local operations. Exposure monitoring and reporting is embedded
throughout the organisation with aggregate credit positions
reported and monitored at Group level.
The Group's credit risk strategy appetite and credit risk policy
are developed by the BRC and are reviewed and approved by the Board
on an annual basis. This is done through the setting of Group
policies, procedures and limits.
In defining its appetite for credit risk the Group looks at
exposures at both an aggregate and business unit level
distinguishing between credit risks incurred as a result of
offsetting insurance risks or operating in the insurance market
(e.g. reinsurance credit risks and risks to receiving premiums due
from policyholders and intermediaries) and credit risks incurred
for the purposes of generating a return (e.g. invested assets
credit risk).
Limits are set at both a portfolio and counterparty level based
on likelihood of default, derived from the rating of the
counterparty, to ensure that the Group's overall credit profile and
specific concentrations are managed and controlled within risk
appetite.
The Group's investment management strategy primarily focuses on
debt instruments of high credit quality issuers and seeks to limit
the overall credit exposure with respect to any one issuer by
ensuring limits have been based upon credit quality. Restrictions
are placed on each of the Group's investment managers as to the
level of exposure to various rating categories including unrated
securities.
The Group is also exposed to credit risk from the use of
reinsurance in the event that a reinsurer fails to settle its
liability to the Group.
The Group Reinsurance Credit Committee oversees the management
of credit risk arising from the reinsurer failing to settle its
liability to the Group. Group standards are set such that
reinsurers that have a financial strength rating of less than 'A-'
with Standard & Poor's, or a comparable rating, are removed
from the Group's authorised list of approved reinsurers unless the
Group's internal review discovers exceptional circumstances in
favour of the reinsurer. Collateral is taken, where appropriate, to
mitigate exposures to acceptable levels. At 31 December 2016 the
extent of collateral held by the Group against reinsurers' share of
insurance contract liabilities was GBP159m (2015: GBP69m). The UK
Legacy reinsurance announced on 7 February 2017 will involve
additional extensive collateral arrangements.
The Group's use of reinsurance is sufficiently diversified that
it is not concentrated on a single reinsurer, or any single
reinsurance contract. The Group regularly monitors its aggregate
exposures by reinsurer group against predetermined reinsurer Group
limits, in accordance with the methodology agreed by the BRC. The
Group's largest reinsurance exposures to active reinsurance groups
are Munich Re, Lloyd's, and Berkshire Hathaway Inc. At 31 December
2016 the reinsurance asset recoverable from these groups does not
exceed 2.4% (2015: 2.8%) of the Group's total financial assets.
Stress tests are performed by reinsurer counterparty and the limits
are set such that in a catastrophic event, the exposure to a single
reinsurer is estimated not to exceed 6.1% (2015: 7.1%) of the
Group's total financial assets.
The credit profile of the Group's assets exposed to credit risk
is shown below. The credit rating bands are provided by independent
rating agencies. The table below sets out the Group's aggregated
credit risk exposure for its financial and insurance assets as at
2016 and 2015.
As at 31 December 2016
Credit rating relating to financial assets that are neither past
due nor impaired
Total
of financial
assets
that
Less: are
Value Amounts neither
including classified past
held as held due
Not for for nor
AAA AA A BBB <BBB rated sale sale impaired
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------ ------- ------- ------- ------- ------- -------- ------------ ------------ --------------
Debt
securities 5,216 3,327 2,733 875 108 62 12,321 776 11,545
------------------ ------- ------- ------- ------- ------- -------- ------------ ------------ --------------
Loans
and receivables 67 - 1 - 4 16 88 - 88
------------------ ------- ------- ------- ------- ------- -------- ------------ ------------ --------------
Reinsurers'
share
of insurance
contract
liabilities - 605 1,577 90 20 51 2,343 96 2,247
------------------ ------- ------- ------- ------- ------- -------- ------------ ------------ --------------
Insurance
and reinsurance
debtors
(1) 129 30 834 96 103 1,518 2,710 15 2,695
------------------ ------- ------- ------- ------- ------- -------- ------------ ------------ --------------
Derivative
assets - 2 8 37 - 9 56 - 56
------------------ ------- ------- ------- ------- ------- -------- ------------ ------------ --------------
Other
debtors - - - - - 127 127 1 126
------------------ ------- ------- ------- ------- ------- -------- ------------ ------------ --------------
Cash
and cash
equivalents 402 202 442 27 - 16 1,089 104 985
------------------ ------- ------- ------- ------- ------- -------- ------------ ------------ --------------
Note:
1. The insurance and reinsurance debtors classified as not rated
comprise personal policyholders and small corporate customers that
do not have individual credit ratings. The overall credit risk to
the Group is deemed to be low as the cover could be cancelled if
payment were not received on a timely basis.
As at 31 December 2015
Credit rating relating to financial assets that are neither past
due nor impaired
Total
of financial
assets
that
Less: are
Value Amounts neither
including classified past
held as held due
Not for for nor
AAA AA A BBB <BBB rated sale sale impaired
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------ ------- ------- ------- ------- ------- -------- ------------ ------------ --------------
Debt
securities 5,737 1,612 2,818 1,166 82 73 11,488 376 11,112
------------------ ------- ------- ------- ------- ------- -------- ------------ ------------ --------------
Loans
and receivables 50 - 1 - 4 45 100 - 100
------------------ ------- ------- ------- ------- ------- -------- ------------ ------------ --------------
Reinsurers'
share
of insurance
contract
liabilities - 368 1,626 91 23 113 2,221 237 1,984
------------------ ------- ------- ------- ------- ------- -------- ------------ ------------ --------------
Insurance
and reinsurance
debtors
(1) 106 22 715 148 93 1,864 2,948 469 2,479
------------------ ------- ------- ------- ------- ------- -------- ------------ ------------ --------------
Derivative
assets 4 5 - 21 - 8 38 - 38
------------------ ------- ------- ------- ------- ------- -------- ------------ ------------ --------------
Other
debtors - - - - - 258 258 9 249
------------------ ------- ------- ------- ------- ------- -------- ------------ ------------ --------------
Cash
and cash
equivalents 304 116 346 57 14 76 913 97 816
------------------ ------- ------- ------- ------- ------- -------- ------------ ------------ --------------
Note:
1. The insurance and reinsurance debtors classified as not rated
comprise personal policyholders and small corporate customers that
do not have individual credit ratings. The overall credit risk to
the Group is deemed to be low as the cover could be cancelled if
payment were not received on a timely basis.
With the exception of government debt securities, the largest
single aggregate credit exposure does not exceed 3% of the Group's
total financial assets.
Ageing of financial assets that are past due but not
impaired
The following table provides information regarding the carrying
value of financial assets that have been impaired and the ageing of
financial assets that are past due but not impaired as at 31
December 2016, excluding those assets that have been classified as
held for sale.
As at 31 December 2016
Financial assets that are past due but not impaired
Financial Carrying
Neither assets value Impairment
past Six Greater that in the losses
due Up to Three months than have statement charged/(reversed)
nor three to six to one one been of financial to the income
impaired months months year year impaired position statement
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------------- ---------- -------- -------- -------- -------- --------- ------------- ------------------
Debt securities 11,545 - - - - - 11,545 -
-------------------- ---------- -------- -------- -------- -------- --------- ------------- ------------------
Loans and
receivables 88 - - - - - 88 (10)
-------------------- ---------- -------- -------- -------- -------- --------- ------------- ------------------
Reinsurers'
share of insurance
contract
liabilities 2,247 - - - - 5 2,252 -
-------------------- ---------- -------- -------- -------- -------- --------- ------------- ------------------
Insurance
and reinsurance
debtors 2,695 79 22 17 7 3 2,823 1
-------------------- ---------- -------- -------- -------- -------- --------- ------------- ------------------
Derivative
assets 56 - - - - - 56 -
-------------------- ---------- -------- -------- -------- -------- --------- ------------- ------------------
Other debtors 126 - - - 3 - 129 -
-------------------- ---------- -------- -------- -------- -------- --------- ------------- ------------------
Cash and cash
equivalents 985 - - - - - 985 -
-------------------- ---------- -------- -------- -------- -------- --------- ------------- ------------------
As at 31 December 2015
Financial assets that are past due but not impaired
Financial Carrying Impairment
Neither assets value losses
past Six Greater that in the charged
due Up to Three months than have statement to the
nor three to six to one one been of financial income
impaired months months year year impaired position statement
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------- ---------- -------- -------- -------- --------- --------- ------------- -------------
Debt securities 11,112 - - - - - 11,112 3
---------------------- ---------- -------- -------- -------- --------- --------- ------------- -------------
Loans and
receivables 100 - - - - - 100 2
---------------------- ---------- -------- -------- -------- --------- --------- ------------- -------------
Reinsurers'
share of insurance
contract liabilities 1,984 - - - - 4 1,988 1
---------------------- ---------- -------- -------- -------- --------- --------- ------------- -------------
Insurance
and reinsurance
debtors 2,479 121 18 18 17 - 2,653 4
---------------------- ---------- -------- -------- -------- --------- --------- ------------- -------------
Derivative
assets 38 - - - - - 38 -
---------------------- ---------- -------- -------- -------- --------- --------- ------------- -------------
Other debtors 249 1 - - 3 - 253 -
---------------------- ---------- -------- -------- -------- --------- --------- ------------- -------------
Cash and cash
equivalents 816 - - - - - 816 -
---------------------- ---------- -------- -------- -------- --------- --------- ------------- -------------
Market risk
Market risk is the risk of adverse financial impact resulting,
directly or indirectly from fluctuations from equity and property
prices, interest rates and foreign currency exchange rates. Market
risk arises in our operations due to fluctuations in both the value
of liabilities and in the value of investments held. At Group
level, it also arises in relation to the overall portfolio of
international businesses. Market risk is subject to the Board Risk
Committee risk management framework, which is subject to review and
approval by the Board.
Market risk can be further broken down into three key
components:
i. Price risk
The Group classifies its investment portfolio in debt securities
and equity securities in accordance with the accounting definitions
under IFRS.
At 31 December 2016 the Group held investments classified as
equity securities of GBP692m (2015: GBP585m). These include
interests in structured entities (as disclosed in note 27) and
other investments where the price risk arises from interest rate
risk rather than from equity market price risk. The Group considers
that within equity securities, investments with a fair value of
GBP170m (2015: GBP159m) may be more affected by equity index market
price risk than by interest rate risk. On this basis a 15% fall in
the value of equity index prices would result in the recognition of
losses of GBP26m (2015: GBP24m) in other comprehensive income.
In addition the Group holds investments in properties and in
group occupied properties which are subject to property price risk.
A decrease of 15% in property prices would result in the
recognition of losses of GBP50m (2015: GBP55m) in the income
statement and GBP5m (2015: GBP6m) in other comprehensive
income.
This analysis assumes that there is no correlation between
interest rate and property market rate risks. It also assumes that
all other assets and liabilities remain unchanged and that no
management action is taken. This analysis does not represent
management's view of future market change, but reflects
management's view of key sensitivities.
This analysis is presented gross of the corresponding tax
credits/(charges).
ii. Interest rate risk
Interest rate risk arises primarily from the Group's investments
in long-term debt and fixed income securities and their movement
relative to the value placed on insurance liabilities. This impacts
both the fair value and amount of variable returns on existing
assets as well as the cost of acquiring new fixed maturity
investments.
Given the composition of the Group's investments as at 31
December 2016, the table below illustrates the impact to the income
statement and other comprehensive income of hypothetical 100bps
change in interest rates on long-term debt and fixed income
securities that are subject to interest rate risk.
Changes in the income statement and other comprehensive
income:
Increase in income
statement Decrease in other
comprehensive
income
-------------------- --------------------- ---------------------
2016 2015 2016 2015
GBPm GBPm GBPm GBPm
-------------------- ---------- --------- ---------- ---------
Increase in interest rate markets:
------------------------------------------------------------------
Impact on fixed
income securities
and cash of
an increase
in interest
rates of 100bps 20 25 (452) (435)
-------------------- ---------- --------- ---------- ---------
The Group manages interest rate risk by holding investment
assets (predominantly fixed income) that generate cashflows which
broadly match the duration of expected claim settlements and other
associated costs.
The sensitivity of the fixed interest securities of the Group
has been modelled by reference to a reasonable approximation of the
average interest rate sensitivity of the investments held within
each of the portfolios. The effect of movement in interest rates is
reflected as a one time rise of 100bps on 1 January 2017 and 1
January 2016 on the following year's income statement and other
comprehensive income.
iii. Currency risk
The Group incurs exposure to currency risk in two ways:
-- Operational currency risk - by holding investments and other
assets and by underwriting and incurring liabilities in currencies
other than the currency of the primary environment in which the
business units operate the Group is exposed to fluctuations in
foreign exchange rates that can impact both its profitability and
the reported value of such assets and liabilities;
-- Structural currency risk - by investing in overseas
subsidiaries the Group is exposed to the risk that fluctuations in
foreign exchange rates impact the reported profitability of foreign
operations to the Group, and the value of its net investment in
foreign operations.
Operational currency risk is principally managed within the
Group's individual operations by broadly matching assets and
liabilities by currency and liquidity. Operational currency risk is
not significant.
Structural currency risk is managed at a Group level through
currency forward contracts and foreign exchange options within
predetermined limits set by the Group Investment Committee. In
managing structural currency risk the needs of the Group's
subsidiaries to maintain net assets in local currencies to satisfy
local regulatory solvency and internal risk based capital
requirements are taken into account. These assets should prove
adequate to support local insurance activities irrespective of
exchange rate movements but may affect the value of the
consolidated shareholders' equity expressed in Sterling.
At 31 December 2016, the Group's total shareholders' equity
deployed by currency was:
Pounds Danish Canadian Swedish
Sterling Krone/Euro Dollar Krona Other Total
GBPm GBPm GBPm GBPm GBPm GBPm
--------------- ---------- ------------ --------- -------- ------ ----------
Shareholders'
equity at
31 December
2016 2,516 284 477 236 202 3,715
--------------- ---------- ------------ --------- -------- ------ ----------
Shareholders'
equity at
31 December
2015 2,158 377 492 132 483 3,642
--------------- ---------- ------------ --------- -------- ------ ----------
Shareholders' equity is stated after taking account of the
effect of currency forward contracts and foreign exchange options.
The analysis aggregates the Danish Krone exposure and the Euro
exposure as the Danish Krone continues to be pegged closely to the
Euro. The Group considers this aggregate exposure when reviewing
its hedging strategy.
The table below illustrates the impact of a hypothetical 10%
change in Danish Krone/Euro, Canadian Dollar or Swedish Krona
exchange rates on shareholders' equity when retranslating into
Sterling:
10%
strengthening 10% weakening
in Pounds in Pounds 10% strengthening 10% weakening 10% strengthening 10% weakening
Sterling Sterling in Pounds in Pounds in Pounds in Pounds
against against Sterling Sterling Sterling Sterling
Danish Danish against against against against
Krone Krone Canadian Canadian Swedish Swedish
/ Euro / Euro Dollar Dollar Krona Krona
GBPm GBPm GBPm GBPm GBPm GBPm
--------------- -------------- -------------- ------------------ -------------- ------------------ --------------
Movement
in
shareholders'
equity
at 31
December
2016 (25) 31 (43) 53 (21) 26
--------------- -------------- -------------- ------------------ -------------- ------------------ --------------
Movement
in
shareholders'
equity
at 31
December
2015 (34) 42 (45) 55 (12) 15
--------------- -------------- -------------- ------------------ -------------- ------------------ --------------
Changes arising from the retranslation of foreign subsidiaries'
net asset positions from their primary currencies into Sterling are
taken through the foreign currency translation reserve and so
consequently these movements in exchange rates have no impact on
profit.
Liquidity risk
Liquidity risk refers to the risk of loss to the Group as a
result of assets not being available in a form that can immediately
be converted into cash, and therefore the consequence of not being
able to pay its obligations when due. To help mitigate this risk,
the BRC sets limits on assets held by the Group designed to match
the maturities of its assets to that of its liabilities.
A large proportion of investments is maintained in short-term
(less than one year) highly liquid securities, which are used to
manage the Group's operational requirements based on actuarial
assessment and allowing for contingencies.
The following table summarises the contractual repricing or
maturity dates, whichever is earlier. Provision for unearned
premium and provision for losses and loss adjustment expenses are
also presented and are analysed by remaining estimated duration
until settlement.
As at 31 December 2016
Carrying
value
in
Less One Two Three Four Five Greater the
than to to to to to than statement
one two three four five ten ten of financial
year years years years years years years Total position
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------ ------- ------ ------ ------ ------ ------ ------- ------- -------------
Subordinated
guaranteed US$
bonds - - - - - - 7 7 6
------------------------ ------- ------ ------ ------ ------ ------ ------- ------- -------------
Perpetual guaranteed
subordinated
capital securities 375 _ - - - - - 375 369
------------------------ ------- ------ ------ ------ ------ ------ ------- ------- -------------
Guaranteed subordinated
notes due 2045
due 2045 - - - - - 400 - 400 395
------------------------ ------- ------ ------ ------ ------ ------ ------- ------- -------------
Guaranteed subordinated
step-up notes
due 2039 - - 300 _ - - - 300 298
------------------------ ------- ------ ------ ------ ------ ------ ------- ------- -------------
Provision for
unearned premium 3,007 246 88 6 4 2 - 3,353 3,311
------------------------ ------- ------ ------ ------ ------ ------ ------- ------- -------------
Provisions for
losses and loss
adjustment expenses 3,583 1,728 1,150 805 556 1,300 1,887 11,009 9,365
------------------------ ------- ------ ------ ------ ------ ------ ------- ------- -------------
Direct insurance
creditors 108 - - - - - - 108 108
------------------------ ------- ------ ------ ------ ------ ------ ------- ------- -------------
Reinsurance creditors 559 201 86 - - - - 846 846
------------------------ ------- ------ ------ ------ ------ ------ ------- ------- -------------
Borrowings 251 - - - - - - 251 251
------------------------ ------- ------ ------ ------ ------ ------ ------- ------- -------------
Deposits received
from reinsurers 67 - - - - - - 67 67
------------------------ ------- ------ ------ ------ ------ ------ ------- ------- -------------
Derivative liabilities 28 1 49 -- 19 35 35 167 167
------------------------ ------- ------ ------ ------ ------ ------ ------- ------- -------------
Total 7,978 2,176 1,673 811 579 1,737 1,929 16,883 15,183
------------------------ ------- ------ ------ ------ ------ ------ ------- ------- -------------
Interest on perpetual
bonds and notes 63 49 32 21 21 81 2 269
------------------------ ------- ------ ------ ------ ------ ------ ------- ------- -------------
As at 31 December 2015
Carrying
value
in
Less One Two Three Four Five Greater the
than to to to to to than statement
one two three four five ten ten of financial
year years years years years years years Total position
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------ ------- ------- ------- ------ ------ ------- ------- -------- -------------
Subordinated
guaranteed US$
bonds - - - - - - 6 6 5
------------------------ ------- ------- ------- ------ ------ ------- ------- -------- -------------
Perpetual guaranteed
subordinated
capital securities - 375 - - - - - 375 359
------------------------ ------- ------- ------- ------ ------ ------- ------- -------- -------------
Guaranteed subordinated
notes due 2045
due 2045 - - - - - 400 - 400 394
------------------------ ------- ------- ------- ------ ------ ------- ------- -------- -------------
Guaranteed subordinated
step-up notes
due 2039 - - - 500 - - - 500 496
------------------------ ------- ------- ------- ------ ------ ------- ------- -------- -------------
Provision for
unearned premium 2,778 232 81 10 3 3 - 3,107 3,107
------------------------ ------- ------- ------- ------ ------ ------- ------- -------- -------------
Provisions for
losses and loss
adjustment expenses 3,256 1,576 1,069 747 536 1,242 2,120 10,546 9,084
------------------------ ------- ------- ------- ------ ------ ------- ------- -------- -------------
Direct insurance
creditors 115 - - - - - - 115 115
------------------------ ------- ------- ------- ------ ------ ------- ------- -------- -------------
Reinsurance creditors 569 183 78 - - - - 830 830
------------------------ ------- ------- ------- ------ ------ ------- ------- -------- -------------
Borrowings 11 - - - - - - 11 11
------------------------ ------- ------- ------- ------ ------ ------- ------- -------- -------------
Deposits received
from reinsurers 14 - - - - - - 14 14
------------------------ ------- ------- ------- ------ ------ ------- ------- -------- -------------
Derivative liabilities 50 1 1 18 - 19 - 89 89
------------------------ ------- ------- ------- ------ ------ ------- ------- -------- -------------
Total 6,793 2,367 1,229 1,275 539 1,664 2,126 15,993 14,504
------------------------ ------- ------- ------- ------ ------ ------- ------- -------- -------------
Interest on perpetual
bonds and notes 93 81 68 39 21 101 2 405
------------------------ ------- ------- ------- ------ ------ ------- ------- -------- -------------
The maturity analysis above is presented on an undiscounted
basis. The carrying values in the statement of financial position
are discounted where appropriate in accordance with Group
accounting policy.
The capital and interest payable on the bonds and notes have
been included until the dates on which the Group has the option to
call the instruments and the interest rates are reset. For further
information on terms of the bonds and notes, see note 34.
Capital Management
It is a key regulatory requirement that the Group maintains
sufficient capital to support its exposure to risk. Accordingly,
the Group's capital management strategy is closely linked to its
monitoring and management of risk. The Group's capital objectives
consist of striking the right balance between the need to support
claims liabilities and ensure the confidence of policyholders,
exposure to other risks, support competitive pricing strategies,
meet regulatory capital requirements, and providing adequate
returns for its shareholders.
The Group's overall capital position is primarily comprised of
shareholders' equity and subordinated loan capital and aims to
maximise shareholder value, while maintaining financial strength
and maintaining adequate regulatory capital. In addition the Group
also aims to hold sufficient capital so as to maintain its single
'A' credit rating.
The Group operates in many countries, and its regulated entities
hold appropriate levels of capital to satisfy applicable local
regulations. Compliance with local regulatory requirements is
embedded within the BRC mandate, for the protection of the Group's
policyholders and the continuation of the Group's ability to
underwrite.
Regulatory solvency position during 2016
The Group's Solvency II Internal Model was approved by the PRA
in December 2015 and forms the basis of the primary Solvency II
solvency capital ratio (SCR) measure.
The Internal Model is used to support, inform and improve the
Group's decision making across the Group. It is used to determine
the Group's optimum capital structure, its investment and hedging
strategy, its reinsurance programme and to determine the pricing
and target returns for each portfolio.
At 31 December 2016, the estimated SCR and corresponding
eligible own funds were as follows:
Unaudited Unaudited
2016 2015
GBPbn GBPbn
---------------------- ---------- ----------
Eligible Own Funds 2.9 2.9
---------------------- ---------- ----------
SCR 1.8 2.0
---------------------- ---------- ----------
Coverage (unrounded) 158% 143%
---------------------- ---------- ----------
The disposal of GBP834m of undiscounted UK legacy insurance
liabilities net of reinsurance was announced on 7 February 2017.
The transaction takes the form of an initial reinsurance agreement,
to be effective at 31 December 2016 and which substantially effects
economic transfer, to be followed by a subsequent legal transfer of
the business. This disposal will add a further 17-20 coverage
points to RSA's Solvency II SCR coverage.
The first solvency and financial condition report as required by
Solvency II for the year ended 31 December 2016 will be publicly
available in May 2017.
The impact on the Solvency II coverage ratio of a range of
sensitivities is set out below:
Unaudited Unaudited
2016 2016
Including Excluding
pensions pensions
-------------------------------------- ----------- -----------
Solvency II sensitivities(1) (change
in coverage ratio):
-------------------------------------- ----------- -----------
Interest rates: +1% non-parallel(2)
shift +6% 0%
-------------------------------------- ----------- -----------
Interest rates: -1% non-parallel(2)
shift -7% -2%
-------------------------------------- ----------- -----------
Equities: -15% -8% -1%
-------------------------------------- ----------- -----------
Foreign exchange: GBP +10% vs all
currencies -4% -4%
-------------------------------------- ----------- -----------
Cat loss of GBP75m net -4% -4%
-------------------------------------- ----------- -----------
Credit spreads: +0.25% parallel
shift +9% -4%
-------------------------------------- ----------- -----------
Credit spreads: -0.25% parallel
shift -13% +4%
-------------------------------------- ----------- -----------
Notes:
1. Sensitivities exclude second order impacts from the application of Tier 1 eligibility rules.
2. RSA has updated its approach to interest rate sensitivities,
from a parallel shift in the yield curve to a non-parallel shift.
This is to reflect that the long end of the yield curve is
typically more stable than the short end.
The above sensitivities have been considered in isolation.
Should insensitivities impact in combination there may be some
natural offsets between them.
Own Risk and Solvency Assessment (ORSA)
The Solvency II directive introduced a requirement for
undertakings to conduct an ORSA.
The Group defines its ORSA as a series of inter-related
activities by which it establishes:
-- The quantity and quality of the risks which it seeks to assume;
-- The level of capital required to support those risks;
-- The actions it will take to achieve and maintain the desired levels of risk and capital.
The assessment considers both the current position and the
positions that may arise during the planning horizon of the Group
(typically the next three years). It looks at both the expected
outcome and the outcome arising when the plan assumptions do not
materialise as expected.
The assessments of how much risk to assume and how much capital
to hold are inextricably linked. In some situations, it may be
desirable to increase the amount of risk assumed or retained in
order to make the most efficient use of capital available or else
to return excess capital to capital providers. In other situations,
where the risks assumed give rise to a capital requirement that is
greater than the capital immediately available to support those
risks, it will be necessary either to reduce the risk assumed or to
obtain additional capital.
The assessment of risk and solvency needs is in principle
carried out continuously. In practice, the assessment consists of a
range of specific activities and decisions carried out at different
times of the year as part of an annual cycle, supplemented as
necessary by ad hoc assessments of the impact of external events
and developments and of internal business proposals.
Papers are presented to the Board throughout the year dealing
with individual elements that make up the ORSA. The information
contained in those papers and the associated decisions taken are
summarised in an annual ORSA report, which is submitted to the
Group's regulators as part of the normal supervisory process.
The ORSA is approved by the BRC.
Related party transactions
The following transactions were carried out with key
management:
2016 2015
GBPm GBPm
------------------------------- ------ ------
Salaries and other short-term
employee benefits 7 9
------------------------------- ------ ------
Bonus awards 5 5
------------------------------- ------ ------
Pension benefits 1 1
------------------------------- ------ ------
Share based awards 4 2
------------------------------- ------ ------
Total 17 17
------------------------------- ------ ------
Key management personnel comprise members of the Group Executive
Committee, executive directors, and non-executive directors.
Included in salaries and other short-term employee benefits and
bonus awards is GBP5,239,000 (2015: GBP5,378,000) paid in respect
of directors. These amounts exclude the value of share options
granted to directors and gains made on the exercise of such
options, Group contributions paid in respect of pension schemes and
cash or other assets received or receivable under long-term
incentive schemes. The total value of the directors' remuneration
(including values for these excluded items) and other details are
disclosed in the remuneration report.
A number of the directors, other key managers, their close
families and entities under their control have general insurance
policies with subsidiary companies of the Group. Such policies are
available at discounted rates to all employees including executive
directors
Responsibility statement
We confirm to the best of our knowledge:
-- The financial statements on pages 109 to 113, prepared in
accordance with the applicable set of accounting standards, give a
true and fair view of the assets, liabilities, financial position
and profit or loss of the Group and Parent Company; and
-- The Strategic Report on pages 4 to 41, includes a fair review
of the development and performance of the business and the position
of the Group, together with a description of the principal risks
and uncertainties the Group faces.
Signed by order of the Board
Stephen Hester Scott Egan
Group Chief Executive Group Chief Financial
Officer
22 February 2017 22 February 2017
This information is provided by RNS
The company news service from the London Stock Exchange
END
ACSLLFFVVDIFFID
(END) Dow Jones Newswires
March 22, 2017 10:34 ET (14:34 GMT)
Rsa Insurance Group Ld (LSE:RSA)
Historical Stock Chart
From Apr 2024 to May 2024
Rsa Insurance Group Ld (LSE:RSA)
Historical Stock Chart
From May 2023 to May 2024