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RSA Ins Grp (RSA)

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Tuesday 10 April, 2012

RSA Ins Grp

Annual Financial Report

Annual Financial Report

RSA Insurance Group Plc

RSA INSURANCE GROUP PLC

(THE “COMPANY”)

2011 ANNUAL REPORT AND NOTICE OF ANNUAL GENERAL MEETING 2012

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 2011
  • Annual Review and Summary Financial Statements for the year ended 31 December 2011
  • Notice of the 2012 Annual General Meeting to be held on 14 May 2012
  • Proxy form for the 2012 Annual General Meeting

The above mentioned documents (except for the Proxy form) are available on our website at www.rsagroup.com/ar2011 and www.rsagroup.com/agm2012 and will shortly be made available for inspection at www.hemscott.com/nsm.do. 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.

The information that follows is disclosed in accordance with DTR 6.3. An indication of the important events that occurred in 2011 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 2012, forming part of the Preliminary Results announcement for the year ended 31 December 2011. Additional content forming part of the management report is in the Appendix below.

Enquiries:

John Mills
Deputy Group Company Secretary
RSA Insurance Group plc
Tel: +44 (0) 20 7111 7000
 

About RSA

With a 300 year heritage, RSA is one of the world’s leading multinational quoted insurance groups. RSA has major operations in the UK, Scandinavia, Canada, Ireland, Asia and the Middle East, Latin America and Central and Eastern Europe and has the capability to write business in around 140 countries. Focusing on general insurance, RSA has around 23,000 employees and, in 2011, its net written premiums were £8.1 billion.

IMPORTANT DISCLAIMER

Visit www.rsagroup.com for more information.

This press release (together with the Annual Report and Accounts referred to herein) has been prepared in accordance with the requirements of English company law and the liabilities of the directors in connection with this press release (together with the Annual Report and Accounts referred to herein) shall be subject to the limitations and restrictions provided by such law. This press release may contain ‘forward-looking statements’ with respect to certain of the Group’s plans and its current goals and expectations relating to its future financial condition, performance, results, strategic initiatives and objectives. Generally, words such as “may”, “could”, “will”, “expect”, “intend”, “estimate”, “anticipate”, “aim”, “outlook”, “believe”, “plan”, “seek”, “continue” or similar expressions identify forward-looking statements. These forward-looking statements are not guarantees of future performance. By their nature, all forward-looking statements involve risk and uncertainty because they relate to future events and circumstances which are beyond the Group’s control, including amongst other things, UK domestic and global economic business conditions, market-related risks such as fluctuations in interest rates and exchange rates, the policies and actions of regulatory authorities (including changes related to capital and solvency requirements), the impact of competition, inflation, deflation, the timing impact and other uncertainties of future acquisitions or combinations within relevant industries, as well as the impact of tax and other legislation or regulations in the jurisdictions in which the Group and its affiliates operate. As a result, the Group’s actual future financial condition, performance and results may differ materially from the plans, goals and expectations set forth in the Group’s forward-looking statements. The Group undertakes no obligation to update any forward-looking statements, save in respect of any requirement under applicable law or regulation. Nothing in this press release (together with the Annual Report and Accounts referred to herein) should be construed as a profit forecast.

Appendix

References to page numbers and notes to the accounts made in this Appendix refer to page numbers and notes to the accounts in the 2011 Annual Report and Accounts.

RISK REVIEW

OUR BUSINESS SUCCESS IS UNDERPINNED BY OUR STRONG RISK MANAGEMENT

RISK MANAGEMENT

We ensure risk is managed to minimise losses and take opportunities for profitable growth. The Group operates under a common framework through which risk management and control is embedded throughout the Group. The Board is responsible for the Group’s Risk Management System and for defining the Group’s risk appetite. Executive management is responsible for implementing systems and controls that manage our risk exposures in line with our risk appetite. Each Group business is required to follow a consistent process to identify, measure, manage, monitor and report its risks. The Board Risk Committee ensures that material risks are identified and that appropriate arrangements are in place to manage and mitigate those risks effectively in line with risk appetite.

GROUP RISK APPETITE

The Group risk appetite is set and monitored at a Group, regional and business level and is reviewed annually and signed off by the Board Risk Committee and Group Board. It sets business volumes for certain higher risk insurance classes, stipulates loss retention limits, reinsurance protection, targets for credit rating and solvency margins.

RISK FRAMEWORK

The Group operates a ‘three lines of defence’ model for the oversight and management of risk as follows:

1st line – Management

• Setting strategy, performance measurement, establishment and maintenance of internal control and risk management in the business.

2nd line – Risk oversight

• Operating a formal Risk Management System within which the Group policies and minimum standards are set

• Oversight and challenge across the Group.

3rd line – Independent assurance

• Providing independent and objective assurance of the effectiveness of the Group’s systems of internal control established by the first and second lines of defence.

GROUP RISK POLICY STATEMENTS

Our policy statements set out the minimum standards to be maintained by the Group’s operations to manage their risks in a way that is consistent with the risk appetite.

RISK CATEGORIES

Risks are viewed under categories that broadly correspond to those used in the Financial Services Authority’s Prudential Sourcebook for Insurers (INSPRU) and Senior Management Arrangements, Systems and Controls (SYSC). Additional information is provided in the Risk Management section on page 93. Some of the key current practices and tools for each risk category are set out overleaf alongside our risks and uncertainties.

PRINCIPLES            
Simple objectives           • Create value for all stakeholders

• Focus on general insurance in our selected markets

• Commitment to sustainable, profitable performance.

Clear risk appetite           • Underwriting and operating excellence

• Strong control environment

• Tight financial management

• Protecting and managing the Group’s reputation.

Robust governance, control and reporting           • Comprehensive policy, procedures and controls

• Clear delegation of authorities

• Robust lines of defence

• Regular and relevant reporting and assurance processes.

Strong culture           • Board set ‘tone from the top’ of open communication

and engagement

• Putting the customer at the centre of what we do

• High quality and engaged staff.

         
2011 UPDATE

During the year we have maintained our focus on risk management, strengthening and developing our processes,
controls and capabilities across the Group through the following activities:

 

ORGANISATION AND CULTURE

• Visible Executive ownership of risk management principles and practices, as demonstrated in the Board Risk
Committee and Regional Risk Committees, which have clearly defined terms of reference and agendas

• Reinforced our three lines of defence model, which clearly articulates the second line role of the Risk Function

• Promoted risk informed decision making, which is focused on achieving a desired outcome and considers both risk and
reward

• Continued solid progress made on our transition into the Solvency II regulatory environment by

- actively responding to the changing insurance regulatory architecture across the UK and Europe

- working with regulators to demonstrate our approach in meeting requirements

-educating our business on its changing roles and responsibilities.

 

SYSTEMS AND PROCESS

• Developed and implemented a Governance Risk and Compliance tool enabling a consistent assessment of risk
across the three assurance functions of Risk, Financial Control and Internal Audit

• Enhanced the alignment of our Risk Management System to our strategic objectives and Solvency II regulatory
requirements

• Further developed and embedded our processes to identify and measure emerging risks, including specific risk
analysis on such issues as the weakening European economies

• Further developed our global programme of comprehensive stress and scenario testing, reinforcing our understanding
of our risk profile and the effectiveness of our control environment. Analysis considered our financial and operational
resilience to the Euro sovereign debt crisis.

 

PEOPLE

• Our risk experts helped to develop excellence across the Group

• We continue to strengthen our insurance and financial risk management capabilities through training and recruitment.

 

RISK CATEGORIES

RISKS

         

PRIMARY ACTIVITIES

         

KEY TOOLS FOR MANAGING

INSURANCE RISK

Our insurance risk strategy has enabled us to continue delivering strong underwriting results.

         

• Pricing, acceptance and management of risks arising from our contracts with customers

• Claims development and reserving

• Exposure and accumulation management.

         

• Reviews of individual insurance portfolios

• Regional and Group Reserving Committees held to determine a recommended level of outstanding claims and aggregate outstanding claims reserves

• Scenario modelling that is appropriate for

the size and complexity of our portfolios

• Investigation of potential emerging insurance risks.

REINSURANCE RISK

Our reinsurance buying and

management expertise has allowed us to manage our insurance exposure and

losses such as those arising from natural catastrophes during 2011, including the

earthquakes in Japan and New Zealand and the floods in Thailand and Australia.

         

• Reinsurance strategy and appetite recommended to the Board by the Board Risk Committee

• Purchase of the worldwide programme of global and local treaties

• Reinsurance counterparty management.

         

• Group Reinsurance policy aligned

with strategy and appetite

• Analysis of major treaty purchases

using various modelling tools

• Monitoring and control of the Group’s

reinsurance activity

• Monitoring of the reinsurance markets

• Reinsurance counterparties approved by the Group Reinsurance Credit Committee.

OPERATIONAL RISK

We have completed various

Group-wide assessments and

roll-out activities to strengthen our operations.

         

• Effective and reliable operation of processes

• Business continuity and disaster recovery

• Information security management

• Monitoring and control to prevent fraud and human error.

         

• Risk and control self-assessments

• Key risk indicators to assess and manage

operational risk

• Scenario analyses to assess operational

events that have occurred elsewhere and

potential exposure to the Group

• Incident management, near misses and loss reporting.

CREDIT , MARKET

& LIQUIDITY RISK

We continue to proactively manage our financial risks despite the challenging economic climate.

         

• Investment strategy and portfolio

management

• Risk analysis (Value-At-Risk, Risk

Contribution and Sensitivity Analysis)

• Treasury activities such as Group liquidity and hedge effectiveness

• Scenario and Stress Testing

• Group Financial Risk policies aligned with strategy and appetite

• Counterparty credit assessments.

         

• Controls to ensure that exposure

is managed within risk appetite

• Monitoring of exposure against limits

set out in the Investment guidelines

• Portfolio analytics

• Requirements to maintain a minimum

level of cash or highly liquid assets

• Committees overseeing the Group’s investment strategy and risk limits.

REGULATORY RISK

Our response to regulatory changes and compliance has helped safeguard our business and we remain at the forefront of UK firms in respect of our Solvency II application process.

         

• Ensuring compliance in all

geographical locations, with

diverse regulatory requirements

• Response to regulatory changes.

         

• Active engagement with regulators

• Close monitoring of regulatory requirements

• Compliance framework with consistent

monitoring methodology

• Monthly reporting of significant regulatory developments and mitigation of emerging risks.

PRINCIPAL UNCERTAINTIES

RISKS

         

POTENTIAL IMPACT

         

MITIGATION

PROLONGED ECONOMIC DOWN TURN

         

• Exposure reduction impacts

premium levels

• Increased claims frequency.

         

• Diversified portfolio providing exposure to markets at different levels of development and insurance cycle

• Limited exposure to economically triggered contracts

• KPI dashboard utilised to support early

corrective action

• Maintain focus on underwriting discipline and targeted profitable growth

• Continuous action on rate and expenses.

ADVERSE FINANCIAL MARKETS

         

• Impact on investment portfolio and investment income due to lower interest rates and market volatility.

         

• Retain focus on high quality, low risk investment strategy

• Action taken to balance risk and return includes increasing our holdings in non government bonds, bond duration and having a significant percentage of our equity portfolio protected by derivatives.

RATING ENVIRONMENT

         

• Inability to charge adequate rates

places downward pressure on underwriting results.

         

• Diversified portfolio by geography and line of business

• Each portfolio has a rate plan which is regularly reviewed

• Focus on underwriting and profitable growth

• Actively shift capacity to where we see the best returns

• Continue to invest in technical skills, sales and marketing capabilities.

ADVERSE LOSS EXPERIENCE

          • Catastrophic losses arising from

insurance events

• Increasing frequency and severity

of large losses

• Deterioration in long tail reserves.

         

• Underwriting strategy set to ensure risks written

are well diversified and within risk appetite

• Regular portfolio reviews to monitor underwriting performance

• Emerging trends in large losses, frequency and severity are investigated and corrective action taken

• Reinsurance programmes limit net losses

• Conservative reserving policy ensuring that claims reserves will be more likely than not to result in positive prior year development.

INSURANCE RISKS OUTSIDE GROUP’S RISK APPETITE

         

• Adverse impact on operating results due to increased volatility.

         

• The Group operates under a clear risk appetite

set by the Board which is monitored at Group

and regional level

• Underwriters are licensed only to write risks within specified limits based on their own experience

• Reviews assess each portfolio against key performance and risk indicators. Portfolios that trigger these indicators are investigated. Corrective measures are implemented where required.

 

NOTES TO THE FINANCIAL STATEMENTS

32. RELATED PARTY TRANSACTIONS

The ultimate Parent Company of the Group is RSA Insurance Group plc which is incorporated in England and Wales.

The following transactions were carried out with related parties:

Key management compensation

        2011       2010
            £m       £m
Salaries and other short term employee benefits 7 6
Bonus awards 3 4
Pension benefits 1 1
Share based awards           2       8
Total           13       19
 

Key management personnel comprise members of the Group Executive Committee, Executive Directors, and Non-Executive Directors.

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.

As at 31 December 2011, there are interest free loans totalling £10,000 (2010: £10,000) outstanding to two members of the Executive Team under standard terms of the Group’s UK Car Ownership Scheme, which is open to all UK managers within a qualifying salary band.