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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Rsa Insurance Group Ld | LSE:RSA | London | Ordinary Share | GB00BKKMKR23 | ORD GBP1.00 |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 684.20 | 684.20 | 684.40 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
TIDMRSA
RNS Number : 6096X
RSA Insurance Group PLC
23 February 2017
RSA Insurance Group plc 23 February 2017
2016 Preliminary Results
RSA announces excellent 2016 Results.
Underlying EPS 39.5p, up 42%. Operating profit GBP655m, up 25%.
Record underwriting profit and combined ratio (GBP380m, up 73%, 94.2% vs 96.9%).
Final dividend 11p/share (16p total for 2016, up 52%).
Statutory net profit GBP20m, impacted by non-capital charges for Legacy disposal.
Stephen Hester, RSA Group Chief Executive, commented:
"In 2016 RSA took major strides forward, moving seamlessly from 'successful turnaround' to organic outperformance. Our improvements are both strategic and operational. They are delivering high quality sustainable results.
Our ambition now is to drive RSA's performance towards 'best in class' levels. Industry and financial market conditions will remain tough. We plan to outperform through continuing self-help measures on customer service, underwriting and costs."
2016 Trading results
-- Group operating profit GBP655m up 25% (2015: GBP523m): Scandinavia GBP311m; Canada GBP140m; UK GBP259m.
-- Record(1) Group underwriting profit of GBP380m, up 73% (2015: GBP220m). Core Group combined ratio of 93.8% (2015: 96.0%). Scandinavia 86.2%; Canada 94.9%; and the UK 95.4%.
-- Record(1) Group current year underwriting profit of GBP271m (2015: GBP129m): Core Group attritional loss ratio 1.4pts better than last year, weather and large losses 0.3pts worse. Group prior year underwriting profit of GBP109m (2015: GBP91m).
-- Core Group premiums of GBP6.3bn up 6%, although down slightly on an underlying basis(2) .
-- Investment income GBP369m (2015: GBP403m), fell 8% reflecting impact of disposals and low bond yields, partly offset by FX translation benefits.
-- Non-capital charge of GBP204m for disposal of legacy liabilities(3) ; Other non-operating charges(3) of GBP261m (c.90% non-capital in nature);
-- Post tax statutory profit of GBP20m reflecting the non-capital accounting charges above (2015: GBP244m benefited from disposal gains).
-- Underlying earnings per share(1) (EPS) 39.5p up 42% (2015: 27.8p).
-- Final dividend of 11p/ordinary share proposed, bringing total 2016 dividends to 16p/ordinary share (up 52%).
(1) Underlying or alternative performance measure, refer to pgs 28-29 for further explanation; (2) At CFX, excluding Group Re; (3) Refer to page 11 for further explanation.
Capital & balance sheet
-- Solvency II coverage ratio of 158% after final dividend (31 December 2015: 143%), at upper end of 130-160% target range; resilient in testing market conditions. Legacy disposal will add a further 17-20 coverage points.
-- Reserve margin was also strengthened to 5.5% (2015: 5.0%). -- Tangible equity(1) GBP2.9bn (31 December 2015: GBP2.8bn), 281p per share.
-- Underlying return on opening tangible equity(1) of 14.2% (2015: 9.7%), at upper end of 12-15% target range.
Strategic update
-- Strategic restructuring and turnaround of RSA delivered ahead of expectations.
-- Completed the disposals of our businesses in Latin America and Russia in the first half. This brings to a close our principal disposal programme (total proceeds GBP1.2bn 2014-16), achieving the desired strategic focus.
-- RSA's balance sheet and capital position are stronger and more resilient. In July, we commenced actions to optimise the composition of capital. We retired GBP200m of subordinated debt, reducing both leverage and interest costs. During the first half of the year we also completed a de-risking of the asset mix in our UK pension schemes.
-- On 7 February 2017, we announced the disposal of GBP834m UK Legacy liabilities to Enstar. This boosts Solvency II coverage by 17-20 points, to be used to accelerate debt retirement in 2017 thereby reducing risk, improving capital quality and improving earnings. Further details on the non-capital charge for this disposal are set out on pages 11 and 30.
-- RSA's financial and operational performance is now healthy, and we are focused on moving performance towards 'best in class' for our markets. Our many performance improvement initiatives are proceeding well, targeted at improving customer service, underwriting and costs.
-- Core business controllable costs(1) for 2016 were reduced 6% year-on-year at constant exchange to GBP1,455m (comprising 8% cost reductions, offset by 2% inflation). Core Group FTE down 7% year-on-year 2016 vs 2015 and down 19% since start of 2014.
-- Our cost reduction programme is ahead of original targets with c.GBP290m of gross annualised savings achieved by the end of 2016 (original 2016 target of >GBP180m). Today we are upgrading the cost savings target for a third time to >GBP400m gross annualised savings by 2018 (previous target >GBP350m by 2018). 'Costs to achieve' now expected to be lower than originally planned at c.1.3 times.
-- We are also increasing our medium term ROTE(1) target range to 13-17% (from 12-15% previously) reflecting the progress RSA has made and the impact of the Legacy sale. While market moves make the denominator volatile, we hope to perform in the upper part of this range. Indeed if our 'best in class' ambitions are reached, there is scope to do better still. This implies performance better than most competitors and should be prized as an ambition but not taken for granted.
-- Dividend policy unchanged: medium term ordinary dividend payout of 40-50% with additional 'special' payouts where justified.
-- RSA is relatively insulated from Brexit impacts with c.70% non-Sterling profits and separate, locally regulated, European subsidiaries.
Note: The Group uses alternative performance measures, including certain underlying measures, to help explain business performance and financial position. Further information on these is set out in the appendix.
(1) Underlying or alternative performance measure, refer to pgs 28-29 for further explanation.
MANAGEMENT REPORT - KEY FINANCIAL PERFORMANCE DATA
Management basis
GBPm (unless stated) FY 2016 FY 2015 Profit and loss Net written premiums Core Group 6,281 5,903 Total Group 6,408 6,825 Underwriting result Core Group 392 245 Total Group 380 220 Combined operating ratio Core Group 93.8% 96.0% Total Group 94.2% 96.9% Investment result 298 322 Operating result 655 523 Profit before tax 91 323 Underlying profit before tax(1) 556 417 Profit after tax 20 244 Metrics Stated earnings / share (pence) 1.8p 22.3p Underlying earnings / share (pence)(1) 39.5p 27.8p Interim dividend / share (pence) 5.0p 3.5p Final dividend / share (pence) 11p 7.0p Return on tangible equity (%) 0.6% 7.8% Underlying return on tangible equity (%)(1) 14.2% 9.7% Balance sheet Net asset value (GBPm) 3,715 3,642 Tangible net asset value (GBPm)(1) 2,862 2,838 Net asset value per share (pence) 352p 346p Tangible net asset value per share (pence)(1) 281p 279p Capital Solvency II surplus (GBPbn) 1.1 0.9 Solvency II coverage ratio 158% 143%
(1) Underlying or alternative performance measure, refer to pgs 28-29 for further explanation.
CHIEF EXECUTIVE'S STATEMENT
From 'Turnaround' towards 'Outperformance'
The strategic restructuring and turnaround of RSA started three years ago. Since then we have accomplished everything, and more, that was targeted.
1. The Group is now focused on its strongest businesses, a key to future outperformance. Divestments to achieve this focus have raised GBP1.2bn.
2. RSA's balance sheet is transformed. Credit Ratings are restored, regulatory capital and related capital ratios are at the upper end of our target ranges.
3. Performance is transformed. 2016 record underwriting profits of GBP380m compare to a 2013 profit of GBP1m(1) . Underlying return on tangible equity(1) of 14.2% in 2016, is now in the upper part of the 12-15% target range we originally set. Dividends are restored and growing.
The quality of the foundations laid during this period, underpinned by the franchise strengths of RSA's 300 year history, gave us confidence at the start of 2016 to lay out new ambitions for the future.
We now aspire to move RSA's performance levels towards 'best in class' for our markets, for customers and shareholders. If we succeed we will outperform over the coming years. 2016 performance provides an encouraging down payment on this aspiration, delivering a combined ratio ('COR') of 94.2%, a record(1) for RSA.
Strategy & Focus
RSA is a strong and focused international insurer. We have complementary leadership positions in the major general insurance markets of the UK, Scandinavia and Canada. We have valuable franchise strength and balance across these regions, between commercial and personal customers and across product lines.
The history, dynamics and structure of our markets show that focused regional market leaders can both successfully sustain customer appeal (market position) and achieve superior shareholder performance. This is the course we have set out upon.
External Conditions
The general insurance markets we operate in are relatively mature, consolidated and stable. Attractive performance is possible despite slow growth, economic and competitive challenges. It requires intense operational focus within a disciplined strategic framework.
Financial markets are also important for all insurers. Low interest rates hurt. But they force a greater concentration on the core business of underwriting which can yield significant improvements. 2016 is the first year for RSA where underwriting profits have grown to exceed investment income, a trend we expect to continue.
2016 was a year of volatile financial markets, testing both capital resilience and profits. Bond yields at year end were below those of a year ago in our major markets. Credit spreads were narrower (hurting UK pension accounting). But conversely, a significant Brexit induced weakening of Sterling since June helps RSA, as c.70% of our operating profit is earned outside the UK.
2016 Actions
Strategic Focus: RSA's 3 year 'focus' programme was completed with the sale of our businesses in Latin America and Russia which closed in 2016. Evidence is mounting that the concentration of management focus and resource onto our core businesses will be a key enabler of future performance gains.
(1) Underlying or alternative performance measure, refer to pgs 28-29 for further explanation
Financial Strength: Our 'A' grade credit ratings are strong and stable. Our Solvency II capital ratio has been improved from 143% (2015) to 158% at the end of 2016 (target range 130-160%), despite retirement of GBP200m of high cost subordinated debt. Risk reduction in our UK pension scheme assets has also been successfully completed. And 2016 saw testing financial and insurance event volatility which RSA withstood well. Since year end our disposal of UK Legacy liabilities has given us an important boost to capital and the opportunity to improve capital quality still further.
Business Improvement: Our goal is to systematically and determinedly hunt down performance improvement opportunities across our business. We have taken RSA's performance from below that of competitors in 2013 and prior, to 'in the pack'. All efforts are now concentrated on moving towards our 'best in class' ambitions. The plan is substantially the same across our businesses. Focus on improving service to customers, on underwriting and on costs.
Across the Group, our many customer initiatives have sustained retention rates and above average satisfaction measures. Core premiums were up in 2016 but on lower policy volumes. We are determined to compete on quality, with competitive but profitable pricing. We will not chase unprofitable growth. However, there are encouraging signs that continuing underwriting and service capability improvements will restore modest volume growth and we hope to deliver good evidence of that in 2017.
RSA's most important performance lever is our underwriting judgement. Across the Group portfolio disciplines, skills enhancement, data and model improvement and indemnity initiatives are producing strong benefits. Attritional loss ratios for the Core Group improved 1.4 points on 2015 and are 4 points better than those of 2013. We target further improvement still.
Cost efficiency is the other crucial performance ingredient. We have achieved c.GBP290m of gross annual savings (vs original 2016 target of >GBP180m). We believe we can raise our savings target for the third time and now expect to deliver over GBP400m p.a. by 2018. Headcount has reduced 19% since 2013 in our core businesses as our people have become more productive. We expect to enhance their productivity further with continued business re-engineering, enabled by technology and infrastructure renewal programmes covering digitisation, robotics, infrastructure replacement and software upgrades which continue successfully in each region.
Financial Results 2016
Operating profits - our key ongoing measure - rose 25% to GBP655m. Underlying earnings per share (EPS) rose 42% to 39.5p. Statutory profit after tax of GBP20m reflects a particularly 'noisy' year in accounting terms. The very strong underlying results were optically offset by planned restructuring costs, debt buy-back costs and non-capital accounting charges. We plan that 2017 should be much cleaner and be the last year of material 'below-the-line' costs.
Core premium income was up 6%, but adjusting for FX and price changes, volumes were modestly down. Premium income was in line with our plan on that basis.
Underwriting profits, the litmus test of performance, rose 73% to a record(1) GBP380m. This represents a combined ratio of 94.2%, also a record(1) for RSA. Reserve margins were strengthened to 5.5% (2015: 5%) building some additional cushion against future challenges.
Underlying quality of results was excellent. Current year underwriting profits were a record GBP271m, up 110%. And volatile weather/large loss items did not help us out, being 0.3 points higher than 2015 at core group level.
(1) Underlying or alternative performance measure, refer to pgs 28-29 for further explanation
Particularly pleasing was the spread of performance. Each region hit or exceeded its operating plan targets. Scandinavia supplied 47% of operating profits with a COR of 86.2%. The UK recorded its first significant underwriting profit in a decade (GBP123m). And Canada did well (94.9% COR), despite natural catastrophes in the region. The one sub-regional disappointment was Ireland. Despite dramatic improvement to breakeven on current year operating profit, further prior year reserve strengthening was required taking the Irish COR to 116.2%.
Reflecting RSA's strong progress, a final dividend of 11p/share is proposed making 16p/share total for the year, up 52%. This represents a 41% pay out of underlying EPS (in line with stated policy). It remains our belief that RSA will generate attractive free capital, net of organic growth needs and regular dividend pay outs, once restructuring actions complete and bond 'pull to par' impacts reduce, probably in 2018.
Looking Forward
Our performance target of 12-15% return on tangible net assets(1) is still good by industry standards and represents a creditable achievement level for RSA, implying better ongoing underwriting performance than any year prior to 2016. However, given our progress and the Legacy sale, we are raising the target range to 13-17% ROTE(1) . Additionally the supplementary ambition we have set of moving towards 'best in class' combined ratio performance in our markets, if achieved, should allow us to exceed even this higher range in time. We will try to do just that.
Thanks
RSA is making terrific progress. This is thanks to the efforts of our people and the support of customers, brokers and other stakeholders. Our performance gains are not easy things to achieve, especially with a tough industry backdrop. Sincere thanks and appreciation go to all involved.
RSA has a proud history, despite bumps along the way. We are determined, in performance terms, that the future can be brighter still.
Stephen Hester
Group Chief Executive
22 February 2017
(1) Underlying or alternative performance measure, refer to pgs 28-29 for further explanation
MANAGEMENT REPORT
SEGMENTAL INCOME STATEMENT
Management basis - 12 months ended 31 December 2016
Hot Features
Premium
Scandinavia Canada UK & International Central Core Total Group
functions Group 'non-core'(1) FY 2016
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Net Written Premiums 1,721 1,443 3,081 36 6,281 127 6,408
Net Earned Premiums 1,735 1,454 3,173 (22) 6,340 188 6,528
Net Incurred Claims (1,181) (948) (1,998) 18 (4,109) (106) (4,215)
Commissions (60) (191) (636) - (887) (54) (941)
Operating expenses (255) (241) (451) (5) (952) (40) (992)
Underwriting result 239 74 88 (9) 392 (12) 380
Investment income 98 71 161 - 330 39 369
Investment expenses (3) (2) (7) - (12) - (12)
Unwind of discount (23) (3) (5) - (31) (28) (59)
Investment result 72 66 149 - 287 11 298
Central expenses - - - (23) (23) - (23)
Operating result 311 140 237 (32) 656 (1) 655
Interest(2) (99)
Adjustment for
Legacy
sale(3,4) (204)
Other non-operating
charges(3,5) (261)
Profit before tax 91
Tax (71)
Profit after tax 20
Underlying profit
before tax(6) 556
Loss ratio (%) 68.0 65.2 63.0 - 64.8 - 64.6
Weather loss ratio 0.4 5.7 2.7 - 2.6 - 2.5 Large loss ratio 5.0 6.4 12.1 - 9.2 - 8.9 Current year attritional loss ratio 64.2 57.8 49.0 - 55.2 - 55.2 Prior year effect on loss ratio (1.6) (4.7) (0.8) - (2.2) - (2.0) Commission ratio (%) 3.4 13.1 20.0 - 14.0 - 14.4 Expense ratio (%) 14.8 16.6 14.2 - 15.0 - 15.2 Combined ratio (%) 86.2 94.9 97.2 - 93.8 - 94.2
Note:
UK & International comprises the UK, Ireland and the Middle East
Please refer to appendix for FY 2015 comparatives
(1) Total 'non-core' comprises discontinued operations of Latin America and Russia; and non-core operations of UK Legacy.
(2) On a statutory basis, interest costs are GBP138m which include GBP39m premium on debt buyback (included within other non-operating charges above).
(3) Refer to pg 11 for further breakdown and explanation.
(4) Non-capital charge.
(5) Over GBP230m of which is non-capital in nature.
(6) Underlying or alternative performance measure, refer to pgs 28-29 for further explanation.
Premiums
2016 Core Group net written premiums of GBP6.3bn were up 6% (though flat year-on-year at constant exchange rates).
Scandinavia Canada UK & International Total
Net Written Premiums (GBPm) 1,721 1,443 3,081
% changes in NWP
Volume change including portfolio
actions (7) (4) (4) (2)
Rate increases 3 1 3 2
Foreign exchange 11 9 2 6
Core Group FY 2016 movt. 7 6 1 6(1)
Impact of non-core businesses/disposals (12)
Total Group FY 2016 movt. (6)
We are pleased with the solid 'topline' performance in 2016, reflecting good customer retention and satisfaction levels. Recent evidence points to a strengthening of underlying customer activity as capability improvements take effect. We target this to continue.
Our goal is to serve customers well but profitably. This means that premium volumes have suffered as we introduced tougher underwriting disciplines over the last 3 years. However, across the Group, customer focused capability improvements are strengthening our ability to compete successfully and profitably, and we expect that to show through in stronger volume trends over time.
Regional trends for 2016 include:
-- Scandinavian premiums up 7%, though down 4% at constant fx, with growth in Sweden offset by reductions in Denmark and Norway. Premiums were down 1% on an underlying basis(2) ;
-- Canadian premiums up 6%, though down 3% at constant fx with Personal down 4% and Commercial flat, reflecting underwriting discipline in competitive market conditions;
-- UK & International premiums were up 1% (down 1% at constant fx). UK premiums were down 1% with Personal down 6% and Commercial up 2%. Premiums in Ireland were up 6% driven by continued rating actions. Middle East premiums were down 8% reflecting economic challenges and contract terminations.
Retention trends remained broadly stable with overall retention across our Core regions of around 80%.
(1) After impact of Group Re (NWP GBP148m higher in 2016 mainly due to purchase of 3 year Group aggregate reinsurance cover for GBP139m in 2015)
(2) Underlying or alternative performance measure, refer to pgs 28-29 for further explanation.
Underwriting result
Group underwriting profit of GBP380m, up 73% year-on-year (2015: GBP220m, or GBP232m at constant fx) and comprised GBP392m from core operations.
Total UW result Current Year Prior Year
UW UW
GBPm 2016 2015 2016 2015 2016 2015
Scandinavia 239 94 213 127 26 (33)
Canada 74 116 6 35 68 81
UK & International 88 (15) 82 (58) 6 43
Of which: UK 123 12 72 (34) 51 46
Group Re (9) 50 (28) 37 19 13
Total Core 392 245 273 141 119 104
Non-core & discontinued (12) (25) (2) (12) (10) (13)
Total Group 380 220 271 129 109 91
Current year profit of GBP271m (2015: GBP129m):
-- The Core Group attritional loss ratio was 55.2% which showed a 1.4 point improvement from 2015. There were good improvements across all key regions with Canada 2.5 points better (although c.1 point of the improvement is due to better 'attritional' weather in 2016 v 2015), UK 1.8 points better and Scandinavia 0.3 points better. We target further improvements still.
-- Total Group weather costs were GBP166m or 2.5% of net earned premiums (2015: GBP219m; 3.1%). Core Group weather costs were GBP165m representing a weather loss ratio of 2.6% (2015: GBP194m or 3.2%; five year average: 3.1%).
Included within this are net claims costs of GBP42m for the Alberta wildfires in May, GBP33m for the UK & European floods in June, and GBP26m for Hurricane Matthew in October.
-- Total Group large losses were GBP583m or 8.9% of net earned premiums (2015: GBP556m; 7.9%). Core Group large losses were GBP582m or 9.2% of premiums (2015: GBP508m or 8.3%), which was marginally above the five year average of 8.5%. Lower than trend levels in Scandinavia and UK were more than offset by more elevated levels in Canada and Ireland.
Prior year profit was GBP109m, with prior year development providing a 2.0 point benefit to the Group combined ratio. This included positive development from the UK, Canada, and Scandinavia and negative results in Ireland.
Pleasingly, current year underwriting results in Ireland improved to a small profit from a GBP29m loss in 2015, on the back of strong pricing action, attritional loss ratio improvement and expense reduction. However, Irish prior year reserves required further strengthening of GBP50m, principally for accident years 2014/15 where trend data was hard to identify due to the remediation actions we have had to take post 2013. We target a return to profitability overall in Ireland in 2017.
Our assessment of the margin in reserves for the Group (the difference between our actuarial indication and the booked reserves in the financial statements) is 5.5% of booked claims reserves (2015: 5.0%).
Underwriting operating expenses
The overall Group underwriting expense ratio improved 0.5 points to 15.2% in 2016 and at a Core Group level was 0.5 points better. There were improvements of 1.6 points in Scandinavia and 0.2 points in Canada, whilst the UK ratio was 0.3 points higher. We expect continued improvements in the expense ratio over the coming years.
Commissions
The Group commission ratio in 2016 of 14.4% was down from 15.9% in 2015, driven mainly by the disposal of Latin America which carried a higher commission ratio. The Core Group commission ratio 14.0% was down 0.3 points (2015: 14.3%). We expect the Core Group's commission ratio to be broadly stable in 2017.
Investment result
The investment result was GBP298m (2015: GBP322m, or GBP335m at constant fx) with investment income of GBP369m (2015: GBP403m), investment expenses of GBP12m (2015: GBP14m) and the liability discount unwind of GBP59m (2015: GBP67m).
Investment income is down 8% on prior year, primarily reflecting the impact of the Latin American disposal and continued low bond yield environment, partly offset by the benefit from the weakening of Sterling. The average book yield across our major bond portfolios was down slightly to 2.5% (2015: 2.8%).
At current market forward rates, and updating for the Legacy sale, we expect investment income of GBP300m, GBP275m, and GBP265m in 2017, 18 & 19 respectively. Discount unwind is now expected to be in the range GBP30-35m per annum. The sale of legacy liabilities has reduced investment income but this has been broadly offset by a lower discount unwind. Refer to page 17 for further details.
Total controllable costs(1)
As at the end of 2016 our cost reduction programme has delivered total gross annualised cost reductions of around GBP290m, ahead of our original 2016 target of >GBP180m. We are raising our target for a third time to greater than GBP400m cost reductions by the end of 2018 (up from our previous target of greater than GBP350m). 'Costs to achieve' is now expected to be lower than originally planned at around 1.3 times the annual cost savings once fully achieved, and we still expect 2017 to be the last year of these 'below-the-line' costs.
Total Group controllable costs(1) were down 16% year-on-year at constant exchange to GBP1,515m. Core business controllable costs were down 6% in the same period at constant exchange to GBP1,455m (comprising 8% cost reductions, offset by 2% inflation).
The majority of the year-on-year core business cost reduction has come from our Canadian and Scandinavian business (both delivering 'real' reductions of 10%). UK delivered 3% 'real' reductions.
Core Group FTE(2) is down 19% since the start of 2014 to 13,394 at December 2016, and is down 7% FY 2016 v 2015.
(1) Underlying or alternative performance measure, refer to pgs 28-29 for further explanation.
(2) Full time equivalent employees.
Non-operating items
Provision for sale of legacy liabilities:
-- As announced on 7 February 2017, we have booked in 2016 a GBP204m charge (non-capital) ahead of the sale of the UK Legacy book, primarily reflecting the difference between the reinsurance premium of GBP799m to be paid and the IFRS carrying value of the legacy liabilities (the IFRS accounts hold the legacy liabilities using a 4% discount to face value, GBP567m v GBP834m undiscounted).
-- In 2017, we expect to recognise an IFRS gain of c.GBP65m in respect of this transaction mainly relating to the realised gains on the mark-to-market of the bonds transferred to the buyer.
Please refer to Appendix (page 30) for further details on this transaction and the associated impacts.
-- The sale of the legacy liabilities means the Group's Adverse Development Cover reinsurance protection bought in 2014 to partly protect these liabilities, is no longer valuable. Accordingly, we have agreed to commute it for a one-time charge in 2017 of GBP22m.
Other non-operating charges:
GBPm 2016 2015 Tangible disposal gains 159 184 FCTR(1) recycle & intangibles (176) - Realised investment gains 30 20 Debt buyback premium (39) - Goodwill/intangible write-down (30) (51) Restructuring costs (168) (183) Solvency II costs (7) (26) Discount rate change (6) - Amortisation (16) (27) Pension net interest cost (4) (8) Other (4) (3) Total (261) (94)
-- Tangible disposal gains in 2016 of GBP159m, relate to the completed Latin America and Russian disposals (and as included in our H1 2016 results);
-- GBP176m non-capital charge relating to the Latin American and Russian disposals (GBP165m for Latin America of which GBP100m recycling of foreign exchange losses (in the FCTR(1) ), and GBP65m of intangibles disposed; and GBP11m of FCTR(3) recycling in respect of Russia, all of which was included in our H1 2016 results);
-- Realised investment gains were GBP30m, mainly relating to bond sales;
-- GBP39m premium (non-capital) paid on the July buyback of GBP200m nominal value subordinated debt;
-- GBP30m goodwill write-down (RSA share GBP10m) relating to the requirement to IPO our Oman business in 2017;
(1) Foreign currency translation reserve.
-- Reorganisation costs were GBP168m and included GBP49m in respect of redundancy and GBP119m in respect of transformation activities. Linked to our remaining and increased cost savings targets we expect to record the last of our reorganisation costs in 2017 of c.GBP100m;
-- Solvency II costs were GBP7m. We expect these costs to fall to zero in 2017 and thereafter;
-- Economic assumption changes relate to a GBP6m charge taken in the first half for a change in the rate used to discount Danish long-tail liabilities (discount rate reduced from 1.75% to 1.5%). This follows a decline in market yields for the assets we hold backing these liabilities;
-- GBP16m of amortisation of customer related intangible assets.
Tax
The Group has reported a tax charge of GBP71m for 2016, giving an effective tax rate (ETR) of 78%. The Group underlying tax rate in 2016 was 24%.
The GBP71m tax charge largely comprises of tax on overseas profits and other overseas tax charges; net local tax costs of GBP12m on the Latin American disposals; partly offset by a GBP52m upward revaluation of UK deferred tax assets, an amount dampened by expected new UK rule changes slowing the utilisation of tax losses.
RSA's ETR is impacted by the IFRS loss on the sale of the UK Legacy liabilities. Although this loss is tax deductible in the UK, no immediate tax credit arises due to RSA's existing unrecognised UK tax losses.
The carrying value of the Group's net deferred tax asset at 31 December 2016 was GBP216m (of which GBP212m is in the UK). At current tax rates, a further c.GBP183m of deferred tax assets remain available for use but not recognised on balance sheet; these are predominantly in the UK and Ireland.
In 2017, we expect the Group's ETR to return to a rate closer to the statutory tax rates in our Core territories. The underlying tax rate, given the scale of unrecognised UK tax assets (which given expected changes in UK legislation are likely to last well over 10 years) may trend towards 20% over the next few years.
Dividend
We are pleased to propose a final dividend of 11p per ordinary share, up 57% year-on-year (2015: 7.0p). Together with the interim dividend of 5.0p, this brings the total dividend for the year to 16p (up 52%), representing 41% payout of underlying EPS.
Our medium term policy of between 40-50% ordinary dividend payouts remains, with additional payouts where justified. Potential for additional payouts should follow the completion of restructuring and progress in the unwind of unrealised bond gains.
(1) Underlying or alternative performance measure, refer to pgs 28-29 for further explanation.
BALANCE SHEET
Movement in Net Assets
Non controlling Equity
Shareholders' interests Loan plus
funds capital loan capital TNAV(1)
GBPm GBPm GBPm GBPm GBPm
Balance at 1 January
2016 3,642 129 1,254 5,025 2,838
Profit/(loss) after
tax 27 (7) - 20 115
Exchange gains/(losses)
net of tax 323 19 1 343 229
Fair value gains/(losses)
net of tax 158 - - 158 159
Pension fund gains/(losses)
net of tax (316) - - (316) (316)
Repayment & amortisation
of loan capital - - (187) (187) -
Share issue 5 - - 5 5
Changes in shareholders'
interests in subsidiaries (9) (6) - (15) (10)
Share based payments 16 - - 16 16
2015 final/2016 interim
dividend (122) (3) - (125) (122)
Preference dividend (9) - - (9) (9)
Goodwill and intangible
additions - - - - (43)
Balance at 31 December
2016 3,715 132 1,068 4,915 2,862
Per share (pence)
At 1 January 2016 346 279
At 31 December 2016 352 281
Tangible net assets(1) have increased by 1% to GBP2.9bn during 2016. The increase was driven by profits in the period (including tangible disposal gains), positive foreign exchange movements, and fair value mark-to-market gains due to lower bond yields, partly offset by negative IAS 19 pension movements due to narrower credit spreads, disposal impacts (notably the sale of UK Legacy liabilities), the payment of the 2015 final and 2016 interim dividends, and intangible asset additions.
(1) Underlying or alternative performance measure, refer to pgs 28-29 for further explanation.
CAPITAL POSITION
Solvency II position(1) Requirement Eligible Surplus Coverage
: (SCR) Own Funds
GBPbn GBPbn GBPbn %
31 December 2016 1.8 2.9 1.1 158%
31 December 2015 2.0 2.9 0.9 143%
The Solvency II surplus(1) increased to GBP1.1bn (31 December 2015: GBP0.9bn) during 2016 with the coverage ratio of 158% (post final dividend) up 15 points.
Since the year end, the sale of UK Legacy liabilities has provided a boost to RSA's Solvency II position with coverage uplift of 17-20 points, giving pro forma coverage of 175-178%. Please refer to Appendix (page 30) for further details on this transaction and the associated capital impacts.
The key drivers of the increase in the year to 158% were as follows:
-- Underlying capital generation added 29 points of coverage. This reflects tangible profit after tax adjusted for restructuring costs and other non-capital P&L items;
-- Restructuring costs and other non-operating charges reduced the ratio by 10 points; -- Pull-to-par on unrealised bond gains accounted for a 8 point reduction;
-- 12 points of benefit from the Latin American and Russian disposals, completed in the period;
-- Market movements added 11 points of coverage, mainly driven by positive foreign exchange and narrower credit spreads;
-- Pension movements, mainly reflecting narrower AA corporate bond spreads, reduced the coverage ratio by 15 points;
-- 2016 interim and final dividends reduced the coverage ratio by 10 points; -- SCR modelling updates added 6 points of coverage.
Please refer to Appendix (page 31) for further Solvency II details (including sensitivities).
Debt retirement
On 12 July we completed the retirement of GBP200m (nominal value) of subordinated debt (the target instrument was our GBP500m subordinated notes with 9.4% coupon). The retirement was achieved at a small premium to the prevailing market value.
Our 2016 results include a one-off P&L non-capital charge of c.GBP39m reflecting the premium paid above market value to buyback the debt. Annualised run-rate interest costs will be lower by c.GBP19m.
Our ambition is to further improve the quality of our capital mix and reduce the cost of our debt. We are currently exploring the possibility of an issuance of restricted Tier 1 securities and opportunities for early debt retirement.
(1) The Solvency II capital position at 31 December 2016 is estimated
OUTLOOK
In 2017, our goal is unchanged: the further raising of performance levels.
Markets will remain competitive. Our priority is to maintain underwriting discipline. Nevertheless, we hope to report premium growth overall.
We target further attritional loss ratio improvements, albeit at a moderated pace, together with further reductions in controllable costs.
Costs from weather/large losses are inherently volatile though bounded by reinsurance protection at levels largely unchanged from 2016.
Investment income is expected to be c.GBP300m for 2017 assuming current market implied rates, with discount unwind in the range GBP30-35m. Both numbers have been adjusted for the UK Legacy sale with lower investment income broadly offset by reduced discount unwind. Financial market volatility remains a risk factor.
Non-operating items in 2017 are expected to include the last year of restructuring costs (associated with our increased cost savings target), together with legacy sale related impacts.
We expect to be able to use the capital generated from the Legacy sale to accelerate debt retirement in 2017 thereby further reducing risk, improving capital quality and improving earnings
Overall we target attractive performance in 2017, building from the quality base now established.
BUSINESS REVIEW - INVESTMENT PERFORMANCE
Management basis
Investment result FY 2016 FY 2015 Change
GBPm GBPm %
Bonds 300 332 (10)
Equities 28 25 12
Cash and cash equivalents 10 17 (41)
Property 23 22 5
Other 8 7 14
Investment income 369 403 (8)
Investment expenses (12) (14) 14
Unwind of discount (59) (67) 12
Investment result 298 322 (7)
Balance sheet unrealised gains (pre-tax) 31 Dec 31 Dec Change
2016 (GBPm) 2015 (GBPm) %
Bonds 619 414 50
Equities 8 (1) -
Other 2 2 -
Total 629 415 52
Investment portfolio Value Foreign Mark to Other Transfer Value
31 Dec exchange market movements to assets 31 Dec
2015 held for 2016
sale
GBPm GBPm GBPm GBPm GBPm GBPm
Government bonds 3,707 424 40 (86) (372) 3,713
Non-Government
bonds 7,405 704 56 71 (404) 7,832
Cash 816 92 - 181 (104) 985
Equities 159 36 15 (40) - 170
Property 365 - (4) (28) - 333
Prefs & CIVs 426 29 6 61 - 522
Other 100 17 10 (39) - 88
Total 12,978 1,302 123 120 (880) 13,643
Split by currency:
Sterling 4,543 3,994
Danish Krone 936 1,081
Swedish Krona 2,207 2,565
Canadian Dollar 2,706 3,232
Euro 1,247 1,345
Other 1,339 1,426
Total 12,978 13,643
Credit quality - bond Non-government Government
portfolio
31 Dec 31 Dec 31 Dec 31 Dec
2016 2015 2016 2015
% % % %
AAA 35 33 65 89
AA 22 15 30 6
A 30 37 4 5
BBB 11 14 1 -
< BBB 2 1 - -
Non rated - - - -
Total 100 100 100 100
INVESTMENT PERFORMANCE
Investment income of GBP369m (2015: GBP403m) was offset by investment expenses of GBP12m (2015: GBP14m) and the liability discount unwind of GBP59m (2015: GBP67m). Investment income was down 8% on prior year, primarily reflecting the impact of the Latin American disposal and continued low bond yield environment, partly offset by favourable FX movements.
The average book yield over the period on the total portfolio was 2.6% (2015: 2.9%), with average yield on the bond portfolios of 2.5% (2015: 2.8%). Reinvestment rates in the Group's major bond portfolios over the year was approximately 1.4%.
Average duration of the Group's bond portfolios is 3.7 years (31 December 2015: 4.0 years) with the reduction driven by the movement of assets associated with UK legacy business to a held-for-sale basis.
The investment portfolio grew by 5% during 2016 to GBP13.6bn. The movement was driven primarily by the impact of weakening of Sterling, positive mark-to-market on bond holdings, and positive cash flow, including proceeds from completed disposals in the year, partly offset by the transfer of legacy assets to held-for-sale.
At 31 December 2016, high quality widely diversified fixed income securities represented 85% of the portfolio (31 December 2015: 86%). Equities represented 1% (31 December 2015: 1%) and cash 7% of the total portfolio (31 December 2015: 6%).
The quality of the bond portfolio remains very high with 98% investment grade and 70% rated AA or above. We remain well diversified by sector and geography.
Unrealised bond gains and pull-to-par
Balance sheet unrealised gains of GBP629m (pre-tax) increased by GBP214m during the year (31 December 2015: GBP415m) driven by lower bond yields and positive foreign exchange movements, partly offset by the pull-to-par of existing bonds.
In 2017 we expect to realise c.GBP80m of these gains on the transfer of bonds to the buyer of our Legacy liabilities. We expect the remaining gains to largely unwind over the next 4 years, based on current forward yields.
Outlook
Based on current forward(1) bond yields and foreign exchange rates it is estimated that investment income will be c.GBP300m for 2017, c.GBP275m for 2018 and c.GBP265m for 2019. These projected income numbers are, however, sensitive to changes in market conditions. We expect a discount unwind in the range GBP30-35m per annum. The sale of legacy liabilities has reduced investment income but this has been broadly offset by a lower discount unwind.
(1) If current yields and FX were kept flat, instead of using forward rates, our guidance would be unchanged for 2017&18, and c.GBP15m lower for 2019. A +/-5% movement in Sterling against all other currencies would move investment income by around +/-GBP10m.
REGIONAL REVIEW - SCANDINAVIA
Management basis
Net written Change (%) Underwriting result
premiums
FY 2016 FY 2015 RFX(1) CFX(1) FY 2016 FY 2015
GBPm GBPm GBPm GBPm
Split by country
Sweden 990 874 13 2 174 101
Denmark 588 585 1 (11) 63 (11)
Norway 143 147 (3) (10) 2 4
Total Scandinavia 1,721 1,606 7 (4) 239 94
Split by class
Household 336 295 14 2 46 35
Personal Motor 332 313 6 (5) 92 89
Personal Accident
& Other 313 275 14 2 37 (16)
Total Scandinavia
Personal 981 883 11 - 175 108
Property 295 297 (1) (11) 12 7
Liability 151 129 17 4 32 (11)
Commercial Motor 202 184 10 (1) 14 4
Marine & Other 92 113 (19) (28) 6 (14)
Total Scandinavia
Commercial 740 723 2 (9) 64 (14)
Total Scandinavia 1,721 1,606 7 (4) 239 94
Investment result 72 69
Scandinavia operating
result 311 163
Operating Ratios (%) Claims Commission Op Expenses Combined
FY'16 FY'15 FY'16 FY'15 FY'16 FY'15 FY'16 FY'15
Household 86.2 87.9
Personal Motor 72.2 71.6
Personal Accident
& Other 88.1 105.9
Total Scandinavia
Personal 66.9 71.3 2.9 3.2 12.2 13.2 82.0 87.7
Property 96.2 97.5
Liability 76.0 108.4
Commercial Motor 93.3 98.1
Marine & Other 94.3 112.0
Total Scandinavia
Commercial 69.5 77.0 4.1 4.7 18.0 20.4 91.6 102.1
Total Scandinavia 68.0 73.8 3.4 3.8 14.8 16.4 86.2 94.0
5yr
Of which: ave
Weather loss ratio 0.4 1.0 1.4
Large loss ratio 5.0 6.3 5.6
Current year attritional
loss ratio 64.2 64.5
Prior year effect
on loss ratio (1.6) 2.0
YTD rate changes(2) At March
(%) At Dec 2016 At Sept 2016 At June 2016 2016
Personal Household 4 4 4 3
Personal Motor 2 2 3 2
Commercial Property 3 3 2 (1)
Commercial Liability 3 3 3 8
Commercial Motor 3 4 4 2
(1) RFX = reported foreign exchange rates; CFX = constant foreign exchange rates
(2) Rate changes reflect changes for risks renewing in the year-to-date versus comparable risks renewing in the same period the previous year
SCANDINAVIA
In 2016 Scandinavia delivered a 130% increase in underwriting profits (at constant fx) driven by strong current year profitability, with record current year profits in Sweden.
We have also made good progress with our customer agenda. In Denmark we've seen positive development in customer 'trust' scores, and we've increased our engagement with lower 'trust' score customers to gain fresh insights. We're ranked 2nd for SME customer satisfaction in Denmark, and first for overall customer satisfaction in Norway. Our retention rates across the region have remained steady at almost 80%.
Net written premiums of GBP1,721m were up 7% but down 4% on a constant exchange rate basis (2015: GBP1,606m as reported), with volumes down 7% and rate up 3%.
Excluding the impact of the transfer of the Marine portfolio to the UK and the non-repeat of two large multi-year deals (as previously flagged at H1 2016), underlying(1) Scandinavian premiums were down 1% (Personal up 1% underlying; Commercial down 3% underlying), reflecting slow market conditions overall.
The underwriting result was GBP239m (2015: GBP94m as reported) with a strong current year profit of GBP213m.
The current year attritional loss ratio was 64.2%, better than 2015 at 64.5%. Benign weather and large losses across the regions reduced weather losses to 0.4% compared to 1.0% in 2015, while large losses of 5.0% compared to 6.3% in 2015. The prior year effect on the loss ratio was a benefit of 1.6%. The overall combined ratio was 86.2% (2015: 94.0%).
After including an investment result of GBP72m (2015: GBP69m), the total operating profit was GBP311m, up 91%.
The Scandinavian transformation programme has delivered well in 2016, with particular success in pricing and claims sophistication improvements, process automation, online quote capabilities, and customer satisfaction.
Total controllable expenses were down 8% year-on-year, with 10% cost reductions offset by 2% inflation. Headcount was down 7% in 2016 and is now down 16% since the end of 2013.
Scandinavia - Outlook
We continue to expect the Scandinavian P&C markets to grow in line with local GDP growth and we target growth broadly in line with the market, subject to maintaining underwriting discipline.
Our focus remains on further improving the underlying performance of the business, particularly attritional loss ratios and cost improvements, as we drive towards our ambition COR of <85%.
(1) Underlying or alternative performance measure, refer to pgs 28-29 for further explanation.
REGIONAL REVIEW - CANADA
Management basis
Net written premiums Change (%) Underwriting result
FY 2016 FY 2015 RFX(1) CFX(1) FY 2016 FY 2015
GBPm GBPm GBPm GBPm
Household 445 421 6 (3) 57 62
Personal Motor 549 529 4 (5) 34 42
Total Canada Personal 994 950 5 (4) 91 104
Property 194 176 10 1 (34) 6
Liability 102 99 3 (5) 4 (5)
Commercial Motor 102 85 20 10 4 7
Marine & Other 51 50 2 (7) 9 4
Total Canada Commercial 449 410 10 - (17) 12
Total Canada 1,443 1,360 6 (3) 74 116
Investment result 66 66
Canada operating
result 140 182
Operating Ratios
(%) Claims Commission Op Expense Combined
FY'16 FY'15 FY'16 FY'15 FY'16 FY'15 FY'16 FY'15
Household 87.4 85.3
Personal Motor 93.6 92.3
Total Canada Personal 64.0 62.4 11.0 11.1 16.0 15.7 91.0 89.2
Property 117.4 96.7
Liability 96.0 105.2
Commercial Motor 96.2 91.2
Marine & Other 83.8 92.6
Total Canada Commercial 67.9 59.2 18.0 18.8 17.9 19.2 103.8 97.2
Total Canada 65.2 61.5 13.1 13.4 16.6 16.8 94.9 91.7
5yr
Of which: ave Weather loss ratio 5.7 2.3 4.3 Large loss ratio 6.4 4.7 3.6 Current year attritional loss ratio 57.8 60.3 Prior year effect on loss ratio (4.7) (5.8) YTD rate changes(2) (%) At Dec 2016 At Sept 2016 At June 2016 At March 2016 Personal Household 5 5 5 6 Personal Motor (1) (1) - - Commercial Property 2 2 2 2 Commercial Liability 2 2 2 2 Commercial Motor - - 1 -
(1) RFX = reported foreign exchange rates; CFX = constant foreign exchange rates
(2) Rate changes reflect changes for risks renewing in the year-to-date versus comparable risks renewing in the same period the previous year
CANADA
We have had a strong and resilient year in Canada, absorbing our share of losses from Fort McMurray, the largest natural catastrophe in Canadian history, yet still delivering an underwriting profit of GBP74m and COR of 94.9%.
We have been working hard to enhance our Customer offering. In Johnson our service and sales metrics have been outperforming benchmarks. In our broker distributed businesses, faster response times and new digital tools are being offered with promising early results. Customer retention rates have improved by 2pts year-on-year to 84%.
Net written premiums of GBP1,443m were up 6% but down 3% at constant exchange rate (2015: GBP1,360m as reported), with volumes down 4% and rate increases of 1%.
The portfolio actions of the last two years are now complete. However, conditions remain competitive, particularly in the Commercial Broker channel. Our priority continues to be on sustained underwriting discipline. Personal premiums were down 4%, driven by rate reductions in Personal Motor and lower volumes. Premium reduction trends have been gradually moderating and Q4 2016 saw flat premiums overall.
The underwriting profit for the year of GBP74m (GBP116m in 2015) was in line with our expectations, even after absorbing the impact of the Fort McMurray wildfire losses in May where our reinsurance programme limited our exposure to a net claims cost of GBP42m. The weather ratio was therefore elevated at 5.7% (1.4 points worse than long term averages). Large losses were higher than expected at 6.4% driven by a small number of large claims in Commercial Property.
The current year attritional loss ratio showed a strong improvement of 2.5 points from prior year to 57.8% demonstrating the benefits of our underwriting and portfolio actions. Current year profits of GBP6m were supported by a continued strong prior year performance with a GBP68m profit or 4.7% benefit to COR. We expect continued positive prior year development in Canada but at lower levels than the last two years. The overall combined ratio was 94.9%, 3.2 points higher than previous year mainly due to the wildfire losses.
Our transformation programme in Canada has progressed well during the year, delivering customer retention actions, deployment of new pricing tools, process simplification, and the implementation of the Guidewire claims system proceeding as planned.
Total controllable expenses were down 8% year-on-year (comprising 10% cost reductions, partly offset by 2% inflation). Headcount was down 7% in the year, and is down 19% since the end of 2013.
Canada - Outlook
We target a stabilisation of premiums in 2017 and continued progress towards our combined ratio ambition of <94%. Our focus continues to be on operational improvement (in underwriting, claims, technology and process simplification) and cost reduction.
REGIONAL REVIEW - UK
Management basis
Net written premiums Change (%) Underwriting result
FY 2016 FY 2015 RFX(1) CFX(1) FY 2016 FY 2015
GBPm GBPm GBPm GBPm
Household 555 600 (8) (8) 48 60
Personal Motor 235 255 (8) (8) (2) (21)
Pet 278 278 - - 2 8
Total UK Personal 1,068 1,133 (6) (6) 48 47
Property 642 634 1 - 77 (8)
Liability 300 297 1 - (11) (4)
Commercial Motor 262 256 2 2 (22) 4
Marine & Other 316 286 10 10 31 (27)
Total UK Commercial 1,520 1,473 3 2 75 (35)
Total UK 2,588 2,606 (1) (1) 123 12
Investment result 136 135
UK operating result 259 147
Operating Ratios Claims Commission Op Expenses Combined
(%)
FY'16 FY'15 FY'16 FY'15 FY'16 FY'15 FY'16 FY'15
Household 91.7 90.3
Personal Motor 101.0 107.8
Pet 99.4 96.7
Total UK Personal 57.8 59.0 21.2 21.3 16.7 15.6 95.7 95.9
Property 88.2 101.3
Liability 103.7 101.5
Commercial Motor 107.4 99.1
Marine & Other 90.5 109.4
Total UK Commercial 61.8 69.6 21.1 20.3 12.3 12.4 95.2 102.3
Total UK 60.2 65.1 21.2 20.7 14.0 13.7 95.4 99.5
5yr
Of which: ave
Weather loss ratio 3.2 6.5 3.6
Large loss ratio 13.2 12.4 13.6
Current year attritional
loss ratio 46.3 48.1
Prior year effect
on loss ratio (2.5) (1.9)
YTD rate changes(2)
(%) At Dec 2016 At Sept 2016 At June 2016 At March 2016
Personal Household 1 1 1 -
Personal Motor 9 10 9 9
Commercial Property (1) (1) - (2)
Commercial Liability - - - (1)
Commercial Motor 5 5 5 4
(1) RFX = reported foreign exchange rates; CFX = constant foreign exchange rates
(2) Rate changes reflect changes for risks renewing in the year-to-date versus comparable risks renewing in the same period the previous year
UK
The UK delivered the best underwriting result in over a decade at GBP123m and a COR of 95.4%. Continued delivery from our performance improvement programme has driven this strong result against a competitive landscape.
Customer satisfaction metrics remain strong with further improvements delivered from 2015. Of note More Than Net Promoter Scores ("NPS") increased by 39% from 2015 and Motability NPS remained at market leading levels of +80. The creation of two new trading divisions in Commercial Lines are enabling us to better serve customers and compete more effectively.
Premiums were down 1% overall which included the impact of portfolio remediation in personal broker motor and delegated business.
UK Personal net written premiums contracted by 6% following the exit of Broker Motor during 2016. The growth of our highly successful Telematics proposition continues at pace with 90% growth from 2015 and helped deliver underlying 15% growth in Personal Motor. Underlying shrinkage (excluding the exited business) was 1% driven by remediation of the Delegated Authority Home portfolio offsetting strong growth in Personal Motor enabled by Telematics performance.
UK Commercial net written premiums grew by 2% following the transfer of Scandinavian Marine portfolio during 2016. Excluding this transfer UK Commercial net written premium growth was flat to 2015.
The UK underwriting result of GBP123m was underpinned by improving attritional loss ratios (1.8 points better) demonstrating the continuing underwriting discipline across the business. Favourable weather experience (3.3 points better than last year) was offset by adverse large loss experience (0.8 points adverse), whilst prior year development of 2.5% included GBP14m of favourable development from the December 2015 Storms.
The UK Personal underwriting result of GBP48m was GBP1m favourable to 2015 with improvements in attritional loss ratios across Personal Motor and Pet. In Commercial, an underwriting profit of GBP75m was GBP110m favourable to 2015 with a 2.4 point improvement in the attritional loss ratio following improvements in Marine and Commercial Motor. The Marine large loss performance was 5.6pts improved from 2015 following the remediation programme in 2016, although this was offset by more elevated large loss levels in Motor and Liability.
The continuing change activity across the UK helped deliver further improvements to controllable expenses which were down 1%, comprising 3% gross cost reduction offset by 2% inflation. Headcount was down 5% in the year and is down 18% since the end of 2013.
UK - Outlook
January renewals have delivered in line with expectations and premium trends are expected to continue to deliver modest growth through 2017.
Despite a challenging external landscape, we have ambitious plans to continue transforming the UK business, investing in capabilities and delivering sustainable 'best in class' performance. Our medium target COR of below 94% remains.
REGIONAL REVIEW - IRELAND & MIDDLE EAST
Ireland - management basis
Net written premiums Change (%) Underwriting result
FY 2016 FY 2015 RFX(1) CFX(1) FY 2016 FY 2015
GBPm GBPm GBPm GBPm
Personal 185 161 15 2 (14) (22)
Commercial 121 100 21 12 (35) (13)
Total Ireland 306 261 17 6 (49) (35)
Investment result 7 9
Ireland operating
result (42) (26)
Operating Ratios
(%) Claims Commission Op Expenses Combined
FY'16 FY'15 FY'16 FY'15 FY'16 FY'15 FY'16 FY'15
Personal 107.6 113.8
Commercial 130.1 112.8
Total Ireland 91.6 84.3 12.2 12.8 12.4 16.3 116.2 113.4
5yr
Of which: ave
Weather loss ratio 0.0 1.5 4.3
Large loss ratio 9.5 6.4 3.8
Current year attritional
loss ratio 66.2 74.2
Prior year effect
on loss ratio 15.9 2.2
YTD rate changes(2)
(%) At Dec 2016 At Sept 2016 At June 2016 At March 2016
Personal Household 16 16 14 14
Personal Motor 35 35 35 37
Commercial Property 4 3 2 1
Commercial Liability 20 22 22 21
Commercial Motor 39 33 25 18
Middle East - management basis
Net written premiums Change (%) Underwriting result
FY 2016 FY 2015 RFX(1) CFX(1) FY 2016 FY 2015
GBPm GBPm GBPm GBPm
Personal 111 106 5 (8) 5 2
Commercial 76 75 3 (10) 9 6
Total Middle East 187 181 3 (8) 14 8
Investment result 6 3
Middle East operating
result 20 11
Operating Ratios
(%) Claims Commission Op Expenses Combined
FY'16 FY'15 FY'16 FY'15 FY'16 FY'15 FY'16 FY'15
Personal 95.7 98.3
Commercial 88.2 91.0
Total Middle East 56.8 61.6 16.6 13.9 19.4 19.9 92.8 95.4
5yr
Of which: ave
Weather loss ratio 1.0 0.0 0.4
Large loss ratio 1.3 1.9 1.3
Current year attritional
loss ratio 57.2 61.9
Prior year effect
on loss ratio (2.7) (2.2)
(1) RFX = reported foreign exchange rates; CFX = constant foreign exchange rates
(2) Rate changes reflect changes for risks renewing in the year-to-date versus comparable risks renewing in the same period the previous year
IRELAND
In Ireland, while the headline underwriting loss of GBP49m is disappointing, the current year underwriting result has returned to profit with an improvement of GBP30m year on year. Full year premiums of GBP306m were up 6% at constant FX versus 2015 with significant rate being carried during 2016.
The underwriting loss of GBP49m comprises a GBP1m current year profit (2015: GBP29m loss) and a GBP50m prior year loss (2015: GBP6m loss). The current year improvement reflects an attritional loss ratio of 66.2% which was 8 points better than last year, significant rate increases, and further cost reductions.
The prior year loss is predominantly in the Republic of Ireland Commercial and Motor portfolios where a combination of higher than expected claims and the distortion of our reserving patterns following the events of 2013 have resulted in further strengthening of reserves during 2016. These issues have been amplified by a challenging Irish market, characterised by aggressive claims inflation and increasing litigation mitigated by a very hard rating environment.
Just over GBP30m of the development relates to three classes: Motor, Liability and SME where we put through significant price increases in 2016 ahead of our plans, with further increases planned for 2017. Much of the remainder of the adverse development relates to business we have now exited.
Within the underwriting result, the impact of weather and large losses, taken together, was broadly in line with long term averages although weather losses were nil while large losses were relatively high.
The performance improvement plan continues in Ireland. Irish FTE was down 9% in 2016 and is down 33% since the end of 2013, with total controllable expenses down 24% year-on-year.
Ireland - Outlook
We are targeting a return to operating profitability in 2017 through continued underwriting improvement, portfolio remediation and cost reduction. The challenging market environment, in particular for claims inflation with the Book of Quantum revision, PPO legislation and judicial reviews, demands that we continue our focus on securing adequate rate in each of our portfolios, and may give rise to additional reserve volatility.
MIDDLE EAST
The Middle East region delivered a sub-96% COR for the 5(th) consecutive year, against a backdrop of a sustained economic downturn and tough trading conditions.
Premiums of GBP187m were down 8% at constant FX as a result of the challenging trading conditions resulting from the macroeconomic difficulties and portfolio action taken in KSA.
The underwriting result of GBP14m is GBP6m better than 2015 and the COR improved by 2.6 points to 92.8%. Underwriting actions have been taken across the portfolios which have delivered 4.7 point improvement in the attritional loss ratio to 57.2% (2015: 61.9%).
The region secured a new major bank assurance partnership with First Gulf Bank and a new health partnership with NowHealth in Dubai, as well as the opening of new branches and the enhancement of digital offerings.
Middle East - Outlook
The medium term outlook for our Middle East business remains positive. Targeted growth plans are in place for 2017 and work is underway to further develop capabilities throughout the region including underwriting and pricing sophistication. With our affinity and bank assurance partnerships, we are well positioned to take early advantage of any economic upturn.
DISCONTINUED & NON-CORE OPERATIONS
Net written premiums Underwriting result
2016 2015 2016 2015
GBPm GBPm GBPm GBPm
UK Legacy(1) - 2 (10) (39)
Other discontinued
& non-core(2) 127 920 (2) 14
Total discontinued
& non-core 127 922 (12) (25)
(1) Non-core
(2) Includes Latin America, Hong Kong, Singapore, China, India, Italy, UK Engineering, and Russia.
Disposal programme
In 2014 we commenced a major disposal programme with the intention of focusing RSA on its strongest businesses. Significant progress has been made to date, 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.
-- Hong Kong & Singapore: announced 21 August 2014, completed 31 March 2015. Total proceeds: GBP123m. Gain on sale: GBP103m.
-- China: announced 3 July 2014, completed 14 May 2015. Total proceeds: GBP69m. Gain on sale: GBP28m.
-- India associate: announced 18 February 2015, completed 29 July 2015. Total proceeds: GBP46m. Gain on sale: GBP21m.
-- Italy: announced 17 October 2014, completed 31 December 2015. Total proceeds: GBP18m. Gain on sale: GBP29m.
-- UK Engineering Inspection: Completed 1 November 2015. Gain on sale: GBP2m.
-- Russia: announced 9 December 2015, completed 29 January 2016. Total proceeds: GBP5m. Tangible gain on sale: GBP1m. Total loss on sale: GBP10m.
-- Latin America: announced 8 September 2015, completed during FY 2016. Total proceeds: GBP434m. Tangible gain on sale: GBP158m. Total loss on sale: GBP19m.
Announced disposals:
-- UK Legacy liabilities: announced 7 February 2017. Disposal of GBP834m of undiscounted UK legacy insurance liabilities net of reinsurance. Transaction takes form of 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. Further details included in Appendix (pg30).
APPIX
UNDERLYING AND ALTERNATIVE PERFORMANCE MEASURES
The Group uses alternative performance measures, including certain underlying measures, to help explain business performance and financial position. Where not defined in the body of this announcement, further information is set out below.
Note 7 on pages 61-63 of the condensed consolidated financial statements presents a reconciliation of the management basis to statutory income statement.
Underlying premiums
Underlying growth rate in Scandinavia has been calculated by adjusting Scandinavian 2015 premiums downwards by GBP26m for the non-repeat of two large multi-year deals and also by GBP33m for the transfer of Marine business from Scandinavia to the UK in FY 2016.
Combined operating ratio
The Group's combined operating ratio (COR) is 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 = commissions / net earned premiums
Expense ratio = operating expenses / net earned premiums
Underlying profit before tax
Underlying profit before tax is calculated as operating profit less interest costs.
Underlying Core Group tax rate
The underlying Core Group tax rate mainly comprises the local statutory tax rates in our territories applied to underlying regional profits (operating profits less interest costs).
Net asset value and tangible net asset value per share
Net asset value per share data at 31 December 2016 was based on total shareholders' funds of GBP3,715m, adjusted by GBP125m for preference shares. Tangible net asset value per share was based on a tangible book value of GBP2,862m (equal to shareholders' funds of GBP3,715m, less goodwill & intangible assets of GBP728m, less GBP125m preference share capital).
Earnings per share
The earnings per share (EPS) is calculated using the result attributable to the ordinary shareholders of the Parent Company and the weighted average number of shares in issue during the period. On a basic and diluted basis these were 1,018,174k and 1,024,449k respectively (net of RSA owned shares). The number of shares in issue at 31 December 2016 was 1,019,555k (net of RSA owned shares).
Stated EPS uses profit attributable to ordinary shareholders (profit after tax less non-controlling interests and preference share dividends). Underlying EPS uses an underlying profit measure calculated as operating profit less interest costs taxed at an underlying tax rate of 24% for FY 2016, less non-controlling interests and preference share dividends.
Constant exchange (CFX)
Prior period comparative translated at current period exchange rates.
Controllable costs
Total controllable costs are stated on a 'written' basis, and include underwriting operating expenses, claims expenses, investment expenses, central expenses, and Solvency II costs.
Current year underwriting result
The profit or loss earned from business for which protection has been provided in the current financial period.
Prior year underwriting result
The profit or loss arising from settling claims incurred in previous years at a better or worse level than the previous estimated costs.
'Record' underwriting performance
Record FY Group underwriting profit and combined ratio considers the FY periods for 2006-2016. In order to compare on a 'like-for-like' basis, historical periods have been adjusted for central expense reallocation changes made in 2015, Scandinavian discount rate changes made in 2014, and IAS 19 pension net interest cost changes made in 2012. In the case of the expense reallocations and IAS 19 changes, the restatement value applied in the year of change has been applied to all preceding years back to 2006.
Return on equity and tangible equity
FY 2016 FY 2015
GBPm GBPm
Profit after tax 20 244
Less: non-controlling interest 7 (9)
Less: preference dividend (9) (9)
A Profit attributable to ordinary shareholders 18 226
Operating profit before tax 655 523
Less: interest costs (99) (106)
Underlying profit before tax 556 417
Less: tax(1) (133) (117)
Less: non-controlling interest (12)(2) (9)
Less: preference dividend (9) (9)
Underlying profit after tax attributable
B to ordinary shareholders 402 282
Opening shareholders' funds 3,642 3,825
Less: preference share capital (125) (125)
C Opening ordinary shareholders' funds 3,517 3,700
Less: goodwill & intangibles (679) (800)
Opening tangible ordinary shareholders'
D funds 2,838 2,900
Return on equity
A/C Reported 0.5% 6.1%
B/C Underlying 11.4% 7.6%
Return on tangible equity
A/D Reported 0.6% 7.8%
B/D Underlying 14.2% 9.7%
(1) Using underlying assumed tax rate of 24% in FY 2016 and 28% in FY 2015
(2) Stated non-controlling interest adjusted for share of goodwill write down in Oman
We expect the underlying assumed tax rate to continue to fall next year to a rate broadly in line with the statutory tax rates in our Core territories. Given the scale of unrecognised UK tax assets it may trend towards 20% over the next few years.
LEGACY DISPOSAL
On 7 February 2017, RSA signed contracts, to dispose GBP834m of UK legacy insurance liabilities to Enstar Group Limited ('Enstar').
The transaction initially takes the form of a reinsurance agreement, effective at 31 December 2016, and which substantially(1) effects economic transfer, to be followed by completion of a subsequent legal transfer of the business by Part VII Transfer.
The Reinsurance is effected via a 100% quota share policy(1) , subject to finalising and effecting certain security arrangements. It covers all claims payments, net of reinsurance, arising in respect of the Business on and after 31 December 2016. The Part VII Transfer is subject to court, regulatory and other approvals and is expected to be completed within 18-24 months.
The transaction covers GBP834m of undiscounted liabilities, net of reinsurance (GBP957m gross of reinsurance), relating to business written in 2005 & prior. Around 75% of these liabilities relate to asbestos, with the balance mainly comprising abuse, deafness, marine and aviation liabilities. Around GBP35m of net discounted post-2005 legacy liabilities will remain with RSA after the transaction.
The reinsurance premium paid by RSA to Enstar is GBP799m(2) , settled through the transfer of a GBP682m portfolio of investment grade assets with the balance in cash. No further consideration will be due in respect of the subsequent Part VII Transfer.
Capital impacts:
-- Solvency II coverage gain of c.17-20 points as follows:
o The majority of the gain comes through an increase in Core Tier 1 available capital. This is because that part of the Group's Solvency II balance sheet relating to Legacy risk comprises amounts to support the Legacy reserves as well as a risk margin and provision for 'events not in data'. Execution of this deal substantially removes the risk exposures from the Solvency II balance sheet, and with it the need for associated reserves.
o The boost to Core Tier 1 capital also allows more of RSA's Tier 3 capital to become eligible in the Solvency II coverage calculation. This impact represents c.3 points of the overall coverage gain.
o The Group's solvency capital requirement (SCR) is not expected to change materially on completion of the Part VII Transfer, as the risk reduction achieved is mostly offset by lost benefit of diversification versus RSA's other SCR risks.
-- The significant majority of the overall coverage benefit is realised immediately.
Accounting impacts:
-- An IFRS non-cash charge of c.GBP145m booked partly in 2016 and partly in 2017 as follows:
o RSA's 2016 financial results include a non-capital charge of GBP204m primarily due to the IFRS accounts holding the legacy liabilities using a 4% discount rate to face value (GBP567m v GBP834m undiscounted), whereas Solvency II discounts the same liabilities for capital purposes at a range of 1.0-1.5%. The buyer is taking on the liabilities at a discount rate in between these figures reflecting its own targeted return profile.
o RSA's 2017 financial results will include a net realised gain of c.GBP65m mainly on the mark-to-market of the bonds transferred to the buyer.
-- The IFRS loss is tax deductible in the UK, and will add to RSA's existing unrecognised tax losses.
(1) Interim Reinsurance has a limit of 175% of net undiscounted reserves
(2) Subject to final adjustment
CAPITAL
We maintain a measured approach to capital management, targeting a single 'A' capital rating. This involves considering a range of indicators relating to capital, to operating results, and to qualitative factors.
RSA is a diversified, multi-channel, multi-product general insurer and its business mix reduces exposure to significant volatility.
However, the UK pension scheme provides a degree of IAS 19 volatility under Solvency II for RSA.
We currently consider a target coverage ratio under Solvency II reporting of 130-160% to be appropriate for the Group's risk profile.
Solvency II sensitivities(1)
FY 2016 coverage ratio 158% FY 2016 coverage ratio proforma for Legacy sale 175-178% Sensitivities (change in coverage ratio): Incl. pensions Excl. pensions 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%
The above sensitivities have been considered in isolation. The impact of a combination of sensitivities may be different to the individual outcomes stated above.
Reconciliation of IFRS total capital to Eligible Own Funds
31 Dec
2016
GBPbn
Shareholders' funds (incl.
preference shares) 3.7
Loan capital 1.1
Non-controlling interests 0.1
Total IFRS capital 4.9
Less: goodwill & intangibles (0.7)
Adjust technical provisions
to SII basis (0.7)
Other 0.1
Basic Own Funds 3.6
Tiering & availability restrictions (0.6)
Forseeable dividends (0.1)
Eligible Own Funds 2.9
(1) Sensitivities exclude second order impacts from the application of Tier 1 eligibility rules.
(2) We have updated our 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.
Capital requirement (SCR) by risk type(1) :
Excluding Legacy 31 Dec
2016
%
Underwriting risk 14
Catastrophe risk 16
Reserve risk 16
Market & credit risk 15
Currency risk 3
Pension risk 26
Operational risk 10
Total 100
Diversification benefit
The level of diversification benefit generated within our SII model, resulting from the nature of the different types of business written and the non-correlation of risk events affecting the group, is between 35%-45% of the undiversified capital requirement (SCR).
(1) Shown as a proportion of the undiversified solvency capital requirement.
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 2016 to 31 December 2016.
UK non-UK Group
GBPm GBPm GBPm
Pension fund surplus/(deficit) at
1 January 2016 117 (53) 64
Actuarial gains/(losses)(1) (295) (39) (334)
Deficit funding 54 - 54
Other movements(2) 11 8 19
Pension fund surplus/(deficit) at
31 December 2016 (113) (84) (197)
At an aggregate level the pension fund position under IAS 19 deteriorated during the year from GBP64m surplus to a deficit of GBP197m.
The UK position deteriorated by GBP230m during the year driven largely by adverse market movements (in particular tightening of credit spreads). Losses were partly offset by deficit funding contributions (GBP66m pre-tax) and actual pension increases being lower than expected.
The non-UK schemes' deficit deteriorated by GBP31m during the year, also driven mainly by market movements - in particular declining yields and the impact of foreign exchange movements.
IAS 19 sensitivities
Assets Liabilities
IAS 19 position at 31 December
2016 (GBPbn) 8.2 8.3
Sensitivities (GBPbn change
in assets/liabilities):
Interest rates: -1% +1.7 +1.8
Inflation: +1% +1.1 +1.0
Equities: -15% -0.1 -
'AA' credit spreads: -0.25% +0.1 +0.4
(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/administration costs, expected returns and interest costs.
REINSURANCE
The main elements of our 2017 reinsurance programme are outlined below.
The 3 year Group aggregate reinsurance deal that commenced in 2015 remains in place. The key terms are as follows:
-- 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 GBP150m; -- Limit of cover is GBP150m in 2017; -- GBP150m limit can also be used if Cat cover is exceeded; and -- Counterparties are high credit quality reinsurers (80% AA- and 20% A or better).
Retentions for our existing Cat and Risk treaties remain unchanged from 2016. The key retentions are GBP75m for UK Cat; GBP50m for non-UK Cat (Canada up from C$50m to C$75m); GBP50m for Property Risk.
The sale of the legacy liabilities means the Group's Adverse Development Cover reinsurance protection bought in 2014 to partly protect these liabilities, is no longer valuable. Accordingly, we have agreed to commute it for a one-time charge in 2017 of GBP22m.
Loss development tables & RESERVE MARGIN
The table below (for continuing operations) presents the general insurance claims provisions net of reinsurance for the accident years 2006 and prior through to 2016. 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.
The table is shown pre-discounting and excludes annuities and held-for-sale businesses.
2006
and
GBPm prior 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Total
Estimate of Cumulative
claims
At end of accident
year 7,507 2,215 2,299 2,199 2,351 2,494 2,463 2,639 2,410 2,290 2,142
1 year later 7,158 2,210 2,289 2,256 2,422 2,492 2,493 2,739 2,434 2,290
2 years later 6,766 2,180 2,290 2,217 2,399 2,477 2,467 2,667 2,396
3 years later 6,438 2,095 2,244 2,189 2,413 2,429 2,427 2,635
4 years later 6,132 2,026 2,233 2,220 2,419 2,386 2,392
5 years later 5,936 2,016 2,203 2,222 2,386 2,362
6 years later 5,734 2,012 2,183 2,201 2,365
7 years later 5,663 1,994 2,171 2,198
8 years later 5,675 1,984 2,169
9 years later 5,857 1,983
10 years later 5,903
2016 movement (46) 1 2 3 21 24 35 32 38 - 110
Claims paid
1 year later 1,645 928 1,074 1,066 1,223 1,127 1,148 1,262 1,122 1,069
2 years later 975 325 337 347 372 393 387 414 354
3 years later 638 238 231 230 246 258 235 233
4 years later 512 146 171 184 191 170 187
5 years later 335 124 102 126 97 103
6 years later 258 66 67 68 58
7 years later 299 35 34 32
8 years later 230 14 29
9 years later 98 20
10 years later 157
Cumulative claims
paid 5,147 1,896 2,045 2,053 2,187 2,051 1,957 1,909 1,476 1,069
Current year
provision
before discounting 756 87 124 145 178 311 435 726 920 1,221 2,142 7,045
Exchange adjustment
to closing rates 292
Discounting (104) Annuities 696 Present value recognised in the statement of financial position 7,929 Held for sale 624 Total Group 8,553
Reconciliation to prior year underwriting result:
GBPm
2016 net loss development 110
Discounting 8
Annuities 2
Held for sale/disposals 19
Prior year net incurred claims 139
Prior year premiums (24)
Prior year commissions (2)
Prior year expenses (4)
Prior year underwriting result 109
Reserve margin
Our own assessment of the margin in reserves for the Group (the difference between our actuarial indication and the booked reserves in the financial statements) is 5.5% of booked claims reserves (2015: 5.0%).
SEGMENTAL ANALYSIS
Management basis - 12 months ended 31 December 2015 (re-presented onto current segmental split)
Scandinavia Canada UK & International Central Core Total Group
functions Group 'non-core'(1) FY 2015
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Net Written Premiums 1,606 1,360 3,048 (111) 5,903 922 6,825
Net Earned Premiums 1,566 1,387 3,174 (24) 6,103 909 7,012
Net Incurred Claims (1,156) (852) (2,111) 78 (4,041) (538) (4,579)
Commissions (60) (186) (625) (2) (873) (240) (1,113)
Operating expenses (256) (233) (453) (2) (944) (156) (1,100)
Underwriting result 94 116 (15) 50 245 (25) 220
Investment income 91 72 159 - 322 81 403
Investment expenses (2) (3) (7) - (12) (2) (14)
Unwind of discount (20) (3) (5) - (28) (39) (67)
Investment result 69 66 147 - 282 40 322
Central expenses - - - (18) (18) (1) (19)
Operating result 163 182 132 32 509 14 523
Interest (106)
Other non-operating
charges(2) (94)
Profit before tax 323
Tax (79)
Profit after tax 244
Underlying profit
before tax(3) 417
Loss ratio (%) 73.8 61.5 66.5 - 66.2 - 65.3
Weather loss ratio 1.0 2.3 5.7 - 3.2 - 3.1
Large loss ratio 6.3 4.7 11.3 - 8.3 - 7.9
Current year attritional
loss ratio 64.5 60.3 51.1 - 56.6 - 55.7
Prior year effect
on loss ratio 2.0 (5.8) (1.6) - (1.9) - (1.4)
Commission ratio
(%) 3.8 13.4 19.7 - 14.3 - 15.9
Expense ratio (%) 16.4 16.8 14.3 - 15.5 - 15.7
Combined ratio (%) 94.0 91.7 100.5 - 96.0 - 96.9
(1) Total 'non-core' comprises discontinued operations of Italy, Hong Kong, Singapore, China, India, Russia and Latin America; and non-core continuing operations of UK Legacy.
(2) Refer to pg 11 for further breakdown and explanation.
(3) Underlying or alternative performance measure, refer to pgs 28-29 for further explanation.
COMBINED RATIO DETAIL
Core Group
GBPm unless stated Current Prior FY 2016 Current Prior FY 2015
year year total year year total
Net Written Premiums 1 6,269 12 7 6,281 13 5,912 (9) 5,903
Net Earned Premiums 2 6,353 8 (13) 14 6,340 6,134 (31) 6,103
Net Incurred Claims 3 (4,258) 9 149 15 (4,109) (4,180) 139 (4,041)
Commissions 4 (874) 10 (13) 16 (887) (873) - (873)
Operating expenses 5 (948) 11 (4) 17 (952) (940) (4) (944)
Underwriting result 6 273 12 119 18 392 141 104 245
CY attritional claims 19 (3,511) (3,478)
Weather claims 20 (165) (194)
Large losses 21 (582) (508)
Net incurred claims 22 (4,258) (4,180)
=15 /
Loss ratio (%) 14 23 64.8 66.2
=20 /
Weather loss ratio 2 24 2.6 3.2
=21 /
Large loss ratio 2 25 9.2 8.3
Current year attritional =19 /
loss ratio 2 26 55.2 56.6
=23 -
Prior year effect 24 - 25
on loss ratio - 26 27 (2.2) (1.9)
Commission ratio =16 /
(%) 14 28 14.0 14.3
=17 /
Expense ratio (%) 14 29 15.0 15.5
=23 +
Combined ratio (%) 28 + 29 30 93.8 96.0
Scandinavia
GBPm unless stated Current Prior FY 2016 Current Prior FY 2015
year year total year year total
Net Written Premiums 1,721 - 1,721 1,606 - 1,606
Net Earned Premiums 1,735 - 1,735 1,572 (6) 1,566
Net Incurred Claims (1,207) 26 (1,181) (1,129) (27) (1,156)
Commissions (60) - (60) (60) - (60)
Operating expenses (255) - (255) (256) - (256)
Underwriting result 213 26 239 127 (33) 94
CY attritional claims (1,114) (1,015)
Weather claims (6) (15)
Large losses (87) (99)
Net incurred claims (1,207) (1,129)
Loss ratio (%) 68.0 73.8
Weather loss ratio 0.4 1.0
Large loss ratio 5.0 6.3
Current year attritional
loss ratio 64.2 64.5
Prior year effect
on loss ratio (1.6) 2.0
Commission ratio
(%) 3.4 3.8
Expense ratio (%) 14.8 16.4
Combined ratio (%) 86.2 94.0
COMBINED RATIO DETAIL
Canada
GBPm unless stated Current Prior FY 2016 Current Prior FY 2015
Year year total year year total
Net Written Premiums 1,447 (4) 1,443 1,360 - 1,360
Net Earned Premiums 1,458 (4) 1,454 1,387 - 1,387
Net Incurred Claims (1,018) 70 (948) (933) 81 (852)
Commissions (196) 5 (191) (189) 3 (186)
Operating expenses (238) (3) (241) (230) (3) (233)
Underwriting result 6 68 74 35 81 116
CY attritional claims (842) (837)
Weather claims (83) (31)
Large losses (93) (65)
Net incurred claims (1,018) (933)
Loss ratio (%) 65.2 61.5
Weather loss ratio 5.7 2.3
Large loss ratio 6.4 4.7
Current year attritional
loss ratio 57.8 60.3
Prior year effect
on loss ratio (4.7) (5.8)
Commission ratio
(%) 13.1 13.4
Expense ratio (%) 16.6 16.8
Combined ratio (%) 94.9 91.7
Total UK (excluding Legacy)
GBPm unless stated Current Prior FY 2016 Current Prior FY 2015
year year total year year total
Net Written Premiums 2,579 9 2,588 2,614 (8) 2,606
Net Earned Premiums 2,679 (2) 2,677 2,742 (8) 2,734
Net Incurred Claims (1,681) 70 (1,611) (1,838) 57 (1,781)
Commissions (550) (17) (567) (564) (2) (566)
Operating expenses (376) - (376) (374) (1) (375)
Underwriting result 72 51 123 (34) 46 12
CY attritional claims (1,243) (1,319)
Weather claims (85) (179)
Large losses (353) (340)
Net incurred claims (1,681) (1,838)
Loss ratio (%) 60.2 65.1
Weather loss ratio 3.2 6.5
Large loss ratio 13.2 12.4
Current year attritional
loss ratio 46.3 48.1
Prior year effect
on loss ratio (2.5) (1.9)
Commission ratio
(%) 21.2 20.7
Expense ratio (%) 14.0 13.7
Combined ratio (%) 95.4 99.5
COMBINED RATIO DETAIL
UK Personal
GBPm unless stated Current Prior FY 2016 Current Prior FY 2015
year year total year year total
Net Written Premiums 1,069 (1) 1,068 1,134 (1) 1,133
Net Earned Premiums 1,093 (1) 1,092 1,153 (2) 1,151
Net Incurred Claims (650) 20 (630) (706) 26 (680)
Commissions (232) - (232) (241) (4) (245)
Operating expenses (182) - (182) (179) - (179)
Underwriting result 29 19 48 27 20 47
CY attritional claims (567) (605)
Weather claims (46) (65)
Large losses (37) (36)
Net incurred claims (650) (706)
Loss ratio (%) 57.8 59.0
Weather loss ratio 4.2 5.6
Large loss ratio 3.4 3.1
Current year attritional
loss ratio 51.9 52.5
Prior year effect
on loss ratio (1.7) (2.2)
Commission ratio
(%) 21.2 21.3
Expense ratio (%) 16.7 15.6
Combined ratio (%) 95.7 95.9
UK Commercial
GBPm unless stated Current Prior FY 2016 Current Prior FY 2015
year year total year year total
Net Written Premiums 1,510 10 1,520 1,480 (7) 1,473
Net Earned Premiums 1,586 (1) 1,585 1,589 (6) 1,583
Net Incurred Claims (1,031) 50 (981) (1,132) 31 (1,101)
Commissions (318) (17) (335) (323) 2 (321)
Operating expenses (194) - (194) (195) (1) (196)
Underwriting result 43 32 75 (61) 26 (35)
CY attritional claims (676) (714)
Weather claims (39) (114)
Large losses (316) (304)
Net incurred claims (1,031) (1,132)
Loss ratio (%) 61.8 69.6
Weather loss ratio 2.4 7.2
Large loss ratio 19.9 19.1
Current year attritional
loss ratio 42.6 45.0
Prior year effect
on loss ratio (3.1) (1.7)
Commission ratio
(%) 21.1 20.3
Expense ratio (%) 12.3 12.4
Combined ratio (%) 95.2 102.3
REPORTING AND DIVID TIMETABLE
Reporting: Q1 2017 trading update 4 May 2017 Annual General Meeting 5 May 2017 Dividend: Final ordinary dividend for the period ended 31 December 2016 Announcement date 23 February 2017 Ex-dividend date 2 March 2017 Record date 3 March 2017 Dividend payment date 12 May 2017 1(st) Preference Dividend Announcement date 23 February 2017 Ex-dividend date 2 March 2017 Record date 3 March 2017 Dividend payment date 3 April 2017
Note: the final ordinary dividend is conditional upon the directors being satisfied, in their absolute discretion, that the payment of the final ordinary dividend would not breach any legal or regulatory requirements, including Solvency II regulatory capital requirements.
Enquiries:
Investors & analysts Press Rupert Taylor Rea Alice Hunt Director of Investor Relations Director of External Communications Tel: +44 (0) 20 7111 7140 Tel: +44 (0) 20 7111 7305 Email: rupert.taylorrea@gcc.rsagroup.com Email: alice.hunt@gcc.rsagroup.com Laura de Mergelina Eilis Murphy & Robin Wrench Investor Relations Manager Brunswick Group Tel: +44 (0) 20 7111 7243 Tel: +44 (0) 20 7404 5959 Email: laura.demergelina@gcc.rsagroup.com Email: emurphy@brunswickgroup.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 on 23 February 2017. A webcast and transcript of the presentation 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.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Table of Contents
Primary Statements 44
Basis of Preparation and Significant Accounting Policies
1 Basis of preparation 49
2 Adoption of new and revised standards 49
3 Recently issued accounting pronouncements 49
Risk and Capital Management
4 Risk and capital management 50
Significant transactions and events
5 Discontinued operations and disposals 57
6 Reorganisation costs 60
Notes to the Condensed Consolidated Income Statement and Condensed
Consolidated Statement of Other Comprehensive Income
7 Segmental information 61
8 Income tax 63
9 Earnings per share 64
10 Distributions paid and proposed 65
Notes to the Condensed Consolidated Statement of Financial Position
11 Goodwill and intangible assets 66
12 Financial Assets 68
13 Reinsurers' share of insurance contract liabilities 70
14 Current and deferred tax 71
15 Cash and cash equivalents 73
16 Share capital 73
17 Insurance contract liabilities 74
18 Post-retirement benefits and obligations 79
19 Results for the year 2016 80
20 Events after the reporting period 80
Appendix
A Exchange rates 81
CONDENSED CONSOLIDATED INCOME STATEMENT
STATUTORY BASIS
for the year ended 31 December 2016
2016 2015
Notes GBPm GBPm
======== ====================================================================== ========================= ==================== ==========================
Income
Gross written premiums 7,220 6,858
Less: reinsurance premiums (981) (906)
================================================================================ ========================= ==================== ==========================
Net written premiums 7 6,239 5,952
==================== ==========================
Change in the gross provision for unearned
premiums 109 (97)
Less: change in provision for unearned reinsurance
premiums (8) 305
==================== ==========================
Change in provision for unearned premiums 101 208
========================= ==================== ==========================
Net earned premiums 6,340 6,160
Net investment return 347 381
Other operating income 170 142
================================================================================ ========================= ==================== ==========================
Total income 6,857 6,683
================================================================================ ========================= ==================== ==========================
Expenses
==================== ==========================
Gross claims incurred (4,826) (4,496)
Less: claims recoveries from reinsurers 707 367
==================== ==========================
Net claims (4,119) (4,129)
Underwriting and policy acquisition costs (1,977) (1,986)
Unwind of discount (59) (52)
Other operating expenses (229) (308)
========================= ==================== ==========================
(6,384) (6,475)
========================= ==================== ==========================
Finance costs (138) (106)
Remeasurement of disposal groups and gains on
disposals of businesses 5(iii) (234) 3
Net share of profit after tax of associates - 1
========================= ==================== ==========================
Profit before tax 7 101 106
Income tax expense 8 (54) (18)
================================================================================ ========================= ==================== ==========================
Profit after tax from continuing operations 47 88
(Loss)/profit from discontinued operations 5(i) (27) 156
================================================================================ ========================= ==================== ==========================
Profit for the year 20 244
================================================================================ ========================= ==================== ==========================
Attributable to:
Equity holders of the Parent Company 27 235
Non-controlling interests (7) 9
================================================================================ ========================= ==================== ==========================
20 244
======== ====================================================================== ========================= ==================== ==========================
Earnings per share on profit/(loss) attributable to the ordinary shareholders
of the Parent Company
Basic
From continuing operations 9 4.4p 6.9p
From discontinued operations 9 (2.6)p 15.4p
================================================================================ ========================= ==================== ==========================
1.8p 22.3p
================================================================================ ========================= ==================== ==========================
Diluted
From continuing operations 9 4.4p 6.9p
From discontinued operations 9 (2.6)p 15.3p
================================================================================ ========================= ==================== ==========================
1.8p 22.2p
================================================================================ ========================= ==================== ==========================
Ordinary dividends paid and proposed for the
year
Interim dividend paid 10 5.0p 3.5p
Final dividend proposed 10 11.0p 7.0p
================================================================================ ========================= ==================== ==========================
The attached notes on pages 49 to 81 form an integral part of these
condensed consolidated financial
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
STATUTORY BASIS
for the year ended 31 December 2016
2016 2015
Notes GBPm GBPm
====================
Profit for the year 20 244
Items from continuing operations that may be reclassified
to the income statement:
==================== ==============================
Exchange gains/(losses) net of tax on translation
of foreign operations 228 (120)
Fair value gains/(losses) on available for sale
financial assets net of tax 151 (211)
==================== ==============================
379 (331)
Items from continuing operations that will not
be reclassified to the income statement:
==================== ==============================
Pension - remeasurement of net defined benefit
asset/liability net of tax (316) 65
Movement in property revaluation surplus net
of tax 1 3
==================== ==============================
(315) 68
Other comprehensive income/(expense) for the year
from continuing operations 64 (263)
Other comprehensive income/(expense) for the year
from discontinued operations 5(i) 120 (106)
============ ==================== ==============================
Total other comprehensive income/(expense) for
the year 184 (369)
============================================================================================= ============ ==================== ==============================
Total comprehensive income/(expense)for the year
from continuing operations 111 (175)
Total comprehensive income for the year from discontinued
operations 5(i) 93 50
============================================================================================= ============ ==================== ==============================
Total comprehensive income/(expense) for the year 204 (125)
============================================================================================= ============ ==================== ==============================
Attributable to:
Equity holders of the Parent Company
==================== ==============================
from continuing operations 98 (189)
from discontinued operations 94 51
==================== ==============================
192 (138)
Non-controlling interests
==================== ==============================
from continuing operations 13 14
from discontinued operations (1) (1)
==================== ==============================
12 13
============================================================================================ ============ ==================== ==============================
204 (125)
============================================================================================ ============ ==================== ==============================
The attached notes on pages 49 to 81 form an integral part of these
condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
STATUTORY BASIS
for the year ended 31 December 2016
Foreign
Ordinary Ordinary Capital currency Share-
share share Own Preference Revaluation redemption translation Retained holders' Non-controlling Total
capital premium shares shares reserves reserve reserve earnings equity interests equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
===================== ========= ========= ======= =========== ============ =========== ============ ========= ========= ==================== ========
Balance at 1 January
2015 1,015 1,075 (1) 125 527 389 (46) 741 3,825 108 3,933
Total comprehensive income
======= =========== ============ =========== ============ ========= ========= ==================== ========
Profit for the year - - - - - - - 235 235 9 244
Other comprehensive
(expense)/income - - - - (234) - (204) 65 (373) 4 (369)
========= ========= ======= =========== ============ =========== ============ ========= ========= ==================== ========
- - - - (234) - (204) 300 (138) 13 (125)
Transactions with owners of
the Group
Contribution and distribution
========= ======= =========== ============ =========== ============ ========= ========= ==================== ========
Dividends (note 10) - - - - - - - (65) (65) (3) (68)
Shares issued for
cash (note 16) 1 2 - - - - - - 3 - 3
Share based payments
(note 16) 1 - - - - - - 13 14 - 14
Other reserve
transfer - - - - - - 29 (29) - - -
========= ========= ======= =========== ============ =========== ============ ========= ========= ==================== ========
2 2 - - - - 29 (81) (48) (3) (51)
Changes in
shareholders'
interests in
subsidiaries - - - - - - - 3 3 11 14
===================== ========= ========= ======= =========== ============ =========== ============ ========= ========= ==================== ========
Total transactions
with owners
of the Group 2 2 - - - - 29 (78) (45) 8 (37)
====================== ========= ========= ======= =========== ============ =========== ============ ========= ========= ==================== ========
Balance at 1 January
2016 1,017 1,077 (1) 125 293 389 (221) 963 3,642 129 3,771
Total comprehensive income
======= =========== ============ =========== ============ ========= ========= ==================== ========
Profit for the year - - - - - - - 27 27 (7) 20
Other comprehensive
income/(expense) - - - - 181 - 299 (315) 165 19 184
========= ========= ======= =========== ============ =========== ============ ========= ========= ==================== ========
- - - - 181 - 299 (288) 192 12 204
Transactions with owners of
the Group
Contribution and distribution
========= ======= =========== ============ =========== ============ ========= ========= ==================== ========
Dividends (note 10) - - - - - - - (131) (131) (3) (134)
Shares issued for
cash (note 16) 2 3 - - - - - - 5 - 5
Share based payments
(note 16) 1 - - - - - - 15 16 - 16
Other reserve
transfer(1) - - - - 28 - - (28) - - -
========= ========= ======= =========== ============ =========== ============ ========= ========= ==================== ========
3 3 - - 28 - - (144) (110) (3) (113)
Changes in
shareholders'
interests in
subsidiaries - - - - (6) - - (3) (9) (6) (15)
===================== ========= ========= ======= =========== ============ =========== ============ ========= ========= ==================== ========
Total transactions
with owners of the
Group 3 3 - - 22 - - (147) (119) (9) (128)
====================== ========= ========= ======= =========== ============ =========== ============ ========= ========= ==================== ========
Balance at 31
December
2016 1,020 1,080 (1) 125 496 389 78 528 3,715 132 3,847
====================== ========= ========= ======= =========== ============ =========== ============ ========= ========= ==================== ========
1. During the year a reclassification was made between retained earnings
and the revaluation reserve of GBP28m primarily as a result of the
changes to UK tax treatment of unrealised investment gains of available
for sale securities.
The attached notes on pages 49 to 81 form an integral part of these
condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
STATUTORY BASIS
as at 31 December 2016
2016 2015
Notes GBPm GBPm
============================================================================================ ============ ==================== ==============================
Assets
Goodwill and other intangible assets 11 728 616
Property and equipment 109 109
==================== ==============================
Investment property 333 365
Investments in associates 12 13
Financial assets 12 12,325 11,797
==================== ==============================
Total investments 12,670 12,175
Reinsurers' share of insurance contract liabilities 13 2,252 1,988
Insurance and reinsurance debtors 2,823 2,653
==================== ==============================
Deferred tax assets 14 270 163
Current tax assets 14 65 51
Other debtors and other assets 430 693
==================== ==============================
Other assets 765 907
Cash and cash equivalents 15 985 816
============================================================================================= ============ ==================== ==============================
20,332 19,264
Assets of operations classified as held for sale 5(ii) 807 1,347
============================================================================================= ============ ==================== ==============================
Total assets 21,139 20,611
============================================================================================= ============ ==================== ==============================
Equity and liabilities
Equity
Shareholders' equity 3,715 3,642
Non-controlling interests 132 129
============ ==================== ==============================
Total equity 3,847 3,771
============ ==================== ==============================
Liabilities
Loan capital 1,068 1,254
Insurance contract liabilities 17 12,676 12,191
Insurance and reinsurance liabilities 17 954 945
Borrowings 251 11
==================== ==============================
Deferred tax liabilities 14 54 40
Current tax liabilities 14 32 31
Provisions 420 261
Other liabilities 1,087 1,017
==================== ==============================
Provisions and other liabilities 1,593 1,349
============================================================================================= ============ ==================== ==============================
16,542 15,750
Liabilities of operations classified as held for
sale 5(ii) 750 1,090
============================================================================================= ============ ==================== ==============================
Total liabilities 17,292 16,840
============================================================================================= ==================== ==============================
Total equity and liabilities 21,139 20,611
============================================================================================= ============ ==================== ==============================
The attached notes on pages 49 to 81 form an integral part of these
condensed consolidated financial statements.
The financial statements were approved on 22 February 2017.
CONDENSED CONSOLIDATED STATEMENT OF CASHFLOWS
STATUTORY BASIS
for the year ended 31 December 2016
2016 2015
Re-presented(1)
Notes GBPm GBPm
============================================================================================ ============ ==================== ==============================
Cashflows from operating activities
Net profit for the year before tax from continuing
operations 101 106
Adjustments for non cash movements in net profit
for the year
Depreciation 20 21
Amortisation and impairment of intangible assets 83 80
Amortisation of available for sale assets 70 64
Fair value gains/ (losses) on disposal of financial
assets 15 (37)
Impairment on available for sale financial assets (8) 7
Share of (profit)/loss of associates - (1)
Loss/ (profit) on disposal of businesses 234 (3)
Foreign exchange (loss)/ gain(1) (87) 41
Other non-cash movements(1) 17 49
Changes in operating assets/liabilities
Loss and loss adjustment expenses (308) (77)
Unearned premiums (76) (179)
Movement in working capital(1) (69) 299
Reclassification of investment income and interest
paid (212) (232)
Tax paid (88) (108)
Dividend income 28 25
Interest and other investment income 328 322
Pension deficit funding (65) (65)
============ ==================== ==============================
Net cashflows from operating activities - continuing
operations (17) 312
============ ==================== ==============================
Net cashflows from operating activities - discontinued
operations (18) 11
============ ==================== ==============================
Cashflows from investing activities
Proceeds from sales or maturities of:
Financial assets 3,747 3,931
Investment property 28 3
Property and equipment 10 1
Sale of subsidiaries (net of cash disposed of) - 14
Purchase of:
Financial assets (3,589) (4,118)
Property and equipment (25) (14)
Intangible assets (139) (48)
============ ==================== ==============================
Net cashflows from investing activities - continuing
operations 32 (231)
============ ==================== ==============================
Net cashflows from investing activities - discontinued
operations 333 219
============ ==================== ==============================
Cashflows from financing activities
Proceeds from issue of share capital 5 3
Dividends paid to ordinary shareholders (122) (56)
Dividends paid to preference shareholders (9) (9)
Dividends paid to non-controlling interests (3) (3)
Redemption of debt instruments (200) (299)
Issue of debt instruments 242 -
Interest paid (150) (107)
Net cashflows from financing activities - continuing
operations (237) (471)
============ ==================== ==============================
Net cashflows from financing activities - discontinued
operations - -
============ ==================== ==============================
Net increase/(decrease) in cash and cash equivalents 93 (160)
Cash and cash equivalents at the beginning of
the year 902 1,135
Effect of changes in foreign exchange on cash
and cash equivalents 92 (73)
============ ==================== ==============================
Cash and cash equivalents at the end of the year 15 1,087 902
============ ==================== ==============================
1. Following a review of other non-cash movements and foreign exchange
adjustments, specific balances have been further analysed and classified
as movements in working capital for 2016 and 2015. These adjustments
have no impact on the overall reported cash flow from operating activities
in either year, or any other notes to the financial statements.
The attached notes on pages 49 to 81 form an integral part of these condensed consolidated financial statements.
EXPLANATORY NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES
RSA Insurance Group Plc (the 'Company') is a public limited company incorporated and domiciled in England and Wales. The Company through its subsidiaries and associates (together the 'Group' or 'RSA') provides personal and commercial insurance products to its global customer base, principally in the UK, Ireland, Middle East (together 'UK & International'), Scandinavia and Canada.
1) BASIS OF PREPARATION
The financial statements within the full Annual Report and Accounts, from which the financial information within this preliminary announcement has been extracted, have been prepared on a going concern basis and in accordance with International Financial Reporting Standards (IFRS) as endorsed by the European Union (EU). The condensed consolidated financial information in this report has been prepared by applying the accounting policies used in the 2016 Annual Report and Accounts.
These condensed consolidated financial statements have been prepared by applying the accounting policies used in the Annual Report and Accounts 2016 (see note 19). Certain amounts in the prior years have been reclassified to conform to the current year presentation.
In line with industry practice, the Group's statement of financial position is not presented using current and non-current classifications, but broadly in increasing order of liquidity. The assets and liabilities considered as non-current include: investments in associates, deferred tax assets, property and equipment, intangible assets, goodwill, deferred tax liabilities, outstanding debt including loan capital and elements of financial investments, insurance contract liabilities and reinsurers' share of insurance contract liabilities.
The assets and liabilities considered as current include cash and cash equivalents, and insurance and reinsurance debtors.
The remaining balances are of a mixed nature. The current and non-current portions of such balances are set out in the respective notes or in the Risk and Capital Management note (note 4).
Except where otherwise stated, all figures included in the condensed consolidated financial statements are presented in millions of pounds sterling (GBPm).
Estimation techniques and assumptions are presented in the relevant note in order to provide context to the figures presented. The most significant estimates and assumptions are those used in determining Insurance contract liabilities (note 17), Deferred tax (note 14) and Defined benefit pension scheme liabilities (note 18). With the exception of the re-presentation of the Segmental information (note 7), all of the information previously disclosed continues to be presented, where material, on a basis consistent with prior year.
2) ADOPTION OF NEW AND REVISED STANDARDS
There are a small number of narrow scope amendments arising from annual improvements to standards that are applicable to the Group for the first time in 2016, none of which have had a significant impact on the consolidated financial statements.
3) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
IFRS 9 'Financial Instruments' and IFRS 17 'Insurance Contracts'
The IASB currently expects to publish IFRS 17 'Insurance Contracts' during the first half of 2017 and that the latest adoption date for the new standard will be 2021.
This timescale is anticipated to be consistent with the latest date of adoption of IFRS 9 'Financial Instruments' as permitted by the amendment to IFRS 4 'Insurance Contracts'. The amendment (which has still to be adopted by the EU) provides the option to defer the normal adoption date of 2018 for up to three years.
The Group plans to take advantage of the deferral approach available under IFRS 4, thereby adopting the standard from 1 January 2021.
IFRS 15 'Revenue Recognition'
IFRS 15 'Revenue Recognition' becomes effective from 1 January 2018. Revenue arising from insurance contracts and from financial instruments is outside the scope of IFRS 15. The impact on the recognition of revenue from other services delivered to customers by the Group is expected to be insignificant.
IFRS 16 'Leases'
In January 2016, the IASB issued IFRS 16 'Leases' to replace the existing standard IAS 17, which will be effective from 1 January 2019 but with earlier adoption permitted.
The main change under IFRS 16 is that it requires the recognition of the lease obligations, together with an asset representing the right to the use of the leased asset during the term of the lease. Under IAS 17, for leases qualifying as operating leases, the lease obligations are not recognised in the statement of financial position.
The Group is currently in the process of assessing the impact of IFRS 16 on the financial statements.
Other pronouncements
There are a number of amendments to IFRS that have been issued by the IASB that become mandatory during 2017 or in a subsequent accounting period. The Group has evaluated these changes and none are expected to have a significant impact on the consolidated financial statements.
RISK AND CAPITAL MANAGEMENT
4) 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 maximum 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 zositions 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
Less: of financial
Amounts assets
Value classified that are
including as held neither
Not held for for past due
AAA AA A BBB <BBB rated sale sale nor 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
======================= ====== ====== ====== ====== ===== ======= =========== ============ ==============
Notes:
(1) The insurance and reinsurance debtors classified as not rated comprise
personal policyholders and small corporate customers that do not have
individual credit ratings. The overall credit risk to the Group is
deemed to be low as the cover could be cancelled if payment were not
received on a timely basis.
As at 31 December 2015
Total
of financial
assets
that are
Credit rating relating to financial neither
assets that are neither past past due
due nor impaired nor impaired
==============================================
Less:
Amounts
Value classified
including as held
Not held for for
AAA AA A BBB <BBB rated sale sale
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
======================= ====== ====== ====== ====== ===== ======= =========== ============ ==============
Notes:
(1) The insurance and reinsurance debtors classified as not rated comprise
personal policyholders and small corporate customers that do not have
individual credit ratings. The overall credit risk to the Group is
deemed to be low as the cover could be cancelled if payment were not
received on a timely basis.
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 Impairment
assets value losses
Neither that in the charged/(reversed)
past Up to Three Six months Greater have statement to the
due nor three to six to one than been of financial income
impaired months months year one 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
assets value losses
Neither that in the charged
past Up to Three Six months Greater have statement to the
due nor three to six to one than been of financial income
impaired months months year one 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 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 in 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:
Decrease in other
Increase in income comprehensive
statement 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 cash flows 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 10% strengthening 10% weakening 10% strengthening 10% weakening
in Pounds in Pounds in Pounds in Pounds in Pounds in Pounds
Sterling Sterling Sterling Sterling Sterling Sterling
against against against against against against
Danish Danish Canadian Canadian Swedish Swedish
Krone/Euro Krone/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
Less Two Greater in the
than One to Three Four Five than statement
one to two three to four to five to 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 - - - - - 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
Less Two Greater in the
than One to Three Four Five than statement
one to two three to four to five to 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 - - - - - 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.
SIGNIFICANT TRANSACTIONS AND EVENTS
5(i) DISCONTINUED OPERATIONS AND DISPOSALS
The Group classified the following operations as discontinued because they have been sold and represent a separate geographical area of operation.
Operation Date of disposal Acquirer Hong Kong 31 March 2015 Allied World Assurance Company Singapore 31 March 2015 Allied World Assurance Company Labuan 12 May 2015 Allied World Assurance Company China 14 May 2015 Swiss Re Corporate Solutions Indian associate 29 July 2015 Sundaram Finance Ltd Italy 31 December 2015 ITAS Mutua Russia 29 January 2016 Joint Stock Insurance Company Blagostoyanie Brazil 29 February 2016 Suramericana S.A. Colombia 31 March 2016 Suramericana S.A. Chile 30 April 2016 Suramericana S.A. Argentina 30 April 2016 Suramericana S.A. Mexico 31 May 2016 Suramericana S.A. Uruguay 30 June 2016 Suramericana S.A. The revenue, expenses and related income tax expense in 2016 and 2015 relating to these discontinued operations is set out below.
The total loss on the sale of discontinued operations disposed of during the year after tax was GBP29m (2015: profit of GBP170m).
DISCONTINUED INCOME STATEMENT
for the year ended 31 December 2016
2016 2015
Notes GBPm GBPm
Income
Gross written premiums 256 1,365
Less: reinsurance premiums (87) (492)
Net written premiums 7 169 873
Change in the gross provision for unearned premiums 38 32
Less: change in provision for unearned reinsurance
premiums (19) (53)
Change in provision for unearned premiums 19 (21)
Net earned premiums 188 852
Net investment return 16 60
Total income 204 912
Expenses
Gross claims incurred (304) (672)
Less: claims recoveries from reinsurers 208 222
Net claims (96) (450)
Underwriting and policy acquisition costs (89) (366)
Unwind of discount (5) (15)
Other operating expenses (7) (45)
(197) (876)
(Loss)/gain on disposal (29) 170
(Loss)/Profit before tax (22) 206
Income tax expense (5) (50)
(Loss)/Profit after tax (27) 156
DISCONTINUED STATEMENT OF COMPREHENSIVE INCOME
for the year ended 31 December 2016
2016 2015
GBPm GBPm
(Loss)/Profit for the year from discontinued operations (27) 156
Items from discontinuing operations that may be
reclassified to the income statement:
Exchange losses/(gains) recycled on disposal of discontinued
operations net of tax 111 (39)
Exchange gains/ (losses) net of tax 3 (53)
Exchange losses on non-controlling interests
net of tax - (3)
114 (95)
Fair value gains/(losses) recycled on disposal
of discontinued operations net of tax 1 (6)
Fair value gains/(losses) on available for sale
financial assets net of tax 3 (9)
4 (15)
Items from discontinuing operations that will
not be reclassified to the income statement:
Movement in property revaluation, net of tax 2 4
Other comprehensive income/(expense) for the year
from discontinued operations 120 (106)
Total comprehensive income for the year from discontinued
operations 93 50
5(ii) HELD FOR SALE DISPOSAL GROUPS
The assets (including any goodwill allocated to the business) and the liabilities of the businesses held for sale are shown below.
As at 31 December 2016
UK Legacy Oman UK Other Total
GBPm GBPm GBPm GBPm
Assets classified as held for
sale:
Property and equipment - - 4 4
Investments 689 87 - 776
Reinsurers' share of insurance
contract liabilities 90 6 - 96
Insurance and reinsurance debtors - 15 - 15
Other debtors and other assets 9 6 1 16
Cash and cash equivalents 101 3 - 104
Total assets of disposal groups 889 117 5 1,011
Remeasurement of disposal groups
to fair value less costs to sell (204) - - (204)
Assets of operations classified as held
for sale 685 117 5 807
Liabilities directly associated with assets
classified as held for sale:
Insurance contract liabilities 685 50 - 735
Insurance and reinsurance liabilities - 5 - 5
Provisions and other liabilities - 10 - 10
Liabilities of operations classified
as held for sale 685 65 - 750
Net assets of operations classified as
held for sale - 52 5 57
As at 31 December 2015
Latin
America Russia Total
GBPm GBPm GBPm
Assets classified as held for
sale:
Goodwill and intangibles 63 - 63
Property and equipment 21 - 21
Investments 380 - 380
Reinsurers' share of insurance
contract liabilities 237 - 237
Insurance and reinsurance debtors 468 1 469
Other debtors and other assets 77 3 80
Cash and cash equivalents 77 20 97
Assets of operations classified
as held for sale 1,323 24 1,347
Liabilities directly associated with assets
classified as held for sale:
Insurance contract liabilities 699 12 711
Insurance and reinsurance liabilities 175 - 175
Provisions and other liabilities 200 4 204
Liabilities of operations classified
as held for sale 1,074 16 1,090
Net assets of operations classified
as held for sale 249 8 257
Discontinued operations disposed of during the year
Year ended 31 December 2016
Latin
America Russia Total
GBPm GBPm GBPm
Consideration received 434 5 439
Transaction costs (20) (1) (21)
Net proceeds from sales 414 4 418
Carrying value of net assets disposed
of (321) (3) (324)
Gains on sale before recycling of items
from other comprehensive income 93 1 94
Reclassification of items from other
comprehensive income on disposals:
Foreign currency translation reserve (99) (11) (110)
Unrealised gains on available for sale
investments (1) - (1)
Losses on disposal of discontinued
operations before tax on disposal (7) (10) (17)
Tax on disposal (12) - (12)
Losses on disposal of discontinued
operations after tax (19) (10) (29)
Year ended 31 December 2015
Hong
Kong,
Singapore India
and Labuan China (associate) Italy Total
GBPm GBPm GBPm GBPm GBPm
Consideration received 123 69 46 18 256
Transaction costs (13) (2) - (5) (20)
Net proceeds from sales 110 67 46 13 236
Carrying value of net assets disposed
of (35) (47) (18) - (100)
Gains on sale before recycling of items from other comprehensive income 75 20 28 13 136 Reclassification of items from other comprehensive income on disposals: Foreign currency translation reserve 27 8 (4) 8 39 Unrealised gains on available for sale investments 1 - (3) 10 8 Related tax - - - (2) (2) Profits on disposal of discontinued operations before tax on disposal 103 28 21 29 181 Tax on disposal - (2) (4) (5) (11) Profit on disposal of discontinued operations after tax 103 26 17 24 170
5(iii) (LOSS)/GAINS ON DISPOSAL OF BUSINESSES NOT CLASSIFIED AS DISCONTINUED
In 2016, the assets and liabilities of the Oman and UK Legacy business are classified as held for sale. Upon classification as held for sale, the net assets are measured at the lower of carrying amount and fair value less costs to sell. This valuation adjustment results in a GBP234m loss which is recognised in the continuing income statement.
In 2015, the GBP3m of gains on disposal of businesses not classified as discontinued include GBP2m relating to the disposal of the Engineering Inspection & Consultancy division in both UK & Ireland to Infexion Private Equity Partners on 1 November 2015.
6) REORGANISATION COSTS
In 2016, the reorganisation costs of GBP160m (note 7) are directly associated with continuing operations (2015: GBP183m). The amounts were directly attributable in respect of redundancy GBP49m (2015: GBP59m) and other restructuring activity of GBP111m (2015: GBP124m). Restructuring costs in 2016 relate to amounts incurred across the Group for activities such as process re-engineering, office footprint consolidation, reducing spans of control, and renegotiation of supplier contracts. These include the transition to a new IT infrastructure provider, Wipro, in the UK, Ireland and Scandinavia.
NOTES TO THE CONDENSED CONSOLIDATED INCOME STATMEENT AND CONDENSED CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE INCOME
7) SEGMENTAL INFORMATION
The Group's operating segments comprise Scandinavia, Canada, UK & International, Central functions and non-core, which is consistent with how the Group is managed.
The primary operating segments are based on geography and are all engaged in providing personal and commercial general insurance services. Central functions include the Group's internal reinsurance function and Group Corporate Centre.
Core businesses
The Group's principal core businesses are Scandinavia, Canada, and UK & International. These represent separate operating segments, and the major geographical areas in which the Group continues to operate through established businesses in mature markets.
Each operating segment is managed by a member of the Group Executive Committee who is directly accountable to the Group Chief Executive and Board of Directors, who together form the central decision making function in respect of the operating activities of the Group. The UK is the Group's country of domicile and one of its principle markets.
Amounts attributable to Central Functions are also included within the core business results.
During 2016, following a reorganisation change, the Middle East was combined with the UK and Ireland regions to form the 'UK & International' segment. Previously the Middle East operations were reported under non-core. The 2015 segmental results have been re-presented accordingly.
Non-core segment
The Group's non-core segment is comprised of the Group's UK legacy business, which is managed as part of the UK operations. The UK Legacy business is not presented as a discontinued operation as it is not a separate geographical area nor a major line of business.
When businesses become classified as discontinued (see note 5) their results on a segmental basis are re-presented from non-core and into discontinued operations, and the comparatives are re-presented on the same basis. During 2016, no further operations were classified as discontinued and as such, the 2015 comparatives do not require re-presentation.
Assessing segment performance
The Group uses the following key measures to assess the performance of its operating segments:
-- Net written premiums; -- Underwriting result; -- Combined operating ratio (COR); -- Operating result.
Net written premiums is the key measure of revenue used in internal reporting.
Underwriting result, COR and operating result are the key internal measures of profitability of the operating segments. The COR reflects the ratio of claims costs and expenses (including commission) to earned premiums, expressed as a percentage.
Transfers or transactions between segments are entered into under normal commercial terms and conditions that would also be available to unrelated third parties.
Year ended 31 December 2016
Core
UK & International
Continuing
UK operations Add
(excluding Middle Central per income discontinued Total
Scandi-navia Canada Legacy) Ireland East Functions Non-core statement operations Group
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
==========
Net written premiums 1,721 1,443 2,588 306 187 36 (42) 6,239 169 6,408
Underwriting
result 239 74 123 (49) 14 (9) (16) 376 4 380
Investment result 72 66 136 7 6 - 2 289 9 298
Central costs
and other activities - - - - - (23) - (23) - (23)
Operating result
(management basis) 311 140 259 (42) 20 (32) (14) 642 13 655
Realised gains/(losses) 28 2 30
Unrealised gains,
impairments and
foreign exchange (4) - (4)
Interest costs (138) - (138)
Amortisation
of intangible
assets (16) - (16)
Pension net interest
and administration
costs (4) - (4)
Solvency II costs (7) - (7)
Reorganisation
costs (160) (8) (168)
Economic assumption
changes (6) - (6)
Losses on disposals
of businesses (234) (17) (251)
Profit before
tax 101 (10) 91
Tax on operations (54) (5) (59)
Tax on disposals
of discontinued
operations - (12) (12)
Profit after
tax 47 (27) 20
Combined operating
ratio (%) 86.2 94.9 95.4 116.2 92.8 94.2
Year ended 31 December 2015 (re-presented)
Core
UK & International
Continuing
UK operations Add
(excluding Middle Central per income discontinued Total
Scandin-avia Canada Legacy) Ireland East Functions Non-core statement operations Group
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
==========
Net written premiums 1,606 1,360 2,606 261 181 (111) 49 5,952 873 6,825
Underwriting
result 94 116 12 (35) 8 50 (60) 185 35 220
Investment result 69 66 135 9 3 - 1 283 39 322
Central costs
and other activities - - - - - (18) 1 (17) (2) (19)
Operating result
(management basis) 163 182 147 (26) 11 32 (58) 451 72 523
Realised gains/(losses) 21 4 25
Unrealised gains,
impairments and
foreign exchange (9) 4 (5)
Interest costs (106) - (106)
Amortisation
of intangible
assets (25) (2) (27)
Pension net interest
and administration
costs (8) - (8)
Solvency II costs (26) - (26)
Reorganisation
costs (183) - (183)
Impairment of
goodwill and
intangible assets (9) (42) (51)
Non-recurring
charges (3) - (3)
Gains on disposals
of businesses 3 181 184
Profit before
tax 106 217 323
Tax on continuing
operations (18) (50) (68)
Tax on disposals
of discontinued
operations - (11) (11)
Profit after
tax 88 156 244
Combined operating
ratio (%) 94.0 91.7 99.5 113.4 95.4 96.9
8) INCOME TAX
The tax amounts charged/(credited) in the income statement
are as follows:
2016 2015
GBPm GBPm
Current tax 90 85
Deferred tax (36) (67)
Total taxation attributable to continuing operations 54 18
Tax on disposal of discontinued operations 12 11
Tax on profits of discontinued operations 5 50
Taxation attributable to the Group 71 79
Reconciliation of the income tax expense
2016 2015
GBPm GBPm
Profit before tax 101 106
Tax at the UK rate of 20% (2015: 20.2%) 20 21
Tax effect of:
Income/gains not taxable (3) (8)
Expenses not deductible for tax purposes 7 7
Impairment and amortisation of goodwill 6 1
Movement in deferred tax assets not recognised (17) (26)
Increase/(release) of tax provided in respect of
prior periods 2 (4)
Different tax rates of subsidiaries operating in
other jurisdictions 17 8
Withholding tax on dividends from subsidiaries 5 5
Effect of change in tax rates 16 15
Other 1 (1)
Total income tax expense attributable to continuing
operations 54 18
Total income tax expense attributable to discontinued
operations 17 61
Income tax expense 71 79
The current tax and deferred income tax credited/(charged) to each
component of other comprehensive income is as follows:
Current Tax Deferred Tax Total
2016 2015 2016 2015 2016 2015
GBPm GBPm GBPm GBPm GBPm GBPm
Fair value gains and losses 5 49 (24) (33) (19) 16
Remeasurement of net defined benefit
pension liability - - 64 (16) 64 (16)
Total credited/(charged) to other
comprehensive income 5 49 40 (49) 45 -
The aggregate current tax and deferred tax relating to items that
are charged directly to equity is GBPnil (2015: GBPnil).
Tax Rates
The table below provides a summary of the current tax and deferred
tax rates for the year in respect of the core tax jurisdictions in
which the Group operates.
2016 2015
Current Deferred Current Deferred
Tax Tax Tax Tax
UK 20.0 % 17.0 % 20.2 % 18.0 %
Canada 27.5 % 27.5 % 26.8 % 26.8 %
Denmark 22.0 % 22.0 % 23.5 % 22.0 %
Ireland 12.5 % 12.5 % 12.5 % 12.5 %
Sweden 22.0 % 22.0 % 22.0 % 22.0 %
9) EARNINGS PER SHARE
The earnings per ordinary share are calculated by reference to the profit attributable to the ordinary shareholders and the weighted average number of shares in issue during the year. These were 1,018,173,824 for basic EPS and 1,024,448,507 for diluted EPS (excluding those held in Employee Stock Ownership Plan (ESOP) and Share Incentive Plan (SIP) trusts). The number of shares in issue at 31 December 2016 was 1,019,140,938 (excluding those held in ESOP and SIP trusts).
Basic EPS
2016 2015
Continuing Discontinued Continuing Discontinued
Profit/(loss) attributable to the shareholders
of the Parent Company (GBPm) 54 (27) 79 156
Less: cumulative preference dividends
(GBPm) (9) - (9) -
Profit/(loss) for the calculation of
earnings per share 45 (27) 70 156
Weighted average number of ordinary shares
in issue (thousands) 1,018,174 1,018,174 1,015,489 1,015,489
Basic earnings/(loss) per share (p) 4.4 (2.6) 6.9 15.4
2016 2015
GBPm GBPm
Weighted average number of ordinary shares in issue (thousands) 1,018,174 1,015,489 Adjustments for share options and contingently issuable shares (thousands) 6,275 3,791 Total weighted average number of ordinary shares for diluted earnings per share (thousands) continuing operations 1,024,449 1,019,280 Diluted earnings/(loss) per share (p) relating to continuing operations 4.4 6.9 Diluted earnings per share (p) relating to discontinued operations (2.6) 15.3
Note 16 includes further information of the outstanding share options and unvested share awards to Group employees that could potentially dilute basic earnings per share in the future, including those awards omitted from the calculation of diluted earnings per share because they were antidilutive in 2016 and 2015.
10) DIVIDS PAID AND PROPOSED
The final dividend to equity holders is recognised as a liability when approved at the Annual General Meeting. The Company and its subsidiaries may be subject to restrictions on the amount of dividends they can pay to shareholders as a result of regulatory requirements. However, based on the information currently available, the Group does not believe that such restrictions materially limit the ability to meet obligations or pay dividends. At the Annual General Meeting (AGM) on 5 May 2017, a final dividend in respect of the year ended 31 December 2016 of 11p per ordinary share amounting to a total dividend of GBP112m is to be proposed. The proposed dividend will be paid and accounted for in shareholders' equity as an appropriation of retained earnings in the year ending 31 December 2017.
2016 2015 2016 2015
p p GBPm GBPm
Ordinary dividend:
Final paid in respect of prior year 7.0 2.0 71 20
Interim paid in respect of current year 5.0 3.5 51 36
12.0 5.5 122 56
Preference dividend 9 9
131 65
11) GOODWILL AND INTANGIBLE ASSETS
Intangible
assets
arising
from acquired Externally Internally
claims acquired generated
Goodwill provisions software software Other Total
GBPm GBPm GBPm GBPm GBPm GBPm
Cost
At 1 January 2016 514 109 86 614 245 1,568
Additions and transfers - - 1 131 9 141
Disposals (144) - (6) (47) (39) (236)
Exchange adjustment 70 19 1 55 44 189
At 31 December 2016 440 128 82 753 259 1,662
Accumulated amortisation
At 1 January 2016 - 108 64 355 151 678
Amortisation charge - 1 8 61 18 88
Amortisation on disposals - - (5) (25) (25) (55)
Exchange adjustment - 19 1 27 28 75
At 31 December 2016 - 128 68 418 172 786
Accumulated impairment
At 1 January 2016 151 - - 55 5 211
Impairment charge 30 - - 1 - 31
Impairment on disposals (86) - - (16) - (102)
Exchange adjustment - - - 8 - 8
At 31 December 2016 95 - - 48 5 148
Carrying amount at 31 December
2016 345 - 14 287 82 728
Less: Assets classified
as held for sale - - - - - -
Carrying amount at 31 December
2016 net of held for sale 345 - 14 287 82 728
Intangible
assets
arising
from acquired Externally Internally
claims acquired generated
Goodwill provisions software software Other Total
GBPm GBPm GBPm GBPm GBPm GBPm
Cost
At 1 January 2015 545 117 123 592 278 1,655
Additions and transfers - - 2 51 - 53
Disposals - (1) (33) (8) (7) (49)
Exchange adjustment (31) (7) (6) (21) (26) (91)
At 31 December 2015 514 109 86 614 245 1,568
Accumulated amortisation
At 1 January 2015 - 114 77 318 149 658
Amortisation charge - 2 10 56 22 90
Amortisation on disposals - (1) (20) (8) (6) (35)
Exchange adjustment - (7) (3) (11) (14) (35)
At 31 December 2015 - 108 64 355 151 678
Accumulated impairment
At 1 January 2015 133 - 3 57 4 197
Impairment charge 18 - - 3 1 22
Impairment on disposals - - (1) (3) - (4)
Exchange adjustment - - (2) (2) - (4)
At 31 December 2015 151 - - 55 5 211
Carrying amount at 31 December
2015 363 1 22 204 89 679
Less: Assets classified
as held for sale 45 - 1 7 10 63
Carrying amount at 31 December
2015 net of held for sale 318 1 21 197 79 616
Amortisation
Amortisation expense of GBP72m (2015: GBP63m) has been charged to underwriting and policy acquisition costs with the remainder recognised in other operating expenses.
Impairments
During 2016 the software impairment charge is GBP1m (2015: GBP3m). In 2016 GBP1m (2015: GBP1m) of software impairment had been recognised within other operating expenses. In 2016 no software impairment was charged to underwriting and policy acquisition costs (2015: GBP2m).
When testing for goodwill impairment, the carrying value of the CGU to which goodwill has been allocated is compared to the recoverable amount as determined by a value in use calculation. These calculations use cashflow projections based on operating plans approved by management covering a three year period and using the best estimates of future premiums, operating expenses and taxes using historical trends, general geographical market conditions, industry trends and forecasts and other available information as discussed in more detail in the strategic report section. Cashflows beyond this period are extrapolated using the estimated growth rates which management deem appropriate for the CGU. The cashflow forecasts are adjusted by appropriate discount rates. Where a sales price has been agreed for a CGU, the sales proceeds less costs to sell are considered the best estimate of the value in use.
Where the value in use is less than the current carrying value of the CGU in the Statement of Financial Position, the goodwill is impaired in order to ensure that the CGU carrying value is not greater than its future value to the Group.
Goodwill impairment charges of GBP30m (2015: GBP18m) have been recognised within other operating expenses, split between continuing operations GBP30m in Oman (2015: Scandinavian Marine GBP6m) and discontinued operations GBPnil (2015: Argentina GBP12m).
The Oman Government has issued legislation by royal decree, which requires a proportion of the company to be offered to the public which is currently expected to result in the Group losing control of the business. As a result of the expected loss of control, the business in Oman is classified as held for sale (HFS) measured at fair value less costs to sell resulting in a revaluation impairment of GBP30m of which GBP20m is attributable to Non Controlling Interest..
Goodwill is allocated to the Group's CGUs, which are contained within
the following operating segments as follows:
Re-presented
2016 2015
GBPm GBPm
Scandinavia 152 131
Canada 160 130
UK and International 33 57
Non-core and discontinued - 45
Total Goodwill 345 363
Impairment Sensitivity
Following completion of the Group impairment testing, it was identified that the Norwegian and the Canadian Commercial goodwill valuation models were sensitive to changes in key assumptions.
The sensitivities are listed below.
Norway Canadian
Potential Commercial
headroom/ Potential
(Impairment) (Impairment)
GBPm GBPm
Impairment Sensitivity
1% decrease in terminal value growth rate 1 (55)
1% increase to discount rate (21) (69)
The range of pre-tax discount rates used for goodwill impairment testing, which reflect specific risks relating to the CGU at the date of evaluation and weighted average growth rates used in 2016 for the cash generating units within each operating segment are shown below. The growth rates include improvements in trade performance, where these are forecast in the three year operational plan for the CGU.
Pre-tax discount Weighted average
rate growth rate
2016 2015 2016 2015
Scandinavia 9%-10% 9%-11% 2%-3% 2%-3%
Canada 11%-12% 10%-11% 2%-4% 3%-4%
UK & International 9%-11% 10%-11% 2% 2%
The key assumptions used by the cash generating unit (CGU) Trygg-Hansa, with goodwill of GBP115m, within the Scandinavia region were discount rate of 8% and growth rate of 2% and by CGU RSA Commercial, with goodwill of GBP82m, within the Canadian region were discount rate of 9% and growth rate of 4%. All other CGUs are not considered significant in comparison to the total value of goodwill.
12) FINANCIAL ASSETS
The following table analyses the Group's financial assets by classification
as at 31 December 2016 and 31 December 2015.
As at 31 December 2016
Available Loans and
At FVTPL for sale receivables Total
GBPm GBPm GBPm GBPm
Equity securities 6 686 - 692
Debt securities 19 12,302 - 12,321
Financial assets measured
at fair value 25 12,988 - 13,013
Loans and receivables - - 88 88
Total financial assets 25 12,988 88 13,101
Less: Assets classified
as held for sale
Debt securities - 776 - 776
Total financial assets
net of held for sale 25 12,212 88 12,325
As at 31 December 2015
Available Loans and
At FVTPL for sale receivables Total
GBPm GBPm GBPm GBPm
Equity securities 38 547 - 585
Debt securities 15 11,473 - 11,488
Financial assets measured
at fair value 53 12,020 - 12,073
Loans and receivables - - 100 100
Total financial assets 53 12,020 100 12,173
Less: Assets classified
as held for sale
Debt securities - 376 - 376
Total financial assets
net of held for sale 53 11,644 100 11,797
The following table analyses the cost/amortised cost, gross unrealised
gains and losses and fair value of financial assets.
2016 2015
Unrealised
Cost / amortised Unrealised losses and
cost gains impairments Fair value Fair value
GBPm GBPm GBPm GBPm GBPm
Equity securities 689 48 (45) 692 585
Debt securities 11,794 627 (100) 12,321 11,488
Financial assets measured
at fair value 12,483 675 (145) 13,013 12,073
Loans and receivables 88 - - 88 100
Total financial assets 12,571 675 (145) 13,101 12,173
Less: Assets classified
as held for sale
Debt securities 776 - - 776 376
Total financial assets
net of held for sale 11,795 675 (145) 12,325 11,797
Collateral
At 31 December 2016, the Group had pledged GBP763m (2015: GBP376m) of financial assets as collateral for liabilities or contingent liabilities. The nature of the assets pledged as collateral comprises government securities of GBP636m (2015: GBP314m), cash and cash equivalents of GBP114m (2015: GBP50m) and debt securities of GBP13m (2015: GBP12m). The terms and conditions of the collateral pledged are market standard in relation to letter of credit facilities.
At 31 December 2016, the Group has accepted GBP101m (2015: GBP554m) in collateral. The Group is permitted to sell or repledge collateral held in the event of default by the owner. The fair value of the collateral accepted is GBP101m (2015: GBP554m). The terms and conditions of the collateral held are market standard. The assets held as collateral are readily convertible into cash.
Derivative financial instruments
The following table presents the fair value and notional amount of
derivatives by term to maturity and nature of risk.
As at 31 December 2016
Notional Amount Fair Value
Less than From 1 Over 5
1 year to 5 years years Total Asset Liability
GBPm GBPm GBPm GBPm GBPm GBPm
Designated as hedging
instruments
Currency risk (net investment
in foreign operation) 1,271 - - 1,271 7 (20)
Cross currency interest
swaps (fair value/ cash
flow) 17 264 261 542 2 (109)
Total 9 (129)
At FVTPL
Currency risk mitigation 317 - - 317 6 (2)
Inflation risk mitigation - - 332 332 41 (36)
Total 47 (38)
Total derivatives 56 167
As at 31 December 2015
Notional Amount Fair Value
Less than From 1 Over 5
1 year to 5 years years Total Asset Liability
GBPm GBPm GBPm GBPm GBPm GBPm
Designated as hedging
instruments
Currency risk (net investment
in foreign operation) 1,076 - - 1,076 7 (8)
Cross currency interest
swaps (fair value/ cash
flow) - 160 158 318 - (39)
Total 7 (47)
At FVTPL
Currency risk mitigation 252 39 - 291 - (8)
Inflation risk mitigation - - 236 236 31 (34)
Total 31 (42)
Total derivatives 38 (89)
The use of derivatives can result in accounting mismatches when gains and losses arising on the derivatives are presented in the income statement in accordance with the Group's accounting policies and corresponding losses and gains on the risks being mitigated are not included in the income statement. In such circumstances the Group may apply hedge accounting in accordance with IFRS and the Group accounting policy on hedging.
The Group applies hedge accounting to derivatives acquired to reduce foreign exchange risk in its net investment in certain major overseas subsidiaries. There was no ineffectiveness recognised in the income statement in respect of these hedges during 2016 or 2015.
The Group also applies hedge accounting to specified fixed interest assets in its investment portfolio. During 2014, the Group invested in a portfolio of high investment grade corporate bonds denominated in US dollars to allow it to invest in a more diversified range of issuers. These investments are used to cover the insurance liabilities in the UK business. In order to remove exchange risk from this portfolio of investments the Group also acquired cross currency interest rate swaps to swap the cashflows from the portfolio into cash flows denominated in pounds sterling. The Group applies fair value hedge accounting when using 'fixed to floating' interest rate swaps and cash flow hedge accounting when using 'fixed to fixed' interest rate swaps. The interest rate swaps exactly offset the timing and amounts expected to be received on the underlying investments. The investments have a remaining term of between two and eight years. There have been no default and no defaults are expected on the hedged investments.
The total gains/ losses on cash flow hedge instruments during 2016 was a GBP6m gain (2015: loss of GBP4m) in the consolidated statement of other comprehensive income, and the amount reclassified to the income statement was GBPnil (2015: GBPnil). The ineffectiveness recognised in the income statement was GBPnil (2015: GBPnil).
The total losses on the fair value hedge instruments recognised in the income statement were GBP50m (2015: GBP19m) and the offsetting gains related to the hedged risk were GBP45m (2015: GBP18m).
The Group enters into derivative transactions under International Swaps and Derivatives Association (ISDA) master netting arrangements. In general, under such agreements the amounts owed by each counterparty on a single day in respect of all transactions outstanding in the same currency are aggregated into a single net amount that is payable by one counterparty to the other. In certain circumstances, such as a credit default, all outstanding transactions under the agreement are terminated, the termination value is assessed and only a single net amount is payable in settlement of all transactions.
The ISDA agreements do not meet the criteria for offsetting in the statement of financial position. This is because the Group does not have any current legally enforceable right to offset recognised amounts, because the right to offset is enforceable only on the occurrence of future events. The tables below provide information on the impact of the netting arrangements.
In addition, during 2016, the Group took out borrowings from credit institutions under repurchase agreements of GBP249m. The Group continues to recognise debt securities in the statement of financial position as the Group remains exposed to the risks and rewards of ownership.
Amounts subject to enforceable netting arrangements
Effect of offsetting in Related items not offset
statement of financial
position
Amounts Net amounts Financial Financial
As at 31 December 2016 Gross amounts offset reported instruments collateral Net amount
GBPm GBPm GBPm GBPm GBPm GBPm
Derivative
financial assets 56 - 56 (45) (9) 2
Reverse repurchase arrangements
and other similar secured
lending 249 - 249 (249) - -
Total
assets 305 - 305 (294) (9) 2
Derivative
financial liabilities 167 - 167 (45) (113) 9
Repurchase arrangements
and other similar secured
borrowing 249 - 249 (249) - -
Total liabilities 416 - 416 (294) (113) 9
Amounts subject to enforceable netting arrangements
Effect of offsetting in Related items not offset
statement of financial
position
Amounts Net amounts Financial Financial
As at 31 December 2015 Gross amounts offset reported instruments collateral Net amount
GBPm GBPm GBPm GBPm GBPm GBPm
Derivative
financial assets 38 - 38 (34) - 4
Reverse repurchase arrangements
and other similar secured
lending - - - - - -
Total 38 - 38 (34) - 4
Derivative
financial liabilities 89 - 89 (34) (46) 9
Repurchase arrangements
and other similar secured
borrowing - - - - - -
Total 89 - 89 (34) (46) 9
13) Reinsurers' share of insurance contract liabilities
2016 2015
GBPm GBPm
Reinsurers' share of provisions for unearned premiums 816 837
Reinsurers' share of provisions for losses and loss adjustment
expenses 1,436 1,151
Total reinsurers' share of insurance contract liabilities
net of held for sale 2,252 1,988
To be settled within 12 months 1,301 998
To be settled after 12 months 951 990
The following changes have occurred in the reinsurer's share of provision
for unearned premiums during the year:
2016 2015
GBPm GBPm
Reinsurers' share of provision for unearned premiums at
1 January 961 709
Premiums ceded to reinsurers 1,068 1,398
Reinsurers' share of premiums earned (1,096) (1,145)
Changes in reinsurance asset (28) 253
Reinsurers' share of portfolio transfers and disposals
of subsidiaries (137) (2)
Exchange adjustment 22 1
Reinsurers' share of provision for unearned premiums at
31 December 818 961
Less: Assets classified as held for sale 2 124
Total Reinsurers' share of provision for unearned premiums
at 31 December net of held for sale 816 837
The following changes have occurred in the reinsurers' share of provision
for losses and loss adjustment expenses during the year:
2016 2015
GBPm GBPm
Reinsurers' share of provisions for losses and loss adjustment
expenses at 1 January 1,264 1,317
Reinsurers' share of total claims incurred 915 589
Total reinsurance recoveries received (414) (558)
Reinsurers' share of portfolio transfers and disposals
of subsidiaries (356) (57)
Exchange adjustment 113 (35)
Other movements 8 8
Reinsurers' share of provisions for losses and loss adjustment
expenses at 31 December 1,530 1,264
Less: Assets classified as held for sale 94 113
Total Reinsurers' share of provisions for losses and loss
adjustment expenses at 31 December net of held for sale 1,436 1,151
14) CURRENT AND DEFERRED TAX
Current Tax
Asset Liability
2016 2015 2016 2015
GBPm GBPm GBPm GBPm
To be settled within 12 months 60 48 25 28
To be settled after 12 months 5 8 11 35
Net current tax position at 31 December 65 56 36 63
Less: Classified as held for sale - 5 4 32
Net current tax position at 31 December
net of held for sale 65 51 32 31
Deferred Tax
Asset Liability
2016 2015 2016 2015
GBPm GBPm GBPm GBPm
Deferred tax assets/liabilities 270 180 54 54
==== ========= ====
Less: Classified as held for sale - 17 - 14
==== ========= ====
Net deferred tax position at 31 December
net of held for sale 270 163 54 40
==== ========= ====
The following are the major deferred tax assets/(liabilities) recognised
by the Group:
2016 2015
GBPm GBPm
Net unrealised gains on investments (54) (1)
Claims equalisation and other catastrophe reserves - (71)
Intangibles capitalised (28) (21)
Deferred acquisition costs (7) (24)
Tax losses and unused tax credits 190 123
Other deferred tax reliefs 10 11
Net insurance contract liabilities (15) (3)
Retirement benefit obligations 55 (3)
Provisions and other temporary differences 65 115
Net deferred tax asset at 31 December 216 126
Less: Net assets classified as held for sale - 3
Net deferred tax asset at 31 December net of held for
sale 216 123
Provisions and other temporary differences arise predominately in
respect of UK deferred capital expenditure GBP56m (2015: GBP80m) and
transitional UK tax relief due to the change in taxation of available
for sale assets GBP16m (2015: GBP0m).
The movement in the net deferred tax assets recognised by the continuing
Group was as follows:
2016 2015
GBPm GBPm
Net deferred tax position at 1 January 123 118
Amounts credited to income statement 44 79
Amounts credited/(charged) to other comprehensive income 41 (50)
Amounts charged to equity - (1)
Net arising on acquisition/disposal of subsidiaries
and other transfers 10 (8)
Exchange adjustments 7 (4)
Effect of change in tax rates - income statement (8) (12)
- other comprehensive income (1) 1
Net deferred tax asset at 31 December 216 123
At the end of the reporting period, the Group's continuing operations have unused tax losses of GBP1,629m (2015: GBP1,840m) for which no deferred tax asset is being recognised. This includes GBPnil (2015: GBP4m) which will expire between 2017 and 2025 and GBP1,194m (2015: GBP1,210m) capital losses for which it is unlikely that a deferred tax asset would be recognised as most UK capital gains are exempt from tax. In addition, the Group has deductible temporary differences of GBP654m (2015: GBP486m) for which no deferred tax has been recognised.
The Group has temporary differences in respect of the retained earnings of overseas subsidiaries not held for sale of GBP1,006m (2015: GBP1,053m) on which overseas taxes, including withholding taxes, might be incurred on the remittance of these earnings to the UK. This amount relates to the Group's subsidiaries in Canada. The Group is able to control the remittance of earnings to the UK and there is no intention to remit the retained earnings in the foreseeable future if the remittance would trigger a material incremental tax liability. As such the Group has not recognised any deferred tax in respect of the potential taxes on the temporary differences arising on unremitted earnings of continuing overseas subsidiaries and associates.
Of the GBP216m (2015: GBP123m) net deferred tax asset recognised by the Group's continuing operations, GBP179m (2015: GBP117m) relate to tax jurisdictions in which the Group has suffered a loss in either the current or preceding period. The assets have been recognised on the basis that future taxable profits will be available against which these deferred tax assets can be utilised. The evidence for the future taxable profits is a forecast consistent with the three year operational plans prepared by the relevant businesses, which are subject to internal review and challenge. Where relevant, the forecast includes extrapolations of the operational plans using assumptions consistent with those used in the plans.
15) CASH AND CASH EQUIVALENTS
The interest bearing financial assets included in cash and cash equivalents
had an effective interest rate of 0.99% (2015: 1.65%) and had an average
maturity of 26 days (2015: 32 days).
2016 2015
GBPm GBPm
Cash and cash equivalents and bank overdrafts (Condensed
Consolidated Statement of Cashflows) 1,087 902
Add: Overdrafts reported in Borrowings 2 11
Total cash and cash equivalents 1,089 913
Less: Assets classified as held for sale 104 97
Total Cash and cash equivalents (Condensed Consolidated
Statement of Financial Position) 985 816
16) SHARE CAPITAL
The issued share capital of the Parent Company is fully paid and consists of two classes; Ordinary Shares with a nominal value of GBP1 each and preference shares with a nominal value of GBP1 each. The issued share capital at 31 December 2016 is:
2016 2015
GBPm GBPm
Issued and fully paid
1,019,554,986 Ordinary Shares of GBP1 each (2015: 1,017,059,842
Ordinary Shares of GBP1 each) 1,020 1,017
125,000,000 Preference Shares of GBP1 each (2015: 125,000,000
Preference Shares of GBP1 each) 125 125
1,145 1,142
During 2016, the Company issued a total of 2,495,144 new Ordinary Shares of GBP1 each ranking pari passu with Ordinary Shares in issue (2015: 1,572,969 new Ordinary Shares of GBP1 each), on the exercise of employee share options and in respect of employee share awards. The number of Ordinary Shares in issue, their nominal value and the associated share premiums are as follows:
Nominal Share
value premium
Number of
shares GBPm GBPm
At 1 January 2015 1,015,486,873 1,015 1,075
Issued in respect of employee share options
and employee share awards 1,572,969 2 2
At 1 January 2016 1,017,059,842 1,017 1,077
Issued in respect of employee share options
and employee share awards 2,495,144 3 3
At 31 December 2016 1,019,554,986 1,020 1,080
Rights attaching to the shares
The rights attaching to each class of share may be varied with the consent of the holders of 75% of the issued shares of that class.
Ordinary Shares of GBP1 each
Each member holding an Ordinary Share shall be entitled to vote on all matters at a general meeting of the Company, be entitled to receive dividend payments declared in accordance with the Articles of Association, and have the right to participate in any distribution of capital of the Company including on a winding up of the Company.
Preference Shares of GBP1 each
The Preference Shares are not redeemable but the holders of the Preference Shares have preferential rights over the holders of Ordinary Shares in respect of dividends and of the return of capital in the event of the winding up of the Company.
Provided a resolution of the Board exists, holders of Preference Shares are entitled to a cumulative preferential dividend of 7.375% per annum, payable out of the profits available for distribution, to be distributed in half yearly instalments. Preference shareholders have no further right to participate in the profits of the Company.
Full information on the rights attaching to shares is in the RSA Insurance Group plc Articles of Association which are available on the Group's website.
Employee share schemes
414,049 Ordinary Shares (2015: 741,636 Ordinary Shares) are held by various employee share trusts which may subsequently be transferred to employees (including Executive Directors) to satisfy Sharebuild Matching Share awards. These shares are presented as own shares. Own shares are deducted from equity. No gain or loss is recognised on the purchase, sale, issue or cancellation of the own shares. Any consideration paid or received is recognised directly in equity.
At 31 December 2016, the total number of options over Ordinary Shares outstanding under the Group employee share option plans is 5,047,441 (2015: 6,784,365) and the total number of potential shares outstanding under the long term incentive plan and under the Sharebuild is 12,638,394 Ordinary Shares (2015: 13,941,035 Ordinary Shares).
17) INSURANCE CONTRACT LIABILITIES
Estimation techniques and uncertainties
Provisions for losses and loss adjustment expenses are subject to a robust reserving process by each of the Group's business units and at Group Corporate Centre, as detailed in the Risk Management note.
There is also considerable uncertainty in regard to the eventual outcome of the claims that have occurred by the end of the reporting period but remain unsettled. This includes claims that may have occurred but have not yet been notified to the Group and those that are not yet apparent to the insured.
The provisions for losses and loss adjustment expenses are estimated using previous claims experience with similar cases, historical payment trends, the volume and nature of the insurance underwritten by the Group and current specific case reserves. Also considered are developing loss payment trends, the potential longer term significance of large events, and the levels of unpaid claims, legislative changes, judicial decisions and economic, political and regulatory conditions.
The Group uses a number of commonly accepted actuarial projection methodologies to determine the appropriate provision to recognise. These include methods based upon the following:
-- The development of previously settled claims, where payments to date are extrapolated for each prior year
-- Estimates based upon a projection of claims numbers and average cost
-- Notified claims development, where notified claims to date for each year are extrapolated based upon observed development of earlier years
-- Expected loss ratios. -- Bornhuetter- Ferguson method, which combines features of the above methods -- Bespoke methods for specialist classes of business.
In selecting the method and estimate appropriate to any one class of insurance business, the Group considers the appropriateness of the methods and bases to the individual circumstances of the provision class and underwriting year.
Individually large and significant claims are generally assessed separately, being measured either at the face value of the loss adjusters' estimates or projected separately in order to allow for the future development of large claims.
The level of provision carried by the Group targets the inclusion of a margin of 5% for the core businesses on top of the actuarial indication outlined above. The appropriateness of the 5% target is subject to regular review as part of the Group reserving process at Group Corporate Centre.
Discount assumptions
The total value of provisions for losses and loss adjustment expenses less related reinsurance recoveries before discounting for continuing operations is GBP8,784m (2015: GBP8,766m).
Claims on certain classes of business (excluding annuities) have been
discounted as follows:
Average number
of years to settlement
from reporting
Discount rate date
2016 2015 2016 2015
Category % % Years Years
UK Asbestos and environmental 4.0 4.0 11 11
Scandinavia Disability 1.3 1.3 7 8
In determining the average number of years to ultimate claims settlement, estimates have been made based on the underlying claims settlement patterns.
As at 31 December 2016, the value of the discount on net claims liability reserves is GBP388m (2015: GBP403m) excluding annuities and periodic payment orders. All other factors remaining constant, a decrease of 1% in the discount rates would reduce the value of the discount by approximately GBP120m (2015: GBP127m).
A decrease of 1% in the real discount rate for UK & Scandinavia annuities would reduce the value of the discount by approximately GBP110m (2015: GBP86m). The sensitivity calculation has taken into consideration the undiscounted provisions for each class of business and the respective average settlement period.
Gross insurance contract liabilities and the reinsurers' share of insurance contract liabilities
The gross insurance contract liabilities and the reinsurers' share
of insurance contract liabilities presented in the statement of financial
position are comprised as follows:
Gross RI Net
2016 2016 2016
GBPm GBPm GBPm
Provision for unearned premiums 3,328 (818) 2,510
Provision for losses and loss adjustment expenses 10,083 (1,530) 8,553
Total insurance contract liabilities 13,411 (2,348) 11,063
Less: Held for sale provision for unearned premiums 17 (2) 15
Less: Held for sale provisions for losses and loss
adjustment expenses 718 (94) 624
Less: Total liabilities held for sale 735 (96) 639
Provision for unearned premiums at 31 December net
of held for sale 3,311 (816) 2,495
Provision for losses and loss adjustment expenses
at 31 December net of held for sale 9,365 (1,436) 7,929
Total insurance contract liabilities excluding held
for sale 12,676 (2,252) 10,424
Gross RI Net
2015 2015 2015
GBPm GBPm GBPm
Provision for unearned premiums 3,445 (961) 2,484
Provision for losses and loss adjustment expenses 9,457 (1,264) 8,193
Total insurance contract liabilities 12,902 (2,225) 10,677
Less: Held for sale provision for unearned premiums 338 (124) 214
Less: Held for sale provisions for losses and loss
adjustment expenses 373 (113) 260
Less: Total liabilities held for sale 711 (237) 474
Provision for unearned premiums at 31 December net
of held for sale 3,107 (837) 2,270
Provision for losses and loss adjustment expenses
at 31 December net of held for sale 9,084 (1,151) 7,933
Total insurance contract liabilities excluding held
for sale 12,191 (1,988) 10,203
Provision for unearned premiums, gross of acquisition costs
The provision for unearned premiums is shown net of deferred acquisition costs of GBP663m (2015: GBP631m). The movement in deferred acquisition costs during 2016 is attributed to GBP1,010m (2015: GBP1,026m) increase due to acquisition costs deferred during the year, GBP1,037m (2015: GBP1,023m) decrease due to amortisation charged during the year, GBP56m exchange gains (2015: GBP45m exchange losses), GBP6m (2015: GBP10m) increase due to other movements, and GBP3m (2015: GBP124m) reduction due to assets transferred to held for sale. The reinsurers' share of deferred acquisition costs is included within accruals and deferred income.
2016 2015
GBPm GBPm
Provision for unearned premiums (gross of acquisition
costs) at 1 January 4,200 4,388
Premiums written 7,477 8,224
Less: Premiums earned (7,624) (8,158)
Changes in provision for unearned premiums (147) 66
Gross portfolio transfers and acquisitions (418) (154)
Exchange adjustment 357 (94)
Other movements 2 (6)
Provision for unearned premiums (gross of acquisition
costs) at 31 December 3,994 4,200
Less: Liabilities classified as held for sale 20 462
Provision for unearned premiums (gross of acquisiton
costs) at 31 December net of held for sale 3,974 3,738
Provisions for losses and loss adjustment expenses
The following changes have occurred in the provisions for losses and
loss adjustment expenses during the year:
2016 2015
GBPm GBPm
Provisions for losses and loss adjustment expenses at
1 January 9,457 10,336
Gross claims incurred and loss adjustment expenses 5,130 5,169
Total claims payments made in the year net of salvage
and other recoveries (5,001) (5,250)
Gross portfolio transfers, acquisitions and disposals (578) (459)
Exchange adjustment 994 (404)
Other movements 81 65
Provisions for losses and loss adjustment expenses at
31 December 10,083 9,457
Less: Liabilities classified as held for sale 718 373
Provisions for losses and loss adjustment expenses at
31 December net of held for sale 9,365 9,084
Claims development tables
The tables below present changes in the historical provisions for losses and loss adjustment expenses that were established in 2006 and the provisions for losses and loss adjustment expenses arising in each subsequent accident year. The tables are presented at current year average exchange rates on an undiscounted basis and have been adjusted for operations that have been disposed of.
The top triangle of the tables presents the estimated provisions for ultimate incurred losses and loss adjustment expenses for each accident year as at the end of each reporting period.
The lower triangle of the tables presents the amounts paid against those provisions in each subsequent accounting period.
The estimated provisions for ultimate incurred losses change as more information becomes known about the actual losses for which the initial provisions were set up and as the rates of exchange.
Consolidated claims development table gross of reinsurance
2006
and
prior 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Estimate of cumulative claims
At end of accident
year 8,890 2,577 2,522 2,426 2,658 2,853 2,714 3,018 2,725 2,718 2,700
One year later 8,460 2,573 2,536 2,517 2,782 2,903 2,751 3,083 2,816 2,789
Two years later 7,994 2,542 2,515 2,474 2,731 2,930 2,726 3,007 2,733
Three years later 7,670 2,454 2,458 2,433 2,759 2,858 2,717 2,968
Four years later 7,382 2,383 2,452 2,460 2,747 2,797 2,675
Five years later 7,199 2,373 2,412 2,455 2,712 2,766
Six years later 6,986 2,363 2,397 2,417 2,675
Seven years later 6,917 2,345 2,384 2,427
Eight years later 6,888 2,325 2,381
Nine years later 7,073 2,323
Ten years later 7,112
2016 Movement (39) 2 3 (10) 37 31 42 39 83 (71) 117
Claims paid
One year later 1,997 1,109 1,205 1,161 1,443 1,307 1,274 1,413 1,292 1,271
Two years later 1,151 393 384 406 401 474 475 530 408
Three years later 770 266 243 261 276 318 277 262
Four years later 661 166 181 193 206 184 182
Five years later 417 135 119 145 112 104
Six years later 295 83 69 71 62
Seven years later 340 35 38 39
Eight years later 261 16 36
Nine years later 129 22
Ten years later 121
Cumulative claims
paid 6,142 2,225 2,275 2,276 2,500 2,387 2,208 2,205 1,700 1,271
Reconciliation to the statement of financial position
Current year provision
before discounting 970 98 106 151 175 379 467 763 1,033 1,518 2,700 8,360
Exchange adjustment
to closing rates 348
Discounting (114)
Annuities 771
Present value recognised
in the consolidated statement
of financial position 9,365
Held for sale 718
Total Group 10,083
Consolidated claims development table net of reinsurance
2006
and
prior 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Estimate of cumulative claims
At end of accident
year 7,507 2,215 2,299 2,199 2,351 2,494 2,463 2,639 2,410 2,290 2,142
One year later 7,158 2,210 2,289 2,256 2,422 2,492 2,493 2,739 2,434 2,290
Two years later 6,766 2,180 2,290 2,217 2,399 2,477 2,467 2,667 2,396
Three years later 6,438 2,095 2,244 2,189 2,413 2,429 2,427 2,635
Four years later 6,132 2,026 2,233 2,220 2,419 2,386 2,392
Five years later 5,936 2,016 2,203 2,222 2,386 2,362
Six years later 5,734 2,012 2,183 2,201 2,365
Seven years later 5,663 1,994 2,171 2,198
Eight years later 5,675 1,984 2,169
Nine years later 5,857 1,983
Ten years later 5,903
2016 Movement (46) 1 2 3 21 24 35 32 38 - 110
Claims paid
One year later 1,645 928 1,074 1,066 1,223 1,127 1,148 1,262 1,122 1,069
Two years later 975 325 337 347 372 393 387 414 354
Three years later 638 238 231 230 246 258 235 233
Four years later 512 146 171 184 191 170 187
Five years later 335 124 102 126 97 103
Six years later 258 66 67 68 58
Seven years later 299 35 34 32
Eight years later 230 14 29
Nine years later 98 20
Ten years later 157
Cumulative claims
paid 5,147 1,896 2,045 2,053 2,187 2,051 1,957 1,909 1,476 1,069
Reconciliation to the statement of financial position
Current year provision
before discounting 756 87 124 145 178 311 435 726 920 1,221 2,142 7,045
Exchange adjustment
to closing rates 292
Discounting (104)
Annuities 696
Present value recognised
in the consolidated statement
of financial position 7,929
Held for sale 624
Total Group 8,553
Insurance and reinsurance liabilities
2016 2015
GBPm GBPm
Direct insurance creditors 110 229
Reinsurance creditors 849 891
============ =============
Total insurance and reinsurance liabilities 959 1,120
============ =============
Less: Liabilities classified as held for sale 5 175
============ =============
Total 954 945
============ =============
18) POST-RETIREMENT BENEFITS AND OBLIGATIONS
Movement in surplus/(deficit) during the year:
2016 2015
GBPm GBPm
Surplus/(deficit) at 1 January 67 (98)
=======
Current service costs (23) (30)
Past service costs (5) (4)
Pension net interest cost 6 -
Administration costs (9) (7)
Total pension expense (31) (41)
Contributions by the Group 110 113
======= ================
Return on scheme assets less amounts included in pension
net interest cost 1,279 (343)
Effect of changes in financial assumptions (1,770) 322
Effect of changes in demographic assumptions 1 (24)
Experience gains and losses 120 140
Investment expenses (10) (14)
Remeasurements of net defined benefit liability (380) 81
Exchange adjustment (18) 12
================
Pension and post retirement (deficit)/surplus (252) 67
Deferred tax in respect of net pension and post retirement
(deficit)/surplus 55 (3)
=======
Net pension and post retirement (deficit)/surplus at
31 December (197) 64
================
The value of scheme assets and the scheme obligations are as follows:
2016 2015
UK Other Total Total
GBPm GBPm GBPm GBPm
Present value of funded obligations 8,314 460 8,774 7,030
Present value of unfunded obligations 7 112 119 96
Present value of obligations 8,321 572 8,893 7,126
Equities 597 167 764 723
Government debt 5,157 132 5,289 4,113
Non government debt 3,151 125 3,276 2,495
Derivatives 808 - 808 476
Other (including infrastructure, commodities,
hedge funds, loans) - 27 27 -
Securities with quoted market price in an
active market 9,713 451 10,164 7,807
Property 164 - 164 166
Cash 55 6 61 73
Other (including infrastructure, commodities,
hedge funds, loans) 484 - 484 744
Other investments 703 6 709 983
Value of asset and longevity swaps (2,232) - (2,232) (1,597)
Total assets in the schemes 8,184 457 8,641 7,193
Total surplus/(deficit) (137) (115) (252) 67
Defined benefit pension schemes (137) (59) (196) 111
Other post retirement benefits - (56) (56) (44)
Schemes in surplus 58 12 70 195
Schemes in deficit (195) (127) (322) (128)
19) RESULTS FOR THE YEAR 2016
This financial information set out above does not constitute statutory accounts for the years ended 31 December 2016 or 31 December 2015 but is derived from those accounts. Statutory accounts for 2015 have been delivered to the Registrar of Companies, and those for 2016 will be delivered in due course. The auditors' have reported on those accounts; their reports were (i) unqualified (ii) did not include reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not include a statement under section 498(2) or (3) of the Companies Act 2006.
20) EVENTS AFTER THE REPORTING DATE
On 7 February 2017, the Group signed contracts to dispose of UK legacy insurance liabilities to Enstar Group Limited.
The transaction takes the form of an initial reinsurance agreement, effective at 31 December 2016, which substantially effects the economic transfer pending completion of a subsequent legal transfer of the business. These assets and liabilities have been presented as held for sale. In accordance with the Group's accounting policy, collateral will be held against the reinsurance contract.
For further information, see note 6(ii).
As a consequence of the sale of the UK legacy insurance liabilities, the Group's Adverse Development Cover reinsurance protection bought in 2014 to partly protect these liabilities is no longer required. The Group has therefore in February 2017 agreed to commute it for a one-time charge of GBP22m.
APPENDIX A: EXCHANGE RATES
12 Months 12 Months
Local currency/GBP 2016 2015
Average Closing Average Closing
Canadian Dollar 1.79 1.66 1.95 2.05
Danish Krone 9.11 8.71 10.27 10.13
Swedish Krona 11.59 11.19 12.88 12.47
Euro 1.22 1.17 1.38 1.36
RESPONSIBILITY STATEMENT
We confirm that to the best of our knowledge:
A) The financial statements within the full Annual Report and Accounts, from which the financial information within this preliminary announcement has been extracted, are prepared in accordance with International Financial Reporting Standards as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and result of the Group;
B) The management report within this preliminary announcement includes a fair review of the development and performance of the business and the position of the Group; and
C) The risk and capital management section within this preliminary announcement includes a description of the principal risks and uncertainties faced by the Group.
Signed on behalf 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
FR LLFEAFSIFFID
(END) Dow Jones Newswires
February 23, 2017 02:01 ET (07:01 GMT)
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