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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Rsa Insurance Group Ld | LSE:RSA | London | Ordinary Share | GB00BKKMKR23 | ORD GBP1.00 |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 684.20 | 684.20 | 684.40 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
From Apr 2019 to Apr 2024
TIDMRSA
RNS Number : 5835F
RSA Insurance Group PLC
22 February 2018
RSA Insurance Group plc 22 February 2018
2017 PRELIMINARY RESULTS
Premium income up 4% to GBP6.7 billion, combined ratio 94%, a new RSA record
Underlying EPS 43.5p, up 10%; statutory profit after tax GBP322m (2016: GBP20m)
Return on tangible equity(1) 15.5% (2016: 14.2%) versus 13-17% target range
Final dividend 13.0p per share (19.6p total for 2017, up 23%)
Stephen Hester, RSA Group Chief Executive, commented:
"In a tough period for insurance markets, we are delighted to produce another year of growing profits, dividends and return on equity for shareholders. Higher premium income also highlights the positive customer response to what we are offering.
"RSA's overseas divisions achieved excellent results in 2017, partly offset by poor underwriting figures in our UK/ London market business as flagged earlier in the year. The Group's performance ambitions remain high and we target further improvement in 2018 and thereafter."
Trading results
-- Underlying pre-tax profits up 12% to GBP620m (2016: GBP556m)
-- Group operating profit GBP663m up 1% (2016: GBP655m): Scandinavia GBP389m; Canada GBP159m; UK & International GBP133m(2)
-- Group underwriting profit of GBP394m up 4% and a new record for RSA (2016: GBP380m):
- Group combined ratio of 94.0% also a record (2016: 94.2%): Scandinavia 82.9%, Canada 93.9% and UK & International 100.5%(2)
- Attritional loss ratio improved by 0.1 point versus 2016(3) with good progress in all businesses except the UK
- Group weather costs in line with last year; large losses elevated at 10.8% of premiums (2016: 8.9%)
- Group prior year underwriting profit of GBP157m (2016: GBP109m)
-- Total Group premiums of GBP6.7bn up 4% at reported FX and up 2% at constant FX excluding disposals: Scandinavia up 0.3%, Canada up 5% and UK & International up 2% (all at constant FX)
-- Group written total controllable costs down 6%(3) to GBP1,425m. This comprised 8% cost reductions, offset by 2% inflation
-- Investment income of GBP331m (2016: GBP369m) down 10% versus last year reflecting the impact of disposals and ongoing reinvestment at lower yields
(1) Underlying measure, please refer to pages 30 to 36 for further information
(2) Proforma for share of aggregate reinsurance recoveries and excludes the impact of the Ogden rate change
(3) Group excluding disposals for 2016 and at constant FX
-- Below the operating result, interest expense halved following our debt restructuring. Restructuring costs of GBP155m (2016: GBP168m) support the existing and increased cost savings targets
-- Statutory profit after tax GBP322m (2016: GBP20m)
-- Underlying earnings per share (EPS) 43.5p, up 10% (2016: 39.5p). Headline EPS 26.3p (2016: 1.8p)
-- Final dividend of 13.0p per ordinary share proposed, bringing total 2017 dividends to 19.6p per ordinary share (up 23%) representing a 45% payout ratio of underlying earnings.
Capital & balance sheet
-- Solvency II coverage ratio of 163% after final dividend (31 December 2016: 158%), slightly above 130-160% target range
-- Tangible equity GBP2.8bn (31 December 2016: GBP2.9bn), 270p per share -- Return on tangible equity of 15.5%(1) (2016: 14.2%) in upper half of 13-17% target range.
Strategic and market update
-- Balance sheet restructuring is now complete. 2017 actions comprised the GBP834m disposal of UK Legacy liabilities (announced in February); issuance of c.GBP300m of restricted tier 1 notes in Scandinavia and the retirement of c.GBP640m of existing high coupon debt. These actions reduced risk, improved capital resilience, and lowered interest costs
-- RSA's entire focus is on the drive for outperformance in our markets. In that context, our many performance improvement initiatives continue to deliver progress; targeted at customer service, underwriting capabilities and costs
-- The improved premium trends we report for 2017 reflect the service enhancements we have been implementing. Pleasingly, trends are better in every region versus 2016
-- Underwriting capabilities continue to advance across the Group. These include more sophisticated and agile pricing models, underwriter training and portfolio discipline, and technology driven insights. Progress on attritional loss ratios can be volatile but is on track overall, except for UK Household where improvement measures are in train. Underwriting actions to improve large loss performance are being actively implemented - 2017 setbacks showed the need to remediate in places
-- Group written controllable costs for 2017 were down 6%(2) year-on-year to GBP1,425m (comprising 8% cost reductions, offset by 2% inflation). Group headcount was down 6% versus 2016 and 23%(2) since the beginning of 2014. We are raising our savings ambition for a fourth time and now target over GBP450m gross savings by 2019 (GBP395m achieved to date). We do not expect to book further 'below the line' restructuring costs to achieve these savings
-- Excellent progress has been made towards our best-in-class combined ratio ambitions across the Group, except in the UK. Scandinavia and Canada have passed the targeted threshold, although in both regions we see scope for further improvements. Ireland has returned to underwriting profit (COR 97%) and we expect good continued progress. In the UK, our performance ambition remains unchanged, although its achievement may take longer than originally hoped. Determined action is underway in order to get back on track
-- Insurance market pricing and volumes have started 2018 with comparable trends to 2017, save for classes particularly impacted by poor loss experience
-- Bond market yield increases, if sustained, allow upgrades to investment income outlook plus reduced capital drag from bond pull-to-par impacts. Conversely, vigilance will be needed to price for any changes in insurance claims inflation.
(1) Underlying measure, please refer to pages 30 to 36 for further information
(2) Group excluding disposals for 2016 and, where relevant, at constant FX
MANAGEMENT REPORT - KEY FINANCIAL PERFORMANCE DATA
Management basis
GBPm (unless stated) FY 2017 FY 2016 Profit and loss Group net written premiums 6,678 6,408 Core Group net written premiums 6,281 Underwriting profit , 394 380 Combined operating ratio , 94.0% 94.2% Investment result , 284 298 Operating result , 663 655 Profit before tax 448 91 Underlying profit before tax , 620 556 Profit after tax 322 20 Net attributable profit , 269 18 Metrics Stated earnings per share (pence) 26.3p 1.8p Underlying earnings per share (pence) , 43.5p 39.5p Interim dividend per ordinary share (pence) 6.6p 5.0p Final dividend per ordinary share (pence) 13.0p 11.0p Underlying return on tangible equity (%) , 15.5% 14.2% Balance sheet Net asset value (GBPm) 3,653 3,715 Tangible net asset value (GBPm) , 2,765 2,862 Net asset value per share (pence) , 345p 352p Tangible net asset value per share (pence) , 270p 281p Capital Solvency II surplus (GBPbn) 1.1 1.1 Solvency II coverage ratio 163% 158%
, Alternative performance measures:
The Group uses Alternative Performance Measures (marked , throughout), 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 in the appendix on pages 30-36.
CHIEF EXECUTIVE'S STATEMENT
In 2017, RSA delivered growth in premiums, profits and dividends and an improved 15.5% return on tangible equity(1) - all compared to an extremely strong 2016 result.
We are pleased to report record underwriting profits. However, the year also had some disappointment relative to our ambitions. Excellent underwriting results in Scandinavia, Canada, Middle East and Ireland were partly offset by poor UK (and related London market) results. It is our task in 2018 to deliver a bounce-back in the latter whilst sustaining underlying progress across the Group as a whole.
Strategy & focus
RSA is a focused international insurer. We have complementary leadership positions in the major general insurance markets of the UK, Scandinavia and Canada, together with supporting 'London market' and international business. The Group is well balanced between personal and business customers, across our geographies, product lines and distribution channels.
Our business strategy is to sustain a disciplined focus on RSA's existing areas of market leadership, whilst driving intense operating improvement in pursuit of best-in-class performance levels.
External conditions
General insurance markets are relatively mature, consolidated and stable, though with some inevitable underwriting volatility. Attractive performance can be achieved through intense operational focus within a disciplined strategic framework.
For the insurance industry, 2017 was a year with some major external underwriting challenges. At a global level, it seems likely to have been one of the worst loss years in recent times due particularly to three major US/ Caribbean hurricanes and Mexico earthquakes. On a lesser scale, UK market losses around the Ogden discount rate change and Household insurance 'escape of water' inflation also dented domestic insurance results. Notwithstanding these factors, market capacity remains high, and there are limited signs of price inflation more broadly.
Conversely, financial markets during 2017 were more stable, at least as impacting RSA. Bond yields are off their lows and global central bank action to wean markets off QE gives some optimism that coming years might offer return upside for insurers' portfolios. However, tight credit spreads continue to hurt, especially on UK pension accounting. RSA makes a majority of profit outside the UK, so FX rates versus sterling are also important. During 2017 impacts were limited despite swings, although the Brexit process continues to have the potential to deliver volatility.
2017 actions
2017 was another year of intense activity at RSA. The great majority of our efforts were focused on operational improvement in pursuit of our best-in-class ambitions. We also delivered the final pieces of RSA's balance sheet restructuring successfully. We look forward to 2018 as the first clean 'business as usual' year since 2012.
Financial strength: RSA's 'A' grade credit ratings are where we want them. The Solvency II capital ratio at 163% (2016: 158%) is in a good place. The GBP834m disposal in February of our UK Legacy insurance liabilities removed a source of long-tail risk whilst funding a GBP640m retirement of high cost subordinated debt capital. This was the final piece of balance sheet work on our agenda. While we aspire to grow 'core tier 1' capital coverage further, the active phase of balance sheet repair is now complete.
(1) Underlying measure, please refer to pages 30 to 36 for further information
Business improvement: Our goal is to systematically and determinedly hunt down performance improvement opportunities across the business to move RSA's capabilities and then outcomes towards best-in-class levels. This involves particular focus on improving three areas; service to customers, underlying underwriting results and cost efficiency.
Personal Lines policy count rose at RSA in 2017 for the first time in four years as customers reacted positively to the many improvements we are putting through. The important home partnership with Nationwide commenced business in December. Operational initiatives also contributed, spanning service improvements via digital capabilities in claims and policy servicing, through to capability and proposition uplifts across our business lines. RSA will not chase unprofitable growth. We prize quality of customer relationship over quantity. But nevertheless, serving customers well remains at the heart of all we seek to achieve.
RSA's most important capability lies in our underwriting judgement. Across the Group multiple improvements continued in areas like portfolio discipline, data and model improvement, machine learning and skills enhancement. Attritional loss ratios improved in every business except the UK. Here our attritional results experienced significant setback, largely through Household 'escape of water' claims, which we expect to rectify for 2018/ 2019. The Group attritional loss ratio was slightly better than prior year as a result, not quite as good as hoped for although still substantially better than historically achieved.
Cost efficiency remains a critical performance lever. We have now achieved GBP395m annual gross savings and are able to raise our savings targets for a fourth time to over GBP450m by 2019. Digitisation, lean operations, site consolidation, enhanced purchasing, robotics, zero based budgeting - all the tools in modern corporate armouries to boost people productivity - are being deployed effectively across our regions.
Financial results 2017
Underlying earnings per share rose 10% to 43.5p. This produced a return on tangible equity(1) of 15.5% (2016: 14.2%), versus our target range of 13-17%.
At a statutory level, net profit before tax rose to GBP448m (2016: GBP91m) reflecting a lower level (though still significant) of restructuring charges. It remains our ambition that 2017 be the last year of such charges.
Premium income was up 4%, in line with our plan, featuring modest policy count increases together with price and FX benefits.
Underwriting profits posted a new record at GBP394m, up 4% versus our record year in 2016. The combined ratio of 94.0% was also a new record for RSA. Underlying pre-tax profits rose 12%, benefiting from resilient investment income and lower interest expense.
Excellent underwriting results were achieved in absolute and relative terms across many of our businesses. Scandinavia led the way with a combined ratio of 82.9%. Canada also improved, in a challenging market, to a combined ratio of 93.9%. Middle East had record results (COR 87.7%) and the Irish turnaround delivered its first profits since 2012 (COR 97.0%).
The disappointment was our UK business (including its European branches and London market Commercial Lines business). A COR of 102.0%(2) reflected three major loss items; GBP72m of losses from US/ Caribbean hurricanes and Mexican earthquakes (net of GVC recovery), elevated Household 'escape of water' inflation and significant adverse large loss volatility versus long-term averages. Underwriting action is well underway to improve results in 2018.
(1) Underlying measure, please refer to pages 30 to 36 for further information;
(2) Proforma for share of aggregate reinsurance recoveries and excludes the impact of the Ogden rate change
Reflecting RSA's overall progress in 2017, a final dividend of 13.0p per share is proposed, making 19.6p per share total for 2017, up 23%. This represents a 45% payout of underlying EPS (higher than 2016 but in line with stated policy). RSA's focused business strategy is designed to generate attractive levels of free cash flow, after meeting organic growth needs. With rising earnings targeted, no more restructuring costs and as bond pull-to-par impacts recede in coming years, RSA should have the potential for attractive further growth in shareholder distributions.
Looking forward
Our performance target of 13-17% return on tangible equity represents attractive shareholder return both relative to cost of capital and insurance industry norms. To the extent that RSA's underwriting performance progresses well towards our best-in-class combined ratio ambitions, even better returns are possible. We will try to achieve just that. For 2018, the key tasks are to re-establish respectable performance in our UK business whilst continuing underlying progress in our overseas markets where the majority of the Group trades.
Thanks
RSA made good progress with customers and for shareholders in 2017, despite significant external challenges. In achieving this, we owe thanks to all stakeholders for their support. But most particularly to my colleagues at RSA, who have embraced our best-in-class ambition so effectively, go my sincere thanks and appreciation.
Stephen Hester
Group Chief Executive
21 February 2018
MANAGEMENT REPORT
SEGMENTAL INCOME STATEMENT
Management basis - 12 months ended 31 December 2017
Hot Features
Premium
Scandinavia Canada UK & International Central Group Group
functions 2017 2016
GBPm GBPm GBPm GBPm GBPm GBPm
Net written premiums 1,833 1,619 3,199 27 6,678 6,408
Net earned premiums 1,836 1,591 3,196 (18) 6,605 6,528
Net incurred claims (1,197) (1,039) (2,199) 85 (4,350) (4,215)
Commissions (59) (212) (638) (2) (911) (941)
Operating expenses (265) (242) (441) (2) (950) (992)
Underwriting result
, 315 98 (82) 63 394 380
UK & International proforma(1)
, (16)
Investment income 102 66 163 - 331 369
Investment expenses (4) (2) (7) - (13) (12)
Unwind of discount (24) (3) (7) - (34) (59)
Investment result , 74 61 149 - 284 298
Central expenses - - - (15) (15) (23)
Operating result , 389 159 67 48 663 655
UK & International proforma(1)
, 133
Interest (43) (99)
Adjustment for Legacy
sale - (204)
Other non-operating
charges (172) (261)
Profit before tax 448 91
Tax (126) (71)
Profit after tax 322 20
Non-controlling interest (33) 7
Other equity costs(2) (20) (9) Net attributable profit , 269 18 Underlying profit before tax , 620 556 Loss ratio (%) 65.2 65.3 68.8 - 65.9 64.6 Weather loss ratio 0.1 3.7 4.8 - 2.6 2.5 Large loss ratio 5.7 7.7 15.5 - 10.8 8.9 Current year attritional loss ratio , 62.6 56.8 50.1 - 55.3 55.2 Prior year effect on loss ratio (3.2) (2.9) (1.6) - (2.8) (2.0) Commission ratio (%) 3.2 13.4 20.0 - 13.7 14.4 Expense ratio (%) 14.5 15.2 13.8 - 14.4 15.2 Combined ratio (%) , 82.9 93.9 102.6 - 94.0 94.2 UK & International proforma (%)(1) , 100.5 Earned controllable expense ratio (%) , 23.3 18.7 20.8 - 21.5 23.3
Notes:
UK & International comprises the UK (and European branches), Ireland and the Middle East
Please refer to appendix for 2016 comparatives
(1) Proforma for share of aggregate reinsurance recoveries and excludes the impact of the Ogden rate change; (2) Preference dividends of GBP9m and coupons of GBP11m paid on 2017 issued restricted tier 1 securities
Premiums
Group net written premiums of GBP6.7bn were up 6%(1) at reported FX and up 2%(1) at constant FX.
Foreign exchange provided a 4% benefit to premiums year-on-year, down from 8% for the first half of the year.
We have seen a strengthening of underlying customer activity as capability improvements take effect. Customer retention trends are improving and satisfaction levels remain good. Overall, Group retention improved to 80.2% (2016: 79.5%).
Our goal remains to serve customers well but profitably.
Regional trends for 2017 include:
-- Scandinavian premiums were up 7% at reported FX and up 0.3% at constant FX. Growth in Sweden and Norway was partly offset by a small contraction in Denmark. Personal Lines policy counts were up 1%, while Commercial Lines volumes (excluding rate) were down 3%
-- Canadian premiums were up 12% at reported FX and 5% at constant FX. The region reported the fourth quarter of consecutive growth in Q4, with Personal Lines policy counts up 3% and Commercial Lines volumes up 1%. There was good growth in our broker channel (policy count up 4% in Personal broker) and our direct channel, Johnson, also returned to organic growth in 2017
-- UK & International premiums were up 4% at reported FX and up 2% at constant FX. UK premiums were up 3%, with Personal up 7% (policy counts up 2%) and Commercial flat. Premiums in Ireland were down 7% at constant FX, while Middle East premiums were up 6%.
More detail is provided in the regional reviews on pages 14 to 19.
(1) Group excluding disposals for 2016
Underwriting result
Group underwriting profit of GBP394m was up 4% year-on-year:
Total UW result Current Year Prior Year
, UW , UW ,
GBPm 2017 2016 2017 2016 2017 2016
Scandinavia 315 239 255 213 60 26
Canada 98 74 56 6 42 68
UK & International(1) (16) 88 (60) 82 44 6
Central functions(1) (3) (9) (14) (28) 11 19
Total Group ex.
disposals 394 392 237 273 157 119
Disposals - (12) - (2) - (10)
Total Group 394 380 237 271 157 109
Current year profit was GBP237m (2016: GBP271m):
-- The Group attritional loss ratio of 55.3% was 0.1 point better than 2016(2) at constant FX. Scandinavia was 1.6 points better, while Canada was 1.0 point better. UK & International was 1.1 points higher than a year ago as improvements in UK Personal Motor, Ireland and the Middle East were offset by a higher attritional loss ratio in UK Household
-- Group weather costs were GBP168m or 2.6% of net earned premiums (2016: 2.6%(2) at constant FX; five year average: 3.2%(2) ). Three major US/ Caribbean hurricanes and Mexico earthquakes cost GBP72m net of reinsurance in 2017 (GBP115m gross). 2016 was also a year with natural catastrophe losses including the Alberta wildfires, UK & European floods and a US hurricane
-- Group large losses were GBP713m or 10.8% of net earned premiums (2016: 9.1%(2) at constant FX; five year average: 9.0%(2) ). This elevated large loss experience was driven by the UK and Canada. While substantial elements of this are volatile, underwriting interventions have also been made to target recovery in 2018 and beyond.
Group prior year profit was GBP157m, pleasingly higher than our planning assumption and providing a 2.8 point benefit (2016: 2.2(2) points at constant FX) to the Group combined ratio. This included positive development from each region.
The 2017 underwriting result included a GBP23m net charge (after release of 2016 margin build) relating to the change in Ogden discount rate in the UK. GBP20m related to our UK business and GBP3m to Northern Ireland. This also reflected the benefit of net settlement gains in H2 against H1 revised case reserves.
Our assessment of the margin in reserves for the Group (the difference between our actuarial indication and the booked reserves in the financial statements) returned to its target level of 5% of booked claims reserves.
Underwriting operating expenses
The Group underwriting expense ratio of 14.4% was 0.6 points better than a year ago at constant FX (2016: 15.0%(2) ). Pleasingly, all regions contributed with improvements of 0.3 points in Scandinavia, 1.4 points in Canada and 0.4 points in UK & International.
Commissions
The Group commission ratio in 2017 of 13.7% was flat(2) at constant exchange.
(1) Proforma for share of aggregate reinsurance recoveries and excludes the impact of the Ogden rate change, with the corresponding adjustment in Central functions; (2) Group excluding disposals for 2016
Investment result
The investment result was GBP284m (2016: GBP298m) with investment income of GBP331m (2016: GBP369m), investment expenses of GBP13m (2016: GBP12m) and the liability discount unwind of GBP34m (2016: GBP59m).
Investment income was down 10% on prior year, primarily reflecting the impact of the disposal of Latin America and the UK Legacy book, together with ongoing reinvestment at lower yields. The average book yield across our major bond portfolios was down slightly to 2.5% (2016: 2.6%).
Based on current forward bond yields and foreign exchange rates, it is estimated that investment income will be c.GBP285-310m for 2018, c.GBP275-300m for 2019 and c.GBP270-295m for 2020. The discount unwind is expected to be in the region of c.GBP30-35m per annum.
Total controllable costs
Our cost reduction programme has now delivered total gross cost reductions of GBP395m, compared to a 2018 target of more than GBP400m. We are raising our target for a fourth time to over GBP450m gross savings by the end of 2019.
Group written total controllable costs were down 6%(1) to GBP1,425m. This comprised 8% cost reductions, offset by 2% inflation. Canada delivered year-on-year 'real' cost reductions of 9%, Scandinavia delivered 5% and UK & International delivered 5%. The written controllable cost ratio was 21.3% (2016: 23.1%(1) ).
Group FTE(2) is down 23% (excluding disposals) since the start of 2014 to 12,636 at 31 December 2017. FTE decreased by 6% during the course of 2017.
The earned controllable expense ratio improved to 21.5% in 2017, with all regions contributing. It is now down 4.4 points since the start of 2014(1) , making good progress towards our ambition of an earned controllable expense ratio of less than 20%.
Earned controllable expense ratio: Scandinavia Canada UK & International Total , % % % % Year ended 31 December 2017 23.3 18.7 20.8 21.5 Year ended 31 December 2016(1) 24.3 20.7 22.0 23.0
Non-operating items
Interest costs:
-- Interest costs in 2017 were GBP43m (GBP54m including the new tier 1 issuance - see below), down from GBP99m in 2016. The reduction reflects debt restructuring actions over the past 12 months
-- In 2017, the Group issued c.GBP300m of restricted tier 1 notes in Scandinavia and retired GBP636m of existing high coupon debt. These actions supplemented the GBP200m debt retirement completed in July 2016
-- Coupon costs for the new Scandinavian issuance are reflected at the bottom of the management P&L as 'other equity costs', as per accounting rules. The cost for the year was GBP11m, with an annualised interest cost for this instrument of GBP14m.
(1) Group excluding disposals for 2016 (and prior years where relevant) and at constant FX
(2) Full time equivalent employees
Other non-operating charges:
GBPm 2017 2016 Net gains/ losses/ FX 47 (194) Debt buyback premium (59) (39) Restructuring costs (155) (168) Amortisation (15) (16) Pension net interest cost (7) (4) Goodwill/ intangible asset write-backs/ (downs) 17 (30) Other - (14) Total , (172) (465)
-- Net gains of GBP47m in 2017 include a GBP66m gain relating to the UK Legacy disposal (mainly mark-to-market of the assets transferred to the buyer); a GBP22m charge relating to the commutation of the Group's adverse development reinsurance cover, both as previously noted in 2016; and a GBP23m software impairment charge relating to the UK, Scandinavia and Ireland
-- 2017 included a charge of GBP59m relating to the premium paid on the debt buybacks completed during the first half of the year
-- Restructuring costs were GBP155m in 2017. These costs are c.GBP50m higher than originally planned; however, they have enabled a fourth increase in our cost savings target to over GBP450m by the end of 2019. It remains our ambition that 2017 will be the last year of 'below the line' restructuring charges. Total 'cost to achieve' these savings will have been c.1.3x the annual savings target, improved from the 1.5x originally expected
-- The goodwill write-back of GBP17m in 2017 reflects the re-measurement of the fair value of the Oman business following its IPO process during the year.
Tax
The Group reported a tax charge of GBP126m for 2017, giving an effective tax rate (ETR) of 28% (2016: 78%). The Group underlying tax rate was 22.1% (2016: 24%).
The tax charge of GBP126m largely comprises tax payable on Scandinavian and Canadian profits as well as Canadian dividend withholding tax of GBP28m. The Canadian dividend withholding tax includes GBP23m attributable to a one-off dividend in connection with an internal debt reorganisation. Excluding this one-off dividend withholding tax the group ETR would be 23%.
The carrying value of the Group's net deferred tax asset at 31 December 2017 was GBP220m (2016: GBP216m), of which GBP217m (2016: GBP212m) is in the UK. At current tax rates, a further c.GBP229m (2016: GBP183m) of deferred tax assets remain available for use but not recognised on balance sheet; these are predominantly in the UK and Ireland.
In 2018, we would expect the Group's ETR and underlying tax rate to continue to trend towards 20% given the scale of the unrecognised UK tax assets.
Dividend
We are pleased to declare a final dividend of 13.0p per ordinary share (2016: 11.0p). Together with the interim dividend of 6.6p, this brings the total dividend for the year to 19.6p (up 23%), representing a 45% payout of underlying EPS. Our medium term policy of ordinary dividend payouts of between 40-50% of earnings remains, with additional distributions where justified.
(1) Foreign currency translation reserve
BALANCE SHEET
Movement in Net Assets
Share-holders' Non- Equity
funds(1) controlling Tier Total Loan &
interests 1 notes equity capital loan TNAV
capital ,
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Balance at 1 January
2017 3,715 132 - 3,847 1,068 4,915 2,862
Profit after tax 289 33 - 322 - 322 385
Foreign exchange losses
net of tax (22) (14) - (36) - (36) (22)
Fair value losses net
of tax (194) (1) - (195) - (195) (194)
Pension fund gains net
of tax 44 - - 44 - 44 44
Repayment & amortisation
of loan capital - - - - (627) (627) -
Issue of tier 1 notes - - 297 297 - 297 -
Share issue 4 - - 4 - 4 4
Share based payments 16 - - 16 - 16 16
Prior year final dividend (112) (10) - (122) - (122) (112)
Interim dividend (68) - - (68) - (68) (68)
Other equity costs(2) (20) - - (20) - (20) (20)
Changes in interests
in subsidiaries 1 12 - 13 - 13 1
Goodwill and intangible
additions - - - - - - (131)
Balance at 31 December
2017 3,653 152 297 4,102 441 4,543 2,765
Per share (pence) ,
At 1 January 2017 352 281
At 31 December 2017 345 270
Tangible net assets remained broadly constant at GBP2.8bn at 31 December 2017.
Profit after tax of GBP385m was offset by negative fair value mark-to-market movements of GBP194m, mainly reflecting a reduction in the bond unrealised gains reserve. This was driven by the bond pull-to-par effect and the realisation of gains on the transfer of the Legacy assets. Payment of the 2016 final and 2017 interim dividends (totalling GBP180m) also reduced tangible net assets, together with investment of GBP131m in intangible assets, primarily IT related (net investment of GBP37m after amortisation shown as part of profit).
The IAS 19 pension valuation generated a gain of GBP44m. The annual update to mortality tables more than offset negative movements, including narrower 'AA' corporate bond spreads (see page 24 for further detail).
(1) Ordinary shareholders' funds including preference share capital of GBP125m
(2) Includes preference dividends of GBP9m and coupons of GBP11m paid on 2017 issued restricted tier 1 securities
CAPITAL POSITION
Solvency II position(1) Requirement Eligible Surplus Coverage
: (SCR) Own Funds
GBPbn GBPbn GBPbn %
31 December 2017 1.8 2.9 1.1 163%
31 December 2016 1.8 2.9 1.1 158%
The Solvency II coverage ratio(1) increased to 163% during 2017 (31 December 2016: 158%):
%
At 1 January 2017 158
Recurring:
Underlying capital generation 25
IAS 19 movements, including annual update to mortality
tables 4
Market movements excluding IAS 19, partly due to a
slight weakening of Sterling 2
Net capital investment after amortisation (2)
Pull-to-par on unrealised bond gains (9)
2017 dividends (11)
Non-recurring:
Disposal of UK Legacy liabilities 18
Ogden rate change (3)
Debt restructuring actions (10)
Restructuring costs and other non-operating items (9)
At 31 December 2017 163
Please refer to Appendix (page 23) for further Solvency II details (including sensitivities).
OUTLOOK
RSA's goal for 2018 is to set new record levels of performance for shareholders and to serve customers well, whilst continuing to move business capabilities forward consistent with our best-in-class ambitions.
We expect markets to remain competitive, showing modest growth overall. Our priority is to maintain underwriting discipline and to improve areas of 2017 underwriting disappointment. Nevertheless, we target positive premium growth in aggregate.
We aim to make further gains in attritional loss ratios and in cost efficiency. Weather and large loss ratios are hard to predict, although bounded by reinsurance protection consistent with prior years. However, we do expect to see improved large loss performance compared with 2017.
Investment income (pre discount unwind) is expected to be c.GBP285-310m for 2018 subject to market movements. Interest costs should be c.GBP25m with a further c.GBP14m in coupons paid on restricted tier 1 securities which is recognised directly in equity. We target 2018 to be clear of 'below the line' restructuring costs.
(1) The Solvency II capital position at 31 December 2017 is estimated
REGIONAL REVIEW - SCANDINAVIA
Management basis
Net written Change Underwriting
premiums result
2017 2016 RFX CFX 2017 2016
GBPm GBPm % % GBPm GBPm
Split by
country
Sweden 1,055 990 7 1 259 174
Denmark 623 588 6 (1) 61 63
Norway 155 143 8 2 (5) 2
Total
Scandinavia 1,833 1,721 7 - 315 239
Split by
class
Household 362 336 8 1
Personal
Motor 353 332 6 1
Personal
Accident
& Other 339 313 8 2
Total
Scandinavia
Personal 1,054 981 7 1 240 175
Policy count
change 1 1
Property 327 295 11 4
Liability 147 151 (3) (9)
Commercial
Motor 214 202 6 -
Other 91 92 (1) (6)
Total
Scandinavia
Commercial 779 740 5 (1) 75 64
Volume change (3) (3)
Total
Scandinavia 1,833 1,721 7 - 315 239
Investment
result 74 72
Scandinavia
operating
result 389 311
Operating Claims Commission Expenses Combined
ratios
(%)
2017 2016 2017 2016 2017 2016 2017 2016
Scandinavia
Personal 61.2 66.9 3.1 2.9 12.7 12.2 77.0 82.0
Scandinavia
Commercial 70.5 69.5 3.4 4.1 16.7 18.0 90.6 91.6
Total
Scandinavia 65.2 68.0 3.2 3.4 14.5 14.8 82.9 86.2
Earned
controllable
expense
ratio 23.3 24.2
Claims ratio: 5 year
average
Weather loss
ratio 0.1 0.4 1.0
Large loss
ratio 5.7 5.0 5.7
Current year
attritional
loss ratio 62.6 64.2
Prior year
effect
on loss
ratio (3.2) (1.6)
SCANDINAVIA
Scandinavia delivered operating profit of GBP389m, up 25%. Driving this was an excellent underwriting profit performance of GBP315m in 2017, up 24% (at constant FX). The combined ratio (82.9%) was within our < 85% best-in-class ambition for the first time on record. Current and prior year profitability were strong, at GBP255m and GBP60m respectively.
Net written premiums of GBP1,833m were up 7% at reported FX and up 0.3% at constant FX (2016: GBP1,721m). A number of premium related key performance indicators are showing positive signs. In Sweden, Personal Lines policies-in-force ('PIFs') grew steadily in 2017, with Q4 1.5% higher than Q4 in 2016. Commercial Lines new business in Q4 was 22% higher than the same quarter last year. While Denmark Personal Lines PIFs contracted between 2012 and 2016, this trend flattened in 2017. Commercial Lines returned to growth this year excepting the more volatile Construction, Power & Engineering business.
We continue to make good progress with our customer agenda. Improvement initiatives included the launch of a 'chat bot' service in Sweden and a new customer claims service portal in Denmark. Overall retention was in line with 2016 at 78%, Personal Lines retention improved but was offset by a decrease in Commercial Lines.
The current year attritional loss ratio of 62.6% was 1.6 points better than 2016 reflecting underwriting discipline, ongoing capability improvements and lower claims handling costs. Benign weather experience (0.3 points better than last year) was offset by adverse large loss experience (0.7 points higher than last year but in line with the 5 year average of 5.7%). The prior year effect on the loss ratio was particularly positive, producing a benefit of 3.2% (2016: 1.6%).
The Scandinavian performance improvement programme has continued to deliver well, with particular focus on operational efficiency; for example, process redesign, robotics and automation. We have also pursued further site consolidation and IT cost reduction, and we launched a BPO programme for certain operational and support activities in Q4 of 2017.
Total written controllable expenses were down 3% year-on-year(1) , with 5% cost reductions absorbing 2% inflation. The earned controllable cost ratio of 23.3% showed a 0.9 point reduction year-on-year. Staff related costs reduced by 8%(1) in 2017 with headcount down 9% in the year and down 23% since the end of 2013.
Geographically, Sweden generated an underwriting profit of GBP259m (2016: GBP184m(1) ) and a combined ratio of 75.3% (2016: 82.2%(1) ). While the current year combined ratio improved by 2.2 points (3%), favourable prior year development contributed 4.7 points year-on-year, partly reflecting more benign Motor account development. Denmark produced a combined ratio of 90.3%; while this was 0.6 points higher than 2016, the current year combined ratio improved by 1.7 points.
Inclusive of an investment result of GBP74m (2016: GBP72m), the region's total operating profit of GBP389m (2016: GBP311m) was up by a pleasing 25%.
Scandinavia - Outlook
We continue to expect Scandinavian P&C markets to grow in line with local GDP and we target medium-term growth broadly in line with the market, subject to maintaining underwriting discipline.
Our focus remains on continued sustainable improvement in the underlying performance of the business, particularly relating to customer volumes, attritional loss ratios and costs. While our 2017 result is within the target combined ratio of < 85%, we see scope for further progress in the sustainability and composition of the result.
(1) At constant FX
REGIONAL REVIEW - CANADA
Management basis
Net written Change Underwriting
premiums result
2017 2016 RFX CFX 2017 2016
GBPm GBPm % % GBPm GBPm
Household 498 445 12 4
Personal Motor 622 549 13 6
Total Canada Personal 1,120 994 13 5 75 91
Policy count change 3 3
Property 218 194 12 5
Liability 109 102 7 -
Commercial Motor 119 102 17 9
Marine & Other 53 51 4 (2)
Total Canada Commercial 499 449 11 4 23 (17)
Volume change 1 1
Total Canada 1,619 1,443 12 5 98 74
Investment result 61 66
Canada operating
result 159 140
Operating ratios
(%) Claims Commission Expenses Combined
2017 2016 2017 2016 2017 2016 2017 2016
Canada Personal 67.1 64.0 11.2 11.0 14.9 16.0 93.2 91.0
Canada Commercial 61.3 67.9 18.3 18.0 15.8 17.9 95.4 103.8
Total Canada 65.3 65.2 13.4 13.1 15.2 16.6 93.9 94.9
Earned controllable
expense ratio 18.7 20.7
5 year
Claims ratio: average
Weather loss ratio 3.7 5.7 5.0
Large loss ratio 7.7 6.4 5.1
Current year attritional
loss ratio 56.8 57.8
Prior year effect
on loss ratio (2.9) (4.7)
CANADA
In 2017, Canada increased operating profit by 14% to GBP159m (2016: GBP140m). Underwriting profit also rose 32% (to GBP98m), despite higher large losses and lower prior year releases than a year ago. The combined ratio improved to within our best-in-class ambition of < 94% and seems likely to compare favourably with local competitors.
Net written premiums of GBP1,619m were up 12% at reported FX and 5% at constant FX (2016: GBP1,443m as reported). Growth was particularly strong in the broker channel, with Personal broker up 10% (policy count up 4%) and Commercial broker up 4%, both at constant FX. Johnson, our direct business, also returned to growth in the year (policy count up 2%).
We continue to work hard to enhance our customer offering. In Johnson, we have made strong progress in digital capabilities while customer NPS scores have continued to improve and outperform benchmarks. In our broker distributed businesses, faster response times and new digital tools enable brokers to service their clients anywhere, anytime, reducing the time to quote from hours to minutes. Customer retention has improved to 85.8% from 84.3% a year ago with Personal Lines up 1.7 points and Commercial Lines up 0.9 points.
The business generated an underwriting profit of GBP98m (2016: GBP74m), with a current year profit of GBP56m and a prior year profit of GBP42m. The current year attritional loss ratio of 56.8% was 1 point lower than a year ago, reflecting both rating action and our investments in pricing sophistication. Weather experience was 2 points favourable to 2016, noting that the prior year included 2.9 points for the Fort McMurray wildfire losses. Large loss experience was elevated at 7.7%, compared to 6.4% in 2016 and a five year average of 5.1%. Prior year reserve releases, while positive at 2.9%, were lower than last year (2016: 4.7%). Overall, the combined ratio was 93.9% (2016: 94.9%).
Our business improvement programme in Canada progressed well, delivering further enhancements to pricing sophistication, process simplification and site consolidation, while the implementation of the Guidewire claims system is proceeding as planned.
Total written controllable expenses were down 7% year-on-year, with 9% cost reductions offset by 2% inflation. The earned controllable cost ratio of 18.7% showed a creditable 2.0 point reduction during 2017. Headcount was down 5% in the year and is now down 21% since the end of 2013.
Canada - Outlook
We target a continuation of the positive premium and underwriting trends that we have seen in 2017. Sustaining a combined ratio of < 94% will remain a priority and we believe that there is scope for further performance improvements from here.
Risks to performance include volatility in weather and large losses. We are working hard to drive large loss ratios back towards long term averages, recognising trends early and taking any underwriting and/ or pricing action required. The Canadian Motor market remains challenging and we continue to lobby through industry associations for product reform.
REGIONAL REVIEW - UK & INTERNATIONAL
Management basis
Underwriting
Net written premiums Change result
2017 2016 RFX CFX 2017 2016
GBPm GBPm % % GBPm GBPm
Household 559 555 1 1
Personal Motor 303 235 29 29
Pet 282 278 1 1
Total UK
Personal 1,144 1,068 7 7 10 48
Policy count
change 2 2
Property 676 642 5 4
Liability 294 300 (2) (2)
Commercial
Motor 226 262 (14) (14)
Marine & Other 348 316 10 6
Total UK
Commercial 1,544 1,520 2 - (126) 75
Volume change 1 1
Total UK 2,688 2,588 4 3 (116) 123
UK proforma(1) (53)
Ireland 303 306 (1) (7) 9 (49)
Middle East 208 187 11 6 25 14
Total UK &
International 3,199 3,081 4 2 (82) 88
UK &
International
proforma(1) (16)
Investment
result 149 149
UK & International operating
result 67 237
UK &
International
proforma(1) 133
Operating Claims Commission Expenses Combined
ratios
(%)
2017 2016 2017 2016 2017 2016 2017 2016
Total UK
Personal 62.7 57.8 20.3 21.2 16.2 16.7 99.2 95.7
Total UK
Commercial 75.3 61.8 21.7 21.1 11.1 12.3 108.1 95.2
Total UK 70.0 60.2 21.1 21.2 13.2 14.0 104.3 95.4
UK proforma(1) 102.0
Ireland 71.8 91.6 11.7 12.2 13.5 12.4 97.0 116.2
Middle East 48.5 56.8 17.3 16.6 21.9 19.4 87.7 92.8
UK &
International 68.8 63.0 20.0 20.0 13.8 14.2 102.6 97.2
UK &
International
proforma(1) 100.5
Earned
controllable
expense ratio 20.8 22.1
5 year
Claims ratio: average
Weather loss
ratio 4.8 2.7 4.0
Large loss
ratio 15.5 12.1 12.4
Current year
attritional
loss ratio 50.1 49.0
Prior year
effect
on loss ratio (1.6) (0.8)
(1) Proforma for net aggregate reinsurance recovery and excludes the impact of the Ogden rate change
UK & INTERNATIONAL
The UK & International business segment delivered operating profit of GBP133m(1) , down 44%. Driving this result was a disappointing combined ratio of 100.5%(1) (2016: 97.2%).
UK
The UK business result (includes European branches and 'London market' international business lines) suffered from a number of material market events in 2017. This was reflected in a combined ratio of 102.0%(1) (2016: 95.4%). Underwriting losses include the impact of adverse weather events (US/ Caribbean hurricanes and Mexico earthquakes) amounting to GBP72m (net of GVC recovery), adverse large loss volatility and higher Household claims inflation.
Despite this accumulation of adverse market conditions, the underlying UK business continues to make progress. Net written premiums increased by 3% at constant exchange. UK Personal growth of 7% (policy count up 2%) was underpinned by continued growth in our Motor telematics proposition. UK Commercial net written premiums were flat at constant FX in a competitive market. Targeted growth in our Marine and Property portfolios was offset by shrinkage in Commercial Motor resulting from strong underwriting actions.
In December, we successfully launched our new distribution partnership with Nationwide Building Society as well as signing/ renewing a number of other important long term distribution relationships. Our transformation agenda continues to deliver benefits with increased process simplification and enhanced data analytics capabilities. Intense pricing response and underwriting remediation of the issues that hit 2017 is already well advanced.
Total written controllable expenses were down 3% on a like-for-like basis. Real cost reductions of 6% were offset by 3% inflation. The earned controllable cost ratio of 20.3% improved 1.6 points year-on-year. Headcount was down 8% in the 2017 and is now down 24% since the end of 2013.
Ireland
Ireland returned to underwriting profit delivering a profit of GBP9.5m and combined ratio of 97.0% (or 96.2% excluding Ogden), underpinned by disciplined underwriting actions. The attritional loss ratio of 60.4% was 5.8 points better than prior year. The result also absorbed a GBP2.5m cost due to the Ogden discount rate change. Net written premiums of GBP303m were down 7% at constant FX versus 2016 following targeted remediation activity.
Middle East
The Middle East delivered an underwriting result of GBP25m (2016: GBP14m) and a record combined ratio of 87.7% (2016: 92.8%) driven by a 5.0 point improvement in the attritional loss ratio. Net written premiums of GBP208m were up 6% at constant FX despite challenging economic conditions.
UK & International - Outlook
We expect underlying premium trends to continue into 2018 and weather and large losses to return towards long term levels. Attritional loss ratio weakness of 2017 will not fully correct in 2018 as remedial pricing actions take time to earn through. Our plans target further underwriting improvements, cost reductions and capability uplifts.
In Ireland, we aim to improve profit levels through underwriting and cost actions. In the Middle East, the medium term outlook remains positive and work is underway to further develop capabilities, including underwriting and pricing sophistication. For the UK & International business as a whole, we retain the performance ambition of < 94% combined ratio, although we do not expect to reach this level in 2018.
(1) Proforma for net aggregate reinsurance recovery and excludes the impact of the Ogden rate change
INVESTMENT PERFORMANCE
Management basis
Investment result 2017 2016 Change
GBPm GBPm %
Bonds 262 300 (13)
Equities 32 28 14
Cash and cash equivalents 5 10 (50)
Property 21 23 (9)
Other 11 8 38
Investment income 331 369 (10)
Investment expenses (13) (12) (8)
Unwind of discount (34) (59) 42
Investment result 284 298 (5)
Balance sheet unrealised gains (pre-tax) 31 Dec 31 Dec Change
2017 (GBPm) 2016 (GBPm) %
Bonds 397 619 (36)
Equities 30 8 275
Other 1 2 (50)
Total 428 629 (32)
Investment portfolio Value Foreign Mark to Other Transfer Value
31 Dec exchange market movements from assets 31 Dec
2016 held for 2017
sale
GBPm GBPm GBPm GBPm GBPm GBPm
Government bonds 3,713 6 (76) 207 - 3,850
Non-Government
bonds 7,832 14 (109) (1,014) 87 6,810
Cash 985 (11) - 76 (2) 1,048
Equities 170 7 8 57 - 242
Property 333 - 1 (26) - 308
Prefs & CIVs 522 (5) 17 (12) - 522
Other 88 (2) 4 129 - 219
Total 13,643 9 (155) (583) 85 12,999
Split by currency:
Sterling 3,994 3,468
Danish Krone 1,081 1,096
Swedish Krona 2,565 2,588
Canadian Dollar 3,232 3,079
Euro 1,345 1,443
Other 1,426 1,325
Total 13,643 12,999
Credit quality - bond Non-government Government
portfolio
31 Dec 31 Dec 30 Dec 31 Dec
2017 2016 2017 2016
% % % %
AAA 42 35 66 65
AA 15 22 30 30
A 30 30 4 4
BBB 11 11 - 1
< BBB 2 2 - -
Non-rated - - - -
Total 100 100 100 100
INVESTMENT PERFORMANCE
Investment income of GBP331m (2016: GBP369m) was offset by investment expenses of GBP13m (2016: GBP12m) and the liability discount unwind of GBP34m (2016: GBP59m). Investment income was down 10% on prior year, primarily reflecting the impact of the UK Legacy business disposal, together with ongoing reinvestment at lower yields.
The average book yield for 2017 on the total portfolio was 2.5% (2016: 2.6%), with an average yield on the bond portfolios of 2.4% (2016: 2.5%). Reinvestment rates in the Group's major bond portfolios were approximately 1.4%.
At 31 December 2017, the average duration of the Group's bond portfolios of 3.8 years was marginally higher than at the prior year end (31 December 2016: 3.6 years).
The investment portfolio decreased by 5% during the year to GBP13.0bn. The movement was driven primarily by cash outflows for corporate debt restructuring and negative mark-to-market unwind on bond holdings.
At 31 December 2017, high quality widely diversified fixed income securities represented 82% of the portfolio (31 December 2016: 85%). Equities (largely REITs) represented 2% (31 December 2016: 1%) and cash was 8% of the total portfolio (31 December 2016: 7%).
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
At year-end, balance sheet unrealised gains of GBP428m (pre-tax) had reduced by GBP201m or 32% during 2017, driven by realised gains from the UK Legacy disposal, negative mark-to-market on bond holdings due to yield movements and bond pull-to-par.
Based on year-end forward yields, we anticipate that unrealised gains on the AFS bond portfolio should largely unwind over the next 3 years, with c.GBP150m expected to unwind in 2018. The capital impact of this amount is under GBP100m, the balance being projected yield change. The capital impact from pull-to-par is expected to fall sharply in 2019 and 2020 based on current market forward yield curves, which have improved further (risen) since year-end.
Outlook
Based on forward bond yields and foreign exchange rates, it is estimated that investment income will be higher than previously guided, namely c.GBP285-310m for 2018, c.GBP275-300m for 2019 and c.GBP270-295m for 2020. These projected income numbers are, however, sensitive to changes in market conditions. We continue to expect a discount unwind on long-tail liabilities of c.GBP30-35m per annum.
APPIX 1
Further information
DISPOSALS
2016 net written premiums of GBP6,408m included GBP127m in respect of businesses now disposed (Latin America and Russia). The underwriting profit of GBP380m for the same period included a loss of GBP12m in respect of these disposed businesses. See page 26 for further detail.
CAPITAL
Solvency II sensitivities
2017 coverage ratio 163% Sensitivities (change in coverage Including Excluding ratio): pensions pensions Interest rates: +1% non-parallel(1) shift +11% +6% Interest rates: -1% non-parallel(1) shift -10% -7% Equities: -15% -8% -2% Property: -10% -3% -2% Foreign exchange: GBP +10% vs all currencies -3% -4% Cat loss of GBP75m net -4% -4% Credit spreads: +0.25%(2) parallel shift +4% -2% Credit spreads: -0.25% parallel shift -14% +3%
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 2017
GBPbn
Shareholders' funds (including
preference shares) 3.9
Loan capital 0.5
Non-controlling interests 0.1
Total IFRS capital 4.5
Less: goodwill & intangibles (0.8)
Adjust technical provisions
to Solvency II basis (0.3)
Basic Own Funds 3.4
Tiering & availability restrictions (0.4)
Foreseeable dividends (0.1)
Eligible Own Funds 2.9
(1) The interest rate sensitivity assumes a non-parallel shift in the yield curve to reflect that the long end of the yield curve is typically more stable than the short end; (2) The IAS 19 surplus cap will dampen upside credit spread sensitivities, so these should not be extrapolated
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 2017 to 31 December 2017:
UK non-UK Group
GBPm GBPm GBPm
Net pension fund deficit at 1 January
2017 (113) (84) (197)
Actuarial gains(1) 66 10 76
Increase in tax charge on UK surplus (32) - (32)
Deficit funding 55 4 59
Other movements(2) 1 5 6
Pension fund surplus/(deficit) at
31 December 2017 (23) (65) (88)
At an aggregate level, the pension fund position under IAS 19 improved during the year from a GBP197m deficit at 1 January 2017 to a deficit of GBP88m at 31 December 2017 (net of tax).
The UK position improved by GBP90m during the year, driven by deficit funding contributions (GBP65m pre-tax) and actuarial gains (primarily due to updated views of life expectancy). Gains were partially offset by actual pension increases being higher than expected.
The UK defined benefit schemes closed to future accrual on 31 March 2017 and, where applicable, the stated accounting position of those schemes has been reduced for the tax cost of an authorised return of surplus.
The non-UK schemes' deficit improved by GBP19m during the year, due largely to a combination of favourable membership experience and positive asset performance.
IAS 19 sensitivities on UK schemes
Assets Liabilities
IAS 19 position at 31 December 2017
(GBPbn) 8.3 (8.3)
Sensitivities (GBPbn change in assets/
liabilities)(3) :
Interest rates: -1%(4) +1.7 +1.7
Inflation: +1%(4) +1.0 +0.9
Equities: -0.1 -
-15%(5)
'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, interest costs and settlement gains/ (losses)
(3) Sensitivities are rounded to the nearest GBP0.1bn; for example, the net interest rate stress as modelled is circa GBP60m adverse
(4) Actual net sensitivity to changes in interest rates and breakeven inflation will vary depending on size and direction of stress and is also highly dependent on the level of credit spreads at any point in time
(5) Includes 15% reduction in equities and 10% reduction in all other 'growth' assets
REINSURANCE
Updates to our reinsurance programme for 2018 are outlined below.
The 3 year Group aggregate reinsurance cover that commenced in 2015 has been renewed until the end of 2020. The key terms of the new 3 year deal are as follows:
-- Cover protects all of our short tail business including Property, Marine and Construction/ Engineering
-- Events or individual net losses of GBP10m or greater are added together across our financial year. When a loss exceeds GBP10m it is included in full
-- Cover attaches when the total of these retained losses is greater than GBP170m -- Limit of cover is GBP150m per year, with GBP300m maximum over the 3 year period -- Counterparties are high credit quality reinsurers (45% AA- or better, 46% A- or better, 9% collateralised).
Retentions for our UK and Ireland Motor programme have been reduced to GBP1m and EUR1m respectively (GBP3m and EUR3m respectively in 2017).
Outside of these, our key retentions remain unchanged at GBP75m for UK Cat; GBP50m for non-UK Cat (Canada/ US/ Caribbean C$75m); maximum of GBP50m for Property Risk.
SEGMENTAL ANALYSIS
Management basis - 12 months ended 31 December 2016
Scandinavia Canada UK & International Central Core Disposals(1) Group
functions Group 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 (99)
Legacy sale (204)
Other non-operating
charges (261)
Profit before tax 91
Tax (71)
Profit after tax 20
Underlying profit before
tax , 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
Earned controllable
expense ratio (%) , 24.2 20.7 22.1 - 23.0 23.3
(1) Disposals comprise Latin America and Russia, both completed during 2016
COMBINED RATIO DETAIL
Group
GBPm unless stated Current Prior 2017 Current Prior 2016
year year total year year total
Net written premiums 1 6,659 7 19 13 6,678 6,438 (30) 6,408
Net earned premiums 2 6,590 8 15 14 6,605 6,542 (14) 6,528
Net incurred claims 3 (4,523) 9 173 15 (4,350) (4,354) 139 (4,215)
Commissions 4 (883) 10 (28) 16 (911) (929) (12) (941)
Operating expenses 5 (947) 11 (3) 17 (950) (988) (4) (992)
Underwriting result
, 6 237 12 157 18 394 271 109 380
CY attritional claims 19 (3,642) (3,605)
Weather claims 20 (168) (166)
Large losses 21 (713) (583)
Net incurred claims 22 (4,523) (4,354)
=15 /
Loss ratio (%) 14 23 65.9 64.6
=20 /
Weather loss ratio 2 24 2.6 2.5
=21 /
Large loss ratio 2 25 10.8 8.9
Current year attritional =19 /
loss ratio , 2 26 55.3 55.2
=23 -
Prior year effect 24 - 25
on loss ratio - 26 27 (2.8) (2.0)
Commission ratio =16 /
(%) 14 28 13.7 14.4
=17 /
Expense ratio (%) 14 29 14.4 15.2
Combined ratio (%) =23 +
, 28 + 29 30 94.0 94.2
Scandinavia
GBPm unless stated Current Prior 2017 Current Prior 2016
year year total year year total
Net written premiums 1,837 (4) 1,833 1,721 - 1,721
Net earned premiums 1,837 (1) 1,836 1,735 - 1,735
Net incurred claims (1,258) 61 (1,197) (1,207) 26 (1,181)
Commissions (59) - (59) (60) - (60)
Operating expenses (265) - (265) (255) - (255)
Underwriting result 255 60 315 213 26 239
CY attritional claims (1,151) (1,114)
Weather claims (1) (6)
Large losses (106) (87)
Net incurred claims (1,258) (1,207)
Loss ratio (%) 65.2 68.0
Weather loss ratio 0.1 0.4
Large loss ratio 5.7 5.0
Current year attritional
loss ratio 62.6 64.2
Prior year effect
on loss ratio (3.2) (1.6)
Commission ratio
(%) 3.2 3.4
Expense ratio (%) 14.5 14.8
Combined ratio (%) 82.9 86.2
COMBINED RATIO DETAIL
Canada
GBPm unless stated Current Prior 2017 Current Prior 2016
Year year total year year total
Net written premiums 1,619 - 1,619 1,447 (4) 1,443
Net earned premiums 1,591 - 1,591 1,458 (4) 1,454
Net incurred claims (1,084) 45 (1,039) (1,018) 70 (948)
Commissions (212) - (212) (196) 5 (191)
Operating expenses (239) (3) (242) (238) (3) (241)
Underwriting result 56 42 98 6 68 74
CY attritional claims (904) (842)
Weather claims (58) (83)
Large losses (122) (93)
Net incurred claims (1,084) (1,018)
Loss ratio (%) 65.3 65.2
Weather loss ratio 3.7 5.7
Large loss ratio 7.7 6.4
Current year attritional
loss ratio 56.8 57.8
Prior year effect
on loss ratio (2.9) (4.7)
Commission ratio
(%) 13.4 13.1
Expense ratio (%) 15.2 16.6
Combined ratio (%) 93.9 94.9
Total UK&I
GBPm unless stated Current Prior 2017 Current Prior 2016
year year total year year total
Net written premiums 3,175 24 3,199 3,072 9 3,081
Net earned premiums 3,179 17 3,196 3,176 (3) 3,173
Net incurred claims (2,238) 39 (2,199) (2,026) 28 (1,998)
Commissions (610) (28) (638) (618) (18) (636)
Operating expenses (441) - (441) (450) (1) (451)
Underwriting result (110) 28 (82) 82 6 88
UK & International
proforma(1) (16)
CY attritional claims (1,593) (1,554)
Weather claims (153) (87)
Large losses (492) (385)
Net incurred claims (2,238) (2,026)
Loss ratio (%) 68.8 63.0
Weather loss ratio 4.8 2.7
Large loss ratio 15.5 12.1
Current year attritional
loss ratio 50.1 49.0
Prior year effect
on loss ratio (1.6) (0.8)
Commission ratio
(%) 20.0 20.0
Expense ratio (%) 13.8 14.2
Combined ratio (%) 102.6 97.2
UK & International
proforma(1) 100.5
(1) Proforma for net aggregate reinsurance recovery and excludes the impact of the Ogden rate change
APPIX 1I
Alternative Performance Measures
JARGON BUSTER & ALTERNATIVE PERFORMANCE MEASURES
Set out below are explanations of the key technical terms and alternative performance measures (APMs) used within this report. APMs are complementary to measures defined within International Financial Reporting Standards (IFRS) and are used by management to explain the Group's business performance and financial position. They include common insurance industry metrics, as well as measures management and the Board consider are more representative of its underlying trading performance and that provide more meaningful comparisons between periods and business segments. APMs are identifiable within Group tables by the symbol ,, and those used to determine management and executive remuneration are identified below with ,*. A reconciliation of APMs to their nearest IFRS Income Statement equivalents, detailing the adjustments made, can be found below.
Term Definition APM Reconciliation
============================ ============================================= ==== =================
Affinity Selling insurance through a partner's
distribution network, usually to
a group of similar customers, e.g.
store-card holders, alumni groups,
unions and utility company customers.
============================ ============================================= ==== ===== ==========
Attritional Loss Ratio This is the underlying loss ratio , 1 R
(net incurred claims and claims
handling expense as a proportion
of net earned premium) of our business
prior to volatile impacts from weather,
large losses and prior-year reserve
developments.
============================ ============================================= ==== ===== ==========
Claims Frequency Average number of claims per policy
over the year.
============================ ============================================= ==== ===== ==========
Claims Handling Expenses The administrative cost of processing
a claim (such as salary costs, costs
of running claims centres, allocated
share of the costs of head office
units) which are separate to the
cost of settling the claim itself
with the policyholder.
============================ ============================================= ==== ===== ==========
Claims Ratio (Loss Percentage of net earned premiums , 1 V
Ratio) that is paid out in claims and claims
handling expenses.
============================ ============================================= ==== ===== ==========
Claims Reserve (Provision A provision established to cover
for Losses and Loss the estimated cost of claims payments
Adjustment Expenses) and claims handling expenses that
are still to be settled and incurred
in respect of insurance cover provided
to policyholders up to the reporting
date.
============================ ============================================= ==== ===== ==========
Claims Severity Average cost of claims incurred
over the period.
============================ ============================================= ==== ===== ==========
Combined Operating A measure of underwriting performance ,* 1 Y
Ratio (COR) 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
============================ ============================================= ==== ===== ==========
Commission An amount paid to an intermediary
such as a broker for introducing
business to the Group.
============================ ============================================= ==== ===== ==========
Constant Exchange (CFX) Prior period comparative retranslated , 4 N/a
at current period exchange rates.
============================ ============================================= ==== ===== ==========
Controllable Costs A measure of operating expenses ,* 5 N/a
/ Expenses incurred by the Group in undertaking
business activities, predominantly
underwriting and policy acquisition
costs, excluding commission and
premium related costs such as levies.
They are adjusted to include claims
handling costs that are reported
within net claims incurred.
============================ ============================================= ==== ===== ==========
Current Year Underwriting The profit or loss earned from business , 1 Q
Result for which insurance cover has been
provided during the current financial
period.
============================ ============================================= ==== ===== ==========
Expense Ratio Underwriting and policy expenses , 1 X
expressed as a percentage of net
earned premium.
============================ ============================================= ==== ===== ==========
Exposure A measurement of risk we are exposed
to through the premiums we have
written. For example, in motor insurance
one vehicle insured for one year
is one unit of exposure.
============================ ============================================= ==== ===== ==========
Financial Conduct Authority The regulatory authority with responsibility
(FCA) for the conduct of the UK financial
services industry.
============================ ============================================= ==== ===== ==========
Gross Written Premium Total revenue generated through
(GWP) sale of insurance products. This
is before taking into account reinsurance
and is stated irrespective of whether
payment has been received.
============================ ============================================= ==== ===== ==========
IBNR (Incurred But An estimated reserve for amounts
Not Yet Reported) owed to all valid claimants who
have had a covered loss but have
not yet reported it and for claims
that have been reported but the
cost is not yet known.
============================ ============================================= ==== ===== ==========
Term Definition APM Reconciliation
======================== ======================================================== ==== ===================
Interest Costs Interest costs represent the cost , 1 O
of Group debt excluding any debt
buy back costs.
======================== ======================================================== ==== ====== ===========
Investment Result Investment result is the money we , 1 AA
make from our investments on a management
basis. It comprises the major component
of net investment return, investment
income, in addition to unwind of
discount and investment expenses.
======================== ======================================================== ==== ====== ===========
Large Losses Single claim or all claims arising
from a single loss event with a
net cost of GBP500k or higher.
======================== ======================================================== ==== ====== ===========
Large Loss Ratio The large loss ratio is an expression , 1 T
of claims incurred in the period
with a net cost of GBP500k or higher
as a percentage of net earned premium
over the same period.
======================== ======================================================== ==== ====== ===========
Net Asset Value (NAV) Net asset value per share is calculated , 3 E
per Share as closing shareholders' funds,
less preference share capital, divided
by the number of shares in issue
at the end of the period.
======================== ======================================================== ==== ====== ===========
Net Earned Premium The proportion of premium written,
(NEP) net of the cost of associated reinsurance,
which represents the consideration
charged to policyholders for providing
insurance cover during the reporting
period.
======================== ======================================================== ==== ====== ===========
Net Incurred Claims The total claims cost incurred in
(NIC) the period less any share that is
borne by reinsurers. It includes
both claims payments and movements
in claims reserves and claims handling
expenses in the period.
======================== ======================================================== ==== ====== ===========
Net Written Premium Premium written or processed in
(NWP) the period, irrespective of whether
it has been paid, less the amount
shared with reinsurers.
======================== ======================================================== ==== ====== ===========
Non-Operating Charges Non-operating charges represent , 1 AD
items that are excluded to arrive
at the underlying profit after tax
measure.
======================== ======================================================== ==== ======== =========
Item Reason for classification , 1 AD
======================== =========================== =========================== ==== ======== =========
Gains and losses To allow assessment
arising from the of the performance
disposal of businesses of ongoing business
activities
=========================== =========================== ==== ====== =========
Amortisation of To allow meaningful
intangible assets assessment of segmental
performance where
similar internally
generated assets
are not capitalised
=========================== ===========================
Impairment of intangible Where the impairment
assets arises from restructuring
activities
=========================== ===========================
Reorganisation To allow assessment
costs of the performance
of ongoing business
activities
=========================== ===========================
Pension administration Costs that are
and net interest dependent on the
costs level of defined
benefit pension
scheme plan funding
and arise from
servicing past
pension commitments
=========================== ===========================
Realised and unrealised To remove the impact
gains and losses of market volatility
on investments and investment
/ foreign exchange rebalancing activity
gains and losses
========================= =============================
Debt buy back costs To allow meaningful
assessment of ongoing
finance costs
======================== ========================= ============================= ==== ====== =========
Operating Profit Operating profit is profit before , 1 AC
tax less non-operating charges.
======================== ======================================================== ==== ======== =========
Payout Ratio Ordinary dividends expressed as
a percentage of underlying profit
after tax attributable to ordinary
shareholders.
======================== ======================================================== ==== ======== =========
Policies in Force The number of active insurance policies
for which Group is providing cover
======================== ======================================================== ==== ======== =========
Prior Year Underwriting Updates to premium, claims, commission , 1 P
Result and expense estimates relating to
prior years.
======================== ======================================================== ==== ======== =========
Property and Casualty Property insurance covers loss or
(P&C) damage through fire, theft, floods,
(Non-Life Insurance storms and other specified risks.
or General Insurance) Casualty insurance primarily covers
losses arising from accidents that
cause injury to other people or
damage to the property of others.
======================== ======================================================== ==== ======== =========
Prudential Regulation The regulatory authority with responsibility
Authority (PRA) for the prudential regulation and
supervision of the UK financial
services industry.
======================== ======================================================== ==== ======== =========
Pull to par The movement of a bond's price toward
its face value as it approaches
its maturity date
======================== ======================================================== ==== ======== =========
Rate The price of a unit of insurance
based on a standard risk for one
year. Actual premium charged to
the policyholder may differ from
the rate due to individual risk
characteristics and marketing discounts.
======================== ======================================================== ==== ======== =========
Reinsurance The practice whereby part or all
of the risk accepted is transferred
to another insurer (the reinsurer).
======================== ======================================================== ==== ======== =========
Reported Exchange (RFX) Prior period comparative translated
at exchange rates applicable at
that time.
======================== ======================================================== ==== ======== =========
Return on Equity Profit attributable to ordinary , 2 F
shareholders (profit after tax excluding
non-controlling interests, coupon
on tier 1 notes and preference dividend)
expressed in relation to opening
ordinary shareholders' funds (opening
ordinary shareholders funds less
preference share capital).
======================== ======================================================== ==== ======== =========
Return on Tangible Profit attributable to ordinary , 2 H
Equity shareholders (profit after tax excluding
non-controlling interests, coupon
on tier 1 notes and preference dividend)
expressed in relation to opening
tangible net asset value.
======================== ======================================================== ==== ======== =========
Solvency II Capital adequacy regime for the
European insurance industry which
commenced in 2016 and is based on
a set of EU wide capital requirements
and risk management standards.
======================== ======================================================== ==== ======== =========
Scrip Dividend Where shareholders choose to receive
the dividend in the form of additional
shares rather than cash. The Group
would issue new shares to meet the
scrip demand.
======================== ======================================================== ==== ======== =========
Tangible Net Asset Tangible net asset value comprises ,* 3 C
Value (TNAV) shareholders' equity, less preference
share capital and goodwill and intangible
assets.
======================== ======================================================== ==== ======== =========
Tangible Net Asset Tangible net asset value, divided , 3 F
Value (TNAV) per Share by the number of shares in issue
at the end of the period.
======================== ======================================================== ==== ======== =========
Underlying Profit after This provides a key measure of shareholder ,* 2 B
Tax value and one that informs overall
valuation in the insurance sector.
It takes profit after tax, excluding
the proportion that is attributable
to non-controlling interests, preference
shareholders and Tier 1 note holders
and adds back the after tax impact
of non-operating charges.
======================== ======================================================== ==== ======== =========
Underlying Return on Underlying profit after tax expressed , 2 G
Equity in relation to opening shareholders'
funds excluding preference share
capital.
======================== ======================================================== ==== ======== =========
Underlying Return on A key measure of shareholder value ,* 2 I
Tangible Equity and one that informs overall valuation
in the insurance sector.
Underlying profit after tax expressed
in relation to opening tangible
net asset value.
======================== ======================================================== ==== ======== =========
Underlying Tax Rate The underlying Core Group tax rate , 6 A
mainly comprising the local statutory
tax rates in the Group's territories
applied to underlying regional profits
(operating profits less interest
costs).
======================== ======================================================== ==== ======== =========
Underlying Earnings A key measure of the underlying , 2 K
per Share (EPS) earnings power of the group as it
excludes shorter-term and temporary
changes, such as restructuring costs.
Underlying earnings per share is
calculated as underlying profit
after tax divided by the weighted
average number of shares in issue
during the period.
======================== ======================================================== ==== ======== =========
Underwriting Result A measure of underwriting performance , 1 Z
calculated as net earned premium
less net claims and underwriting
and policy acquisition costs.
======================== ======================================================== ==== ======== =========
Unearned Premium The portion of a premium that relates
to future periods, for which protection
has not yet been provided, irrespective
of whether the premium has been
paid or not.
======================== ======================================================== ==== ======== =========
Weather Losses Weather claims incurred with a net
cost of GBP500k or higher.
======================== ======================================================== ==== ======== =========
Weather Loss Ratio The weather loss ratio is an expression , 1 S
of weather losses in the period
with a net cost of GBP500k or higher
as a percentage of earned premium.
======================== ======================================================== ==== ======== =========
Yield Rate of return on an investment
in percentage terms.
The dividend payable on a share
expressed as a percentage of the
market price.
======================== ======================================================== ==== ======== =========
1. IFRS reconciliation to management P&L for the 12 months ended 31
December 2017
Profit
Underwriting Investment Central Operating Non-operating before
Continuing Discontinued Total result result costs result charges tax
----------- ------------ -------- ------------ ---------- ------- --------- ------------- -------
GBP'm IFRS Management
Income
Gross written
premiums 7,599 - 7,599 7,599
Less:
reinsurance
premiums (921) - (921) (921)
================ =========== ============ ======== ============ ========== ======= =============
Net written
premiums 6,678 - 6,678 6,678
=========== ============ ======== ============ ========== ======= =============
Change in the
gross
provision for
unearned
premiums (16) - (16) (16)
Less: change in
provision
for unearned
reinsurance
premiums (57) - (57) (57)
=========== ============ ======== ============ ========== ======= =============
Change in
provision
for unearned
premiums (73) - (73) (73)
================ =========== ============ ======== ============ ========== ======= =============
Net earned
premiums,
analysed as 6,605 - 6,605 A 6,605
------------
Current year B 6,590
Prior year C 15
------------
6,605
=========== ============ ======== ============ ========== ======= =============
Investment
income 331 331 D 331
Realised gains
on
investments 19 19 19
Gains / (losses)
on forex
derivatives (5) (5) (5)
Unrealised gains
/ (losses) 1 1 1
Impairments 4 4 4
=========== ============ ======== ============ ========== ======= =============
Net investment
return 350 - 350
=========== ============ ======== ============ ========== ======= =============
Other insurance
income 146 146 E 146
Other
non-insurance
income 4 4 4
Foreign exchange - - -
gain
=========== ============ ======== ============ ========== ======= =============
Other operating
income 150 - 150
================ =========== ============ ========
Total income 7,105 - 7,105
================ =========== ============ ========
Expenses
=========== ============ ======== ============ ========== ======= =============
Gross claims
incurred (5,136) - (5,136) (5,136)
Less: claims
recoveries
from reinsurers 786 - 786 786
=========== ============ ======== ============ ========== ======= =============
Net claims,
analysed
as (4,350) - (4,350) F (4,350)
------------
Attritional G (3,642)
Weather H (168)
Large I (713)
Prior year J 173
------------
(4,350)
=========== ============ ======== ============ ========== ======= =============
Earned CY
commission (883) (883) K (883)
Earned PY
commission (28) (28) L (28)
Earned CY
operating
expenses (1,093) (1,093) M (1,093)
Earned PY
operating
expenses (3) (3) N (3)
=========== ============ ======== ============ ========== ======= =============
Underwriting and
policy
acquisition
costs (2,007) - (2,007) (2,007)
Unwind of
discount (34) - (34) (34)
=========== ============ ======== ============ ========== ======= =============
Investment
expenses (13) (13) (13)
Non-insurance
expenses (3) (3) (3)
Central expenses (17) (17) (17)
Amortisation of
intangible
assets (15) (15) (15)
Pension net
interest
and
administration
costs (7) (7) (7)
Reorganisation
costs (155) (155) (155)
Foreign exchange
losses (1) (1) (1)
Impairment of
intangibles (23) (23) (23)
=========== ============ ======== ============ ========== ======= =============
Other operating
expenses (234) - (234)
================ =========== ============ ========
(6,625) - (6,625)
================ =========== ============ ======== ============ ========== ======= =============
Interest costs (43) (43) (43)
Debt buy back
costs (59) (59) (59)
=========== ============ ======== ============ ========== ======= =============
Finance costs (102) - (102) (102)
Acquisitions and
disposals 69 - 69 69
Net share of
profit
after tax of
associates 1 - 1
================ =========== ============ ======== ============ ========== ======= ========= ============= =======
Profit / (Loss)
before
tax 448 - 448 394 284 (15) 663 (215) 448
================ =========== ============ ======== ============ ========== ======= ========= ============= =======
Income tax
expense (126) - (126) Z AA AB AC AD
================ =========== ============ ========
Profit / (Loss)
for
the year 322 - 322
================ =========== ============ ======== ============
C+J+L+N P 157 PY Underwriting
Z - P Q 237 CY Underwriting
============
394
Attritional
loss ratio G / B R 55.3%
Weather
loss
ratio H / B S 2.6%
Large loss
ratio I / B T 10.8%
Prior year
loss ratio V-R-S-T U (2.8%)
------------
Loss ratio F/A V 65.9%
Commission (K+L)
ratio / A W 13.7%
Expense (E+M+N)
ratio / A X 14.4%
------------
Combined
operating V + W
ratio + X Y 94.0%
1. IFRS reconciliation to management P&L for the 12 months ended 31
December 2016
Profit
Underwriting Investment Central Operating Non-operating before
Continuing Discontinued Total result result costs result charges tax
----------- ------------ -------- ------------ ---------- ------- --------- ------------- -------
GBP'm IFRS Management
----------------------------------- --------------------------------------------------------------------
Income
Gross written
premiums 7,220 256 7,476 7,476
Less:
reinsurance
premiums (981) (87) (1,068) (1,068)
================ =========== ============ ======== ============ ========== ======= =============
Net written
premiums 6,239 169 6,408 6,408
=========== ============ ======== ============ ========== ======= =============
Change in the
gross
provision for
unearned
premiums 109 38 147 147
Less: change in
provision
for unearned
reinsurance
premiums (8) (19) (27) (27)
================ =========== ============ ======== ============ ========== ======= =============
Change in
provision
for unearned
premiums 101 19 120 120
================ =========== ============ ======== ============ ========== ======= =============
Net earned
premiums,
analysed as 6,340 188 6,528 A 6,528
------------
Current year B 6,542
Prior year C (14)
------------
6,528
=========== ============ ======== ============ ========== ======= =============
Investment
income 355 14 369 D 369
Realised gains
on
investments 28 2 30 30
Gains / (losses)
on forex
derivatives (41) (41) (41)
Unrealised gains
/ (losses) (3) (3) (3)
Impairments 8 8 8
=========== ============ ======== ============ ========== ======= =============
Net investment
return 347 16 363
=========== ============ ======== ============ ========== ======= =============
Other insurance
income 133 133 E 133
Other
non-insurance
income 5 5 5
Foreign exchange
gain 32 32 32
=========== ============ ======== ============ ========== ======= =============
Other operating
income 170 - 170
================ =========== ============ ========
Total income 6,857 204 7,061
================ =========== ============ ========
Expenses
=========== ============ ======== ============ ========== ======= =============
Gross claims
incurred (4,826) (304) (5,130) (5,130)
Less: claims
recoveries
from reinsurers 707 208 915 915
=========== ============ ======== ============ ========== ======= =============
Net claims,
analysed
as (4,119) (96) (4,215) F (4,215)
------------
Attritional G (3,605)
Weather H (166)
Large I (583)
Prior year J 139
------------
(4,215)
=========== ============ ======== ============ ========== ======= =============
Earned CY
commission (873) (56) (929) K (929)
Earned PY
commission (12) (12) L (12)
Earned CY
operating
expenses (1,088) (33) (1,121) M (1,121)
Earned PY
operating
expenses (4) (4) N (4)
=========== ============ ======== ============ ========== ======= =============
Underwriting and
policy
acquisition
costs (1,977) (89) (2,066) (2,066)
Unwind of
discount (59) (5) (64) (59) (5) *
=========== ============ ======== ============ ========== ======= =============
Investment
expenses (12) (12) (12)
Non-insurance
expenses (5) (5) (5)
Central expenses (23) (23) (23)
Amortisation of
intangible
assets (16) (16) (16)
Pension net
interest
and
administration
costs (4) (4) (4)
Reorganisation
costs (161) (7) (168) (168)
Solvency II
costs (7) (7) (7)
Impairment of
intangibles (1) (1) (1) *
=========== ============ ======== ============ ========== ======= =============
Other operating
expenses (229) (7) (236)
================ =========== ============ ========
(6,384) (197) (6,581)
================ =========== ============ ======== ============ ========== ======= =============
Interest costs (99) (99) (99)
Debt buy back
costs (39) (39) (39)
============ ======== ============ ========== ======= =============
Finance costs (138) - (138) (138)
Acquisitions and
disposals (234) (17) (251) (251)
Net share of - - -
profit
after tax of
associates
================ =========== ============ ======== ============ ========== ======= ========= ============= =======
Profit / (Loss)
before
tax 101 (10) 91 380 298 (23) 655 (564) 91
================ =========== ============ ======== ============ ========== ======= ========= ============= =======
Income tax
expense (54) (17) (71) Z AA AB AC AD
================ =========== ============ ========
Profit / (Loss)
for
the year 47 (27) 20
================ =========== ============ ======== ============
C+J+L+N P 109 PY Underwriting
Z - P Q 271 CY Underwriting
============
380
Attritional
loss ratio G / B R 55.2%
Weather
loss
ratio H / B S 2.5%
Large loss
ratio I / B T 8.9%
Prior year
loss ratio V-R-S-T U (2.0%)
------------
Loss ratio F/A V 64.6%
Commission (K+L)
ratio / A W 14.4%
Expense (E+M+N)
ratio / A X 15.2%
------------
Combined
operating V + W
ratio + X Y 94.2%
* GBP5m of discount unwind reported as economic assumption changes
2. Metric calculations 2017 2016
GBPm GBPm
Profit after tax 322 20
Less: non-controlling interest (33) 7
Less: coupon on 2017 issued restricted tier -
1 instrument (11)
Less: preference dividend (9) (9)
A Profit attributable to ordinary shareholders 269 18
APM Rec
1 Add: non-operating charges 215 564
Add: non-controlling interest share of non-operating
charges 13 (19)
APM Rec
1 Less: interest costs (43) (99)
APM Rec
6 Less: underlying tax differential (10) (62)
Underlying profit after tax attributable to
B ordinary shareholders 444 402
Opening shareholders' funds 3,715 3,642
Less: preference share capital (125) (125)
C Opening ordinary shareholders' funds 3,590 3,517
Note
11 Less: opening goodwill and intangibles (728) (679)
D Opening tangible ordinary shareholders' funds 2,862 2,838
Weighted average no. share issue during the
E period (un-diluted) 1,021 1,018
Return on equity
A/C F Reported 7.5% 0.5%
B/C G Underlying 12.4% 11.4%
Return on tangible equity
A/D H Reported 9.4% 0.6%
B/D I Underlying 15.5% 14.2%
Earnings per share
A/E J Basic earnings per share 26.3 1.8
B/E K Underlying earnings per share 43.5 39.5
3. Balance sheet reconciliations 2017 2016
GBPm GBPm
A Closing shareholders' funds 3,653 3,715
Less: preference share capital (125) (125)
B Ordinary shareholders funds 3,528 3,590
Note
23 Less: closing goodwill and intangibles (763) (728)
C Tangible net asset value 2,765 2,862
D Shares in issue at the period end 1,023 1,019
B/D E Net asset value per share 345 352
C/D F Tangible net asset value per share 270 281
4. Net written premium movement and constant exchange 2017 2016
GBPm GBPm
Total net written premium 6,678 6,408
Discontinued net written premium - (169)
Continuing net written premium 6,678 6,239
Disposals of continuing operations - 42
Note
9 A Core net written premiums 6,678 6,281
YOY movement 397 378
Comprised of:
Volume change including portfolio actions
and reinsurance (25) (137)
Rate increases 163 141
B Movement at constant exchange 138 4
Foreign exchange 259 374
Total movement 397 378
B/A C % movement at constant exchange 2% 0%
5. Controllable expenses 2017 2016
GBPm GBPm
Underwriting and policy admin costs (2,007) (2,066)
APM Rec
1 Less: commission 911 941
Less: non controllable premium related costs
e.g. levies 130 112
Add: claims expenses within net claims (406) (424)
APM Rec
1 Add: investment expenses (13) (12)
APM Rec
1 Add: central expenses (17) (23)
Add: other (23) (43)
A Written controllable expense base (1,425) (1,515)
Less: controllable deferred acquisition costs 8 (6)
B Earned controllable expense base (1,417) (1,521)
C Net written premiums 6,678 6,408
D Net earned premiums 6,605 6,528
A/C E Written controllable expense ratio 21.3% 23.7%
B/D F Earned controllable expense ratio 21.5% 23.3%
6. Underlying tax rate 2017 2016
% %
Effective tax rate (ETR) 28 78
Less tax effect of:
Withholding tax on intercompany dividend (5) -
Unrecognised tax losses (1) (11)
Underlying versus IFRS regional profit mix (1) (27)
Tax on disposals 0 (13)
Other 1 (3)
A Underlying tax rate 22 24
APM
Rec 1 GBPm GBPm
Operating profit 663 655
APM
Rec 1 Less interest costs (43) (99)
B Underlying profit before tax 620 556
AxB C Underlying tax (136) (133)
Tax (126) (71)
D Underlying tax differential (10) (62)
7. COR proforma
Reported Ogden GVC Proforma
UK & International
A Net earned premium GBPm 3,196 (23) 3,173
B Underwriting result GBPm (82) 23 43 (16)
1-(B/A) C COR % 102.6 100.5
UK
A Net earned premium GBPm 2,684 (23) 2,661
B Underwriting result GBPm (116) 20 43 (53)
1-(B/A) C COR % 104.3 102.0
REPORTING AND DIVID TIMETABLE
Reporting: Q1 2018 trading update 10 May 2018 Dividend: Final ordinary dividend for the period ended 31 December 2017 Announcement date 22 February 2018 Ex-dividend date 1 March 2018 Record date 2 March 2018 Dividend payment date 18 May 2018 1(st) preference dividend Announcement date 22 February 2018 Ex-dividend date 1 March 2018 Record date 2 March 2018 Dividend payment date 3 April 2018
Note: The final ordinary dividend is conditional upon the directors being satisfied, in their absolute discretion, that the payment of the interim ordinary dividend would not breach any legal or regulatory requirements, including Solvency II regulatory capital requirements.
PREFERENCE SHARE DIVID
In accordance with the original subscription terms, qualifying registered holders of the 7 3/8 percent cumulative irredeemable preference shares of GBP1 each will receive the first preference dividend at a rate of 3.6875p per share.
Enquiries:
Investors & analysts Press Kerry McConnell Natalie Whitty Group Director of Investor Relations Group Head of External Communications Tel: +44 (0) 20 7111 1891 Tel: +44 (0) 20 7111 7213 Email: kerry.mcconnell@gcc.rsagroup.com Email: natalie.whitty@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 22 February 2018. 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 40
Basis of Preparation and Significant Accounting Policies
1. Basis of preparation 45
2. Adoption of new and revised standards 45
3. New accounting standards, interpretations and amendments 45
Risk Management
4. Risk management 47
Significant Transactions and Events
5. Discontinued operations and disposals 54
6. Reorganisation costs 57
Notes to the Condensed Consolidated Income Statement, Condensed
Consolidated Statement of Other Comprehensive Income and
Dividends
7. Segmental information 58
8. Income tax 61
9. Earnings per share 62
10. Dividends paid and proposed 63
Notes to the Condensed Consolidated Statement of Financial
Position
11. Goodwill and intangible assets 64
12. Financial assets 67
13. Fair value measurement 70
14. Reinsurers' share of insurance contract liabilities 73
15. Current and deferred tax 74
16. Cash and cash equivalents 75
17. Share capital 75
18. Other equity instruments - Tier 1 Notes 76
19. Loan capital 77
20. Insurance contract liabilities 77
21. Post-retirement benefits and obligations 83
Notes to the Condensed Consolidated Statement of Cash Flows
22. Reconciliation of cash flows from operating activities 84
Results for the Year 2017
23. Results for the year 2017 85
Appendix
A. Exchange rates 86
Responsibility Statement of the Directors in respect of the
annual financial report 87
CONDENSED CONSOLIDATED INCOME STATEMENT
STATUTORY BASIS
for the year ended 31 December 2017
2017 2016
Note GBPm GBPm
Income
Gross written premiums 7,599 7,220
Less: reinsurance premiums (921) (981)
================================================== ===== ========= ========
Net written premiums 7 6,678 6,239
=========
Change in gross provision for unearned
premiums (16) 109
Less: change in provision for unearned
reinsurance premiums (57) (8)
========= ========
Change in provision for unearned premiums (73) 101
================================================== ===== ========= ========
Net earned premiums 6,605 6,340
Net investment return 350 347
Other operating income 150 170
================================================== ===== ========= ========
Total income 7,105 6,857
================================================== ===== =========
Expenses
========= ========
Gross claims incurred (5,136) (4,826)
Less: claims recoveries from reinsurers 786 707
========= ========
Net claims (4,350) (4,119)
Underwriting and policy acquisition costs (2,007) (1,977)
Unwind of discount (34) (59)
Other operating expenses, reorganisation
costs and impairments (234) (229)
================================================== ===== ========= ========
(6,625) (6,384)
================================================== ===== ========= ========
Finance costs (102) (138)
Profit on disposal of business and realised
gains on held for sale assets 5(c) 69 -
Remeasurement of disposal groups 5(d) - (234)
Net share of profit after tax of associates 1 -
================================================== ===== ========= ========
Profit before tax 7 448 101
Income tax expense 8 (126) (54)
================================================== ===== ========= ========
Profit after tax from continuing operations 322 47
(Loss) from discontinued operations, net
of tax 5(a) - (27)
================================================== ===== ========= ========
Profit for the year 322 20
================================================== ===== ========= ========
Attributable to:
Equity holders of the Parent Company 289 27
Non-controlling interests 33 (7)
================================================== ===== ========= ========
322 20
================================================== ===== ========= ========
Earnings per share on profit attributable to the ordinary shareholders
of the Parent Company:
Basic
From continuing operations 9 26.3p 4.4p
From discontinued operations 9 - (2.6)p
================================================== ===== ========= ========
26.3p 1.8p
================================================== ===== ========= ========
Diluted
From continuing operations 9 26.1p 4.4p
From discontinued operations 9 - (2.6)p
================================================== ===== ========= ========
26.1p 1.8p
================================================== ===== ========= ========
Ordinary dividends paid and proposed for
the year
Interim dividend paid 10 6.6p 5.0p
Final dividend proposed 10 13.0p 11.0p
================================================== ===== ========= ========
The attached notes on pages 45 to 85 form an integral part of these
consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
STATUTORY BASIS
for the year ended 31 December 2017
2017 2016
Note GBPm GBPm
=====
Profit for the year 322 20
Items from continuing operations that may be reclassified
to the income statement:
===== ======
Exchange (losses)/gains net of tax on translation
of foreign operations (36) 228
Fair value (losses)/gains on available for sale
financial assets net of tax (197) 151
===== ======
(233) 379
Items from continuing operations that will not
be reclassified to the income statement:
===== ======
Pension - remeasurement of net defined benefit
asset/liability net of tax 44 (316)
Movement in property revaluation surplus net
of tax 2 1
===== ======
46 (315)
Other comprehensive (expense)/income for the year
from continuing operations (187) 64
Other comprehensive income for the year from discontinued
operations 5(a) - 120
============================================================ ===== ===== ======
Total other comprehensive (expense)/income for
the year (187) 184
============================================================ ===== ===== ======
Total comprehensive income for the year from continuing
operations 135 111
Total comprehensive income for the year from discontinued
operations 5(a) - 93
============================================================ ===== ===== ======
Total comprehensive income for the year 135 204
============================================================ ===== ===== ======
Attributable to:
Equity holders of the Parent Company
===== ======
from continuing operations 117 98
from discontinued operations - 94
===== ======
117 192
Non-controlling interests
===== ======
from continuing operations 18 13
from discontinued operations - (1)
===== ======
18 12
=========================================================== ===== ===== ======
135 204
=========================================================== ===== ===== ======
The attached notes on pages 45 to 85 form an integral part of these
consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
STATUTORY BASIS
for the year ended 31 December 2017
Foreign
Ordinary Ordinary Capital currency Share- Tier
share share Own Preference Revaluation redemption translation Retained holders' 1 Non-controlling Total
capital premium shares shares reserves reserve reserve earnings equity notes interests equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
================== ======== ======== ====== ========== =========== ========== =========== ======== ======== ===== =============== =======
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 17) 2 3 - - - - - - 5 - - 5
Share based
payments (note
17) 1 - - - - - - 15 16 - - 16
Other reserve
transfer - - - - 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 1
January 2017 1,020 1,080 (1) 125 496 389 78 528 3,715 - 132 3,847
Total comprehensive income
======== ====== ========== =========== ========== =========== ======== ======== ===== =============== =======
Profit for the
year - - - - - - - 289 289 - 33 322
Other
comprehensive
income/(expense) - - - - (192) - (24) 44 (172) - (15) (187)
======== ======== ====== ========== =========== ========== =========== ======== ======== ===== =============== =======
- - - - (192) - (24) 333 117 - 18 135
Transactions with owners of the Group
Contribution and
distribution
======== ====== ========== =========== ========== =========== ======== ======== ===== =============== =======
Dividends (note
10) - - - - - - - (200) (200) - (10) (210)
Shares issued for
cash (note 17) 1 3 - - - - - - 4 - - 4
Share based
payments (note
17) 2 - - - - - - 14 16 - - 16
Issue of Tier 1
notes (note 18) - - - - - - - - - 297 - 297
Other reserve
transfer - - - - (7) - - 7 - - - -
3 3 - - (7) - - (179) (180) 297 (10) 107
Changes in
shareholders'
interests in
subsidiaries - - - - - - - 1 1 - 12 13
=================== ======== ======== ====== ========== =========== ========== =========== ======== ======== ===== =============== =======
Total transactions
with owners of
the Group 3 3 - - (7) - - (178) (179) 297 2 120
=================== ======== ======== ====== ========== =========== ========== =========== ======== ======== ===== =============== =======
Balance at 31
December 2017 1,023 1,083 (1) 125 297 389 54 683 3,653 297 152 4,102
=================== ======== ======== ====== ========== =========== ========== =========== ======== ======== ===== =============== =======
The attached notes on pages 45 to 85 form an integral part of these consolidated financial
statements.
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
STATUTORY BASIS
as at 31 December 2017
2017 2016
Note GBPm GBPm
Assets
Goodwill and other intangible assets 11 763 728
Property and equipment 104 109
Investment property 308 333
Investments in associates 13 12
Financial assets 12 11,643 12,325
Total investments 11,964 12,670
Reinsurers' share of insurance contract liabilities 14 2,252 2,252
Insurance and reinsurance debtors 2,923 2,823
Deferred tax assets 15 276 270
Current tax assets 15 43 65
Other debtors and other assets 559 430
Other assets 878 765
Cash and cash equivalents 16 1,048 985
19,932 20,332
Assets of operations classified as held for sale 5(b) 668 807
Total assets 20,600 21,139
Equity and liabilities
Equity
Shareholders' equity 3,653 3,715
Tier 1 notes 18 297 -
Non-controlling interests 152 132
Total equity 4,102 3,847
Liabilities
Loan capital 19 441 1,068
Insurance contract liabilities 20 12,793 12,676
Insurance and reinsurance liabilities 20 934 954
Borrowings 123 251
Deferred tax liabilities 15 56 54
Current tax liabilities 15 24 32
Provisions 407 420
Other liabilities 1,052 1,087
Provisions and other liabilities 1,539 1,593
15,830 16,542
Liabilities of operations classified as held for sale 5(b) 668 750
Total liabilities 16,498 17,292
Total equity and liabilities 20,600 21,139
The attached notes on pages 45 to 85 form an integral part of these consolidated financial
statements.
The financial statements were approved on 21 February 2018 by the Board of Directors and are
signed on its behalf by:
Scott Egan
Group Chief Financial Officer
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
STATUTORY BASIS
for the year ended 31 December 2017
Re-presented(1)
2017 2016
Note GBPm GBPm
Cash flows from operating activities
Cash generated from operating activities 22 469 71
Tax paid (104) (88)
Net cash flows from operating activities - continuing
operations 365 (17)
Net cash flows from operating activities - discontinued
operations - (18)
Cash flows from investing activities
Proceeds from sales or maturities of:
Financial assets 3,030 3,747
Investment property 28 28
Property and equipment - 10
Sale of subsidiaries (net of cash disposed of) 15 -
Purchase of:
Financial assets (2,406) (3,589)
Property and equipment (18) (25)
Intangible assets (131) (139)
Cash element of reinsurance premium on UK Legacy
assets 5(b) (96) -
Net cash flows from investing activities - continuing
operations 422 32
Net cash flows from investing activities - discontinued
operations - 333
Cash flows from financing activities
Proceeds from issue of share capital 4 5
Proceeds from issue of Tier 1 notes 18 297 -
Dividends paid to ordinary shareholders (180) (122)
Coupon payment on Tier 1 notes (11) -
Dividends paid to preference shareholders (9) (9)
Dividends paid to non-controlling interests (10) (3)
Redemption of debt instruments 19 (636) (200)
Net movement in other borrowings (136) 242
Interest paid (133) (150)
Net cash flows from financing activities - continuing
operations (814) (237)
Net cash flows from financing activities - discontinued
operations - -
Net (decrease)/increase in cash and cash equivalents (27) 93
Cash and cash equivalents at the beginning of
the year 1,087 902
Effect of changes in foreign exchange on cash
and cash equivalents (11) 92
Cash and cash equivalents at the end of the year 16 1,049 1,087
(1) A reconciliation of net profit before tax to cash flow from operating
activities is now shown as a separate note.
The attached notes on pages 45 to 85 form an integral part of these 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 consolidated 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) and the Companies Act 2006 where applicable. The consolidated financial statements are prepared on a historical cost basis. Where other bases are applied these are identified in the relevant accounting policy. The condensed consolidated financial information in this report has been prepared by applying the accounting policies used in the 2017 Annual Report and Accounts (see note 22).
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 Management note (note 4).
Except where otherwise stated, all figures included in the 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 judgements are those used in determining insurance contract liabilities (note 20), deferred tax (note 15) and defined benefit pension scheme liabilities (note 21).
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 2017, none of which have had a significant impact on the consolidated financial statements.
3. NEW ACCOUNTING STANDARDS, INTERPRETATIONS AND AMMENTS
IFRS 17 'Insurance Contracts'
The International Accounting Standards Board (IASB) issued IFRS 17 'Insurance Contracts' in May 2017, which it is expected will replace IFRS 4 'Insurance Contracts' at the latest for annual reporting periods beginning on or after 1 January 2021. A Transitional Resource Group has been set up by the IASB to support implementation of the new standard. The European Financial Reporting Advisory Group (EFRAG) have been requested by the European Commission to provide their advice by the end of 2018 which should lead to endorsement some time in 2019. There is currently no certainty at the moment of what the endorsement process will be if this has not happened by the time the UK leaves the EU and RSA will continue to monitor this.
The Group has completed its initial impact assessment and is using these results to inform a detailed planning phase which is underway. During this phase decisions will be made on appropriate policies to adopt and the required change to Finance systems and processes. The Group intends to start implementation activities in 2018 and intends to parallel run systems and reporting during 2020 to assure reporting compliance by 1 January 2021.
IFRS 9 'Financial Instruments'
IFRS 9 'Financial Instruments' has been issued to replace IAS 39 'Financial Instruments: Recognition and Measurement' and primarily changes the classification and measurement of financial assets, depending on the business model under which they are held, as well as hedge accounting requirements and recognising expected credit losses.
The Group, in line with peers, will take advantage of the exemption available to entities whose activities are predominantly insurance related to defer applying IFRS 9 'Financial Instruments' (which would otherwise be applicable for annual reporting periods beginning on or after 1 January 2018) until 1 January 2021 which will coincide with the expected implementation of IFRS 17. This will enable accounting policy choices to consider the interrelationships of IFRS 17 and 9 particularly with regards to asset and liability management. Assessment and implementation of IFRS 9 will therefore run alongside IFRS 17 activity.
IFRS 15 'Revenue Recognition'
IFRS 15 'Revenue Recognition' is effective from 1 January 2018 and does not apply to insurance and financial instrument income. The impact of IFRS 15 on the recognition of relevant revenue has been evaluated during the year with no significant changes identified.
IFRS 16 'Leases'
IFRS 16 'Leases' replaces the existing standard IAS 17 'Leases' and standardises lessee treatment of leases and becomes effective at the latest for periods beginning on or after 1 January 2019. The standard requires a lessee to recognise a right-of-use asset representing its right to use the underlying asset and a lease liability representing the corresponding obligation to make lease payment. In addition, the nature of expenses related to those leases will now change as IFRS 16 replaces the straight line operating lease expense with a depreciation charge for the right-of-use assets and interest expense on the lease liabilities.
The Group has completed an initial assessment of the potential impact of adopting the standard but has still to complete its detailed assessment or to incorporate into its financial reporting systems and processes, which will take place during 2018. The actual impact of implementing IFRS 16 on the Group's financial statements will depend on future economic conditions, including the Group's borrowing rate at 1 January 2019, the composition of the Group's lease portfolio at that date, the Group's latest assessment of whether it will exercise any lease renewal options and the extent to which the group chooses to use practical expedients and recognition exemptions.
Other standards
The following amended standards and interpretations are not expected to have a significant impact on the Group's consolidated financial statements:
-- Annual improvement to IFRSs 2014-2016 Cycle -Amendments to IFRS 1 and IAS 28 -- Classification and Measurement of Share-based Payment Transactions (Amendments to IFRS 2) -- Transfers of Investment Property (Amendments to IAS 40)
-- Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28)
-- IFRIC 22 Foreign Currency Transactions and Advance Consideration -- IFRIC 23 Uncertainty over Income Tax Treatments
RISK MANAGEMENT
4. RISK MANAGEMENT
Insurance Risk
The Group is exposed to risks arising from insurance contracts as set out below:
A) Underwriting risk B) Reserving risk A) Underwriting risk
Underwriting risk refers to the risk that claims arising are higher (or lower) than assumed in pricing due to bad experience including catastrophes, weakness in controls over underwriting or portfolio management, or claims management issues.
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 minimises the volatility of its 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 adverse claims development.
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.
Decisions on how much insurance risk to pass on to other insurers through the use of reinsurance is another key strategy employed in managing the Group's exposure to insurance risk. The Group Board determines a maximum and the Group Corporate Centre determines a minimum level of risk to be retained by the Group as a whole and, therefore, the amount of central reinsurance cover purchased. This is then distributed across the Group in accordance with deemed risk appetite. Local operations may also purchase additional reinsurance within agreed local reinsurance appetite parameters.
Reinsurance arrangements in place include proportional, excess of loss, stop loss, catastrophe and adverse development coverage. These arrangements aim to prevent the Group suffering 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.
B) Reserving risk
Reserving risk refers to the risk that the Group's estimates of future claims payments 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.
4. RISK MANAGEMENT (CONTINUED)
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. This 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. 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 primary 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 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 2017, 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; 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 for fixed income investments and premium receivables is embedded throughout the organisation with aggregate credit positions reported and monitored at Group level.
The Group's credit risk strategy appetite and credit risk policy are developed by the BRC and are reviewed and approved by the Board on an annual basis. This is done through the setting of Group policies, procedures and limits.
In defining its appetite for credit risk the Group looks at exposures at both an aggregate and business unit level distinguishing between credit risks incurred as a result of offsetting insurance risks or operating in the insurance market (e.g. reinsurance credit risks and risks to receiving premiums due from policyholders and intermediaries) and credit risks incurred for the purposes of generating a return (e.g. invested assets credit risk).
Limits are set at both a portfolio and counterparty level based on likelihood of default, derived from the rating of the counterparty, to ensure that the Group's overall credit profile and specific concentrations are managed and controlled within risk appetite.
The Group's investment management strategy primarily focuses on debt instruments of high credit quality issuers and seeks to limit the overall credit exposure with respect to any one issuer by ensuring limits have been based upon credit quality. Restrictions are placed on each of the Group's investment managers as to the level of exposure to various rating categories including unrated securities.
4. RISK MANAGEMENT (CONTINUED)
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 2017 the extent of collateral held by the Group against reinsurers' share of insurance contract liabilities was GBP585m (2016: GBP159m), which in the event of a default would be called and recognised on the balance sheet. The increase reflects the UK Legacy reinsurance arrangement announced on 7 February 2017 which is fully collateralised.
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 Berkshire Hathaway, Lloyd's of London and Talanx. At 31 December 2017 the reinsurance asset recoverable from these groups does not exceed 3.9% (2016: 2.4%) 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 6.4% (2016: 6.1%) 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 31 December 2017
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 5,358 2,170 2,305 655 171 1 10,660 - 10,660
Loans and receivables 81 - 5 104 4 25 219 - 219
Reinsurers' share
of insurance
contract liabilities(1) - 617 1,574 605 45 41 2,882 636 2,246
Insurance and reinsurance
debtors(2) 75 32 971 74 53 1,622 2,827 16 2,811
Derivative assets - 6 16 38 - 10 70 - 70
Other debtors - - - - - 189 189 11 178
Cash and cash equivalents 317 315 378 14 8 21 1,053 5 1,048
(1) The increase in BBB reinsurers' share of insurance contract liabilities
reflects the UK Legacy reinsurance arrangement announced in 2017 which
is fully collateralised.
(2) 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 2016
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 5,216 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
(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% (2016: 3%) of the Group's total financial assets.
4. RISK MANAGEMENT (CONTINUED)
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 2017, excluding those assets that have been classified as held for sale.
As at 31 December 2017
Financial assets that
are past due but not impaired
Financial Carrying Impairment
Neither assets value losses
past Six Greater that in the charged/(reversed)
due Up to Three months than have statement to the
nor three to six to one one been of financial income
impaired months months year year impaired position statement
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Debt securities 10,660 - - - - - 10,660 -
Loans and receivables 219 - - - - - 219 (4)
Reinsurers' share
of insurance
contract liabilities 2,246 - - - - 6 2,252 -
Insurance and
reinsurance
debtors 2,811 51 22 24 13 2 2,923 4
Derivative assets 70 - - - - - 70 -
Other debtors 178 11 1 - 1 - 191 -
Cash and cash
equivalents 1,048 - - - - - 1,048 -
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 -
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 the possibility that fluctuations in the value of liabilities are not offset by fluctuations 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. Equity and property risk
The Group classifies its investment portfolio in debt securities and equity securities in accordance with the accounting definitions under IFRS.
At 31 December 2017 the Group held investments classified as equity securities of GBP764m (2016: GBP692m). 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 GBP242m (2016: GBP170m) may be more affected by equity index market price risk than by interest rate risk. On this basis a 15% fall in the value of equity index prices would result in the recognition of losses of GBP36m (2016: GBP26m) in other comprehensive income.
4. RISK MANAGEMENT (CONTINUED)
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 GBP46m (2016: GBP50m) in the income statement and GBP5m (2016: GBP5m) 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 2017, the table below illustrates the impact to the income statement and other comprehensive income of a hypothetical 100bps change in interest rates on fixed income securities and cash that are subject to interest rate risk.
Changes in the income statement and other comprehensive income (OCI):
Decrease in other
Increase in income comprehensive
statement income
2017 2016 2017 2016
GBPm GBPm GBPm GBPm
Increase in interest rate markets:
Impact on fixed income securities and
cash of an increase in interest rates
of 100bps 18 20 (412) (452)
=========
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 2018 and 1 January 2017 on the following year's income statement and other comprehensive income. The impact of an increase in interest rates on the fair value of fixed income securities that would be initially recognised in OCI will reduce over time as the maturity date approaches.
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 2017, 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 2017 2,607 414 506 201 222 3,950
Shareholders' equity at 31
December 2016 2,516 284 477 236 202 3,715
4. RISK MANAGEMENT (CONTINUED)
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 2017 (38) 46 (46) 56 (18) 22
Movement in
shareholders'
equity at 31
December 2016 (25) 31 (43) 53 (21) 26
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 are 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 losses and loss adjustment expenses are presented and are analysed by remaining estimated duration until settlement.
As at 31 December 2017
Carrying
value
Less One Two Three Four Greater in the
than to to to to Five than statement
one two three four 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
Guaranteed subordinated
notes due 2045 - - - - - 400 - 400 396
Guaranteed subordinated
step-up notes
due 2039 - 39 - - - - - 39 39
Provisions for losses
and loss
adjustment expenses 3,913 1,645 1,110 799 584 1,379 1,872 11,302 9,477
Direct insurance creditors 111 2 - - - - - 113 113
Reinsurance creditors 506 239 76 - - - - 821 821 Borrowings 123 - - - - - - 123 123 Deposits received from reinsurers 35 - - - - - - 35 35 Derivative liabilities 7 27 - 11 - 5 38 88 88 Total 4,695 1,952 1,186 810 584 1,784 1,917 12,928 11,098 Interest on perpetual bonds and notes 25 23 21 21 21 60 1 172
4. RISK MANAGEMENT (CONTINUED)
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
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 4,971 1,930 1,585 805 575 1,735 1,929 13,530 11,872
Interest on perpetual
bonds and notes 63 49 32 21 21 81 2 269
The maturity analysis above is presented on an undiscounted basis. The carrying values in the statement of financial position are discounted where appropriate in accordance with Group accounting policy.
The capital and interest payable on the bonds and notes have been included until the dates on which the Group has the option to call the instruments and the interest rates are reset. For further information on terms of the bonds and notes, see note 19.
Pension risk
The Group is exposed to risks through its obligation to fund a number of schemes. These risks include market risk (assets not performing as well as expected), inflation risk and mortality risk over the lives of the members. The Group and trustees of the schemes work together to reduce these risks through agreement of investment policy including the use of interest rate, inflation rate and mortality swaps.
SIGNIFICANT TRANSACTIONS AND EVENTS
5. DISCONTINUED OPERATIONS AND DISPOSALS
a) 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 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 relating to these discontinued operations is set out below.
The total loss on the sale of discontinued operations disposed of during 2016 after tax was GBP29m.
DISCONTINUED INCOME STATEMENT
for the year ended 31 December 2017
2017 2016
Note GBPm GBPm
Income
Gross written premiums - 256
Less: reinsurance premiums - (87)
Net written premiums 7 - 169
Change in the gross provision for unearned
premiums - 38
Less: change in provision for unearned reinsurance
premiums - (19)
Change in provision for unearned premiums - 19
Net earned premiums - 188
Net investment return - 16
Total income - 204
Expenses
Gross claims incurred - (304)
Less: claims recoveries from reinsurers - 208
Net claims - (96)
Underwriting and policy acquisition costs - (89)
Unwind of discount - (5)
Other operating expenses - (7)
- (197)
(Loss) on disposal - (29)
(Loss) before tax - (22)
Income tax expense 8 - (5)
(Loss) after tax - (27)
5. DISCONTINUED OPERATIONS AND DISPOSALS (CONTINUED)
DISCONTINUED STATEMENT OF COMPREHENSIVE INCOME
for the year ended 31 December 2017
2017 2016
GBPm GBPm
Loss for the year from discontinued operations - (27)
Items from discontinued operations that may be
reclassified to the income statement:
Exchange losses recycled on disposal of discontinued
operations net of tax - 111
Exchange gains net of tax - 3
- 114
Fair value gains recycled on disposal of discontinued
operations net of tax - 1
Fair value gains on available for sale financial
assets net of tax - 3
- 4
Items from discontinued operations that will
not be reclassified to the income statement:
Movement in property revaluation, net of tax - 2
Other comprehensive income for the year from
discontinued operations - 120
Total comprehensive income for the year from discontinued
operations - 93
Discontinued operations disposed of during the year
There were no discontinued operations disposed of during 2017.
As at 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)
5. DISCONTINUED OPERATIONS AND DISPOSALS (CONTINUED)
b) 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.
Reinsurance
and other
UK Legacy 2016 movements 2017
GBPm GBPm GBPm
Assets classified as held for
sale:
Investments 689 (689) -
Reinsurers' share of insurance
contract liabilities 90 546 636
Insurance and reinsurance debtors - 16 16
Other debtors and other assets 9 2 11
Cash and cash equivalents 101 (96) 5
Total assets of disposal groups 889 (221) 668
Remeasurement of disposal groups to fair
value less costs to sell (204) 204 -
Assets of operations classified
as held for sale 685 (17) 668
Liabilities directly associated with assets
classified as held for sale:
Insurance contract liabilities 685 (49) 636
Insurance and reinsurance liabilities - 2 2
Provisions and other liabilities - 30 30
Liabilities of operations classified
as held for sale 889 (221) 668
Net assets of operations classified
as held for sale - - -
The value of insurance contract liabilities, net of reinsurance (GBP90m),
of GBP595m as at 31 December 2016 was GBP834m on an undiscounted basis
(excludes claims handling provision and margin The value of insurance
contract liabilities, net of reinsurance (GBP90m), of GBP595m as at
31 December 2016 was GBP834m on an undiscounted basis (excludes claims
handling provision and margin).
As at 31 December 2016
UK Legacy Oman(1) 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
(1) At 31 December 2016 it was probable that the Group would lose control
over its Oman business as a result of a government required public
offering of 40% of the group holding. In 2017, the actual required
sale was only 25% meaning control was maintained and as a result it
is no longer held for sale.
5. DISCONTINUED OPERATIONS AND DISPOSALS (CONTINUED)
c) Profit on disposal of business and realised gains on held for sale assets
The net gain of GBP69m includes GBP66m relating to the realised gain on the investments transferred as part of the UK Legacy reinsurance transaction, offset by a charge of GBP22m on the commutation of the Group's Adverse Development Cover reinsurance protection bought partly to protect the UK Legacy book.
The reversal of part of the valuation adjustment on the Group's Oman business has resulted in a gain of GBP17m and the Group recognised a gain of GBP7m on the disposal of the Accident and Repairs business in the UK.
d) Remeasurement of disposal groups
In 2016, the assets and liabilities of the Oman and UK Legacy businesses were classified as held for sale. Upon classification as held for sale, the net assets were measured at the lower of carrying amount and fair value less costs to sell. This valuation adjustment resulted in a GBP234m loss which was recognised in the continuing income statement.
6. REORGANISATION COSTS
In 2017, the reorganisation costs of GBP155m (note 7) are directly associated with continuing operations (2016: GBP160m). The amounts are directly attributable to redundancy GBP68m (2016: GBP49m) and other restructuring activity of GBP87m (2016: GBP111m). Restructuring costs in 2017 relate to amounts incurred across the Group for activities such as process re-engineering and other cost reduction initiatives such as office footprint consolidation and reduction, reducing spans of control, and outsourcing.
NOTES TO THE CONDENSED CONSOLIDATED INCOME STATEMENT AND CONDENSED CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE INCOME
7. SEGMENTAL INFORMATION
Group excluding disposals
The Group's primary operating segments comprise Scandinavia, Canada, UK & International and Central Functions 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.
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 principal markets.
Disposals
Disposals are categorised between disposals of continuing operations and discontinued operations:
Disposals of continuing operations
On 7 February 2017, the Group's UK Legacy liabilities were disposed of to Enstar Group Limited. The transaction initially takes the form of a reinsurance agreement, effective from 31 December 2016, which substantially effects economic transfer, to be followed by completion of a subsequent legal transfer of the business. The Group's UK Legacy business is managed as part of the UK operations. It is not presented as a discontinued operation as it is neither a separate geographical area nor a major line of business.
Discontinued operations
During 2015, the Group classified the Latin American and Russian operations as discontinued as they were held for sale at 31 December 2015 and represented a separate geographical area of operation. The sale of these operations completed in the first six months of 2016 and they were therefore classified as discontinued at 31 December 2016 (see note 5(a) for further details).
During 2017, no further operations have been classified as discontinued and as such, the 2016 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 Alternative Performance Measures (APMs), 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.
7. SEGMENTAL INFORMATION (CONTINUED)
Year ended 31 December 2017
Scandinavia Canada UK & International Central Total
Functions Group
GBPm GBPm GBPm GBPm GBPm
Net written premiums 1,833 1,619 3,199 27 6,678
Underwriting result 315 98 (82) 63 394
Investment result 74 61 149 - 284
Central costs and other activities - - - (15) (15)
Operating result (management basis) 389 159 67 48 663
Realised gains 19
Unrealised losses, impairments and
foreign exchange (1)
Interest costs (102)
Amortisation of intangible assets (15)
Pension net interest and administration costs (7) Reorganisation costs (155) Impairment of intangible assets and similar charges (23) Profit on disposal of business and realised gains on held for sale assets 69 Profit before tax 448 Tax on operations (126) Profit after tax 322 Combined operating ratio (%) 82.9% 93.9% 102.6% 94.0%
7. SEGMENTAL INFORMATION (CONTINUED)
Year ended 31 December 2016
Scandinavia Canada UK & Central Group Disposals Continuing Discontinued Total
International Functions excluding of operations operations Group
disposals continuing per income (note
operations statement 5)
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Net written premiums 1,721 1,443 3,081 36 6,281 (42) 6,239 169 6,408
Underwriting result 239 74 88 (9) 392 (16) 376 4 380
Investment result 72 66 149 - 287 2 289 9 298
Central costs and
other activities - - - (23) (23) - (23) - (23)
Operating result
(management basis) 311 140 237 (32) 656 (14) 642 13 655
Realised gains 28 2 30
Unrealised losses,
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)
Remeasurement of
disposal groups (234) (17) (251)
Profit/(loss) before
tax 101 (10) 91
Tax on continuing
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% 97.2% 93.8% 94.2%
8. INCOME TAX
The tax amounts charged/(credited) in the income statement
are as follows:
2017 2016
GBPm GBPm
Current tax 136 90
Deferred tax (10) (36)
Total taxation attributable to continuing operations 126 54
Tax on disposal of discontinued operations - 12
Tax on profits of discontinued operations - 5
Taxation attributable to the Group 126 71
Reconciliation of the income tax expense
2017 2016
GBPm GBPm
Profit before tax 448 101
Tax at the UK rate of 19.2% (2016: 20.0%) 86 20
Tax effect of:
Income/gains not taxable (8) (3)
Expenses not deductible for tax purposes 6 7
Impairment and amortisation of goodwill (2) 6
Movement in deferred tax assets not recognised 4 (17)
Increase of tax provided in respect of prior periods - 2
Different tax rates of subsidiaries operating in other
jurisdictions 11 17
Withholding tax on dividends from subsidiaries 29 5
Effect of change in tax rates 2 16
Deductible Restricted Tier 1 coupon in equity (2) -
Other - 1
Total income tax expense attributable to continuing
operations 126 54
Total income tax expense attributable to discontinued
operations - 17
Income tax expense 126 71
The current tax and deferred income tax credited/(charged) to each
component of other comprehensive income is as follows:
Current Tax Deferred Tax Total
2017 2016 2017 2016 2017 2016
GBPm GBPm GBPm GBPm GBPm GBPm
Fair value gains and losses 20 5 (18) (24) 2 (19)
Remeasurement of net defined benefit
pension liability - - 15 64 15 64
Total credited/(charged) to other
comprehensive income 20 5 (3) 40 17 45
Foreign exchange arising on the revaluation of current and deferred
tax balances is reported through other comprehensive income within
the foreign currency translation reserve.
The net current tax and deferred tax charged directly to equity is
GBPnil (2016: GBPnil).
8. INCOME TAX (CONTINUED)
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.
2017 2016
Current Deferred Current Deferred
Tax Tax Tax Tax
UK 19.2 % 17.0 % 20.0 % 17.0 %
Canada 27.2 % 27.2 % 27.5 % 27.5 %
Denmark 22.0 % 22.0 % 22.0 % 22.0 %
Ireland 12.5 % 12.5 % 12.5 % 12.5 %
Sweden 22.0 % 22.0 % 22.0 % 22.0 %
9. Earnings per share (EPS)
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 1,021,417,775 for basic EPS and 1,028,498,695 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 2017 was 1,022,677,174 (excluding those held in ESOP and SIP trusts).
Basic EPS
2017 2016
Continuing Discontinued Continuing Discontinued
Profit/(loss) attributable to the shareholders
of the Parent Company (GBPm) 289 - 54 (27)
Less: cumulative preference dividends
(GBPm) (9) - (9) -
Less: Tier 1 notes coupon payment (GBPm) (11) - - -
Profit/(loss) for the calculation of
earnings per share 269 - 45 (27)
Weighted average number of ordinary shares
in issue (thousands) 1,021,418 - 1,018,174 1,018,174
Basic earnings/(loss) per share (p) 26.3 - 4.4 (2.6)
Diluted EPS
2017 2016
GBPm GBPm
Weighted average number of ordinary shares in issue
(thousands) 1,021,418 1,018,174
Adjustments for share options and contingently issuable
shares (thousands) 7,081 6,275 Total weighted average number of ordinary shares for diluted earnings per share (thousands) 1,028,499 1,024,449 Diluted earnings per share (p) relating to continuing operations 26.1 4.4 Diluted (loss) per share (p) relating to discontinued operations - (2.6)
Note 17 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.
10. DIVIDS PAID AND PROPOSED
The final dividend to equity holders is recognised as a liability when approved at the Annual General Meeting (AGM). 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 AGM on 5 May 2018, a final dividend in respect of the year ended 31 December 2017 of 13.0p per ordinary share amounting to a total dividend of GBP133m 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 2018.
2017 2016 2017 2016
p p GBPm GBPm
Ordinary dividend:
Final paid in respect of prior year 11.0 7.0 112 71
Interim paid in respect of current year 6.6 5.0 68 51
17.6 12.0 180 122
Preference dividend 9 9
Tier 1 notes coupon payment 11 -
200 131
The Tier 1 notes coupon payment relates to the two floating rate notes
issued on 27 March 2017 (note 18).
NOTES TO THE CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
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 2017 440 128 82 753 259 1,662
Additions - - - 131 - 131
Disposals - - - (28) - (28)
Exchange adjustment 1 4 - 3 (3) 5
At 31 December 2017 441 132 82 859 256 1,770
Accumulated amortisation
At 1 January 2017 - 128 68 418 172 786
Amortisation charge - - 9 66 19 94
Amortisation on disposals - - - (28) - (28)
Exchange adjustment - 4 - - (2) 2
At 31 December 2017 - 132 77 456 189 854
Accumulated impairment
At 1 January 2017 95 - - 48 5 148
Impairment charge - - - 20 - 20
Reversal of held for sale
valuation adjustment (17) - - - - (17)
Exchange adjustment 1 - - 1 - 2
At 31 December 2017 79 - - 69 5 153
Carrying amount at 31 December
2017 362 - 5 334 62 763
11. GOODWILL AND INTANGIBLE ASSETS (CONTINUED)
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
Held for sale valuation
adjustment 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
Amortisation
Amortisation expense of GBP79m (2016: GBP72m) has been charged to underwriting and policy acquisition costs with the remainder recognised in other operating expenses.
Impairments
During 2017 the software impairment charge was GBP20m (2016: GBP1m), none of which was charged to underwriting and policy acquisition costs (2016: GBPnil). The impairment relates to software in the UK where business volumes have been lower than anticipated GBP11m and a Scandinavian IT system where certain older elements have been rendered obsolete GBP9m.
When testing for goodwill impairment, the carrying value of the Cash Generating Unit (CGU) to which goodwill has been allocated is compared to the recoverable amount as determined by a value in use calculation. These calculations use cash flow 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. Cash flows beyond this period are extrapolated using the estimated growth rates which management deem appropriate for the CGU. The cash flow 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.
11. GOODWILL AND INTANGIBLE ASSETS (CONTINUED)
Goodwill is allocated to the Group's CGUs, which are contained within
the following operating segments:
2017 2016
GBPm GBPm
Scandinavia (Sweden, Norway, Denmark) 155 152
Canada (Commercial, Johnson, Personal, Travel) 157 160
UK and International (Ireland, Oman) 50 33
Total Goodwill 362 345
In 2016, legislation was issued by the Oman Government requiring a proportion of the company to be offered to the public. This was expected to result in the Group losing control and therefore the Oman business was classified as held for sale. Consequently the business was measured at fair value less costs to sell resulting in a revaluation adjustment in 2016 of GBP30m.
The proportion of business sold in 2017 was lower than expected resulting in control being retained by the Group. Goodwill of GBP17m has been reinstated in 2017 as a consequence.
Impairment Sensitivity
Following completion of the Group impairment testing, it was identified that the Norway CGU was sensitive to changes in key assumptions.
The sensitivities are listed below:
Norway
Potential
impairment
GBPm
Change to each year of the planning period (2018 to 2020)
6% decrease in earned premium (3)
6% increase in COR% (3)
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 2017 for the CGUs 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
2017 2016 2017 2016
Scandinavia 10%-11% 9%-10% 1%-3% 2%-3%
Canada 11%-13% 11%-12% 2%-4% 2%-4%
UK & International 9%-11% 9%-11% 2% 2%
12. FINANCIAL ASSETS
The following table analyses the Group's financial assets by classification as at 31 December 2017 and 31 December 2016.
As at 31 December 2017
At fair
value through
profit and Available Loans and
loss (FVTPL) for sale receivables Total
GBPm GBPm GBPm GBPm
Equity securities - 764 - 764
Debt securities 18 10,642 - 10,660
Financial assets measured
at fair value 18 11,406 - 11,424
Loans and receivables - - 219 219
Total financial assets 18 11,406 219 11,643
As at 31 December 2016
At fair
value through
profit and Available Loans and
loss (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
The following table analyses the cost/amortised cost, gross unrealised
gains and losses, and fair value of financial assets.
2017 2016
Unrealised
Cost / amortised Unrealised losses and
cost gains impairments Fair value Fair value
GBPm GBPm GBPm GBPm GBPm
Equity securities 740 52 (28) 764 692
Debt securities 10,356 431 (127) 10,660 12,321
Financial assets measured
at fair value 11,096 483 (155) 11,424 13,013
Loans and receivables 219 - - 219 88
Total financial assets 11,315 483 (155) 11,643 13,101
Less: Assets classified
as held for sale
Debt securities - - - - 776
Total financial assets
net of held for sale 11,315 483 (155) 11,643 12,325
Collateral
At 31 December 2017, the Group had pledged GBP514m (2016: GBP763m) of financial assets as collateral for liabilities or contingent liabilities. The assets pledged are included within the balance sheet as follows; government securities of GBP461m (2016: GBP636m), cash and cash equivalents of GBP43m (2016: GBP114m) and debt securities of GBP10m (2016: GBP13m). The terms and conditions of the collateral pledged are market standard in relation to letter of credit facilities.
At 31 December 2017, the Group has accepted GBP31m (2016: GBP101m) in collateral. The assets accepted are included within the balance sheet. 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 GBP31m (2016: GBP101m). The terms and conditions of the collateral held are market standard. The assets held as collateral are readily convertible into cash.
12. FINANCIAL ASSETS (CONTINUED)
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 2017
Notional Amount Fair Value
From
Less than 1 to Over
1 year 5 years 5 years Total Asset Liability
GBPm GBPm GBPm GBPm GBPm GBPm
Designated as hedging
instruments
Currency risk (net investment
in foreign operation) 1,253 - - 1,253 21 (5)
Currency risk (cash flow) 1 5 - 6 1 -
Cross currency interest
swaps (fair value/ cash
flow) 4 159 181 344 3 (44)
Total 25 (49)
At FVTPL
Currency risk mitigation 223 - - 223 2 -
Inflation risk mitigation - 60 323 383 43 (39)
Total 45 (39)
Total derivatives 70 (88)
As at 31 December 2016
Notional Amount Fair Value
Less From
than 1 to Over
1 year 5 years 5 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)
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 2017 or 2016.
The Group also applies hedge accounting to specified fixed interest assets in its investment portfolio. In order to remove exchange risk from these assets the Group may also acquire cross currency interest rate swaps to swap the cash flows from the portfolio into cash flows denominated in pounds sterling or the functional currency of the entity acquiring the asset. 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 four months and 38 years, with the substantial majority having a term of less than eight years. There have been no default and no defaults are expected on the hedged investments.
12. FINANCIAL ASSETS (CONTINUED)
The total gains on cash flow hedge instruments during 2017 were GBP3m (2016: GBP6m) in the consolidated statement of other comprehensive income, and the amount reclassified to the income statement was GBP1m (2016: GBP1m). The ineffectiveness recognised in the income statement was GBPnil (2016: GBPnil).
The total losses on the fair value hedge instruments recognised in the income statement were GBP45m (2016: GBP50m) and the offsetting gains related to the hedged risk were GBP50m (2016: GBP45m).
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 2017, the Group took out borrowings from credit institutions under repurchase agreements of GBP119m (2016: 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 2017 Gross amounts offset reported instruments collateral Net amount
GBPm GBPm GBPm GBPm GBPm GBPm
Derivative financial
assets 70 - 70 (54) (15) 1
Reverse repurchase
arrangements and other
similar secured lending 119 - 119 (119) - -
Total assets 189 - 189 (173) (15) 1
Derivative financial
liabilities 88 - 88 (54) (31) 3
Repurchase arrangements
and other similar secured
borrowing 119 - 119 (119) - -
Total liabilities 207 - 207 (173) (31) 3
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
13. FAIR VALUE MEASUREMENT
Fair value is used to value a number of assets within the statement of financial position and represents its market value at the reporting date.
Cash and cash equivalents, loans and receivables, other assets and other liabilities
For cash, loans and receivables, commercial paper, other assets, liabilities and accruals, their carrying amounts are considered to be as approximate fair values.
Group occupied property and investment property
Group occupied properties are valued on a vacant possession basis using third party valuers. Investment properties are valued, at least annually, at their highest and best use.
The fair value of property has been determined by external, independent valuers, having appropriate recognised professional qualifications and recent experience in the location and category of the property being valued.
The valuations of buildings with vacant possession are based on the comparative method of valuation with reference to sales of other vacant buildings. Fair value is then determined based on the locational qualities and physical building characteristics (principally condition, size, specification and layout) as appropriate.
Investment properties are valued using discounted cash flow models which take into account the net present value of cash flows to be generated from the properties. The cash flow streams reflect the current rent (the gross rent) payable to lease expiry, at which point it is assumed that each unit will be re-let at its estimated rental value. Allowances have been made for voids and rent free periods where applicable. The appropriate rent to be capitalised is selected on the basis of the location of the building, its quality, tenant credit quality and lease terms amongst other factors.
These cash flows are discounted at an appropriate rate of interest to determine their present value.
In both cases the estimated fair value would increase/(decrease) if:
-- The estimated rental value is higher/(lower); -- Void periods were shorter/(longer); -- The occupancy rates were higher/(lower); -- Rent free periods were shorter/(longer); -- The discount rates were lower/(higher).
Derivative financial instruments
Derivative financial instruments are financial contracts whose fair value is determined on a market basis by reference to underlying interest rate, foreign exchange rate, equity or commodity instrument or indices.
Loan capital
The fair value measurement of the Group's loan capital instruments, with the exception of the subordinated guaranteed US$ bonds, are based on pricing obtained from a range of financial intermediaries who base their valuations on recent transactions of the Group's loan capital instruments and other observable market inputs such as applicable risk free rate and appropriate credit risk spreads.
The fair value measurement of the subordinated guaranteed US$ bonds is also obtained from an indicative valuation based on the applicable risk free rate and appropriate credit risk spread.
Fair value hierarchy
Fair value for all assets and liabilities which are either measured or disclosed is determined based on available information and categorised according to a three-level fair value hierarchy as detailed below.
-- Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities;
-- Level 2 fair value measurements are those derived from data other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices);
-- Level 3 fair value measurements are those derived from valuation techniques that include significant inputs for the asset or liability valuation that are not based on observable market data (unobservable inputs).
13. FAIR VALUE MEASUREMENT (CONTINUED)
A financial instrument is regarded as quoted in an active market (level 1) if quoted prices for that financial instrument are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency and those prices represent actual and regularly occurring market transactions on an arm's length basis.
The Group uses prices received from external providers who calculate these prices from quotes available at the reporting date for the particular investment being valued. For investments that are actively traded the Group determines whether the prices meet the criteria for classification as a level 1 valuation. The price provided is classified as a level 1 valuation when it represents the price at which the investment traded at the reporting date taking into account the frequency and volume of trading of the individual investment together with the spread of prices that are quoted at the reporting date for such trades. Typically investments in frequently traded government debt would meet the criteria for classification in the level 1 category. Where the prices provided do not meet the criteria for classification in the level 1 category, the prices are classified in the level 2 category.
In limited circumstances, the Group does not receive pricing information from an external provider for its financial investments. In such circumstances the Group calculates fair value which may use input parameters that are not based on observable market data. Unobservable inputs are based on assumptions that are neither supported by prices from observable current market transactions for the same instrument nor based on available market data. In these cases, judgment is required to establish fair values. Valuations that require the significant use of unobservable data are classified as level 3 valuations. In addition, the valuations used for investment properties and for group occupied properties are classified in the level 3 category.
The following table provides an analysis of financial instruments and other items that are measured subsequent to initial recognition at fair value as well as financial liabilities not measured at fair value, grouped into levels 1 to 3. The table does not include financial assets and liabilities not measured at fair value if the carrying value is a reasonable approximation of fair value.
Fair value hierarchy
2017
Less: Assets
of operations
classified
Level Level Level as held
1 2 3 for sale Total
GBPm GBPm GBPm GBPm GBPm
Group occupied property - land and
buildings - - 35 - 35
Investment properties - - 308 - 308
Available for sale financial assets:
Equity securities 407 7 350 - 764
Debt securities 3,711 6,604 327 - 10,642
Financial assets at FVTPL:
Equity securities - - - - -
Debt securities - - 18 - 18
4,118 6,611 1,038 - 11,767
Derivative assets:
At FVTPL - 45 - - 45
Designated as hedging instruments - 25 - - 25
Total assets measured at fair value 4,118 6,681 1,038 - 11,837
Derivative liabilities:
At FVTPL - 39 - - 39
Designated as hedging instruments - 49 - - 49
Total liabilities measured at fair
value - 88 - - 88
Loan capital - 507 - - 507
Total value of liabilities not measured
at fair value - 507 - - 507
13. FAIR VALUE MEASUREMENT (CONTINUED)
Fair value hierarchy
2016
Less: Assets
of operations
classified
Level Level Level as held
1 2 3 for sale Total
GBPm GBPm GBPm GBPm GBPm
Group occupied property - land and
buildings - - 38 4 34
Investment properties - - 333 - 333
Available for sale financial assets:
Equity securities 323 - 363 - 686
Debt securities 4,256 7,756 290 776 11,526
Financial assets at FVTPL:
Equity securities - - 6 - 6
Debt securities - - 19 - 19
4,579 7,756 1,049 780 12,604
Derivative assets:
At FVTPL - 47 - - 47
Designated as hedging instruments - 9 - - 9
Total assets measured at fair value 4,579 7,812 1,049 780 12,660
Derivative liabilities:
At FVTPL - 38 - - 38
Designated as hedging instruments - 129 - - 129
Total liabilities measured at fair
value - 167 - - 167
Loan capital - 1,129 8 - 1,137
Total value of liabilities not measured
at fair value - 1,129 8 - 1,137
The movement in the fair value measurements of level 3 financial assets
is shown in the table below:
Available for Investments
sale investments at FVTPL
Equity Debt Equity Debt
securities securities securities securities Total
GBPm GBPm GBPm GBPm GBPm
At 1 January 2016 269 154 38 15 476
Total gains/(losses) recognised in:
Income statement 1 - 1 (9) (7)
Other comprehensive income 16 2 - - 18
Purchases 49 118 5 28 200
Disposals 7 - (38) (15) (46)
Exchange adjustment 21 16 - - 37
At 1 January 2017 363 290 6 19 678
Total gains/(losses) recognised in:
Income statement 2 - - (1) 1
Other comprehensive income (12) (6) - - (18)
Purchases 22 59 - - 81
Disposals (31) (16) (6) - (53)
Exchange adjustment 6 - - - 6
Level 3 financial assets at 31 December
2017 350 327 - 18 695
13. FAIR VALUE MEASUREMENT (CONTINUED)
The following table shows the level 3 available for sale financial assets, investment properties and group occupied property carried at fair value as at the balance sheet date, the valuation basis, main assumptions used in the valuation of these instruments and reasonably possible decreases in fair value based on reasonably possible alternative assumptions.
Reasonably possible alternative
assumptions
2017 2016
Current Decrease Current Decrease
fair in fair fair in fair
value value value value
Available for sale financial
assets and property Main assumptions GBPm GBPm GBPm GBPm
Group occupied property -
land and buildings(1) Property valuation 35 (5) 38 (5)
Cash flows; discount
Investment properties(1) rate 308 (48) 333 (50)
Level 3 available for sale
financial assets:
Cash flows; discount
Equity securites(2) rate 350 (10) 363 (14)
Cash flows; discount
Debt securities(2) rate 327 (9) 290 (15)
Total 1,020 (72) 1,024 (84)
(1) The Group's property portfolio (including the Group occupied properties)
is almost exclusively located in the UK. Reasonably possible alternative
valuations have been determined using an increase of 100bps in the
discount rate used in the valuation.
(2) The Groups investment in financial assets classified at level 3
in the hierarchy are primarily investments in various private fund
structures investing in debt instruments where the valuation includes
estimates of the credit spreads on the underlying holdings. The estimates
of the credit spread are based upon market observable credit spreads
for what are considered to be assets with similar credit risk. Reasonably
possible alternative valuations have been determined using an increase
of 100bps in the credit spread used in the valuation.
14. REINSURERS' SHARE OF INSURANCE CONTRACT LIABILITIES
2017 2016
GBPm GBPm
Reinsurers' share of provisions for unearned premiums 729 816
Reinsurers' share of provisions for losses and loss adjustment
expenses 1,523 1,436
Total reinsurers' share of insurance contract liabilities
net of held for sale 2,252 2,252
To be settled within 12 months 1,187 1,301
To be settled after 12 months 1,065 951
The following changes have occurred in the reinsurers' share of provision
for unearned premiums during the year:
2017 2016
GBPm GBPm
Reinsurers' share of provision for unearned premiums
at 1 January 818 961
Premiums ceded to reinsurers 920 1,068
Reinsurers' share of premiums earned (977) (1,096)
Changes in reinsurance asset (57) (28)
Reinsurers' share of portfolio transfers and disposals
of subsidiaries (27) (137)
Exchange adjustment (5) 22
Reinsurers' share of provision for unearned premiums
at 31 December 729 818
Less: Assets classified as held for sale - 2
Total reinsurers' share of provision for unearned premiums
at 31 December net of held for sale 729 816
14. REINSURERS' SHARE OF INSURANCE CONTRACT LIABILITIES (CONTINUED)
The following changes have occurred in the reinsurers' share of provision
for losses and loss adjustment expenses during the year:
2017 2016
GBPm GBPm
Reinsurers' share of provisions for losses and loss adjustment
expenses at 1 January 1,530 1,264
Reinsurers' share of total claims incurred 786 915
Total reinsurance recoveries received (730) (414)
Reinsurers' share of portfolio transfers and disposals
of subsidiaries - (356)
Reinsurance of UK Legacy 568 -
Exchange adjustment (23) 113
Other movements 28 8
Reinsurers' share of provisions for losses and loss adjustment
expenses at 31 December 2,159 1,530
Less: Assets classified as held for sale 636 94
Total reinsurers' share of provisions for losses and
loss adjustment expenses at 31 December net of held for
sale 1,523 1,436
15. CURRENT AND DEFERRED TAX
Current Tax
Asset Liability
2017 2016 2017 2016
GBPm GBPm GBPm GBPm
To be settled within 12 months 40 60 13 25
To be settled after 12 months 3 5 11 11
Net current tax position at 31 December 43 65 24 36
Less: Classified as held for sale - - - 4
Net current tax position at 31 December
net of held for sale 43 65 24 32
Deferred Tax
Asset Liability
2017 2016 2017 2016
GBPm GBPm GBPm GBPm
Net deferred tax position at 31 December 276 270 56 54
The following are the major deferred tax assets/(liabilities) recognised
by the Group:
2017 2016
GBPm GBPm
Net unrealised gains on investments (31) (54)
Intangibles capitalised (24) (28)
Deferred acquisition costs (8) (7)
Tax losses and unused tax credits 97 190
Other deferred tax reliefs 87 10
Net insurance contract liabilities (18) (15)
Retirement benefit obligations 53 55
Capital allowances 55 56
Provisions and other temporary differences 9 9
Net deferred tax asset at 31 December 220 216
15. CURRENT AND DEFERRED TAX (CONTINUED)
The movement in the net deferred tax assets recognised by the continuing
Group was as follows:
2017 2016
GBPm GBPm
Net deferred tax asset at 1 January 216 123
Amounts credited to income statement 10 44
Amounts (charged)/credited to other comprehensive income (3) 41
Net arising on acquisition/disposal of subsidiaries
and other transfers - 10
Exchange adjustments (3) 7
Effect of change in tax rates - income statement - (8)
- other comprehensive income - (1)
Net deferred tax asset at 31 December 220 216
At the end of the reporting period, the Group's continuing operations have unused tax losses of GBP2,326m (2016: GBP1,629m) for which no deferred tax asset is being recognised. This includes capital losses of GBP1,189m (2016: GBP1,194m) for which it is unlikely that a deferred tax asset would be recognised as most UK capital gains are exempt from tax. None of these losses are subject to expiry. In addition, the Group has deductible temporary differences of GBP198m (2016: GBP654m) 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 GBP509m (2016: GBP1,006m) 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 GBP220m (2016: GBP216m) net deferred tax asset recognised by the Group's continuing operations, GBP233m (2016: GBP179m) 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.
16. CASH AND CASH EQUIVALENTS
2017 2016
GBPm GBPm
Cash and cash equivalents and bank overdrafts (consolidated
statement of cash flows) 1,049 1,087
Add: Overdrafts reported in other borrowings 4 2
Total cash and cash equivalents 1,053 1,089
Less: Assets classified as held for sale 5 104
Total cash and cash equivalents (consolidated statement
of financial position) 1,048 985
17. 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 2017 is:
2017 2016
GBPm GBPm
Issued and fully paid
1,022,835,039 Ordinary Shares of GBP1 each (2016: 1,019,554,986
Ordinary Shares of GBP1 each) 1,023 1,020
125,000,000 Preference Shares of GBP1 each (2016: 125,000,000
Preference Shares of GBP1 each) 125 125
1,148 1,145
17. share capital (CONTINUED)
During 2017, the Company issued a total of 3,280,053 new Ordinary Shares of GBP1 each ranking pari passu with Ordinary Shares in issue (2016: 2,495,144 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 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 1 January 2017 1,019,554,986 1,020 1,080
Issued in respect of employee share options
and employee share awards 3,280,053 3 3
At 31 December 2017 1,022,835,039 1,023 1,083
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
157,866 Ordinary Shares (2016: 414,049 Ordinary Shares) are held by the Share Incentive Plan Trust 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 2017, the total number of options over Ordinary Shares outstanding under the Group employee share option plans is 4,996,149 (2016: 5,047,441) and the total number of potential shares outstanding under the long term incentive plan and under the Sharebuild is 11,940,129 Ordinary Shares (2016: 12,638,394 Ordinary Shares).
18. OTHER EQUITY INSTRUMENTS - TIER 1 NOTES
On 27 March 2017, the Company issued two floating rate Restricted Tier 1 (RT1) Notes totalling GBP297m in aggregate size and with a blended coupon of c.4.7%. The Notes are as follows:
Swedish Krona 2,500m at 3 month Stibor +525bps (equivalent to c.4.8% coupon on issue)
Danish Krone 650m at 3 month Cibor +485bps (equivalent to c.4.6% coupon on issue)
Interest on the Notes is due and payable only at the sole and absolute discretion of the Company, subject to certain additional restrictions set out in the terms and conditions, and is non-cumulative. In addition the terms and conditions of the Notes will require the Company to cancel interest payments in certain circumstances. The Notes are redeemable (subject to certain conditions) at the option of the Company in whole but not in part on the first call date, being the fifth anniversary of the issue date, or any interest payment date thereafter or in the event of certain changes in the tax, regulatory or ratings treatment of the Notes. Any redemption is subject, inter alia, to the Company giving notice to the relevant regulator and the regulator granting permission to redeem. The Notes convert into ordinary shares of the Company, at a pre-determined price in the event that certain solvency capital requirements are breached, as more fully set out in the terms and conditions of the Notes. Accordingly, the Notes are treated as a separate category within Equity and coupon payments are recognised as distributions, similar to the treatment of preference share dividends.
19. LOAN CAPITAL
Non cash
Cash movements movements
2016 Settlement Amortisation 2017
GBPm GBPm GBPm GBPm
Subordinated guaranteed US$ bonds 6 - - 6
Guaranteed subordinated step-up notes
due 2039 298 (261) 2 39
Guaranteed subordinated notes due 2045 395 - 1 396
Total dated loan capital 699 (261) 3 441
Perpetual guaranteed subordinated capital
securities 369 (375) 6 -
Total loan capital 1,068 (636) 9 441
The subordinated guaranteed US$ bonds were issued in 1999 and have a nominal value of $9m and a redemption date of 15 October 2029. The rate of interest payable on the bonds is 8.95%.
The dated guaranteed subordinated step-up notes were issued on 20 May 2009 at a fixed rate of 9.375%. The nominal GBP500m bonds have a redemption date of 20 May 2039. On 12 July 2016, the Group bought back GBP200m in nominal value of these step-up notes, with a further GBP245m being bought back on 31 March 2017, GBP15m in Q2 2017 and GBP1m in Q3 and Q4 2017. The remaining GBP39m has a first call date of 20 May 2019.
The dated guaranteed subordinated notes were issued on 10 October 2014 at a fixed rate of 5.125%. The nominal GBP400m bonds have a redemption date of 10 October 2045. The Group has the right to repay the notes on specific dates from 10 October 2025. If the bonds are not repaid on that date, the applicable rate of interest would be reset at a rate of 3.852% plus the appropriate benchmark gilt for a further five year period.
The perpetual guaranteed subordinated capital securities issued on 12 May 2006 have a nominal value of GBP375m and the rate of interest payable is 6.701% of the nominal value. On 29 March 2017, the Group bought back GBP347m of the outstanding principal amount. The remaining GBP28m balance was settled in July 2017.
The bonds and the notes are contractually subordinated to all other creditors of the Group such that in the event of a winding up or of bankruptcy, they are able to be repaid only after the claims of all other creditors have been met.
There have been no defaults on any bonds or notes during the year. The Group has the option to defer interest payments on the bonds and notes, but has to date not exercised this right.
20. 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 GBP8,520m (2016: GBP8,784m).
Claims on certain classes of business (excluding annuities) have been
discounted as follows:
Average number
of years to settlement
from reporting
Discount rate date
2017 2016 2017 2016
Category % % Years Years
UK Asbestos and environmental 4.0 4.0 8 11
Scandinavia Disability 1.3 1.3 8 7
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 2017, the value of the discount on net claims liability reserves is GBP111m (2016: GBP388m) 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 GBP70m (2016: GBP120m).
A decrease of 1% in the real discount rate for UK and Scandinavia annuities would reduce the value of the discount by approximately GBP100m (2016: GBP110m). The sensitivity calculation has taken into consideration the undiscounted provisions for each class of business and the respective average settlement period.
20. INSURANCE CONTRACT LIABILITIES (CONTINUED)
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
2017 2017 2017
GBPm GBPm GBPm
Provision for unearned premiums 3,316 (729) 2,587
Provision for losses and loss adjustment expenses 10,113 (2,159) 7,954
Total insurance contract liabilities 13,429 (2,888) 10,541
Less: Held for sale provision for unearned premiums - - -
Less: Held for sale provisions for losses and loss
adjustment expenses 636 (636) -
Less: Total liabilities held for sale 636 (636) -
Provision for unearned premiums at 31 December net
of held for sale 3,316 (729) 2,587
Provision for losses and loss adjustment expenses
at 31 December net of held for sale 9,477 (1,523) 7,954
Total insurance contract liabilities excluding held
for sale 12,793 (2,252) 10,541
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
Provision for unearned premiums, gross of acquisition costs
2017 2016
GBPm GBPm
Provision for unearned premiums (gross of acquisition
costs) at 1 January 3,994 4,200
Premiums written 7,599 7,477
Less: Premiums earned (7,583) (7,624)
Changes in provision for unearned premiums 16 (147)
Gross portfolio transfers and disposals - (418)
Exchange adjustment (24) 357
Other movements - 2
Provision for unearned premiums (gross of acquisition
costs) at 31 December 3,986 3,994
Less: Liabilities classified as held for sale - 20
Provision for unearned premiums (gross of acquisition
costs) at 31 December net of held for sale 3,986 3,974
20. INSURANCE CONTRACT LIABILITIES (CONTINUED)
The provision for unearned premiums is shown net of deferred acquisition costs of GBP670m (2016: GBP663m). The reasons for the movement in deferred acquisition costs during 2017 are as follows:
2017 2016
GBPm GBPm
Acquisition costs deferred during the year 1,101 1,010
Amortisation charged during the year (1,094) (1,037)
Exchange (losses)/gains (4) 56
Other movements 4 6
Assets transferred to held for sale - (3)
Movement in deferred acquisition costs 7 32
The reinsurers' share of deferred acquisition costs is included within
accruals and deferred income.
Provisions for losses and loss adjustment expenses
The following changes have occurred in the provisions for losses and
loss adjustment expenses during the year:
2017 2016
GBPm GBPm
Provisions for losses and loss adjustment expenses at
1 January 10,083 9,457
Gross claims incurred and loss adjustment expenses 5,135 5,130
Total claims payments made in the year net of salvage
and other recoveries (5,093) (5,001)
Gross portfolio transfers, acquisitions and disposals (46) (578)
Exchange adjustment (27) 994
Other movements 61 81
Provisions for losses and loss adjustment expenses at
31 December 10,113 10,083
Less: Liabilities classified as held for sale 636 718
Provisions for losses and loss adjustment expenses at
31 December net of held for sale 9,477 9,365
Claims development tables
The tables below present changes in the historical provisions for losses and loss adjustment expenses that were established in 2007 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 change.
20. INSURANCE CONTRACT LIABILITIES (CONTINUED)
Consolidated claims development table gross of reinsurance
2007
and
prior 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Estimate of cumulative claims
At end of accident
year 9,388 2,623 2,524 2,802 2,999 2,854 3,181 2,857 2,850 2,844 3,088
One year later 8,889 2,644 2,616 2,935 3,053 2,898 3,246 2,973 2,863 2,837
Two years later 8,524 2,621 2,573 2,875 3,082 2,874 3,169 2,886 2,828
Three years later 8,125 2,560 2,531 2,905 3,008 2,866 3,123 2,861
Four years later 7,856 2,554 2,559 2,891 2,942 2,821 3,113
Five years later 7,625 2,514 2,554 2,856 2,909 2,836
Six years later 7,544 2,498 2,515 2,817 2,900
Seven years later 7,499 2,485 2,526 2,803
Eight years later 7,674 2,483 2,529
Nine years later 7,910 2,485
Ten years later 7,832
2017 Movement 78 (2) (3) 14 9 (15) 10 25 35 7 158
Claims paid
One year later 2,352 1,257 1,209 1,533 1,378 1,342 1,491 1,351 1,338 1,440
Two years later 1,205 401 425 418 499 503 558 429 545
Three years later 947 252 271 286 334 291 275 292
Four years later 604 186 200 212 193 190 206
Five years later 443 123 149 116 108 145
Six years later 438 72 73 65 77
Seven years later 308 39 40 54
Eight years later 155 37 32
Nine years later 146 23
Ten years later 227
Cumulative claims
paid 6,825 2,390 2,399 2,684 2,589 2,471 2,530 2,072 1,883 1,440
Reconciliation to the statement of financial position
Current year provision
before discounting 1,007 95 130 119 311 365 583 789 945 1,397 3,088 8,829
Exchange adjustment
to closing rates (5)
Discounting (105)
Annuities 758
Present value recognised in the consolidated
statement of financial position 9,477
Held for sale 636
Total Group 10,113
20. INSURANCE CONTRACT LIABILITIES (CONTINUED)
Consolidated claims development table net of reinsurance
2007
and
prior 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Estimate of cumulative claims
At end of accident
year 8,017 2,388 2,287 2,455 2,625 2,584 2,776 2,531 2,403 2,263 2,319
One year later 7,603 2,380 2,345 2,532 2,613 2,616 2,876 2,568 2,332 2,239
Two years later 7,239 2,379 2,305 2,502 2,597 2,593 2,801 2,522 2,292
Three years later 6,827 2,331 2,276 2,518 2,549 2,554 2,770 2,472
Four years later 6,550 2,319 2,309 2,525 2,504 2,515 2,729
Five years later 6,330 2,289 2,311 2,492 2,478 2,522
Six years later 6,253 2,269 2,290 2,468 2,463
Seven years later 6,244 2,256 2,285 2,458
Eight years later 6,423 2,256 2,271
Nine years later 6,664 2,246
Ten years later 6,682
2017 Movement (18) 10 14 10 15 (7) 41 50 40 24 179
Claims paid
One year later 1,974 1,118 1,109 1,282 1,184 1,208 1,328 1,182 1,132 1,071
Two years later 993 349 363 386 414 407 436 371 317
Three years later 770 239 238 256 269 248 244 217
Four years later 498 176 190 196 176 195 188
Five years later 394 106 130 100 107 122
Six years later 381 70 70 61 64
Seven years later 275 35 34 49
Eight years later 117 30 28
Nine years later 184 21
Ten years later 207
Cumulative claims
paid 5,793 2,144 2,162 2,330 2,214 2,180 2,196 1,770 1,449 1,071
Reconciliation to the statement of financial position
Current year provision
before discounting 889 102 109 128 249 342 533 702 843 1,168 2,319 7,384
Exchange adjustment
to closing rates (19)
Discounting (99)
Annuities 688
Present value recognised in the consolidated
statement of financial position 7,954
Held for sale -
Total Group 7,954
Insurance and reinsurance liabilities
2017 2016
GBPm GBPm
Direct insurance creditors 113 110
Reinsurance creditors 823 849
Total insurance and reinsurance liabilities 936 959
Less: Liabilities classified as held for sale 2 5
Total 934 954
21. POST-RETIREMENT BENEFITS AND OBLIGATIONS
Movement in surplus/(deficit) during the year:
2017 2016
GBPm GBPm
(Deficit)/surplus at 1 January (252) 67
Current service costs (11) (23)
Past service costs (1) (5)
Pension net interest (charge)/credit (6) 6
Administration costs (7) (9)
Gains/(losses) on settlements/curtailments 6 -
Total pension expense (19) (31)
Contributions by the Group 101 110
Return on scheme assets less amounts included in pension
net interest credit 277 1,279
Effect of changes in financial assumptions (309) (1,770)
Effect of changes in demographic assumptions 166 1
Experience gains and losses (34) 120
Investment expenses (11) (10)
Other net surplus remeasurements (62) -
Remeasurements of net defined benefit liability 27 (380)
Exchange adjustment 2 (18)
Pension and post-retirement deficit (141) (252)
Deferred tax in respect of net pension and post-retirement
deficit 53 55
Net pension and post-retirement deficit at 31 December (88) (197)
The value of scheme assets and the scheme obligations are as follows:
2017 2016
UK Other Total Total
GBPm GBPm GBPm GBPm
Present value of funded obligations (8,326) (434) (8,760) (8,774)
Present value of unfunded obligations (7) (111) (118) (119)
Present value of obligations (8,333) (545) (8,878) (8,893)
Equities 591 161 752 764
Government debt 5,275 147 5,422 5,289
Non-Government debt 3,351 114 3,465 3,276
Derivatives 743 - 743 808
Other (including infrastructure, commodities,
hedge funds, loans) - 26 26 27
Securities at fair value 9,960 448 10,408 10,164
Property 189 - 189 164
Cash 63 7 70 61
Other (including infrastructure, commodities,
hedge funds, loans) 519 - 519 484
Other investments 771 7 778 709
Value of asset and longevity swaps (2,387) - (2,387) (2,232)
Total assets in the schemes 8,344 455 8,799 8,641
Other net surplus remeasurements (62) - (62) -
Total deficit (51) (90) (141) (252)
Defined benefit pension schemes (51) (30) (81) (196) Other post-retirement benefits - (60) (60) (56) Schemes in surplus 119 22 141 70 Schemes in deficit (170) (112) (282) (322)
The UK defined benefit schemes closed to future accrual on 31 March 2017. UK schemes in surplus have been reduced for the tax cost of an authorised return of surplus, classified above as 'Other net surplus remeasurements'. Our judgement is that the authorised refund tax charge is not an income tax within the meaning of IAS12 and so the surplus is recognised net of this tax charge rather than the tax charge being included within deferred taxation.
NOTES TO THE CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
22. RECONCILIATION OF CASH FLOWS FROM OPERATING ACTIVITIES
The reconciliation of net profit before tax to cash flows from operating activities is as follows:
2017 2016
Note GBPm GBPm
Cash flows from operating activities
Profit for the year before tax from continuing
operations 448 101
Adjustments for non-cash movements in net profit
for the year
Amortisation of available for sale assets 58 70
Depreciation 22 20
Amortisation and impairment of intangible assets 11 114 83
Fair value (gains)/losses on disposal of financial
assets (15) 15
Impairment on available for sale financial assets (4) (8)
Share of (profit) of associates (1) -
(Profit) on disposal of business and realised
gains on held for sale assets (69) -
Remeasurement of disposal groups - 234
Foreign exchange loss/(gain) 7 (87)
Other non-cash movements 24 17
Changes in operating assets/liabilities
Loss and loss adjustment expenses 2 (308)
Unearned premiums 68 (76)
Movement in working capital (253) (69)
Reclassification of investment income and interest
paid (181) (212)
Pension deficit funding (65) (65)
Cash generated from investment of insurance assets
Dividend income 32 28
Interest and other investment income 282 328
Cash flows from operating activities 469 71
RESULTS FOR THE YEAR 2017
23. results for THE YEAR 2017
This financial information set out above does not constitute statutory accounts for the years ended 31 December 2017 or 31 December 2016 but is derived from those accounts. Statutory accounts for 2016 have been delivered to the Registrar of Companies, and those for 2017 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.
APPENDIX A: EXCHANGE RATES
12 Months 12 Months
Local currency/GBP 2017 2016
Average Closing Average Closing
Canadian Dollar 1.67 1.70 1.79 1.66
Danish Krone 8.49 8.39 9.11 8.71
Swedish Krona 10.99 11.09 11.59 11.19
Euro 1.14 1.13 1.22 1.17
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
21 February 2018 21 February 2018
This information is provided by RNS
The company news service from the London Stock Exchange
END
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(END) Dow Jones Newswires
February 22, 2018 02:00 ET (07:00 GMT)
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