Final Results

LONDON--()--

2014 PRELIMINARY RESULTS

26 February 2015

2014 pre-tax profit of £275 million, up from £244 million loss in 2013

Good progress on implementing new strategy and laying foundations for stronger future performance

Medium-term performance targets reaffirmed. Dividend recommencing

Stephen Hester, RSA Group Chief Executive, commented:

“2014 was an important year for RSA. The Company made good progress in the face of some tough realities. We can look to the coming years with much sounder strategic and financial foundations. We have created far reaching and detailed plans for operational improvement. Actions are well underway and beginning to benefit both the underlying potential and performance of our businesses.

“RSA returned to profit in 2014 and to paying a dividend. Our customer franchises proved resilient. Current year underwriting profit (ex-Ireland) was improved to record levels. Successful disposals realised strong gains. Costs were cut and savings targets increased. However, the clean-up of past weaknesses was also expensive; and market headwinds, especially from exchange rate changes and low interest rates, are a drag on results.

“RSA is much better positioned than before to make continued good progress. We are determined to do just that in 2015 and beyond.”

Trading results

  • Tangible equity up 74% to £2.9bn (31 December 2013: £1.7bn).
  • Net written premiums of £7.5bn down 8%1 (down 2% underlying2) reflecting disposals, our portfolio action plan and competitive market conditions.
  • Foreign exchange movements, notably the weakening of key currencies against Sterling, translated reported premiums down 14%.
  • Group operating profit was £365m (2013: £349m) with core business operating profit of £367m up 17% from 2013 £315m). Scandinavia £251m; Canada £107m; and UK £147m.
  • Headline Group underwriting profit was £90m (2013: £57m), comprising strong current year results reduced by losses in Ireland and UK charges for prior year reserve strengthening. The combined ratio3 was 98.8% (2013: 99.4%).
  • Current year core business underwriting profit improved sharply to a record £190m excluding Ireland (2013: £97m); underlying current year loss ratio of 56.2%, 1.0pts better than prior year (2013: 57.2%).
  • Prior year underwriting loss was £31m. Excluding Ireland and non-core operations, prior year profit was £25m (2013: £150m profit ex Ireland). This reflected various adjustments, particularly reserve additions in the UK, but also the unsustainable level of past reserve releases.
  • Ireland underwriting loss of £107m as remediation continued. Our goal is to return Ireland to underwriting profitability in 2016 with significant loss reduction in 2015.
  • Net gains of £476m include £342m from completed disposals. Gains were partly offset by £405m charges including £99m write down of goodwill and intangibles and £73m redundancy costs.
  • Pre-tax profit was £275m (2013: £244m loss). Post tax profit of £76m (2013: £338m loss) after tax charge that included a deferred tax asset write down of £92m.
  • Capital metrics at 31 December 2014: IGD surplus c.£1.8bn with coverage of 2.2 times; ECA surplus c.£0.9bn with coverage of 1.3 times.
  • Reserve margin for the core Group is unchanged at 5% of booked reserves.
  • Return on tangible equity 3.6% (2013: (16.7)%). Underlying return on tangible equity4 of 9.7% (2013: 6.9%).
  • Dividend payments are proposed to recommence with a final dividend recommendation of 2p per ordinary share.

Strategic update

  • Good progress in executing our Action Plan; to tighten strategic focus, build capital strength, and put in place the foundations to improve business performance.
  • Completed disposals of the Baltics, Poland, Noraxis and Thailand. Sales agreed for China, Hong Kong, Singapore, Italy and India businesses.
  • Total announced disposal proceeds to date of £800m; expected disposal gains of c.£500m (£342m booked from disposals already completed).
  • Successfully completed £773m rights issue in April, and £400m subordinated bond issue refinancing in early October with a coupon of 5.1%.
  • Tangible equity to premiums ratio of 39% (31 December 2013: 19%).
  • Detailed plans for operational improvement now in place across the business, including activity to sustain and improve our customer franchises, to improve underwriting, to reduce costs, and to invest in technology, product and service initiatives.
  • Controllable costs are down 6% at constant exchange to £2.1bn. Core business costs were down 4% (comprising 6% cost reductions offset by 2% inflation).
  • Existing 2016 annualised cost reduction target is increased to greater than £210m (up from greater than £180m) and a new target of greater than £250m set for 2017.
  • Medium term performance targets reaffirmed: underlying return on tangible equity of 12-15%; tangible equity to be 35-45%5 of net written premiums; dividend payout ratio of 40-50% in time.

1 At constant FX
2 At constant FX & excluding Motability, Group ADC and completed disposals
3 Stated on an ‘earned’ basis, please refer to the appendix for further details
4 Please refer to the appendix for a detailed calculation of underlying return on tangible equity
5 Capital target to be updated at end 2015 once Solvency II impacts are assessed
Note: On an IFRS basis, pre-tax profit of £275m comprises profits from both continuing and discontinued operations. Please refer to page 42 for further details.

MANAGEMENT REPORT – KEY FINANCIAL PERFORMANCE DATA

Management basis

   

FY 2014

£m

  FY 2014

£m

  FY 2013

£m

Constant FX

  FY 2013

£m

Reported FX

Net Written Premiums Personal   Commercial Total Total Total
Scandinavia 969 790 1,759 1,713 1,863
Canada 1,039 471 1,510 1,553 1,755
UK 1,176 1,393 2,569 3,034 3,041
Ireland 194 101 295 312 327
Latin America 259 431 690 662 837
Group Re1 - (42) (42) 54 54
Total Core Group 3,637 3,144 6,781 7,328 7,877
Discontinued & non-core2 328 356 684 743 787
Total Group net written premiums 3,965 3,500 7,465 8,071 8,664
 

Combined operating ratio (%)3

FY 2014

£m

FY 2013

£m

FY 2013

£m

Underwriting performance FY 2014 FY 2013 Constant FX Reported FX
Scandinavia 89.4 88.1 187 207 225
Canada (ex Noraxis) 98.0 100.7 30 (12) (13)
UK (ex Legacy) 99.5 99.6 15 15 13
Ireland 132.3 166.2 (107) (209) (220)
Latin America 100.3 97.5 (2) 12 20
Group Re1 - - (15) 2 2
Total Core Group 98.6 99.6 108 15 27
Discontinued & non-core2 - - (18) 26 30
Total Grp underwriting performance 98.8 99.4 90 41 57
Investment result 327 365
Insurance result 417 422
Operating result 365 349
Profit / (Loss) before tax 275 (244)
Profit / (Loss) after tax 76 (338)
 
Earnings per share – basic (pence) 6.2p (43.7)p
Recommended dividend per share (pence) 2.0p 10.2p
Return on tangible equity (%) 3.6% (16.7)%
Underlying return on tangible equity (%)4 9.7 6.9
 
31 Dec 2014 31 Dec 2013
Net asset value (£m) 3,825 2,893
Tangible net asset value (£m) 2,900 1,665
Net asset value per share (pence) 365 335
Tangible net asset value per share (pence) 286 202
 
IGD surplus (£bn) 1.8 0.2
IGD coverage ratio (times) 2.2 1.1
ECA surplus (S&P ‘A’ curve calibration) (£bn) 0.9 0.7
ECA coverage ratio (times) 1.3 1.3

1 Includes Adverse Development Cover written premium of £67m
2 Discontinued operations include Poland, Baltics, Italy, Hong Kong, Singapore, China, Italy and Thailand. Non-core operations include Noraxis, UK Legacy, Russia, Middle East and India
3 The combined ratio calculation methodology is presented on an ‘earned’ basis, please refer to the appendix for further details
4 Refer to the appendix for detailed calculation

CHIEF EXECUTIVE’S STATEMENT

2014 was an important year for RSA. The Company made good progress in the face of some tough realities. We can look to the coming years with much sounder strategic and financial foundations. We have created far reaching and detailed plans for operational improvement. Actions are well underway and beginning to benefit both the underlying potential and performance of our businesses.

Strategy and Focus

RSA is a leading international insurer. Our refocused business has leadership positions in Scandinavia, Canada, UK/Ireland and parts of Latin America. Where we do business, we are determined to do it well and be known for our service and appeal to customers. In volatile and competitive markets, our balance of geography, customer, product and distribution channels are valuable and distinctive attributes.

We have three interrelated priorities. Customers are our lifeblood; serving them well is our purpose. We need to operate with financial strength and transparency; and have the discipline to sustain it. Our shareholders own the Company; we are concentrating intensely on building strong, long-term performance to make RSA the best investment proposition we can achieve.

Industry Conditions

We operate in relatively mature, stable and consolidated markets. These continue to underpin our ambition of good and improving customer service - offering vital risk management and value for money. We see continued evolution as digital and other trends are harnessed to improve the scope of how we operate. Despite economic challenges, industry conditions also allow us to realistically target a cash generative business, returning greater than the cost of capital for shareholders.

RSA's diversity helps protect our performance potential. However, like industry competitors and many other businesses, low interest rates, exchange rate moves and modest growth rates create significant performance headwinds. Strong price competition, intensified by third party capital seeking alternative outlets from stock and bond markets, has led to sharper price/volume trade-offs than before in a number of segments. As a result, in each of our larger markets there are some competitors reporting falls in or static like-for-like premium income. Five year bond yields are down a further 0.8-1.6% since the start of 2014 across our principal markets, impacting the outlook for investment returns. Around two thirds of RSA's premiums lie outside the UK. January 2015 month-end spot exchange rates would imply a c.3% reduction in the reported Sterling figures versus the premiums reported for 2014, with the impact being larger in profitability terms.

2014 Actions

I joined RSA in February 2014 with a mandate to lead the Company in three urgent tasks. These were: to thoroughly identify the sources of RSA's performance weaknesses; to devise plans to fix these and address internal and external challenges to realising RSA's potential; and then to implement those plans. The first two tasks are largely done. The third is well in hand, but with much tough and disciplined work ahead to follow through.

As so often in corporate turnarounds, the cost of remediation has proven greater than we hoped, especially in the form of reserving and non-cash charges. But we have been able to pay for this through outperformance in divestment proceeds. We have refocused RSA on its most important businesses, with a well executed divestment programme already substantially completed.

We raised £773m in May thanks to shareholder support via a rights issue and a further £810m of proceeds from announced divestments to date (of which £550m already completed) at prices well above tangible book value. We also successfully refinanced £400m of long-term subordinated debt and saw credit ratings restored.

Across our core business, determined action has set a course for improved underwriting results with current year loss ratios (ex-volatile items) improving versus 2013, overall and in most major business units, and expected to do so again in 2015. Alongside this is activity across our business to sustain and improve the health of our customer franchise and to invest in technology, product and service initiatives. These efforts mitigated the customer impact of RSA's 2013/14 problems and are expected to improve performance further in coming years, also returning us to moderate top line growth.

The cost base is being tackled vigorously and investment plans to facilitate this and improve customer capabilities have been set out for the next five years. Total controllable costs are down 12% to £2.1bn versus 2013 (down 6% in real terms ex disposals and FX). Our 2016 target of greater than £180m underlying cost reduction has been raised to greater than £210m and a new target of greater than £250m set for 2017. Our linked ambition is to lift productivity measures (Premiums:FTE) by 15-20% by the end of 2017 versus 2013 numbers.

RSA needed a substantial financial overhaul. This has focused on improving both the quality and the health of its balance sheet and profits. The on-going drag of costs below the underwriting line is also being addressed through reducing central overhead, interest and non-cash amortisation. Intangible assets and deferred acquisition costs have been written down where no longer well supported, with action on booked values of discounted liabilities and deferred tax assets to better reflect current circumstances, though both are still potentially vulnerable to future economic conditions and business performance. We still have significant volatile accounting items in the form of unrealised bond gains as well as off-balance sheet pension liabilities (which are now reporting a surplus under IFRS for the UK, but with latent risk).

Financial Results

Headline profits at £275m pre-tax compare to a £244m pre-tax loss in 2013, yet still represent a fraction of what we seek to achieve as RSA improves performance in coming years.

Net tangible assets have improved by £1.2bn (74%) to £2.9bn in 2014 (from 19% to 39% of net written premiums) and now lie within our target range from a capital perspective, though still at the lower end. We are pleased to recommence dividend payments with a final dividend recommendation of 2p per share. This is a modest level reflecting the work remaining on profit and capital build. We reiterate a medium term ambition of 40-50% dividend payouts plus further capital distributions if excess capital arises.

Behind the 2014 headline figures are many moving parts, reflecting market movements and the actions we have taken.

Premium income is down 2% on an underlying level at constant exchange (8% headline including completed disposals, Motability changes and the Group ADC). Scandinavia did well (up 3%), UK saw most portfolio restructuring (down 6% underlying) with Canada also down a little (down 3%). At reported exchange rates premiums were down 14%.

Current year core business underwriting profit (ex-Ireland) was a record £190m (2013 £97m) reflecting a one point improvement in underlying loss ratios, and after a relatively normal weather and large loss charge. The core business current year underlying loss ratio (ex-Ireland) was 56.2% (2013: 57.2%) and has improved in each quarter during 2014.

Total underwriting profit was £90m (2013 £57m). The figure was depressed by significant reserve strengthening which impacted prior year profits (prior year underwriting profit ex Ireland £14m; 2013: £172m) and an Irish underwriting loss of £107m. The latter mainly relates to the development of issues from 2013 and prior. Both items have proven more costly than was estimated at the start of the year. We expect them to improve sharply in 2015.

Disposal gains of £342m were offset by the charges outlined above, albeit much of the latter being non-cash items.

Plans for the Future

RSA's new and focused strategy was set out a year ago. We believe it is the right one. Our medium-term performance targets are also unchanged; 12-15% underlying return on net tangible assets, 35-45% tangible equity/net premiums, though the latter is sensitive to Solvency II outcomes as well as market factors and may need to be updated at the end of 2015.

Thanks

Managing major transformations is not easy. Sincere thanks and appreciation are due to all our stakeholders; customers and brokers for their support in the uncertainties of early 2014; shareholders for support through disappointing past news and equity fundraising; and of equally vital importance, my RSA colleagues. The steadfast and dedicated service of our 19,000 staff towards customers and to improving our Company is hugely appreciated. There have been significant changes to our executive management team, and talented people have stepped up internally and have joined us from elsewhere. To all I am grateful.

We know where we want to take RSA and how to do it. We will face challenges and setbacks. But we believe in this Company, in its place in our industry and its performance potential.

Stephen Hester
Group Chief Executive
25 February 2015

MANAGEMENT REPORT

INCOME STATEMENT

Management basis - year ended 31 December 2014

          Total ‘non-core’  
Group

FY 2014

Core5 ‘Non-core’6  

Discontinued
operations6

Group

FY 2013

£m £m £m £m £m
Net Written Premiums 7,465 6,781 186 498 8,664
Net Earned Premiums 7,874 7,183 178 513 8,594
Net Incurred Claims1 (5,381) (4,896) (174) (311) (5,970)
Commissions7 (1,195) (1,097) (20) (78) (1,218)
Operating expenses7 (1,208) (1,082) (31) (95) (1,349)
Underwriting result 90 108 (47) 29 57
Investment income 439 397 28 14 493
Investment expenses (29) (27) - (2) (31)
Unwind of discount (83) (60) (23) - (97)
Investment result 327 310 5 12 365
Insurance result 417 418 (42) 41 422
Central expenses (52) (51) (6) 5 (73)
Operating result 365 367 (48) 46 349
Net gains/losses/exchange 476 32
Interest (119) (117)
Non-operating charges2 (42) (57)
Non-recurring charges3 (405) (451)
Profit before tax 275 (244)
Tax (199) (94)
Profit after tax 76 (338)
 
Loss ratio (%) 68.3 68.2 69.5
Weather loss ratio 3.2 3.3 3.5
Large loss ratio 7.4 7.7 7.9
Current year underlying loss ratio4 57.6 57.2 58.7
Prior year effect on loss ratio 0.1 - (0.6)
Commission ratio (%)7 15.2 15.3 14.2
Expense ratio (%)7 15.3 15.1 15.7
Combined ratio (%) 98.8 98.6 99.4
 
Reported ROTE 3.6% (16.7)%
Underlying ROTE 9.7% 6.9%
 
Notes:
1 Of which: claims handling costs (460) 484
 
2 Amortisation (32) (42)
2 Pension net interest costs (10) (15)
 
3 Solvency II costs (25) (20)
3 Reorganisation costs (276) (356)
3 Transaction costs (6) (12)
3 Economic assumption changes (98) (63)

4 Current year underlying loss ratio excludes weather and large losses.
5 ‘Core’ comprises Scandinavia, Canada (ex Noraxis), UK (ex Legacy), Ireland, Latin America and central functions.
6 Discontinued operations include Poland, Baltics, Italy, Hong Kong, Singapore, China and Thailand. Non-core operations include Noraxis, UK Legacy, Middle East, India and Russia
7 The combined ratio calculation methodology is presented on an ‘earned’ basis, please refer to the appendix for further details
Note: please refer to appendix for FY 2013 comparatives

SEGMENTAL ANALYSIS

Management basis - year ended 31 December 2014

    Scandinavia   Canada4   UK5   Ireland  

Latin
America

 

Central
functions

 

Total ‘non-
core’1

 

Group
FY 2014

£m £m £m £m £m £m £m £m
Net Written Premiums 1,759 1,510 2,569 295 690 (42) 684 7,465
Net Earned Premiums 1,752 1,536 2,850 328 700 17 691 7,874
Net Incurred Claims (1,219) (1,056) (1,861) (340) (400) (20) (485) (5,381)
Commissions2 (68) (215) (587) (42) (178) (7) (98) (1,195)
Operating expenses2 (278) (235) (387) (53) (124) (5) (126) (1,208)
Underwriting result 187 30 15 (107) (2) (15) (18) 90
Investment income 112 82 144 11 46 2 42 439
Investment expenses (11) (3) (7) (1) (5) - (2) (29)
Unwind of discount (37) (2) (5) - (14) (2) (23) (83)
Investment result 64 77 132 10 27 - 17 327
Insurance result 251 107 147 (97) 25 (15) (1) 417
Central expenses - - - - - (51) (1) (52)
Operating result 251 107 147 (97) 25 (66) (2) 365
Net gains/losses/exchange 476
Interest (119)
Non-operating charges (42)
Non-recurring charges (405)
Profit before tax 275
Tax (199)
Profit after tax 76
 
Loss ratio (%) 69.6 68.7 65.3 103.5 57.2 68.3
Weather loss ratio 1.6 5.0 3.8 5.8 0.3 3.2
Large loss ratio 4.7 3.6 12.9 3.4 3.6 7.4
Current year underlying loss ratio3 64.8 62.8 49.0 80.3 52.2 57.6
Prior year effect on loss ratio (1.5) (2.7) (0.4) 14.0 1.1 0.1
Commission ratio (%)2 3.9 14.0 20.6 12.6 25.5 15.2
Expense ratio (%)2 15.9 15.3 13.6 16.2 17.6 15.3
Combined ratio (%) 89.4 98.0 99.5 132.3 100.3 98.8

1 Total ‘non-core’ comprises discontinued operations of Poland, Baltics, Italy, Hong Kong, Singapore, China and Thailand and other non-core operations of Noraxis, UK Legacy, Middle East, India and Russia
2 The combined ratio calculation methodology is presented on an ‘earned’ basis, please refer to the appendix for further details
3 Current year underlying loss ratio excludes weather and large losses
4 Excluding Noraxis
5 Excluding Legacy
Note: please refer to appendix for FY 2013 comparatives

Market conditions

Insurance market conditions during 2014 remained competitive. Low interest rates, exchange rate moves and modest economic growth rates continue to create headwinds for our industry.

Price competition, intensified by third party capital seeking alternative outlets from stock and bond markets, has led to sharper price/volume trade-offs than before in a number of segments. As a result, in each of our larger markets there are some major competitors reporting falls in or static like-for-like premium income.

Five-year bond yields are down a further 0.8-1.6% since the start of 2014 across our principal markets. This impacts the outlook for investment returns, discount rates on liabilities and inflates certain elements of capital requirement.

Around two thirds of RSA's core premiums lie outside the UK (more in profitability terms). Foreign exchange movements, notably the strengthening of Sterling during 2014, have impacted reported results, with premiums down 8% on a constant exchange rate basis (2% underlying), but down 14% at reported exchange rates. January 2015 month-end spot exchange rates would imply a c.3% reduction in the reported Sterling figures versus the premiums reported for 2014, with the impact being larger in profitability terms.

Premiums

2014 net written premiums were down 8% from 2013 at constant exchange rates and down 2% on an underlying basis, with the key movements being:

%        

Scandi-
navia

  Canada   UK   Ireland  

Latin
America

 

Total

Volume change including portfolio actions - (5) (8) (10) 1 (4)
Rate increases 3 2 2 5 3 2
Underlying movement at CFX 3 (3) (6) (5) 4 (2)
Group Adverse Development cover - - - - - (1)
Changes to Motability contract - - (9) - - (4)
Completed disposals - - - - - (1)
Total 2014 movement at constant FX 3 (3) (15) (5) 4 (8)
 

Regional highlights (at constant FX) include:

  • Premiums in Scandinavia were up 3%, with good focus on increasing rates across the book;
  • Canadian premiums were down 3% driven by a 5% reduction in Commercial premiums due to the underwriting actions we have been taking on the portfolio;
  • UK premiums were down 6% (down 15% including Motability). During 2014 we have taken significant portfolio actions in the UK, with particular focus on UK Personal Motor where premiums were down 26% as we remain focused on achieving our target returns;
  • Ireland premiums were down 5% following strong rate increases during the year in key lines requiring remediation, which affected retention rates; and
  • Latin American premiums grew 4% at constant exchange with inflation-led growth in Argentina partly offset by the impact of restructuring actions elsewhere in the region.

Customer sentiment has remained supportive in 2014 across our core regions as reflected in our customer satisfaction scores. Accordingly, retention trends have remained broadly stable with overall retention across the Group of around 80%.

Underwriting result

2014 has been a year to rebuild quality foundations from which our Action Plan can deliver future improvements. Group underwriting profit of £90m (2013: £57m) comprised £108m from core operations, and a £18m loss from discontinued and non-core operations. Excluding Ireland, the core operations delivered £215m of underwriting profit.

      Total UW result     Current Year UW     Prior Year UW
£m 2014   2013 2014   2013 2014   2013
Scandinavia 187 225 166 102 21 123
Canada (ex Noraxis) 30 (13) (8) (32) 38 19
UK (ex Legacy) 15 13 17 2 (2) 11
Ireland (107) (220) (62) (93) (45) (127)
Latin America (2) 20 6 17 (8) 3
Group Re (15) 2 9 8 (24) (6)
Total Core 108 27 128 4 (20) 23
 
Memo: total core ex Ireland 215 247 190 97 25 150
 
Non-core & discontinued (18) 30 (7) 8 (11) 22
Total Group 90 57 121 12 (31) 45
 

Current year profit of £121m (2013: £12m):

  • Excluding Ireland, current year profits were up 96% to £190m (2013: £97m);
  • The current year underlying loss ratio was 57.6% (2013: 58.7%) and has improved in each quarter during 2014. Excluding Ireland the underlying current year loss ratio was 56.2% which is 1.0 points better than 2013;
  • Total weather costs for 2014 were £253m representing a weather loss ratio of 3.2% (2013: £303m or 3.5%; five year average: 3.0%). Weather was worse than trend following the impact of flooding and storms in the UK (weather ratio 3.8%) and Ireland (5.8%) in Q1, and severe winter weather in Canada (5.0%) also in Q1; and
  • The large loss ratio of 7.4% (2013: 7.8%) was lower than the five year average of 8.4%1, reflecting business mix improvements and relatively benign experience in Scandinavia, partly offset by the earthquake in Chile which impacted the Latin America and Group Re result.

Prior year loss of £31m includes the following specific items:

  • Ireland prior year underwriting loss of £45m;
  • UK Legacy reserve additions of £32m for asbestos, abuse and deafness claims;
  • UK Professional Indemnity reserve additions of £46m; and
  • £30m for further UK 2013 weather claims and Marine premiums.

We expect sustainable prior year releases to be generally below 1% of premiums, but there is the potential for volatility given our commitment to transparent reserve margins.

1 The 5 year large loss average has been restated to include UK Professional Indemnity large losses which were previously reported within underlying.

Investment result

The investment result, which now includes investment expenses of £29m (previously reported below the insurance result), was £327m (2013: £365m).

Investment income of £439m (2013: £493m) was offset by investment expenses of £29m (2013: £31m) and the liability discount unwind of £83m (2013: £97m). The liability discount unwind was lower than 2013 following the reduction in UK discount rates from 5% to 4% at FY 2013. The discount unwind will fall further in 2015 following the reduction in Scandinavian discount rates (see page 12 for further details).

Investment income of £439m is in line with our expectations but down 11% on prior year, primarily reflecting the continued impact of the low bond yield environment.

Average book yield across the whole portfolio fell from 3.5% to 3.1% year on year.

Total controllable costs

Total Group controllable costs were down 12% in 2014 (down 6% at constant exchange) to £2.1bn. Core business controllable costs were down 4% at constant exchange to £1.85bn (comprising 6% cost reductions, offset by 2% inflation).

The majority of the 2014 core business cost reduction has come from our UK business, with good progress in headcount reductions (510 (7%) UK FTE reduction in 2014). Further detailed cost reduction plans are in place for our core businesses. Group FTE was down 16% in 2014 to 19,006 (2013: 22,664), and within our core businesses FTE was down 7% to 17,509 (2013: 18,801).

Central expenses were £52m. Going forward we intend to allocate significantly more central and investment expenses to the underwriting result to allow for more transparent market comparisons.

We have raised our 2016 target of greater than £180m underlying cost reduction1 to greater than £210m. We have also set a new target of greater than £250m reduction by 2017. Our linked ambition is to lift productivity measures (Premiums:FTE) by 15-20% by the end of 2017 versus 2013 (£363k2 NWP per FTE).

1 Core business pre disposals, FX and inflation
2 Adjusted to remove the impact of the changes to the Motability contract

Non-operating items

Net gains of £476m include:

  • £342m of disposal gains (comprising Noraxis £164m; Baltics £124m; Poland £29m; Thailand £21m; Scandinavian Agriculture book £4 m);
  • £69m of gains in respect of the sale of equities mainly in January;
  • £25m relating to the sale and leaseback of our Swedish head office; and
  • £30m of unrealised gains on property assets.

Non-operating charges of £42m comprise £32m of customer list amortisation and £10m of pension net interest costs.

Non-recurring charges of £405m include:

  • Reorganisation costs of £276m as follows:
    • £55m goodwill write downs (£44m in Ireland and £11m in Russia);
    • £44m intangible asset write downs mainly relating to software write downs in the UK, Ireland and Scandinavia;
    • £110m of redundancy and restructuring costs (£73m relating to redundancy); and
    • A further £67m primarily relating to the revision of estimates. This includes the re-estimation of deferred acquisition costs and dilapidation provisions in respect of leasehold properties, resulting in charges of £17m and £5m respectively. A review of the Group’s reinsurance accounting resulted in a charge of £22m. Finally, as a result of a remediation process, better information has become available which has resulted in revisions to certain accounting estimates and a charge of £23m which predominately relates to Ireland.
  • Economic assumption changes - £98m charge relating to a change in the rate used to discount long-tail liabilities in Sweden and Denmark. The decline in market yields for the assets we hold backing these liabilities has required this adjustment. As a result, the discount rate has been lowered in Sweden and Denmark (see table below for changes). The full year impact of this on Scandinavia is expected to be around a £6-7m reduction in underwriting profit, with a £12m benefit to the discount unwind.

    The UK discount rate of 4% (lowered from 5% at FY 2013) remains unchanged as this remains broadly matched by the yields on the assets backing these liabilities.

    The assumptions will be re-examined bi-annually going forward and necessary changes made. Discount rates for our major long term portfolios (total net discounted reserves: £2,008m at 31 December 2014) are as follows:
     

31 Dec
2014

   

31 Dec
2013

UK 4.00% 4.00%
Sweden Personal Accident 1.25% 3.75%
Sweden annuities1 1.00% 1.50%
Denmark Workers Compensation 1.75% 3.70%
Canada 3.50% 3.50%
 

1 real discount rate (i.e. net of indexation)

 
  • Solvency II implementation costs of £25m (2013: £20m), and transaction costs of £6m (2013: £12m).

Tax

The Group has recognised a tax charge of £199m for the year.

Included in this is a deferred tax asset impairment charge of £92m (£84m relating to the UK and £8m relating to Ireland). This follows the conclusion that the carrying value of the deferred tax assets in the UK and Ireland are no long fully supportable following the re-setting of the Group strategy in 2014 together with the issues faced in Ireland. This accounting charge has no economic consequences as the tax losses remain available to us.

The carrying value of the remaining deferred tax asset in the UK is £95m, and in Ireland is £5m.

Dividend

We are pleased to recommence dividend payments with a final dividend recommendation of 2p per ordinary share. This is a modest absolute level reflecting 2014 profitability still depressed as well as the work remaining on capital build. We reiterate a medium term ambition of 40-50% dividend payouts.

BALANCE SHEET

Movement in Net Assets

   

Shareholders’
funds

 

Non
controlling
interests

 

Loan
capital

 

Equity plus
loan
capital

 

TNAV

£m £m £m £m £m
 
Balance at 1 January 2014 2,893 121 1,309 4,323 1,665
Profit/(loss) after tax 69 7 - 76 403
Exchange gains/(losses) net of tax (139) 2 - (137) (85)
Fair value gains/(losses) net of tax 255 (2) - 253 255
Pension fund gains/(losses) net of tax (7) - - (7) (7)
Debt issue - - 385 385 -
Repayment & amortisation of loan capital - - (451) (451) -
Share issue 753 - - 753 753
Changes in shareholders’ interests in subsidiaries - (14) - (14) -
Share based payments 10 - - 10 10
Prior year final dividend - (6) - (6) -
Preference dividend (9) - - (9) (9)
Goodwill and intangible additions - - - - (85)
Balance at 31 December 2014 3,825 108 1,243 5,176 2,900
 
Per share (pence)
At 1 January 20141 335 202
At 31 December 2014 365 286

1 Restated to include the bonus element of the subsequent rights issue in accordance with IAS 33, and the impact of the share consolidation.

Tangible net assets have increased by 74% to £2.9bn during 2014. The most significant driver of this is the proceeds from the rights issue (£747m net of costs). There were also £474m of post-tax disposal benefit and £255m of fair value gains on available for sale assets. Foreign exchange movements on the retranslation of the balance sheets of non-sterling denominated operations gave rise to foreign exchange losses of £85m.

CAPITAL POSITION

        Requirement   Surplus   Coverage
£bn £bn (times)
 

Insurance Groups
Directive1

31 December 2014 1.4 1.8 2.2
31 December 2014 (plus announced disposals) 1.4 2.0 2.4
31 December 2013 1.5 0.2 1.1
 

Economic Capital2
(S&P ‘A’ curve)

31 December 2014 3.4 0.9 1.3
31 December 2014 (plus announced disposals) 3.4 1.1 1.3
31 December 2013 2.4 0.7 1.3

1 The IGD position at 31 December 2014 is estimated.
2 The economic capital position at 31 December 2014 is estimated, pending the outcome of the next full model run.

Preliminary reconciliation of IFRS capital to IGD and ECA capital

        IGD

£bn

    ECA

£bn

 
Total IFRS equity plus loan capital at 31 December 2014 5.2 5.2
Adjust for:
Non-controlling interests (0.1) -
Goodwill and intangibles (0.8) (0.8)
Deferred tax (0.2) (0.1)
Discounting (0.5) -
Claims equalisation reserve (0.3) -
IAS 19 pension accounting - 0.1
Other (0.1) (0.1)
Total available capital at 31 December 2014 3.2 4.3
 

At 31 December 2014 the Group’s estimated IGD surplus was £1.8bn giving coverage of 2.2 times the capital requirement. The £1.6bn increase in the surplus during 2014 mainly reflects the impact of capital financing (including the rights issue) of £0.7bn, capital generated (including disposal gains) of £0.5bn, the reversal of a hybrid debt restriction of £0.3bn which took effect at the end of 2013, and mark-to-market gains of £0.2bn, partly offset by £(0.1)bn of adverse foreign exchange movements.

The Group’s estimated economic capital surplus was £0.9bn at 31 December 2014 giving coverage of 1.3 times the capital requirement. The movement in the year was driven by capital generated including disposal gains of £0.3bn and capital financing of £0.7bn, partly offset by the impact of lower yields £(0.4)bn, adverse foreign exchange movements £(0.2)bn, and pension and other movements of £(0.2)bn. Allowing for announced disposals, the surplus was £1.1bn with coverage of 1.3 times.

During the year the economic capital requirement has increased by £1.0bn to £3.4bn with available capital up by £1.2bn to £4.3bn. The movement in the requirement was driven mainly by the impact of lower yields, adverse foreign exchange movements, and the removal of a credit for the modelled disposal value of Noraxis from our capital assessment.

Diversification provides a significant credit to RSA within our economic capital model. We analyse our main modelled risks, including underwriting, catastrophe, reserve, market, credit and currency, pension and operational risks. On this basis, the level of diversification generated within our capital model, resulting from the nature of the different types of business written, geographic spread of our business, and the non-correlation of risk events affecting the Group, is around 40% of the undiversified capital requirement. This level of diversification is broadly consistent with the credit that the Group receives under other internally modelled Group measures.

GROUP OUTLOOK

In 2015 we aim to substantially complete the Group’s strategic restructuring and related ‘inorganic’ capital improvements. Focus will continue on actions to improve core business performance on a sustainable basis.

Our operational improvement programmes set a long-term ambition of upper quartile / ‘best in class’ underwriting results versus comparable companies. This targets improving customer metrics, profitability measures and building solid capital and related foundations.

Foreign exchange moves will continue to impact Sterling reported results. Market conditions permitting, in 2015 we target an end to the shrinkage of core business written premiums. Underlying loss ratios should improve again and costs continue to reduce. Weather and large loss items will remain unpredictable but volatility should be below that of extreme prior years due to reinsurance actions. We expect sustainable prior year releases to be below 1% of premiums, but potentially volatile given our commitment to transparent reserve margins.

We hope to report combined ratios, on an underlying basis, closer to ‘market’ performance than in recent times. Investment income should trend downwards reflecting market conditions. We anticipate disposal profits from completing non-core transactions, broadly offset by on-going restructuring and cost programme expenses.

Our medium term 12-15% underlying return on tangible equity target remains in place. Foreign exchange and interest rate impacts from the last 12 months suggest it is more likely to be met in 2017 than 2016 despite a broadly unchanged ambition for combined ratios.

BUSINESS REVIEW – INVESTMENT PERFORMANCE

Management basis

Investment result   2014

£m

  2013

£m

  Change

%

Bonds 354 381 (7)
Equities 23 47 (51)
Cash and cash equivalents 29 26 12
Property 28 28 -
Other 5 11 (55)
Investment income 439 493 (11)
Investment expenses (29) (31) 6
Unwind of discount (83) (97) 14
Investment result 327 365 (10)
 
Balance sheet unrealised gains

31 Dec
2014 (£m)

31 Dec
2013 (£m)

Change
%

Bonds 634 299 112
Equities 35 86 (59)
Other 3 7 (57)
Total 672 392 71

 

Investment portfolio  

Value
31 Dec
2013

 

Foreign
exchange

 

Mark to
market

Other
movements

Transfer to
assets held
for sale

Value
31 Dec
2014

£m £m £m £m £m £m
Government bonds 4,168 (230) 141 195 (111) 4,163
Non-Government bonds 7,083 (325) 152 1,526 (351) 8,085
Cash 1,162 (61) - 34 (124) 1,011
Equities 582 (26) 19 (415) - 160
Property 331 (2) 32 (15) - 346
Prefs & CIVs 280 (5) (9) 69 - 335
Other 146 (5) - (44) - 97
Total 13,752 (654) 335 1,350 (586) 14,197
 
Split by currency:
Sterling 3,493 4,466
Danish Krone 1,302 1,229
Swedish Krona 2,287 2,344
Canadian Dollar 2,947 3,128
Euro 1,763 1,308
Other 1,960 1,722
Total 13,752 14,197
 
Credit quality – bond portfolio Non-government Government

31 Dec
2014
%

31 Dec
2013
%

31 Dec
2014
%

31 Dec
2013
%

AAA 31 34 81 74
AA 21 24 10 14
A 38 33 3 2
BBB 8 7 5 9
< BBB 1 1 1 1
Non rated 1 1 - -
Total 100 100 100 100
 

Investment income of £439m (2013: £493m) was offset by investment expenses of £29m (2013: £31m) and the liability discount unwind of £83m (2013: £97m). Investment income of £439m is in line with our expectations but down 11% on prior year, primarily reflecting the continued impact of the low bond yield environment.

The average book yield on the total portfolio was 3.1% (2013: 3.5%), with average yield on the bond portfolios of 3.0% (2013: 3.3%). Reinvestment rates in the Group’s major bond portfolios at 31 December 2014 were approximately 1.3%.

Average duration is 4.0 years (31 December 2013: 3.8 years).

The investment portfolio grew 3% during 2014 to £14.2bn. The movement was driven by the rights issue proceeds, other net cash inflows including disposal proceeds, and positive mark-to-market movements, partly offset by foreign exchange translation losses and transfers into assets held for sale relating to the announced disposals of our Hong Kong, Singapore, China, Thailand, and Italy businesses.

At 31 December 2014, high quality widely diversified fixed income securities represented 86% of the portfolio (31 December 2013: 82%). As reported at our 2013 Preliminary Results, we reduced our exposure to equities during the first quarter of 2014 with equities now representing 1% of the total portfolio (31 December 2013: 4%). We also agreed the sale and leaseback of our Swedish head office. These proceeds together with the rights issue and disposal proceeds have been invested into high quality fixed income assets. Cash accounts for 7% of the total portfolio (31 December 2013: 8%).

The quality of the bond portfolio remains very high with 98% investment grade and 66% rated AA or above. We remain well diversified by sector and geography.

Balance sheet unrealised gains of £672m (pre-tax) increased by £280m during the year (31 December 2013: £392m); an increase in bond unrealised gains driven by lower yields was partly offset by a reduction in unrealised equity gains as we crystalised these by reducing our exposure to equities during the first quarter. Assuming yields at 2014 year end remained constant, the unrealised gains would ‘pull to par’ at a rate of around £150m per annum (over the next three years).

Outlook

Based on current forward bond yields and foreign exchange rates, it is estimated that investment income will be in the order of £380m for 2015, falling to around £350m in 2016 and 2017. However, with yields at historic lows, these income numbers are sensitive to market changes. This outlook reflects the combined impact of sharply lower bond yields and depreciation of our major overseas operating currencies compared to 2014, together with the ongoing impact of maturing high yield bond positions.

REGIONAL REVIEW – SCANDINAVIA

Management basis

 

Net written premiums

 

Change

  Underwriting result
2014

£m

  2013

£m

Constant

FX (%)

2014

£m

  2013

£m

Split by country
Sweden 956 1,032 2 138 153
Denmark 633 656 1 47 63
Norway 170 175 9 2 9
Total Scandinavia 1,759 1,863 3 187 225
Split by class
Household 307 320 4 3 10
Personal Motor 360 398 (1) 55 108
Personal Accident & Other 302 310 7 104 118
Total Scandinavia Personal 969 1,028 3 162 236
 
Property 306 310 6 (2) (28)
Liability 133 134 7 29 22
Commercial Motor 206 224 - - (13)
Marine & Other 145 167 (6) (2) 8
Total Scandinavia Commercial 790 835 2 25 (11)
 
Total Scandinavia 1,759 1,863 3 187 225
 
Investment result 64 85
Scandinavia insurance result 251 310
 
Operating Ratios1 (%) Claims Commission   Op Expenses   Combined
2014   2013 2014 2013 2014 2013 2014   2013
Household 99.0 97.0
Personal Motor 84.8 73.3
Personal Accident & Other 64.7 60.9
Total Scandinavia Personal 66.3 61.0 3.4 2.8 13.3 13.1 83.0 76.9
 
Property 100.4 108.4
Liability 78.2 83.1
Commercial Motor 99.9 105.8
Marine & Other 101.9 95.7
Total Scandinavia Commercial 73.5 78.5 4.5 3.8 18.9 19.0 96.9 101.3
 
Total Scandinavia 69.6 69.0 3.9 3.3 15.9 15.8 89.4 88.1
Of which: 5yr ave
Weather loss ratio 1.6 1.8 1.6
Large loss ratio 4.7 6.6 5.6
Current year underlying loss ratio 64.8 67.5
Prior year effect on loss ratio (1.5) (6.9)
 
YTD rate increases2 (%) At Dec 2014 At Sept 2014 At June 2014 At March 2014
Personal Household 4 4 4 3
Personal Motor 3 3 2 1
Commercial Property 2 4 5 5
Commercial Liability 4 4 4 3
Commercial Motor 4 4 4 4

1 The combined ratio calculation methodology is presented on an ‘earned’ basis, please refer to the appendix for further details
2 Rating increases reflect rate movements achieved for risks renewing in the year-to-date versus comparable risks renewing in the same period the previous year

SCANDINAVIA

Our Scandinavian business performed strongly at an underlying level in 2014. Underwriting profits were £187m (2013: £225m) and the combined ratio was 89.4% (2013: 88.1%).

Net written premiums of £1,759m were up 3% at constant exchange (2013: £1,863m as reported; £1,713m at constant exchange), with volumes flat across the region and rate increases contributing 3% growth.

Personal premiums were up 3% with strong growth of 6% in Swedish Personal driven by Household and Personal Accident due to a combination of good new business levels and rate increases. Danish Personal premiums were down 4% as we continued our work in 2014 to return that business to stronger profitability. Norway Personal premiums were up 2%.

Commercial premiums were up 2% with growth of 5% in Denmark reflecting strong retention across the portfolio, good new business levels in Workers Compensation and good growth in Renewable Energy. Our strategic partnership in Norwegian Hospital Care insurance continues strongly, and as a result Norway Commercial premiums were up 16% in the year. In Sweden, premiums were down 4% as we continued to take actions to rationalise our Commercial portfolio and increase rate.

The Scandinavian underwriting result was a profit of £187m (2013: £225m) with a current year profit of £166m (2013: £102m) and a prior year profit of £21m (2013: £123m). After including investment returns net of discount unwind of £64m (2013: £85m), the insurance result was £251m (2013: £310m).

In Personal, underwriting profits were £162m with a combined ratio of 83.0%. This mainly reflects a strong performance in Swedish Personal Accident following product enhancements and rate actions. Personal Motor profitability was lower than 2013, partly reflecting an increase in H1 to prior year Swedish Motor annuity reserves of £19m in anticipation of an upcoming market review of longevity assumptions. Scandinavia Commercial made a 2014 underwriting profit of £25m and a combined ratio of 96.9%, with good underlying performances across our Danish business and in Swedish Liability and Motor.

The combined ratio in 2014 was 89.4% (2013: 88.1%). Weather and large loss experience was broadly in line with expectations. The weather ratio of 1.6% is in line with the five year average, whilst large losses of 4.7% compare to a long term average of 5.6% and in part benefit from a change in underwriting mix. The underlying current year loss ratio was noticeably improved in 2014 at 64.8%, 2.7 points better than 2013, and there were good improvements in both Sweden and Denmark. Prior year claims were 1.5%, significantly below 2013 levels but now more normalised for likely future outlook. Controllable expenses are in line with our expectations, and in 2014 we reduced FTE by around 5%.

Scandinavia – Outlook

We expect the Scandinavian P&C markets to grow in line with local GDP growth, and we target top line performance broadly in line with the market. Our focus is on sustaining strong Personal lines results in Sweden and improving Commercial lines profitability; achieving significant cost improvements in Denmark; and focusing on profitable growth in Norway.

REGIONAL REVIEW – CANADA

Management basis

    Net written premiums     Change     Underwriting result
2014

£m

  2013

£m

Constant

FX (%)

2014

£m

  2013

£m

Household 433 464 5 (7) (18)
Personal Motor 606 729 (6) 18 47
Total Canada Personal 1,039 1,193 (2) 11 29
 
Property 211 252 (5) (23) (64)
Liability 114 143 (10) 2 -
Commercial Motor 92 108 (3) 28 12
Marine & Other 54 59 4 12 10
Total Canada Commercial 471 562 (5) 19 (42)
 
Total Canada 1,510 1,755 (3) 30 (13)
 
Investment result 77 93
Canada insurance result 107 80
 
Operating Ratios1 (%)     Claims   Commission   Op Expense   Combined
2014   2013 2014   2013 2014   2013 2014   2013
Household 101.5 104.3
Personal Motor 97.2 93.7
Total Canada Personal 73.3 72.5 11.6 11.5 14.1 13.6 99.0 97.6
 
Property 110.4 125.8
Liability 98.1 99.7
Commercial Motor 70.2 88.1
Marine & Other 78.3 82.9
Total Canada Commercial 59.0 70.1 19.1 19.8 17.9 17.6 96.0 107.5
 
Total Canada 68.7 71.7 14.0 14.1 15.3 14.9 98.0 100.7
Of which: 5yr ave
Weather loss ratio 5.0 8.0 4.3
Large loss ratio 3.6 3.3 3.0
Current year underlying loss ratio 62.8 62.1
Prior year effect on loss ratio (2.7) (1.7)
 
YTD rate increases2 (%) At Dec 2014 At Sept 2014 At June 2014 At March 2014
Personal Household 10 10 9 9
Personal Motor (2) (1) (1) -
Commercial Property 5 4 4 4
Commercial Liability 3 3 3 3
Commercial Motor 1 2 1 1

1 The combined ratio calculation methodology is presented on an ‘earned’ basis, please refer to the appendix for further details
2 Rating increases reflect rate movements achieved for risks renewing in the year-to-date versus comparable risks renewing in the same period the previous year

CANADA

After a record bad year for weather events in Canada in 2013, adverse weather conditions continued into the first quarter of 2014. As a result, 2014 has been challenging for our Canadian business. However, the underlying performance of our Canadian business remains supportive of improved future results.

Net written premiums in Canada were down 3% on a constant exchange rate basis to £1,510m (2013: £1,755m as reported; £1,553m at constant exchange) with 5% volume reductions partly offset by 2% rate growth.

Personal premiums were down 2%, with a 6% reduction in Motor partly offset by growth of 5% in Household. Household premiums included double digit rate increases (on renewal business) as the market responded to the weather events of 2013 and early 2014; volumes were down 3%. In Motor, premium reductions reflected the exit of certain broker relationships, lower new business and rate in Ontario, and competitive conditions in Quebec.

In Commercial, premiums were down 5% driven mainly by the actions we have been taking on the portfolio, particularly where we have been re-underwriting or exiting poorer performing accounts. Property reductions of 5% are mainly driven by underwriting actions taken in Quebec, and Liability reductions of 10% are due to the exit of unprofitable programs and market leading rating action.

Underwriting profit was £30m (2013: £13m loss) with a current year loss of £8m and a prior year profit of £38m. The combined ratio was 98.0% (2013: 100.7%). After including investment returns of £77m (2013: £93m), the insurance result was £107m (2013: £80m). Ongoing balance sheet work across the Group has included in Canada a more granular segmentation of the portfolio for reserving purposes. This has led to a reallocation of reserves (as reported in August) to better reflect the risk profile of the book, and a £19m release of margin.

The level of weather losses, although lower than 2013, was higher than trend, impacting profitability. The weather loss ratio of 5.0% for the year compares to a five year average for our Canadian business of 4.3%. Personal Household and Motor were both affected by the weather, with Motor experiencing elevated claims frequency as a result of severe driving conditions in the first quarter.

In Commercial, the reallocation of reserves in H1 resulted in an increase in Liability reserves and a release in Motor, impacting their respective results. Property profitability remains under pressure given a highly competitive market, with adverse weather and large loss experience impacting results. At a total Canadian level, the large loss ratio was 3.6% in 2014 compared to a five year average of 3.0% and a 2013 ratio of 3.3%. The current year underlying loss ratio was 62.8% (2013: 62.1%).

Canada – Outlook

2014 has been a challenging year for RSA in Canada. However, we anticipate the business returning to better performance patterns, subject to volatile items such as weather trends. Our focus will be on delivering operational improvement, particularly underwriting and claims improvements, process simplification and modernisation of technology and infrastructure.

REGIONAL REVIEW – UK (excluding Legacy)

Management basis

    Net written premiums     Change     Underwriting result
2014

£m

  2013

£m

Constant

FX (%)

2014

£m

  2013

£m

Household 644 665 (3) 65 82
Personal Motor 270 366 (26) (7) (41)
Pet 262 226 16 (9) 3
Total UK Personal 1,176 1,257 (6) 49 44
 
Property 611 628 (2) (8) 58
Liability 296 303 (2) (43) (104)
Commercial Motor 214 532 (60) 25 8
Marine & Other 272 321 (15) (8) 7
Total UK Commercial 1,393 1,784 (22) (34) (31)
 
Total UK 2,569 3,041 (15) 15 13
 
Investment result 132 128
UK insurance result 147 141
 
Operating Ratios1 (%)     Claims   Commission   Op Expenses   Combined
2014   2013 2014   2013 2014   2013 2014   2013
Household 90.1 87.0
Personal Motor 102.4 110.6
Pet 103.5 98.6
Total UK Personal 58.5 59.4 22.0 20.4 15.4 16.6 95.9 96.4
 
Property 101.5 90.8
Liability 115.1 134.3
Commercial Motor 94.7 98.6
Marine & Other 102.9 97.7
Total UK Commercial 70.4 70.6 19.5 17.2 12.2 13.9 102.1 101.7
 
Total UK 65.3 66.1 20.6 18.5 13.6 15.0 99.5 99.6
Of which: 5yr ave
Weather loss ratio 3.8 3.0 3.3
Large loss ratio 12.9 13.2 14.9
Current year underlying loss ratio 49.0 50.2
Prior year effect on loss ratio (0.4) (0.3)
 
YTD rate increases2 (%) At Dec 2014 At Sept 2014 At June 2014 At March 2014
Personal Household (1) - - -
Personal Motor 2 3 3 2
Commercial Property 2 3 3 3
Commercial Liability 4 5 5 4
Commercial Motor 2 3 3 5

1 The combined ratio calculation methodology is presented on an ‘earned’ basis, please refer to the appendix for further details
2 Rating increases reflect rate movements achieved for risks renewing in the year-to-date versus comparable risks renewing in the same period the previous year

UK

In the UK we have made progress with management action on pricing and underwriting that included both planned exits and focused growth. Adverse weather in the first quarter together with reserve additions in Commercial have affected profitability. However, expenses are coming down and the good progress made with cost reductions in the first half has continued into the second half, including a reduction of over 500 (7%) FTE during the year.

At a headline level, UK premiums of £2,569m were down 15%. However, premiums excluding Motability were down 6% with Personal down 6% and Commercial down 6%.

Household premiums were down 3% reflecting competitive conditions and a softening rate environment. In Personal Motor, premiums were down 26% as a result of our portfolio actions and pricing discipline, although the steep declines seen in the first half have now begun to slow. Excluding planned exits, Motor premiums were down 11%. In 2014 we launched our MORE TH>N Smart Wheels ‘black box’ telematics product aimed at young drivers and MORE TH>N Drive, an app that allows drivers to track their driving behaviour, which are showing promising growth. Pet premiums were up 16% although the underlying movement after removing prior period accounting premium adjustments was 9%, mainly driven by rate increases.

Across Commercial we have maintained underwriting discipline in a competitive market and a soft rate environment. Reported premiums were down 22% to £1,393m primarily driven by a reduction in Motability premiums as a result of our new contract terms which took effect from 1 October 2013 (Motability net written premiums in 2014 were £57m versus £351m in 2013) and a reduction in Marine mainly due to adjustments to prior year premiums after the change in accounting methodology we have reported previously. We ceased writing Specialty Lines business in Germany with effect from 1 October 2014, but continue to actively write and grow our Marine business there. SME, one of our areas of focused growth, grew 9% over last year and targeted activity in Engineering delivered 4% growth.

The UK underwriting result was a profit of £15m (2013: £13m loss). The current year profit of £17m represents our strongest current year result in the UK since 2005, and includes a Personal profit of £26m and a Commercial loss of £9m. The prior year loss of £2m includes a loss of £25m in Commercial and a profit of £23m in Personal.

Household continued to perform strongly with a £65m profit despite adverse weather in the first quarter, while a £7m loss in Motor reflected a highly competitive market but nevertheless a significant improvement from the 2013 loss of £41m. Pet profitability was disappointing due to higher than expected claims inflation, for which we have implemented rating and indemnity actions to address.

The UK Commercial underwriting loss of £34m is driven by the adverse development of the prior year Professional Indemnity book (£46m) which we reported on at both H1 and Q3. Our Property book suffered an underwriting loss of £8m driven by heavy weather losses, following storms in January/February and also in June in Europe, plus marginally elevated large losses. Commercial Motor produced a significantly improved COR of 94.7% reflecting better performance across the book.

The UK combined ratio was 99.5% (2013: 99.6%). The weather ratio of 3.8% was 0.8 points higher than 2013 and 0.5 points higher than the five year average for the UK business. The large loss ratio of 12.9% was 0.3 points lower than 2013 and 2.0 points lower than the five year average. The current year underlying loss ratio improved by 1.2 points against the same period last year to 49.0%.

UK – Outlook

Continuing improvements in our core UK trading performance together with ongoing cost actions give us confidence as we look out to 2015. We target improving profitability and a return to modest top line growth.

REGIONAL REVIEW – IRELAND

Management basis

    Net written premiums     Change     Underwriting result
2014

£m

  2013

£m

Constant

FX (%)

2014

£m

  2013

£m

 
Personal 194 210 (3) (58) (139)
Commercial 101 117 (11) (49) (81)
Total Ireland 295 327 (5) (107) (220)
 
Investment result 10 14
Ireland insurance result (97) (206)
 
Operating Ratios1 (%)     Claims   Commission   Op Expenses   Combined
2014   2013 2014   2013 2014   2013 2014   2013
 
Personal 126.5 163.2
Commercial 144.1 172.2
Total Ireland 103.5 132.1 12.6 17.1 16.2 17.0 132.3 166.2
Of which: 5yr ave
Weather loss ratio 5.8 4.2 5.8
Large loss ratio 3.4 5.7 2.3
Current year underlying loss ratio 80.3 84.2
Prior year effect on loss ratio 14.0 38.0
 
YTD rate increases2 (%) At Dec 2014 At Sept 2014 At June 2014 At March 2014
Personal Household - - - (2)
Personal Motor 14 14 13 6
Commercial Property 1 1 2 -
Commercial Liability 13 14 15 9
Commercial Motor 8 5 3 1

1 The combined ratio calculation methodology is presented on an ‘earned’ basis, please refer to the appendix for further details
2 Rating increases reflect rate movements achieved for risks renewing in the year-to-date versus comparable risks renewing in the same period the previous year

IRELAND

In Ireland, it has been a difficult year for RSA in recognising further losses for events announced in 2013 and beginning the recovery process. The 2014 underwriting loss was £107m, recorded as a current year loss of £62m and a prior year loss of £45m.

No substantive new issues were found in 2014, however the cost of remediation, reserve strengthening and the level of required underwriting improvement has been greater than that expected at the start of the year.

The current year loss of £62m reflects the ongoing impact of the issues identified in 2013, in particular inadequate pricing on pre-remediation business that came through in earned premiums. Once claims reserving was more fully remediated during 2014, it became apparent that in key portfolios loss ratios were higher than expected and loss patterns have remained volatile as data is cleansed and new patterns established. Pricing and underwriting action taken in 2014 should earn through into significant further loss ratio improvement in 2015.

The 2014 weather ratio of 5.8% was in line with long term trends but marginally worse than plan, while the large loss ratio of 3.4% was 1.1points worse than trend.

The prior year loss of £45m reflects a combination of updated reserving judgements from 2013 events in light of the latest development experience, and some specific factors including the remediation of a specific delegated authority scheme, changes to reinsurance retentions, and the impact of lower discount rates following a High Court ruling in December.

Our remediation work is ongoing, and we remain confident that the actions we are taking will restore the business to profitability.

The Irish executive management team has been completely restructured and we have made good progress in filling critical management vacancies with a new CEO, CFO, COO and Chief Underwriting Officer now in place.

Cost reduction plans are in place, and underwriting actions should improve current year underwriting performance to a profit in 2016. Reserving actions are now largely complete, although some 2015 impact remains possible.

On pricing we have applied strong rate increases during 2014 in key lines requiring remediation, with year-on-year rate increases of c.25% in Motor and c.15% in Liability. As a result of this focus, premiums for the year were down 5% at constant exchange.

As reported at our half year results in August, we have undertaken an impairment review of the carrying value of Irish goodwill and intangible assets. In 2014 we have written down £44m relating to goodwill and £17m relating to software and customer lists. This leaves £48m of goodwill and intangible assets in the Irish business. In addition to this we have also written down our Irish deferred tax asset by £8m leaving a remaining tax asset of £5m.

Ireland - Outlook

Our goal remains to return the business to profitability in 2016 through underwriting improvement and cost reduction, and from there to return to greater than cost of capital returns in the future.

REGIONAL REVIEW – LATIN AMERICA

Management basis

    Net written premiums     Change     Underwriting result
2014

£m

  2013

£m

Constant

FX (%)

2014

£m

  2013

£m

 
Chile 166 205 - (4) 17
Argentina 210 248 32 10 (1)
Brazil 119 134 2 (13) 3
Mexico 88 102 (4) 2 3
Colombia 61 100 (31) 1 (1)
Uruguay 46 48 15 2 (1)
Total Latin America 690 837 4 (2) 20
 
Investment result 27 26
Latin America insurance result 25 46
 
Operating Ratios1 (%)     Claims   Commission   Op Expenses   Combined
2014   2013 2014   2013 2014   2013 2014   2013
 
Chile 102.4 90.8
Argentina 94.9 100.4
Brazil 110.9 97.5
Mexico 97.2 96.8
Colombia 99.1 101.2
Uruguay 94.7 102.5
Total Latin America 57.2 55.2 25.5 24.2 17.6 18.1 100.3 97.5
Of which: 5yr ave
Weather loss ratio 0.3 0.4 0.9
Large loss ratio 3.6 2.7 2.4
Current year underlying loss ratio 52.2 51.5
Prior year effect on loss ratio 1.1 0.6

1 The combined ratio calculation methodology is presented on an ‘earned’ basis, please refer to the appendix for further details

LATIN AMERICA

Net written premiums in Latin America were up 4% on a constant exchange rate basis to £690m (2013: £837m as reported; £662m at constant exchange) with 1% volume growth and 3% rate growth. The impact of foreign exchange has been significant, with premiums down 18% at reported exchange rates.

There was strong growth in Argentina of 32% driven by the high inflation environment, and growth of 15% (or £6m) in Uruguay. Brazil premiums were up 2% in a competitive market. We have also taken action to restructure the business which include the exit of Risk Managed Property, Construction & Engineering and Liability. In Chile premiums were flat due to soft market conditions and actions taken on our Motor portfolio.

During the year we have restructured our business in Colombia. We have announced the exit of Personal and Commercial Motor, and intend to pursue profitable growth in non-Motor Commercial lines and affinity schemes. As a result, premiums were down 31% in the year.

The underwriting loss of £2m includes £10m in respect of the Chile earthquake in April (a further £8m is included in the Group Re result bringing the total event cost to £18m) and several other large losses. The large loss ratio of 3.6% is 1.2pts higher than the five year average, while weather losses of 0.3% are better than the five year average of 0.9%.

Latin America - Outlook

In Latin America, the markets we operate in continue to be attractive on a fundamental basis, though competitive, driven by low insurance penetration and a growing middle class across the region. Given the softer economic outlook, we anticipate growth continuing at a more subdued pace than historical levels, with improving profitability targeted.

DISCONTINUED & NON-CORE OPERATIONS

    Net written premiums     Underwriting result
2014

£m

  2013

£m

2014

£m

  2013

£m

 
Asia 145 151 5 7
CEE&ME 343 415 4 20
Italy 196 221 10 (1)
Noraxis - - 11 23
UK Legacy - - (48) (19)
Total Discontinued & Non-Core 684 787 (18) 30

Note: Non-core operations also include our Indian associate, which generated 2014 NWP of £130m (2013: £141m) at 100% level, and our Thailand associate holding, which generated 2014 NWP of £179m (2013: £176m) at 100% level.

Disposal programme

In 2014, the Group adopted a fresh strategy, one element of which was to tighten the strategic focus of the Group in order to concentrate more effectively on performing sustainably well in core businesses. During the year we commenced a disposal programme with the intention of divesting our non-core businesses. Significant progress has been, as follows:

Completed disposals:

  • Baltics (Lithuania, Latvia, Estonia): announced 17 April 2014, completed 30 June 2014 Latvia, 31 October 2014 Lithuania and Estonia. Total proceeds: £215m. Gain on sale: £124m.
  • Poland: announced 17 April 2014, completed 15 September 2014. Total proceeds: £74m. Gain on sale: £29m.
  • Noraxis: announced 19 May 2014, completed 2 July 2014. Total proceeds: £220m. Gain on sale: £164m.
  • Thailand associate: announced and completed 19 December 2014. Total proceeds: £37m. Gain on sale: £21m.

Announced disposals pending completion:

  • China: announced 3 July 2014. Expected total proceeds: £71m.
  • Hong Kong & Singapore: announced 21 August 2014. Expected total proceeds: £130m.
  • Italy: announced 17 October 2014. Expected total proceeds: £19m.
  • India associate: announced 18 February 2015. Expected total proceeds: £46m.

Remaining discontinued and non-core operations1:

  • Middle East
  • Russia
  • UK Legacy

1 Not all will necessarily be disposed

UK Legacy

The UK Legacy underwriting result for 2014 was a loss of £48m (2013: £19m loss) and was primarily driven by a combination of asbestos, deafness and ‘abuse’ reserve additions. The asbestos additions are mainly due to revisions to estimates of reinsurance recoveries to reflect the latest experience of claims across accident years.

Asbestos

The technical provisions (before discounting) include £829m (31 December 2013: £831m) for asbestos in the UK comprising £778m (31 December 2013: £778m) for UK risks and £50m (31 December 2013: £52m) for US risks written in the UK. As in previous years, and as a standard part of our reserving practices, these asbestos provisions have been reviewed by external consultants. These provisions can be analysed by survival ratio. Survival ratio is an industry standard measure of a company’s reserves, expressing the number of years that carried reserves will be available if the recent year payment or notification levels continue. The following table outlines the asbestos provisions as at 31 December 2014 analysed by risk and survival ratio:

    Total    

UK risks written
in the UK

   

US risks written
in the UK

Provisions in £m
Net of reinsurance 829 778 50
Net of discount 506 465 41
Survival ratios (Gross of discount) - On payment
One year 29 32 12
Three year average 30 32 14
Survival ratios (Gross of discount) - On notifications
One year 25 25 18
Three year average 23 25 10
 

One year average ratios are inherently more volatile and impacted by the size and timing of payments or notifications in the year, with the three year average providing a more stable benchmark. For UK risks written in the UK, the paid survival ratios have remained stable, with the incurred survival ratio impacted by changes in the level of notifications from year to year. We continue to monitor notification levels closely. For US risks written in the UK, the remaining reserves are relatively small in total and will therefore be particularly sensitive to changes in notifications or the size and timing of claims payments and settlements during the year.

APPENDIX

RATIOS, DEFINITIONS AND OTHER INFORMATION

Changes to management basis reporting

During 2014 the Group has made certain changes to enhance and improve the transparency of its financial disclosure.

The presentation of the Group’s financial performance has been separated between its ‘core’ operations and its ‘discontinued & non-core’ operations. ‘Core’ operations comprise Scandinavia, Canada (excluding Noraxis), UK (excluding Legacy), Ireland, Latin America and Group Re. ‘Discontinued & non-core’ operations comprise the Baltics, Poland, Noraxis, Hong Kong, Singapore, China, Italy, Middle East, Russia, UK Legacy, and associate holdings in Thailand and India.

The combined ratio is now stated on an ‘earned’ basis. See below for further details

Investment expenses have been reclassified from Other Activities into the Investment Result. The Investment Result now includes investment income, investment expenses and the discount unwind. Other Activities has been renamed as Central Expenses.

Below the Operating Result, amortisation and pension costs have been grouped into ‘non-operating charges’ whilst Solvency II costs, reorganisation costs, transaction costs, and economic assumption changes have been grouped into ‘non-recurring charges’.

Economic assumption changes is a new line item in management basis reporting and in 2014 captures the impact following the changes to discount rates.

European Specialty Lines (ESL) previously reported within Western Europe, has been reclassified into UK Commercial in order to better reflect the way in which the ESL businesses are managed.

Combined operating ratio

The Group’s combined operating ratio (COR) is now calculated on an ‘earned’ basis, as follows:

COR = loss ratio + commission ratio + expense ratio

Where:

Loss ratio = net incurred claims / net earned premiums

Commission ratio = earned commissions / net earned premiums

Expense ratio = earned operating expenses / net earned premiums

Net asset value and tangible net asset value per share

Net asset value per share data at 31 December 2014 was based on total shareholders’ funds of £3,825m, adjusted by £125m for preference shares. Tangible net asset value per share was based on a tangible book value of £2,900m.

Earnings per share

The earnings per share is calculated by reference to the result attributable to the ordinary shareholders of the Parent Company and the weighted average number of shares in issue during the period. These were 961,657,975 on both a basic and diluted basis (net of RSA owned shares). The number of shares in issue at 31 December 2014 was 1,014,264,898 (net of RSA owned shares).

Return on equity and tangible equity

      2014     20131
£m £m
 
Profit/(loss) after tax 76 (338)
Less: non-controlling interest (7) (9)
Less: preference dividend (9) (9)
A Profit/(loss) attributable to ordinary shareholders 60 (356)
 
Operating profit/(loss) before tax 365 349
Less: interest costs (119) (117)
Underlying profit/(loss) before tax 246 232
Less: tax2 (69) (67)
Less: non-controlling interest (7) (9)
Less: preference dividend (9) (9)
B Underlying profit/(loss) after tax attributable to ordinary shareholders 161 147
 
Opening shareholders’ funds 2,893 3,750
Less: preference share capital (125) (125)
C Opening ordinary shareholders’ funds 2,768 3,625
 
Less: goodwill & intangibles (1,103) (1,489)
D Opening tangible ordinary shareholders’ funds 1,665 2,136
 
Return on equity
A/C Reported 2.2% (9.8)%
B/C Underlying 5.8% 4.0%
 
Return on tangible equity
A/D Reported 3.6% (16.7)%
B/D Underlying 9.7% 6.9%

1 restated for 2014 methodology
2 using underlying assumed tax rate of 28% for 2014 and 29% for 2013

RSA reports return on tangible equity on both a ‘reported’ and an ‘underlying’ basis to aid stakeholder review. In the light of market feedback and to achieve consistency of treatment of charges and gains reported beneath the Operating Profit line, the definition of ‘underlying’ set out above shows a change from past years and now excludes non-cash customer list amortisation, for which in past years the corresponding intangible asset had already been excluded. By 2017 this is expected to be immaterial in financial results terms. Incentive plans will adjust targets to exclude any benefit from this change.

Related party transactions

In 2014, there have been no related party transactions that have materially affected the financial position of the Group.

NET EARNED PREMIUMS BY CLASS

Management basis

    2014     2013    

Change as
reported

   

Change at
constant fx

£m £m % %
Scandinavia
Household 303 315 (4) 4
Personal Motor 357 401 (11) (2)
Personal Accident & Other 297 305 (3) 6
Total Personal 957 1,021 (6) 2
 
Property 311 328 (5) 2
Liability 131 131 - 7
Commercial Motor 207 227 (9) -
Marine & Other 146 174 (16) (9)
Total Commercial 795 860 (8) -
Total Scandinavia 1,752 1,881 (7) 1
 
Canada
Household 424 431 (2) 11
Personal Motor 626 735 (15) (4)
Total Personal 1,050 1,166 (10) 2
 
Property 217 248 (13) (1)
Liability 120 143 (16) (5)
Commercial Motor 94 105 (10) 1
Marine & Other 55 58 (5) 8
Total Commercial 486 554 (12) (1)
Total Core Canada 1,536 1,720 (11) 1
 
UK
Household 659 631 4 4
Personal Motor 306 390 (22) (22)
Pet 254 217 17 17
Total Personal 1,219 1,238 (2) (2)
 
Property 597 645 (7) (7)
Liability 286 305 (6) (6)
Commercial Motor 479 567 (16) (16)
Marine 269 301 (11) (11)
Total Commercial 1,631 1,818 (10) (10)
Total Core UK 2,850 3,056 (7) (7)
 
Ireland
Personal 217 220 (1) 4
Commercial 111 113 (2) 4
Total Ireland 328 333 (2) 4
 
Latin America
Chile 170 187 (9) 13
Argentina 198 235 (16) 32
Brazil 124 133 (7) 7
Mexico 90 96 (6) 3
Uruguay 44 46 (4) 16
Colombia 74 98 (24) (15)
Total Latin America 700 795 (12) 11
 
Group Re 17 38 (55) (55)
Total Core Group 7,183 7,823 (8) (1)
 
Discontinued & non-core 691 771 (10) (5)
Total Group 7,874 8,594 (8) (2)
 

LOSS DEVELOPMENT TABLES & RESERVE MARGIN

The table below (for continuing operations) presents the general insurance claims provisions net of reinsurance for the accident years 2004 and prior through to 2014. The top half of the table shows the estimate of cumulative claims at the end of the initial accident year and how these have developed over time. The bottom half of the table shows the value of claims paid for each accident year in each subsequent year. The current year provision for each accident year is calculated as the estimate of cumulative claims at the end of the current year less the cumulative claims paid.

£m    

2004
and
prior

  2005   2006   2007   2008   2009   2010   2011   2012   2013   2014   Total
Estimate of Cumulative claims
At end of accident year 8,034 2,210 2,242 2,282 2,360 2,222 2,311 2,575 2,636 2,769 2,556
1 year later 7,860 2,088 2,213 2,282 2,340 2,253 2,329 2,571 2,660 2,863
2 years later 7,981 2,011 2,121 2,254 2,327 2,219 2,320 2,560 2,644
3 years later 7,768 1,938 2,045 2,192 2,291 2,192 2,351 2,511
4 years later 7,540 1,860 1,997 2,150 2,273 2,214 2,360
5 years later 7,409 1,804 1,975 2,132 2,247 2,221
6 years later 7,253 1,780 1,943 2,132 2,228
7 years later 7,073 1,755 1,919 2,121
8 years later 6,971 1,730 1,904
9 years later 6,960 1,727
10 years later 7,024
2014 movement (64) 3 15 11 19 (7) (9) 49 16 (94) (61)
Less: margin release/(build) 21 2 15 7 11 6 2 23 (5) (89) (7)
Discounting (19) - - (1) (1) (1) - 2 - (2) (22)
2014 movement ex margin (62) 1 - 3 7 (14) (11) 28 21 (7) (34)
 
Claims paid
1 year later 1,687 840 872 992 1,136 1,116 1,207 1,196 1,238 1,347
2 years later 976 263 318 328 339 348 380 401 408
3 years later 608 150 171 238 230 232 231 261
4 years later 557 127 160 146 173 183 181
5 years later 407 96 106 124 103 126
6 years later 320 74 77 67 68
7 years later 190 37 54 36
8 years later 177 22 30
9 years later 253 11
10 years later 222
Cumulative claims paid 5,397 1,620 1,788 1,931 2,049 2,005 1,999 1,858 1,646 1,347
Current year provision before discounting 1,627 107 116 190 179 216 361 653 998 1,516 2,556 8,519
Exchange adjustment to closing rates (146)
Discounting (444)
Annuities 673
Present value recognised in the statement of financial position 8,602
Held for sale 417
Total Group 9,019
 

In terms of accident year, 2011 and 2012 have shown positive development across most major lines in Scandinavia, UK Commercial Property, UK Personal lines and Canada. 2009 and 2010 have been impacted by UK Professional Indemnity strengthening. 2004 & prior includes strengthening for UK Deafness reserves and also in UK Asbestos, relating to revisions to estimates of reinsurance recoveries to reflect the latest experience of claims across accident years.

Reconciliation to prior year underwriting result:

          £m
2014 net loss development (61)
Discounting 22
Annuities 18
Held for sale entities 30
Other 4
Prior year net incurred claims 13
Prior year premiums (33)
Prior year commissions (4)
Prior year expenses (7)
Prior year underwriting result (31)
 

Reserve margin

Our own assessment of the margin in reserves for the core Group (the difference between our actuarial indication and the booked reserves in the financial statements) is unchanged at 5% of booked claims reserves, though there have been movements between regional businesses during the year. This reserve margin effectively acts as a cushion against stressed claims movements in capital models.

PENSIONS

The table below provides a reconciliation of the movement in the Group’s pension fund position under IAS 19 (net of tax) from 1 January 2014 to 31 December 2014.

    UK     Other     Group
£m £m £m
 
Pension fund surplus/(deficit) at 1 January 2014 (58) (67) (125)
 
Actuarial gains/(losses)1 35 (39) (4)
Deficit funding 52 - 52
Other movements2 4 1 5
 
Pension fund surplus/(deficit) at 31 December 2014 33 (105) (72)

1 Actuarial gains/(losses) include pension investment expenses, variance against expected returns, change in actuarial assumptions and experience losses.
2 Other movements include regular contributions, service/administration costs, expected returns and interest costs.

The IAS 19 pension has improved during the year from a deficit of £125m to a deficit of £72m. The UK pension position has improved by £91m during the year to a surplus of £33m, driven by greater than expected return on assets and contributions, partly offset by changes to actuarial assumptions (the pension inflation rate fell from 3.2% to 2.9% in the year, whilst the discount rate fell from 4.6% to 3.7%), experience losses and service costs. The overseas pension position deteriorated from a deficit of £67m to a deficit of £105m driven primarily by lower discount rates.

At the most recent funding valuations as of 31 March 2012, the three main UK funds had an aggregate funding deficit of £477m, equivalent to a funding level of 93%. The Group and the Trustees agreed funding plans at that time to eliminate the funding deficits by 2022. The funding plans will be reviewed following the next triannual funding valuations, which will have an effective date of 31 March 2015.

The Scheme Actuaries also carry out interim assessments on an annual basis and at the last update as at 31 March 2014 the funding level was estimated to have increased to 97%. This update is not formally agreed between the Group and the Trustees but reflects changes in market conditions and the deficit contributions paid.

For completeness, in addition to calculating the funding valuation, the Scheme Actuaries also provide an estimate of the cost of full risk removal by purchasing annuities from an insurance company to meet the existing retirement obligations. This is a theoretical calculation and does not reflect what we expect to pay into the schemes. In common with most UK defined benefit arrangements, the liabilities and hence deficit on this basis are materially higher than on an ongoing funding basis and as at 31 March 2014 there was estimated to be a shortfall of approximately £3.1bn. This is largely due to the use of more conservative assumptions in relation to future investment return and to a lesser extent, how long members will live. However, the cost of purchasing annuities will also reflect insurers' reserving requirements, cost of capital, profit margins and supply and demand dynamics.

The purchase of annuities would effectively result in full removal of all economic and demographic risks associated with provision of the liabilities. Alternatively, full removal of investment and economic risk on expected benefit payments could also be achieved through the use of a fully matched swaps based investment strategy. This effectively eliminates the assumed return benefits in the funding basis of equity and credit investments which form part of the asset mix of the funds. The Trustee's investment advisers have estimated that as at 31 March 2014 this would have resulted in a shortfall of £2.4bn, however under this approach the funds would remain exposed to longevity and other behavioural and demographic risks.

REINSURANCE

For 2015 we have made some changes to our reinsurance programme.

We have purchased a Group aggregate reinsurance cover, the key terms of which are:

  • Events or individual net losses greater than £10m are added together across our financial year (when a loss exceeds £10m it is included in full);
  • Cover attaches when total of these retained losses is greater than £180m;
  • Limit of cover is £150m in any year;
  • 3 year deal with maximum recovery available during that period of £300m;
  • £150m limit can also be used if Cat cover is exceeded;
  • Profit commission and no claims bonus arrangements in place; and
  • Counterparties are high credit quality reinsurers (80% AA- and 20% A or better).

Retentions for our existing Cat and Risk treaties have therefore been adjusted accordingly. The key changes are to increase non-UK Cat retentions from £25m to £50m (Canada C$30m to C$50m), and to increase Property Risk retentions from £25m to £50m. UK Cat retention remains unchanged at £75m.

INCOME STATEMENT

Management basis - year ended 31 December 2013 (re-presented for core, non-core and discontinued split)

        Total ‘non-core’

Group
FY 2013

Core5 ‘Non-core’6  

Discontinued
operations6

£m £m £m £m
Net Written Premiums 8,664 7,877 188 599
Net Earned Premiums 8,594 7,823 172 599
Net Incurred Claims1 (5,970) (5,461) (138) (371)
Commissions7 (1,218) (1,122) (10) (86)
Operating expenses7 (1,349) (1,213) (14) (122)
Underwriting result 57 27 10 20
Investment income 493 443 30 20
Investment expenses (31) (28) (1) (2)
Unwind of discount (97) (69) (27) (1)
Investment result 365 346 2 17
Insurance result 422 373 12 37
Central expenses (73) (58) (18) 3
Operating result 349 315 (6) 40
Net gains/losses/exchange 32
Interest (117)
Non-operating charges2 (57)
Non-recurring charges3 (451)
Profit before tax (244)
Tax (94)
Profit after tax (338)
 
Loss ratio (%) 69.5 69.8
Weather loss ratio 3.5 3.7
Large loss ratio 7.9 8.2
Current year underlying loss ratio4 58.7 58.3
Prior year effect on loss ratio (0.6) (0.4)
Commission ratio (%)7 14.2 14.3
Expense ratio (%)7 15.7 15.5
Combined ratio (%) 99.4
 
Reported ROTE (16.7)%
Underlying ROTE 6.9%
 
Notes:
1 Of which: claims handling costs 484
 
2 Amortisation (42)
2 Pension net interest costs (15)
 
3 Solvency II costs (20)
3 Reorganisation costs (356)
3 Transaction costs (12)
3 Economic assumption changes (63)

4 Current year underlying loss ratio excludes weather and large losses.
5 ‘Core’ comprises Scandinavia, Canada (ex Noraxis), UK (ex Legacy), Ireland, Latin America and central functions.
6 Discontinued operations include Poland, Baltics, Italy, Hong Kong, Singapore, China and Thailand. Non-core operations include Noraxis, UK Legacy, Middle East, India and Russia
7 The combined ratio calculation methodology is presented on an ‘earned’ basis, please refer to the appendix for further details

SEGMENTAL ANALYSIS

Management basis - year ended 31 December 2013 (re-presented onto 2014 segmental split)

    Scandinavia   Canada4   UK5   Ireland  

Latin
America

 

Central
functions

 

Total ‘non-
core’1

 

Group
FY 2013

£m £m £m £m £m £m £m £m
Net Written Premiums 1,863 1,755 3,041 327 837 54 787 8,664
Net Earned Premiums 1,881 1,720 3,056 333 795 38 771 8,594
Net Incurred Claims (1,298) (1,233) (2,019) (439) (439) (33) (509) (5,970)
Commissions2 (61) (244) (565) (57) (192) (3) (96) (1,218)
Operating expenses2 (297) (256) (459) (57) (144) - (136) (1,349)
Underwriting result 225 (13) 13 (220) 20 2 30 57
Investment income 134 100 144 14 42 9 50 493
Investment expenses (9) (4) (9) - (6) - (3) (31)
Unwind of discount (40) (3) (7) - (10) (9) (28) (97)
Investment result 85 93 128 14 26 - 19 365
Insurance result 310 80 141 (206) 46 2 49 422
Central expenses - - - - - (58) (15) (73)
Operating result 310 80 141 (206) 46 (56) 34 349
Net gains/losses/exchange 32
Interest (117)
Non-operating charges (57)
Non-recurring charges (451)
Profit before tax (244)
Tax (94)
Profit after tax (338)
 
Loss ratio (%) 69.0 71.7 66.1 132.1 55.2 69.5
Weather loss ratio 1.8 8.0 3.0 4.2 0.4 3.5
Large loss ratio 6.6 3.3 13.2 5.7 2.7 7.9
Current year underlying loss ratio3 67.5 62.1 50.2 84.2 51.5 58.7
Prior year effect on loss ratio (6.9) (1.7) (0.3) 38.0 0.6 (0.6)
Commission ratio (%)2 3.3 14.1 18.5 17.1 24.2 14.2
Expense ratio (%)2 15.8 14.9 15.0 17.0 18.1 15.7
Combined ratio (%) 88.1 100.7 99.6 166.2 97.5 99.4

1 Total ‘non-core’ comprises discontinued operations of Poland, Baltics, Italy, Hong Kong, Singapore, China and Thailand and other non-core operations of Noraxis, UK Legacy, Middle East, India and Russia
2 The combined ratio calculation methodology is presented on an ‘earned’ basis, please refer to the appendix for further details
3 Current year underlying loss ratio excludes weather and large losses
4 Excluding Noraxis
5 Excluding Legacy

SUMMARY CONSOLIDATED STATEMENT OF FINANCIAL POSITION

Management basis – year ended 31 December 2014

   

31 December

    31 December
2014 2013
£m £m
Assets
Goodwill and other intangible assets 800 1,103
Property and equipment 151 160
Investment property 346 331
Investment in associates 31 44
Financial assets 12,840 12,259
Total investments 13,217 12,634
Reinsurers’ share of insurance contract liabilities 1,897 2,026
Insurance and reinsurance debtors 3,174 3,593
Deferred tax assets 180 302
Current tax assets 21 60
Other debtors and other assets 759 787
Other assets 960 1,149
Cash and cash equivalents 1,011 1,162
Assets associated with continuing operations 21,210 21,827
Assets held for sale 808 103
Total assets 22,018 21,930
 
Equity and liabilities
 
Equity and loan capital
Shareholders’ funds 3,825 2,893
Non-controlling interests 108 121
Total equity 3,933 3,014
Loan capital 1,243 1,309
Total equity and loan capital 5,176 4,323
 
Liabilities (excluding loan capital)
Insurance contract liabilities 13,266 15,001
Insurance and reinsurance liabilities 904 643
Borrowings 299 301
Deferred tax liabilities 62 82
Current tax liabilities 83 57
Provisions 338 366
Other liabilities 1,160 1,157
Provisions and other liabilities 1,643 1,662
Liabilities associated with continuing operations 16,112 17,607
Liabilities held for sale 730 -
Total liabilities (excluding loan capital) 16,842 17,607
 
Total equity, loan capital and liabilities 22,018 21,930
 

SUMMARY CASH FLOW FOR CONTINUING OPERATIONS

Management basis

    2014     2013
£m £m
 
Current year underwriting profit/(loss) 121 12
Adjustment for non-cash items, claims payments/receipts 2 182
Underwriting cash 123 194
Investment cash 469 534
Underlying operating cash flow 592 728
Non-operating cash flow (including reorganisation costs) (187) (120)
Operating cash flow 405 608
Tax paid (83) (102)
Interest paid (119) (117)
Pension deficit funding (65) (73)
Cash generation 138 316
Group dividends (9) (157)
Dividend to non-controlling interests (6) (14)
Issue of share capital 753 7
Net movement of debt (66) 4
Corporate activity 678 (42)
Cash movement 1,488 114
 
Represented by:
Increase/(decrease) in cash and cash equivalents 34 (111)
Purchase/(sale) of other investments 1,454 225
Cash movement 1,488 114
 

RECONCILIATION: MANAGEMENT BASIS TO STATUTORY REPORTING

Management basis    

Discontinued
operations

 

Add back
other
income

  Statutory basis
Net written premiums   7,465 (498) 6,967   Net written premiums
Net earned premiums 7,874 (513) 7,361 Net earned premiums
Net incurred claims (5,381) 311 (5,070) Net claims and benefits
Commissions (1,195)

(2,403)

173 (180) (2,410) Underwriting and policy acquisition costs
Operating expenses (1,208)
Underwriting result 90
 
Profit before tax 275 (215) 60 Profit before tax
Tax (199) 17 (182) Tax
Profit from discontinued operations - 198 198 Profit from discontinued operations
Profit after tax 76 - 76 Profit after tax
 

REPORTING AND DIVIDEND TIMETABLE

5 March 2015     Ex dividend date for the 2014 final dividend
5 March 2015 Ex dividend date for the first preference dividend for 2015
6 March 2015 Record date for the 2014 final dividend
6 March 2015 Record date for the record preference dividend for 2015
1 April 2015 Payment date for the first preference dividend for 2015
7 May 2015 Q1 2015 Interim Management Statement
8 May 2015 Annual General Meeting
15 May 2015 Payment date for the 2014 final dividend
6 August 2015 2015 Interim Results
Note: the scrip dividend alternative is not being offered for the 2014 final dividend payment
 

Enquiries:

       
 

Investors & analysts

Press

Rupert Taylor Rea Louise Shield
Head of Investor Relations Director of External Communications
Tel: +44 (0) 20 7111 7140 Tel: +44 (0) 20 7111 7047

Email: rupert.taylorrea@gcc.rsagroup.com

Email: louise.shield@gcc.rsagroup.com

 
Ryan Jones Kaidee Sibborn
Investor Relations Manager Media Relations Manager
Tel: +44 (0) 20 7111 7243 Tel: +44 (0) 20 7111 7137

Email: ryan.jones@gcc.rsagroup.com

Email: kaidee.sibborn@gcc.rsagroup.com

 

Further information

A live webcast of the analyst presentation, including the question and answer session, will be broadcast on the website at 09:00am today and is available via a listen only conference call by dialling +44 (0) 20 3427 1900. Participants should use access code 6917899. A webcast of the call will be available via the company website (www.rsagroup.com).

Important disclaimer

This press release and the associated conference call may contain ‘forward-looking statements’ with respect to certain of the Group’s plans and its current goals and expectations relating to its future financial condition, performance, results, strategic initiatives and objectives. Generally, words such as “may”, “could”, “will”, “expect”, “intend”, “estimate”, “anticipate”, “aim”, “outlook”, “believe”, “plan”, “seek”, “continue” or similar expressions identify forward-looking statements. These forward-looking statements are not guarantees of future performance. By their nature, all forward-looking statements are inherently predictive and speculative and involve risk and uncertainty because they relate to future events and circumstances which are beyond the Group’s control, including amongst other things, UK domestic and global economic business conditions, market-related risks such as fluctuations in interest rates and exchange rates, the policies and actions of regulatory authorities, the impact of competition, inflation, deflation, the timing impact and other uncertainties of future acquisitions or combinations within relevant industries, as well as the impact of tax and other legislation or regulations in the jurisdictions in which the Group and its affiliates operate. As a result, the Group’s actual future financial condition, performance and results may differ materially from the plans, goals and expectations set forth in the Group’s forward-looking statements. Forward-looking statements in this press release are current only as of the date on which such statements are made. The Group undertakes no obligation to update any forward-looking statements, save in respect of any requirement under applicable law or regulation. Nothing in this press release shall be construed as a profit forecast.

Short Name: RSA Ins Grp
Category Code: FR
Sequence Number: 454546
Time of Receipt (offset from UTC): 20150225T185931+0000

Contacts

RSA Insurance Group Plc

Contacts

RSA Insurance Group Plc