TIDMRSA
RNS Number : 2691E
RSA Insurance Group PLC
27 February 2020
2019 PRELIMINARY RESULTS
RSA Insurance Group plc 27 February 2020
Strong results for 2019
-- Total Group profits up on all measures
-- Record current year underwriting profit, up by GBP229m
Excluding exit portfolios(1) :
-- Group underwriting profit GBP405m, combined ratio 93.6%
-- Underlying EPS 44.5p per share, return on tangible equity 16.0%
-- UK & International region underwriting profit GBP144m; combined ratio 95.0%
Statutory profit before tax GBP 492 m, impacted by exits and
other charges
Dividends 23.1 p per share, up 10% (final dividend 15.6p)
__
Stephen Hester, RSA Group Chief Executive, commented:
"We are pleased to report strong results for RSA in 2019. Our
profits are up, our dividends are up and return on tangible equity
is very good. This progress is driven by improved underwriting,
which has produced record current year profits and combined
ratio.
2019 was an important period for RSA. Significant management
renewal and a repositioning of our UK & International division
are showing good promise. Our Groupwide focus on underwriting
improvement with strong cost control proved effective. Yet there is
plenty more we can do to improve each of our businesses for
customers and shareholders. There are challenges, but we are
determined to drive further progress and high performance."
Trading results
-- Underlying profit before tax GBP624m ex. exits (GBP565m incl.
exits). Statutory profit before tax GBP492m was up 3% despite the
impact of exits and other charges (2018: GBP480m)
-- Group business operating result GBP656m profit (ex. exits):
Scandinavia GBP286m; Canada GBP159m; UK & International GBP279m
(GBP220m incl. exits). Total Group business operating result
GBP597m profit (2018: GBP517m)
-- Group underwriting profit of GBP405m (ex. exits). Total Group
underwriting profit GBP346m (2018: GBP250m); current year
underwriting profit of GBP314m up GBP229m vs. 2018
-- Group combined ratio of 93.6% (ex. exits): Scandinavia 87.4%;
Canada 94.5%; UK & International 95.0%. Group combined ratio
(incl. exits) 94.6%; UK & International 97.1%
- Group attritional loss ratio(2) improved 1 point vs. 2018
- Group weather costs 2.6% of premiums (2018: 3.7%)
- Large losses 9.7% of premiums (ex. exits), total 10.0% (2018: 11.6%)
- Group prior year loss ratio 0.8% benefit (ex. exits), total 0.6% benefit (2018: 2.6% benefit)
(1) Excluding UK&I exit portfolios, refer to pages 32 to 41
for further information
(2) At constant FX and ex. changes in reinsurance, refer to
pages 32 to 41 for further information
-- Net written premiums ('NWP') of GBP6,417m, down 1%(1) vs.
2018 (down 2%(2) underlying but broadly flat(2) ex. exits):
- NWP up 1%(2) in Scandinavia
- NWP up 3%(2) in Canada
- NWP down 7%(2) in UK & International as underwriting and
rating actions take effect (exits account for c.5 points of the
reduction)
-- Group written controllable costs GBP1,346m (2018: GBP1,343m).
Earned controllable cost ratio 20.9%
-- Investment income of GBP306m (2018: GBP322m) down 5% as expected
-- Other charges of GBP73m include GBP19m for completion of the
UK Legacy sale contracted in 2017 (capital accretive), GBP15m of
accounting impact from a reduction in the discount rate on
long-term insurance liabilities in Denmark, and UK restructuring
charges of GBP27m. Losses on UK & International exit portfolios
were GBP59m
-- Statutory profit after tax GBP383m (2018: GBP372m)
-- Underlying EPS 44.5p excluding exits (inc. exits: 2019:
39.4p; 2018: 34.1p), statutory earnings per share 32.6p (2018:
31.8p)
-- Final dividend of 15.6p per ordinary share proposed, bringing
total dividends for 2019 to 23.1p, up 10% (2018: 21.0p). Payout of
underlying EPS (ex. exits) of 52%. Target dividend payout range
raised from 40-50% to 50-60% from 2020.
Capital & balance sheet
-- Solvency II coverage ratio of 168%(3) (31 December 2018: 170%), above 130-160% target range
-- Tangible equity GBP2.91bn up 1% (31 December 2018:
GBP2.87bn), 282p per share. Shareholders' equity GBP3.87bn (31
December 2018: GBP3.79bn)
-- Underlying return on tangible equity of 16.0% excluding exits
(14.2% inc. exits), in the upper part of 13-17% target range
-- IFRS pension surplus GBP211m (31 December 2018: GBP182m).
Strategic and market update
-- RSA's focus is on building capabilities to outperform in our
markets. This drives many continuing initiatives - targeted at
customer service, underwriting and costs
-- RSA's particular task for 2019 was to sustain momentum in the
large parts of our business that already perform well whilst
applying determined actions to improve elsewhere.
- Our Personal Lines businesses (57% of premiums in 2019)
achieved an 88.5% combined ratio for 2019 (ex. exits), sustaining
their previous excellence
- Across our Commercial Lines businesses the current year
combined ratio improved by 6 points to 100% (98.6% ex. exits). This
was driven by re-underwriting and re-pricing business where needed
or lapsing if necessary; we exceeded the pricing and underwriting
actions targeted for 2019 which should give further improvements in
2020. However, results in Canada and Denmark remained poor, though
are expected to improve sharply in 2020
(1) At constant FX
(2) At constant FX and excluding changes in reinsurance, refer
to pages 32 to 41 for further information
(3) The Solvency II capital position at 31 December 2019 is
estimated
- Underwriting capabilities continue to receive intensive focus
across the Group. These include more sophisticated and agile
pricing models, underwriter training and portfolio discipline and
technology driven insights
-- In our 2018 Preliminary Results, we confirmed London Market
portfolio exits and other business lapses targeted at reducing
unprofitable business and risk exposures by c.GBP250m vs. 2017 NWP
baseline. This has been substantially accomplished and just
c.GBP15m of earned premium remains to run-off. The validity of
these decisions was borne out by exit losses and competitor
experience in similar lines in 2019.
-- Our UK & International business significantly
restructured its management team and operating structure in 2019
with gratifying early results. A programme targeted at removing
>GBP50m costs annually by 2021 is well advanced, with related
restructuring costs of c.1.3x (GBP27m restructuring charge booked
in 2019 with the remainder to come in 2020).
Market conditions
-- Insurance market conditions are competitive across our
territories with significant price/ volume trade-offs. However,
rate hardening and capacity adjustment is helping us re-price in
Canada and in previously loss-making international business
lines
-- Financial market conditions are volatile, driven by political
developments and their knock-on to monetary and economic trends.
RSA is relatively well protected with conservative investment
portfolios and a broad array of internationally derived profits.
However, bond yields fell c.20-50bps in 2019. This will reduce
future investment income in addition to its 'pull to par' impact on
capital usage. FX movements also have a translation effect on RSA,
costing c.2% at underwriting profit level in 2019 compared to the
prior period with similar impact likely again in 2020. The UK's
Brexit process is not expected to materially impact RSA beyond any
financial market effects.
MANAGEMENT REPORT - KEY FINANCIAL PERFORMANCE DATA
Management basis
GBPm (unless stated) FY 2019 FY 2018
ex. exits FY 2019
Profit and loss
Group net written premiums 6,400 6,417 6,470
Underwriting profit , 405 346 250
Combined operating ratio , 93.6% 94.6% 96.2%
Investment result , 263 263 275
Business operating result , 656 597 517
Profit before tax 551 492 480
Underlying profit before tax , 624 565 492
Profit after tax 383 372
Metrics
Earnings per share (pence) 32.6p 31.8p
Underlying earnings per share (pence)
, 44.5p 39.4p 34.1p
Interim dividend per ordinary share
(pence) 7.5p 7.3p
Final dividend per ordinary share
(pence) 15.6p 13.7p
Total dividend per ordinary share
(pence) 23.1p 21.0p
Return on tangible equity (%) , 11.7% 11.8%
Underlying return on tangible equity
(%) , 16.0% 14.2% 12.6%
31 Dec 2019 31 Dec
2018
Balance sheet
Net asset value (GBPm) 3,872 3,786
Tangible net asset value (GBPm) , 2,910 2,867
Net asset value per share (pence)
, 363p 357p
Tangible net asset value per share
(pence) , 282p 279p
Capital
Solvency II surplus (GBPbn) 1.2 1.2
Solvency II coverage ratio 168% 170%
, Alternative performance measures:
The Group uses Alternative Performance Measures (marked ,
throughout), including certain underlying measures, to help explain
business performance and financial position. Where not defined in
the body of this announcement, further information is set out in
the appendix on pages 32 to 41.
CHIEF EXECUTIVE'S STATEMENT
2019 was a pleasing year for RSA with total Group profits up on
all measures. We report new records in both the current year
underwriting result and combined ratio. Underlying earnings per
share(1) grew to 44.5p and underlying return on tangible equity(1)
to 16.0%, despite headwinds from low interest rates and FX.
Dividends increase 10% to 23.1p/share for 2019.
RSA's results come in the context of our consistent strategy, to
focus on core markets and seek to improve operational capabilities
towards 'best in class' levels. While we have much yet to do in
pursuit of these ambitions, each of our three regions contributed
well to 2019 results. In particular the repositioning of our UK
& International region showed good progress with underwriting
profits(1) of GBP144m. The costs of this repositioning - losses on
exit portfolios and cost restructuring charges - impacted results
at a statutory level however.
Strategy and Focus
RSA is a focused international insurance group. We have
complementary leadership positions in the large general insurance
markets of the UK, Scandinavia and Canada together with supporting
international business in Ireland, Continental Europe and Middle
East. The Group is well balanced between personal (57%) and
business customers (43%), and across product lines and distribution
channels.
Our disciplined strategy has enabled important improvements to
customer service, underwriting skills and cost effectiveness in
recent years. These improvements are driven by significant
development of our capabilities and performance culture, as well as
in our technology and data science tools. As a result, RSA has
recorded its three best underwriting results this century over the
last four years.
The Group's only 'down year' since 2013 came in 2018, driven
particularly by marketwide losses and weaknesses in the London
market portfolios of our UK & International division. In
response, we announced the exit of c.GBP250m of business (NWP)
which has been substantially completed. Extensive changes to
leadership and management structure in this division were also made
and a new programme is well advanced to bring structural costs down
further.
Customers
Serving customers well is RSA's raison d'être. For over 300
years we have built our brands and reputation in this way. Modern
times bring heightened demands and expectations from our customers.
These range from digital delivery of services, to help with new or
changing areas of risk such as cyber and climate change. We are
committed to doing all we can to improve and to serve customers
well.
Across the Group, where our underwriting is stable and producing
the expected results, customer retention and satisfaction levels
are generally high and even improving. Conversely, when loss
challenges require adjustments to pricing or underwriting
conditions, we experience more challenges with service and
retention. Many initiatives continue across our business, using
technology and data science, to serve customers better. And we are
striving to meet rising customer expectations with competitive
services that deliver good outcomes.
Market Conditions
General insurance markets are relatively mature, consolidated
and stable, though with natural intrinsic volatility. Strong levels
of competition mean that profitable growth opportunities are
modest, and require a continuous focus on strong underwriting
discipline and cost efficiency. Nevertheless, well managed
companies do produce returns well above cost of capital and
(1) Excluding UK&I exit portfolios, refer to pages 32 to 41
for further information
RSA is clearly in that position. Despite competition, in those
market segments challenged by negative loss trends, pricing has
increased in 2019 which is helpful. Climate change is a key issue
for insurers with heightened weather losses seen, notably in North
America and certain international business lines.
Insurers are exposed to financial markets, and through them to
political and macro-economic challenges, despite insurance services
themselves being relatively insensitive to GDP changes. 2019 saw
yield declines in most bond markets off already low levels, which
produces further income headwinds for insurers. It is striking that
investment income made up c.90% of RSA operating profit in 2010 vs
well under 50% today. The intense focus on improving underwriting
margins has been a very necessary one. Similarly, since c.75% of
RSA's profits come from international business, Sterling's strength
post UK election produces an earnings translation challenge for
2020, though our individual business units are well matched in
currency terms.
2019 Actions
It was a busy year for RSA. Right across the business,
improvement programmes continue in pursuit of "best in class"
ambitions. They span customer service, underwriting & claims,
cost efficiency, technology and people performance. Superimposed on
these programmes were decisive actions to address problem areas
from 2018 and correct performance. We are encouraged by the results
to date.
Management: An important feature of 2019 was senior management
change - to reward success and to bolster areas needing better
performance. We recruited Charlotte Jones as Group CFO, Scott Egan
moved to CEO UK&I Region and Ken Norgrove moved from CEO
Ireland to CEO Scandinavia. In their regional executive committees
there was also significant change. Christian Baltzer has joined as
CEO Codan Denmark, new CEOs of Ireland, Middle East and Europe were
hired as was a new Group HRD and head of UK Personal Lines. It is
an important measure of RSA's progress that we are able both to
internally develop leaders and to hire talented people from outside
successfully. And beneath these changes, throughout the
organisation professional development and performance delivery are
advancing as part of our culture.
RSA's culture is also advancing in other ways. We have met two
key diversity & inclusion targets in 2019 - over 33% of the
senior management group are now female, as are 40% of my direct
reports.
Underwriting & Pricing: At the heart of our business sit the
data science driven disciplines of underwriting and claims
handling. Every year we seek to move these forward, using modern
techniques of analytics and AI, as well as focus on skills and
training.
In general our Personal Lines capabilities are in a good place
but need continued investment. Exceptions are motor underwriting in
the UK where technology driven retooling is underway; and in parts
of Canada where claims inflation challenges, especially weather
related, are driving further action.
In Commercial Lines we saw the greatest re-underwriting activity
in 2019 in addition to substantially completing the UK portfolio
exits announced last year. In terms of actions taken, the year went
even better than planned. However, while UK & International
results improved strongly, Canada and Denmark remained
disappointing and further action will need to continue into
2020.
Our additional reinsurance covers for 2019 proved valuable in
both Canada and Scandinavia, though a better weather year at Group
level meant no recoveries for our GVC layer. The coverage for 2020
is substantially unchanged.
Cost Efficiency & Technology : Data science and technology
advancement are at the heart of all we do. We are progressively
implementing "backbone" IT platform replacements in all regions
whilst pursuing many smaller enhancements. Spend is likely to
continue in excess of historic depreciation levels. Technology and
better ways of working drive our efficiency efforts, whilst also
enabling better underwriting and customer service. Cost efficiency
is absolutely vital for any mature, competitive industry. RSA's
record is very good in this regard. However, our top line
reductions in the UK necessitate a further targeted programme of
>GBP50m p.a. cost saving by end 2021, which is well
advanced.
Financial Results 2019 : It was a strong year for RSA with total
Group profits up on every measure. The best indicator of ongoing
performance levels are our underlying results (ex. exits). These
show EPS at 44.5p and return on tangible equity of 16.0% (vs 13-17%
target). Statutory profit after tax was up 3% despite the impact of
exits and restructuring costs in the UK. Proposed dividends are up
10% to 23.1p/share.
Driving our Group results were strong underwriting profits of
GBP405m and combined ratio ('COR') of 93.6% (ex. exits). These were
achieved on flat premium income with improvements in each of
attritional loss ratio, weather and large loss costs, but a
reduction in prior year development.
On a geographic basis, the highlight was a major improvement in
our UK & International results, to a combined ratio of 95.0%
(ex. exits). Canada improved sharply to 94.5%, Scandinavia was as
usual the largest contributor (87.4% COR), though held back by poor
Danish Commercial lines results.
The repositioning of RSA's UK&I region in 2019 has driven
some significant costs for exit portfolios and restructuring of
expense base. Those actions make us more valuable going forward and
have been absorbed by our organic capital generation.
Dividends : We propose total dividends for 2019 of 23.1p/share,
up 10%. This represents an 52% payout of underlying EPS (ex.
exits), above our 40-50% policy range. Our strong capital position
and organic capital generation support this, despite the costs of
'below the line' items and bond 'pull to par'. Reflecting the
improvements of recent years in RSA's performance and resilience,
we are also increasing our target dividend payout range to 50-60%
of underlying EPS.
Looking Forward
RSA's focused regional strategy is working well. Our ambition to
drive towards "best in class" performance levels remains in place
and we are optimistic about the ability of our business to improve
further to that end. We target progress in each of our three
regions in 2020. We have headwinds from lower investment income and
adverse FX translation, but believe that EPS growth overall is
again in prospect, subject to normal underwriting volatility.
Thanks
RSA could not perform well for stakeholders, without their
heartening and reciprocal support - for which we are very grateful.
While customers and shareholders are our primary audience, we are
also determined to serve the broader interest of RSA well. All we
achieve is driven by the efforts of RSA's people. I am proud to
work with and to lead this group. And my sincere thanks go to them
for 2019's efforts.
Stephen Hester
Group Chief Executive
26 February 2020
MANAGEMENT REPORT
SEGMENTAL INCOME STATEMENT
Management basis - 12 months ended 31 December 2019
UK&I
UK&I exit Central Group
Scandi ex. portfolios UK&I functions ex. Group Group
-navia Canada exits (1,2) total(2) (2) exits FY19 FY18
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Net written premiums 1,764 1,735 2,864 17 2,881 37 6,400 6,417 6,470
Net earned premiums 1,767 1,723 2,893 88 2,981 (9) 6,374 6,462 6,537
Net incurred claims (1,233) (1,176) (1,773) (108) (1,881) (42) (4,224) (4,332) (4,480)
Commissions (65) (209) (534) (24) (558) 1 (807) (831) (886)
Operating expenses (246) (244) (442) (15) (457) (6) (938) (953) (921)
Underwriting result
, 223 94 144 (59) 85 (56) 405 346 250
Investment income 87 69 150 - 150 - 306 306 322
Investment expenses (2) (2) (8) - (8) - (12) (12) (14)
Unwind of discount (22) (2) (7) - (7) - (31) (31) (33)
Investment result
, 63 65 135 - 135 - 263 263 275
Central expenses - - - - - (12) (12) (12) (8)
Business operating
result , 286 159 279 (59) 220 (68) 656 597 517
Interest (32) (25)
Other charges (73) (12)
Profit before tax 492 480
Tax (109) (108)
Profit after tax 383 372
Non-controlling interest (24) (23)
Other equity costs(3) (23) (23)
Net attributable
profit , 336 326
Loss ratio (%) 69.8 68.2 61.3 63.1 66.3 67.0 68.5
Weather loss ratio 0.4 5.0 2.3 2.5 2.5 2.6 3.7
Large loss ratio 7.8 8.0 10.4 11.2 9.7 10.0 11.6
Current year attritional
loss ratio , 63.4 56.0 48.7 49.1 54.9 55.0 55.8
Prior year effect
on loss ratio (1.8) (0.8) (0.1) 0.3 (0.8) (0.6) (2.6)
Commission ratio
(%) 3.7 12.1 18.4 18.7 12.6 12.9 13.6
Expense ratio (%) 13.9 14.2 15.3 15.3 14.7 14.7 14.1
Combined ratio (%)
, 87.4 94.5 95.0 97.1 93.6 94.6 96.2
Controllable expense
ratio (%)(4) , 21.7 16.9 22.5 22.5 20.9 20.9 20.4
Notes:
UK & International comprises the UK, Europe, Ireland and
Middle East. Refer to page 28 for comparatives.
(1) Exit portfolios in UK & International which have
substantially run-off over the course of 2019
(2) GBP8m of prior year GVC recoveries relating to UK&I
exited business has been reallocated from Central Functions to
UK&I Exits and therefore to total UK&I
(3) Preference dividends of GBP9m and coupons of GBP14m paid on
Restricted Tier 1 securities (4) On an earned basis
Premiums
Net written premiums ('NWP') of GBP6,417m were down 1% in the
period at constant FX. Underlying premiums were down 2%(1) when
adjusted for reinsurance changes but broadly flat(1,2) excluding
the exit portfolios.
Group retention remained strong at 80% (2018: 80%). We are
pleased to report improvements across Scandinavia, and in UK
Personal Lines. In Commercial Lines, retention was down in the UK
and Canada, where we have been taking the most rating and
underwriting action.
Regional trends for 2019 include:
-- Scandinavian premiums were flat or up 1% excluding changes in
reinsurance, both at constant FX. Personal Lines premiums were
flat(1 3) and included underlying growth of 2% in Sweden. Premiums
were up 2%(1) in Commercial Lines. Rate was ahead of our plans and
last year, but was dampened by a reduction in volumes as higher
retention was more than offset by lower new business
-- Premiums grew 3% in Canada at constant FX. This was driven by
6%(1) growth in Personal Lines led by Johnson. We achieved high
single-digit rate and hard market conditions meant that retention
remained strong at c.90% for Johnson. Overall, policies-in-force
(PIFs) were up 4% in Johnson with continued organic growth
supplemented by our new partnership with Scotiabank commencing in
the spring. Premiums in Commercial Lines decreased by 4%(1) where a
reduction in volumes was partly offset by strong rate. Lower
volumes were driven by targeted lapses and were in line with our
plans
-- Premiums were down 7% in the UK & International region at
constant FX. Exits accounted for c.5 points of the reduction. UK
Personal Lines premiums were down 11% in the period, with exits
driving c.1.5 points of the reduction. Household was down 10% with
the sale of Oak Home accounting for c.3 points of the reduction.
Importantly, we have continued to achieve good rate increase
through our Household book. Motor and Pet premiums also decreased.
Commercial Lines premiums (which now exclude Europe which is
reported separately) were down 7%(1) excluding reinsurance changes,
but up c.5%(1 2) excluding exits; rate was positive in all major
lines of business, although this impacted retention. Premiums in
Europe were down 7%(1) reflecting the reshaping of the portfolio.
Irish premiums increased by 6%(1) helped by strong new business in
Personal Motor. In the Middle East, premiums were down 5%(1)
largely due to lower volumes in Commercial Lines and rating
pressure in Personal Lines
-- Net written premiums in the UK & International exit
portfolios were GBP17m. Net earned premiums were higher at GBP88m
reflecting the ongoing run-off of exposures. Earned premiums will
reduce significantly to c.GBP15m in 2020.
More detail is provided in the regional reviews on pages 16 to
21.
(1) At constant FX and excluding changes in reinsurance, refer
to pages 32 to 41 for further information
(2) Excluding UK & International exit portfolios, refer to
pages 32 to 41 for further information (3) Excluding a one-off
adjustment in Swedish Personal Accident in Q1 2018
Underwriting result
Total Group underwriting result:
Current year Prior year Total UW result
UW , UW , ,
GBPm FY 2019 FY 2018 FY 2019 FY 2018 FY 2019 FY 2018
Scandinavia 202 182 21 56 223 238
Canada 80 (21) 14 46 94 25
UK & International 85 (111) - 68 85 (43)
UK & International ex.
exits 131 13 144
Central functions (53) 35 (3) (5) (56) 30
Total Group 314 85 32 165 346 250
Total Group ex. exits 360 45 405
-- The Group attritional loss ratio of 55.0% was 1(1) point
better than 2018. The ratio improved by 0.4(1) points in
Scandinavia, with improvements in Danish Personal and Norway,
partly offset by Danish Commercial for which action plans are in
place to address. In Canada, the attritional loss ratio improved by
2.1 points and was better across all major lines. In particular,
Personal Auto was c.2 points better as rate and claims initiatives
started to impact. Property also showed pleasing improvements. The
UK & International attritional loss ratio improved by 1.2(1)
points. In the UK, improvements in Household, Pet, and Commercial
Property were partly offset by an increase in Motor. Household
improved by 2.5 points reflecting the actions taken to address the
'escape of water' claims inflation issue which presented in
2017
-- Weather losses amounted to GBP167m or 2.6% of net earned
premiums (2018: 3.7%; five year average: 2.9%(2) ). Overall,
weather for the year was around half a point better than our
expectations, with experience in H2 relatively benign at 2.0% of
premiums. This compares to 3.2% reported for H1 which included
heavy experience in Canada
-- Large losses were GBP645m or 10.0% of net earned premiums
(2018: 11.6%; five year average: 10.0%(2) ). This was 9.7%
excluding UK&I exit portfolios. All regions reported
improvements vs 2018 with Scandinavia and Canada each around 1
point better, and the UK & International 3 points better
-- Reinsurance: The retentions were not reached in 2019 on the
Group Volatility Cover ('GVC'). However, we made recoveries of
GBP15m and GBP17m on our regional aggregate covers in Canada and
Scandinavia respectively. Please see page 27 for further details of
our reinsurance covers for 2020.
Group prior year profit of GBP45m provided a 0.8 point benefit
excluding exits to the combined ratio (0.6 points inc. exits; 2018:
2.6 points; five year average: 2.0%). This included positive
development from each of our three regions (ex. exits), although
negative development in UK Personal Lines dampened this in the UK
& International. Overall Group PYD for the year was impacted by
a flat first quarter which included negative prior year development
in Commercial Lines arising from refinements to loss estimates
relating to the 2018 accident year.
Our assessment of the margin in reserves for the Group (the
difference between our actuarial indication and the booked reserves
in the financial statements) remains at its target level at c.5% of
best estimate claims reserves.
(1) At constant FX and excluding changes in reinsurance, refer
to pages 32 to 41 for further information
(2) 2015 - 2019
Underwriting operating expenses
The Group underwriting expense ratio of 14.7% increased as
expected. Scandinavian and Canadian expense ratios increased
slightly vs 2018, while the expense ratio in UK & International
increased by 1 point, in line with expectations and reflecting the
contraction in premiums. We have commenced a further UK focused
cost programme to address this (see further details below).
Commissions
The Group commission ratio of 12.9% decreased by 0.7 points
(2018: 13.6%), mainly due to a higher proportion of Personal Lines
in net earned premiums.
Investment result
The investment result was GBP263m (2018: GBP275m) with
investment income of GBP306m (2018: GBP322m), investment expenses
of GBP12m (2018: GBP14m) and the liability discount unwind of
GBP31m (2018: GBP33m).
Investment income was down 5% on prior year, primarily
reflecting the impact of reinvestment at lower yields which was
partly offset by increased income from actions taken on the
portfolios to increase exposure to less liquid credit investments.
The average book yield across our major bond portfolios was 2.1%
(2018: 2.3%).
Based on current forward bond yields and FX rates, it is
estimated that investment income will be c.GBP255-270m for 2020, c.
GBP240-255m for 2021, and c.GBP235-250m for 2022. The discount
unwind is expected to be c.GBP30m per annum and investment expenses
c.GBP14m per annum.
Controllable costs
Group written controllable costs were GBP1,346m (2018:
GBP1,343m). This comprised 2% cost reductions, offset by 2%
inflation. At CFX and gross of inflation, Scandinavia written
controllable costs of GBP379m were flat vs 2018, Canada (GBP294m)
was 2% lower, and UK & International (GBP667m) was 2%
lower.
The earned controllable expense ratio of 20.9% was up slightly
versus 2018 (20.4%) mainly due to UK&I business exits. The
ratio is down by c.3.5(1) points since 2013 and our ambition of an
earned controllable expense ratio of less than 20% is
unchanged.
Group FTE(2) was 12,378 at 31 December 2019, down 25% (excluding
disposals) since the beginning of 2014.
We have commenced a new cost reduction programme in our UK
business. This is targeting the removal of >GBP50m costs by
2021. Associated restructuring costs of c.1.3x are expected, with
GBP27m booked in 2019 and the remainder to be booked in 2020.
UK&I UK&I Group Total
Earned controllable expense Scandinavia Canada ex. exits total ex. exits Group
ratio: , % % % % % %
FY 2019 21.7 16.9 22.5 22.5 20.9 20.9
FY 2018 21.1 17.3 21.4 20.4
(1) At constant FX and ex. disposals (where relevant) (2) Full
time equivalent employees
Other items
Interest costs:
-- Interest costs were GBP32m (GBP46m including the Tier 1
securities), up from GBP25m in 2018. The increase reflects changes
to lease accounting (IFRS 16), mainly on properties
-- Coupon costs of GBP14m (2018: GBP14m) for the 2017 Tier 1
securities are presented at the bottom of the management P&L as
'other equity costs'. Under IFRS, these are recognised in the
statement of changes in equity.
Other charges:
GBPm FY 2019 FY 2018
Net gains/ losses/ FX (23) 20
Amortisation (12) (13)
Pension net interest cost 4 (6)
Restructuring costs (27) -
Changes in economic assumptions (15) -
Other - (13)
Total , (73) (12)
-- Net losses of GBP23m in 2019 included GBP19m of final costs
relating to the disposal of UK Legacy liabilities to Enstar Group
Limited. This follows the sanction of the Part VII transfer of
these liabilities by the High Court of Justice of England and Wales
on 13 June 2019. The completion of this transaction provided a net
benefit to capital
-- GBP27m of restructuring charges were incurred relating to the
cost reduction programme that has commenced in the UK business (see
previous page for further details)
-- Changes in economic assumptions represents GBP15m for the
accounting impact of a reduction in the discount rate in H1 on
long-term insurance liabilities in Denmark.
Tax
The Group reported a tax charge of GBP109m for 2019, giving an
effective tax rate ('ETR') of 22% (2018: 23%). The tax charge
largely comprises tax on overseas profits. The Group's ETR of 22%
is higher than the UK statutory rate of 19% mainly due to higher
tax rates in some of the Group's core overseas jurisdictions and
withholding taxes. The Group underlying tax rate for 2019 was 20%
(2018: 20%). Excluding UK&I exited business the Group
underlying tax rate for 2019 was 19%.
The carrying value of the Group's deferred tax assets at 31
December 2019 was GBP209m (31 December 2018: GBP234m), of which
GBP180m (31 December 2018: GBP189m) are in the UK. The decrease in
the Group's deferred tax assets in 2019 was largely due to
accelerated tax depreciation in Canada and a small reduction in the
UK deferred tax asset reflecting lower investment income outlook.
At expected tax rates, a further GBP254m (31 December 2018:
GBP260m) of deferred tax assets remain available for use but not
recognised on balance sheet; these are predominantly in the UK and
Ireland. The carrying value of the Group's deferred tax liabilities
at 31 December 2019 was GBP84m (31 December 2018: GBP79m), the
majority of which are in Sweden and Denmark.
For 2020 we expect the Group's ETR and underlying tax rate to
continue to be in the region of 20%, given the scale of
unrecognised UK and Irish tax assets.
Dividend
We are pleased to declare a final dividend of 15.6p per ordinary
share (2018: 13.7p). Together with the interim dividend of 7.5p,
this brings the total dividend for the year to 23.1p (up 10%),
representing a payout of 52% of underlying EPS (ex. exits). This is
above our 40-50% policy range, supported by our strong capital
position and organic capital generation, despite the costs of
'below the line' items and bond 'pull to par'.
Reflecting the improvements of recent years in RSA's performance
and resilience, we are also increasing our target dividend payout
range to 50-60% of underlying EPS.
Outlook
RSA is targeting further progress in 2020. We expect to sustain
a consistent strategy and operational focus and to work towards our
unchanged financial targets.
At this early stage of the year we are assuming insurance market
conditions broadly comparable to 2019. Using current bond yields,
investment income is expected to be GBP255-270m in 2020 (see
guidance on page 11), and current FX rates imply a 2% headwind in
GBP terms on operating profits versus 2019.
We expect Net Written Premiums to be similar in 2020 vs 2019 at
constant FX, and Net Earned Premiums slightly lower reflecting
residual earn through of 2019 actions.
Subject to natural loss ratio volatility, we target improved
underwriting profit overall and from each region.
BALANCE SHEET
Movement in Net Assets
Share-holders' Non- Equity
funds(1) controlling Tier Total Loan &
interests 1 notes equity capital loan TNAV
capital ,
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Balance at 1 January 2019 3,786 168 297 4,251 441 4,692 2,867
Profit after tax 359 24 - 383 - 383 443
Foreign exchange losses
net of tax (79) (6) - (85) - (85) (63)
Fair value gains net of
tax 122 - - 122 - 122 122
Pension fund losses net
of tax (86) - - (86) - (86) (86)
Repayment of loan capital - - - - (39) (39) -
Share based payments &
share issue 14 - - 14 - 14 14
Prior year final dividends (141) (13) - (154) - (154) (141)
Interim dividend (78) - - (78) - (78) (78)
Other equity costs(2) (23) - - (23) - (23) (23)
Goodwill and net intangible
additions - - - - - - (143)
Other (2) - - (2) - (2) (2)
Balance at 31 December
2019 3,872 173 297 4,342 402 4,744 2,910
Per share (pence) ,
At 1 January 2019 357 279
At 31 December 2019 363 282
Tangible net assets increased by 1% to GBP2.91bn at 31 December
2019.
The increase was driven by profit after tax of GBP443m(3) and
positive fair value mark-to-market movements of GBP122m, mainly
reflecting tightening credit spreads and falling bond yields.
Tangible net assets were reduced by payment of the 2018 final
dividend (GBP141m) and 2019 interim dividend (GBP78m), together
with investment of GBP143m in intangible assets which were
primarily IT related (net investment of GBP59m after amortisation
of GBP84m shown as part of profit).
The pension schemes generated a loss of GBP86m in net asset
terms and this was primarily as a result of tighter 'AA' corporate
bond spreads, by which liabilities are discounted. The IAS 19
surplus at 31 December 2019 was GBP211m, please see page 26 for
more details.
TNAV per share increased by 1% to 282p.
(1) Ordinary shareholders' funds including preference share
capital of GBP125m
(2) Includes preference dividends of GBP9m and coupons of GBP14m
paid on 2017 issued restricted tier 1 securitie s
(3) Adjusted for items relating to goodwill and intangible
assets
CAPITAL POSITION
Solvency II position(1) Requirement Eligible Surplus Coverage
: (SCR) Own Funds
GBPbn GBPbn GBPbn %
31 December 2019 1.7 2.9 1.2 168%
31 December 2018 1.8 3.0 1.2 170%
The Solvency II coverage ratio(1) decreased to 168% during the
period:
%
At 1 January 2019 170
Underlying capital generation 27
Net capital investment (3)
Impact of pension contributions (paid annually in Q1) (4)
Pull-to-par on unrealised bond gains (4)
Exit losses (3)
Reorganisation costs (2)
Dividends (14)
Market movements and other 1
At 31 December 2019 168
Please refer to appendix (page 25) for further Solvency II
details (including sensitivities).
(1) The Solvency II capital position at 31 December 2019 is
estimated
REGIONAL REVIEW - SCANDINAVIA
Management basis
Net written premiums Change Underwriting Change
results
FY 2019 FY 2018 CFX FY 2019 FY 2018 CFX
GBPm GBPm % GBPm GBPm %
Split by country
Sweden 1,033 1,062 1 257 251 7
Denmark 606 627 (2) (18) 6 (386)
Norway 125 128 1 (16) (19) 17
Total Scandinavia 1,764 1,817 - 223 238 (2)
Split by class
Household 338 362 (4)
Personal Motor 360 364 2
Personal Accident
& Other 345 355 1
Total Scandinavia
Personal 1,043 1,081 - 231 222 8
Policy count change -
Property 317 315 3
Liability 138 144 (3)
Commercial Motor 204 211 -
Other 62 66 (4)
Total Scandinavia
Commercial 721 736 1 (8) 16 (155)
Volume change (4)
Total Scandinavia 1,764 1,817 - 223 238 (2)
Investment result 63 68 (3)
Scandinavia business operating
result 286 306 (3)
Operating ratios Claims Commission Expenses Combined
(%)
FY FY 2018 FY 2019 FY FY 2019 FY 2018 FY 2019 FY
2019 2018 2018
Scandinavia
Personal 62.9 63.5 3.1 3.0 11.8 12.4 77.8 78.9
Scandinavia
Commercial 79.8 78.0 4.3 4.4 17.0 15.5 101.1 97.9
Total Scandinavia 69.8 69.6 3.7 3.5 13.9 13.7 87.4 86.8
Earned controllable
expense ratio 21.7 21.1
FY FY 2018 5 year
2019 average
Claims ratio:
Weather loss ratio 0.4 0.4 0.4
Large loss ratio 7.8 8.9 6.8
Current year
attritional
loss ratio 63.4 63.3
Prior year effect
on loss ratio (1.8) (3.0)
SCANDINAVIA
The Scandinavian business operating result was strong at GBP286m
profit, down 3%(1) on 2018. The combined ratio of 87.4% was 0.6
points higher. Personal Lines showed continued excellent
performance with a combined ratio of 77.8%. Commercial Lines
increased by 3.2 points to a combined ratio of 101.1% - higher
attritional losses and expenses, and lower PYD contributed, while
large losses were better but still elevated.
Net written premiums of GBP1,764m were unchanged at constant FX
or up 1%(2) on an underlying basis. Personal Lines premiums were
unchanged(2,3) . This included Swedish Personal Lines growth of
2%(2,3) with Household, Motor and Personal Accident all up.
Mid-single digit rates and strong retention of 85% contributed.
Net written premiums increased by 2%(2) in Com mercial Lines.
Rate was ahead of our plans last year in all lines of business but
was dampened by a 4% reduction in volumes. Higher retention was
more than offset by lower new business where action to improve
performance in Motor and Property has impacted premiums.
Customer metrics continue to improve. An 'effortless' measure
determines and tracks how seamless customer interactions are
against defined targets. Our Personal Lines businesses across the
region continue to report scores at or close to target levels.
Customer satisfaction scores improved in Denmark versus Q4 2018 and
our newly introduced satisfaction measure in Sweden is near to
benchmark level. Overall, retention improved to 83% (2018: 81%) and
was better in all countries.
Large losses of 7.8% were better than last year (2018: 8.9%) but
above the five year average of 6.8% driven by Denmark, particularly
Commercial Property . Sweden and Norway both reported lower large
losses vs 2019. Recoveries of GBP17m were made in 2019 from local
aggregate reinsurance protection in Scandinavia. The attritional
loss ratio of 63.4% was flat versus 2018 or around half a point
better excluding the impact of 2019 reinsurance changes.
Significant improvements in Norway and Danish Personal Lines were
offset by Danish Commercial Lines (mainly Property) and Sweden (to
support topline). We have taken strong action in Danish Commercial
to re-price, re-underwrite and lower capacity where required.
Written controllable expenses were up 2%(1) in 2019, with costs
flat pre-inflation. The earned controllable cost ratio of 21.7%
increased by around half a point in part due to flat topline. We
continue to invest in important areas of the business such as
pricing sophistication, data analytics, the IT hub in Malmö and a
talent acquisition hub.
Geographically, Sweden generated an underwriting profit of
GBP257m (2018: GBP251m) and a combined ratio of 75% (2018: 76%)
driven by lower large losses and better expenses. Denmark reported
an underwriting loss of GBP18m (2018: GBP6m profit) and a combined
ratio of 103% (2018: 99%). Danish Personal Lines performed well
with an underwriting profit of GBP30m (up 9%(1) ) but the result
was driven by poor Danish Commercial Lines performance (as reported
at the first half), with higher attritional and large losses,
notably in Motor (large losses only) and Property. The underwriting
loss in Norway of GBP16m (2018: GBP19m loss) included a prior year
underwriting loss of GBP6m, while the current year performance
included significantly improved attritional and large loss
ratios.
(1) At constant FX
(2) At constant FX and excluding changes in reinsurance, refer
to pages 32 to 41 for further information
(3) Excluding a one-off adjustment in Swedish Personal Accident
in Q1 2018
REGIONAL REVIEW - CANADA
Management basis
Net written Change Underwriting Change
premiums result
FY 2019 FY 2018 CFX FY 2019 FY 2018 CFX
GBPm GBPm % GBPm GBPm %
Household 537 512 3
Personal Motor 708 641 8
Total Canada Personal 1,245 1,153 6 106 29 259
Policy count change (2)
Property 212 215 (3)
Liability 100 105 (7)
Commercial Motor 123 127 (5)
Marine & Other 55 52 3
Total Canada Commercial 490 499 (4) (12) (4) (166)
Volume change (13)
Total Canada 1,735 1,652 3 94 25 275
Investment result 65 59 6
Canada business operating
result 159 84 85
Operating ratios (%) Claims Commission Expenses Combined
FY 2019 FY 2018 FY FY 2018 FY 2019 FY FY 2019 FY
2019 2018 2018
Canada Personal 67.5 72.6 9.9 10.9 13.9 13.9 91.3 97.4
Canada Commercial 69.9 68.8 17.6 18.2 14.8 13.9 102.3 100.9
Total Canada 68.2 71.5 12.1 13.1 14.2 13.9 94.5 98.5
Earned controllable
expense ratio 16.9 17.3
FY 2019 FY 2018 5 year
average
Claims ratio:
Weather loss ratio 5.0 6.8 4.7
Large loss ratio 8.0 9.4 7.3
Current year attritional
loss ratio 56.0 58.1
Prior year effect
on loss ratio (0.8) (2.8)
CANADA
Canada delivered a pleasing business operating result of GBP159m
profit for 2019, almost double that of last year. The combined
ratio improved by 4 points to 94.5%. Personal Lines improved by c.6
points to 91.3%, helped by lower weather losses for the year
(despite a heavy first half). The combined ratio in Commercial
Lines was disappointing and increased by around one and a half
points with flat prior year development for the year more than
offsetting better (but still elevated) weather and large losses,
and lower attritional claims.
Net written premiums of GBP1,735m increased by 3% at constant FX
or 3%(1) on an underlying basis. Personal Lines reported growth of
6%(1) driven by Johnson. The rating environment was strong in 2019,
and we applied rate increases of c.8% in Personal Auto and c.11% in
Household. This helped to combat ongoing and significant claims
inflation and build an allowance for heavier weather losses
expected as a result of climate change. Hard market conditions
meant that retention remained strong at c.90% for Johnson, our
direct business. Personal broker reported a 6 point decrease to 83%
reflecting targeted actions to improve profitability. Johnson
reported organic growth of 7% and policies-in-force were up 4%. We
commenced writing new business for Scotiabank in April and renewals
followed in July; the partnership has so far outperformed our
expectations. Premiums in Commercial Lines decreased by 4%(1) where
a 13% reduction in volumes was partly offset by rate of 9%. Lower
volumes were in line with our plans and mainly driven by targeted
lapses. We expect to continue to prioritise profitability over
volume in 2020.
Our customer metrics continue to track well, although rating
action has impacted service levels throughout the year. Johnson
sales and service NPS(3) was +45 in Q4, with first contact
resolution for inbound calls at 93%, while our fast track process
for simple low cost claims reported NPS of +53 in Q4.
While the weather loss ratio reduced by 1.8 points to 5.0%, it
was again above the five year average of 4.7%. This reflected a
heavy first half of the year for cat losses across the Canadian
industry. Experience in the second half was more 'normal' and we
benefitted from our new local aggregate reinsurance cover (overall
recoveries of GBP15m, of which GBP7m relate to weather losses). The
large loss ratio of 8.0% was 1.4 points better than last year but
still 0.7 points above the five year average. This large loss
experience impacted mainly Commercial Property.
The attritional loss ratio of 56.0% improved by 2 points in 2019
and was better across all major lines of business. Personal Auto
improved by c.2 points as rate and claims initiatives started to
take effect. We expect to continue to apply rate in 2020, subject
to regulatory approval. Personal Property was 1.2 points better,
and we saw good improvements across Commercial Auto and
Property.
2019 was a busy year from a technology perspective. Guidewire
Claims is now full deployed across the business and our new Claims
Portal is now live for Personal Broker and Johnson providing a
quicker and more efficient claims journey for our customers. Radar
Live is fully deployed in all major lines and is improving the
speed and efficacy of our non-regulatory rate filings.
Written controllable expenses of GBP294m were flat(2) versus
last year, with 2% cost reductions absorbing 2% inflation. The
earned controllable expense ratio of 16.9% was 0.4 points lower
than last year and better than our plans. We expect the ratio to
rise in 2020 as technology related amortisation builds, but to
remain within our target zone of <20%.
(1) At constant FX and excluding changes in reinsurance, refer
to pages 32 to 41 for further information (2) At constant FX
(3) Net Promoter Score
REGIONAL REVIEW - UK & INTERNATIONAL (1)
Management basis (1) Net written premiums Underwriting result
FY 2019 FY 2019 FY 2018 FY 2019 FY 2019(2) FY 2018
Ex. exits Total Total Ex. exits Total Total
GBPm GBPm GBPm GBPm GBPm GBPm
Household 587 587 651
Personal Motor 207 207 254
Pet 244 244 262
Total UK Personal 1,038 1,038 1,167 18 2 (23)
Policy count
change
ex. exits (12)%
Property 466 479 501
Liability 252 257 250
Commercial Motor 201 200 194
Marine & Other 153 146 221
Total UK
Commercial
(1) 1,072 1,082 1,166 32 1 (70)
Volume change ex.
exits 3%
Total UK (1) 2,110 2,120 2,333 50 3 (93)
Europe(1) 230 237 256 17 5 (13)
Ireland 327 327 312 42 42 30
Middle East 197 197 199 35 35 33
Total UK &
International 2,864 2,881 3,100 144 85 (43)
Investment result 135 135 148
UK & International business
operating result 279 220 105
Operating ratios Claims Commission Expenses Combined
(%)
FY 2019 FY FY FY FY 2019 FY 2018 FY FY
2018 2019 2018 2019 2018
Total UK Personal 60.8 63.2 20.6 21.0 18.4 17.8 99.8 102.0
UK Personal ex.
exits 98.4
Total UK
Commercial
(1) 68.6 74.0 19.9 21.5 11.4 10.3 99.9 105.8
UK Commercial ex.
exits (1) 96.9
Total UK (1,) (2) 64.7 68.7 20.3 21.3 14.9 13.9 99.9 103.9
UK ex. exits (1) 97.7
Europe(1) 68.1 78.1 14.2 14.5 15.3 12.6 97.6 105.2
Europe ex. exits
(1) 92.6
Ireland 60.2 64.1 11.6 11.8 15.3 14.3 87.1 90.2
Middle East 44.4 45.3 18.3 17.6 20.3 20.5 83.0 83.4
Total UK &
International
(2) 63.1 67.6 18.7 19.5 15.3 14.3 97.1 101.4
UK & International
ex. exits 61.3 18.4 15.3 95.0
Earned
controllable
expense ratio 22.5 21.4
Claims ratio: 5 year
FY 19 5 year average
ex exits FY 19 FY 18 average adj.(3)
Weather loss ratio 2.3 2.5 5.7 4.3 c.3.0
Large loss ratio 10.4 11.2 14.2 12.9 c.11.0
Current year
attritional
loss ratio 48.7 49.1 50.1
Prior year effect
on loss ratio (0.1) 0.3 (2.4)
(1) Europe, previously reported within UK Commercial, is now
reported separately. 2018 comparatives have been restated.
(2) GBP8m of prior year GVC recoveries relating to UK&I
exited business has been reallocated from Central Functions to
UK&I Exits and therefore to total UK&I; (3) Adjusted for
changes in UK&I business mix resulting from exits.
UK & INTERNATIONAL
The UK & International region delivered a sharply improved
business operating result of GBP279m profit for 2019 (GBP220m(1)
inc. exits) with a combined ratio of 95.0% (97.1%(1) inc.
exits).
The UK reported an underwriting profit of GBP50m and a combined
ratio of 97.7%, excluding exit portfolios. This was driven by
better current year results offset by lower prior year development.
Including exits, the COR was 99.9%(1) . Across the rest of the
UK&I region performance was very strong with Europe delivering
a combined ratio of 92.6% (97.6% including exits), Ireland 87.1%
and the Middle East 83.0%.
UK net written premiums of GBP2,120m were down 9% as reported.
Exits accounted for c.6 points of the reduction. Personal Lines
premiums decreased by 11%; Household was down 10% with the sale of
Oak Home accounting for c.3 points of this. We have continued to
achieve good rate increases in Household and pleasingly new
business in More Than Home doubled in 2019. Motor and Pet premiums
decreased. While retention improved, new business was down as we
continued to hold our discipline on rate. Commercial premiums were
down 7% excluding reinsurance changes, but up c.5%(2,3) excluding
exits. Rate was ahead of plan and prior year in all major lines;
e.g. Commercial Property achieved rate of 6% and Marine achieved
10%. However, pricing and underwriting actions have impacted
retention.
Premiums in Europe decreased by 7%(3) as a result of
underwriting actions in Property and Marine. In Ireland premiums
increased by 6%(3) helped by strong new business in Personal Motor,
and in the Middle East premiums were down 5%(3) largely as a result
of lower volumes in Commercial Lines and rating pressure in
Personal Lines.
UK&I weather costs of 2.5% (2.3% ex. exits) were 3.2 points
lower than 2018 with better experience across all parts of the
region. Large losses of 11.2% (10.4% ex. exits) improved by 3pts
versus prior year driven by UK Commercial, Europe and Ireland. The
attritional loss ratio of 49.1% (48.7% ex. exits) improved by 1
point with improvements seen particularly across the UK and Europe.
Within the UK, Household was 2.5 points better as strong rate
earned through. Prior year development added 0.3(1) points to the
COR (0.1 point benefit ex. exits) compared to a benefit of 2.4
points in 2018. This was mainly due to the impact of the Ogden
discount rate change and strengthening on recent accident years
including 2018. This was offset by strong positive development in
Ireland and the Middle East.
The UK&I expense ratio increased by a point as expected,
savings of 3% gross of inflation were offset by the impact of lower
premiums. These topline reductions have necessitated a further
targeted cost programme in the UK of >GBP50m p.a. cost saving by
end 2021. This is already well advanced, and associated
restructuring costs of c.1.3x are expected, with GBP27m booked in
2019 and the remainder to be booked in 2020.
Exit portfolios
In 2018, we announced portfolio exits and changes in
underwriting appetite for our London Market business. Additional
exits included two UK generalist MGA schemes and certain European
branch business. This was in response to challenging market
conditions as well as our own strategic reassessment. The total net
written premium we targeted for exit was c.GBP250m against a 2017
baseline, of which substantially all has been implemented.
The underwriting loss from these portfolios was GBP59m(1) in
2019. Net written premiums were GBP17m. Net earned premiums were
higher at GBP88m reflecting the ongoing run-off of exposures. A
further c.GBP15m of exited premiums are expected to be earned out
in 2020.
(1) GBP8m of prior year GVC recoveries relating to UK&I
exited business has been reallocated from Central Functions to
UK&I Exits and therefore to total UK&I; (2) Excluding
changes in reinsurance, see pages 32 to 41 for further information;
(3) At constant FX
INVESTMENT PERFORMANCE
Management basis
Investment result FY 2019 FY 2018 Change
GBPm GBPm %
Bonds 223 242 (8)
Equities 35 35 -
Cash and cash equivalents 9 10 (10)
Property 18 19 (5)
Other 21 16 31
Investment income 306 322 (5)
Investment expenses (12) (14) 14
Unwind of discount (31) (33) 6
Investment result 263 275 (4)
Balance sheet unrealised gains (pre-tax) 31 Dec 31 Dec Change
2019 (GBPm) 2018 (GBPm) %
Bonds 370 272 36
Equities 1 (22) 105
Total 371 250 48
Investment portfolio Value Foreign Mark to Other movements Value
31 Dec exchange market 31 Dec
2018 2019
GBPm GBPm GBPm GBPm GBPm
Government bonds 3,965 (67) 36 (493) 3,441
Non-Government bonds 6,505 (243) 28 680 6,970
Cash 788 (10) - 131 909
Equities 205 (27) 38 2 218
Property 310 - (10) - 300
Preference shares
& CIVs 534 - - (79) 455
Other 249 (2) 1 90 338
Total 12,556 (349) 93 331 12,631
Split by currency:
Sterling 3,114 3,567
Danish Krone 1,148 1,030
Swedish Krona 2,465 2,367
Canadian Dollar 2,928 2,901
Euro 1,423 1,474
Other 1,478 1,292
Total 12,556 12,631
Credit quality - bond Non-government Government
portfolio
31 Dec 31 Dec 31 Dec 31 Dec
2019 2018 2019 2018
% % % %
AAA 42 43 62 66
AA 13 15 33 30
A 29 27 5 4
BBB 13 13 - -
< BBB 3 2 - -
Non-rated - - - -
Total 100 100 100 100
INVESTMENT PERFORMANCE
Investment income of GBP306m (2018: GBP322m) was offset by
investment expenses of GBP12m (2018: GBP14m) and the liability
discount unwind of GBP31m (2018: GBP33m). Investment income was
down compared to last year reflecting the impact of reinvestment at
lower yields which was partly offset by enhanced income from
actions taken on the portfolios to increase exposure to less liquid
credit investments.
The average book yield for 2019 on the total portfolio was 2.4%
(2018: 2.5%), with an average yield on the bond portfolios of 2.1%
(2018: 2.3%). Reinvestment rates in the Group's major bond
portfolios were approximately 1.2% (2018: 1.6%).
At 31 December 2019, the average duration of the Group's bond
portfolios was 3.9 years (31 December 2018: 3.8 years).
The investment portfolio increased by 1% during the period to
GBP12.6bn.
At 31 December 2019, high quality widely diversified fixed
income securities represented 82% of the portfolio (31 December
2018: 83%). Equities (largely REITs(1) ) represented 2% (31
December 2018: 2%) and cash was 7% of the total portfolio (31
December 2018: 6%).
The quality of the bond portfolio remains very high with 98%
investment grade and 69% rated AA or above. We remain well
diversified by sector and geography.
Based on current forward bond yields and foreign exchange rates,
it is estimated that investment income will be c.GBP255-270m in
2020, c.GBP240-255m in 2021, and c.GBP235-250m in 2022. The
discount unwind is expected to be c.GBP30m per annum and investment
expenses are expected to be c.GBP14m per annum.
Unrealised bond gains and pull-to-par
At 31 December 2019, balance sheet unrealised gains of GBP371m
(pre-tax) had increased by GBP121m over the year, principally
driven by positive mark-to-market on bond holdings due to declining
government bond yields and tightening credit spreads. Yield
movements since year end have further increased the unrealised
gains.
This higher opening balance, together with flattening yield
curves, has meant that the predicted period of time for the AFS
gain to unwind has increased. If yield curves were to stay as they
are currently, it is now estimated that the gains would take around
7 to 8 years to fully unwind, with around 50% within the next 3
years. AFS unwind is estimated to be c.GBP80m post tax for 2020.
The capital impact of this amount is c.GBP70m with the balance
being projected yield change. The capital impact from pull-to-par
is expected to fall significantly in 2021 and 2022 based on current
market forward yield curves.
(1) Real Estate Investment Trusts
APPIX I
Further information
CAPITAL
Solvency II sensitivities
Coverage ratio at 31 December
2019 168%
Sensitivities (change in coverage Including Excluding
ratio): pensions(1) pensions
Interest rates: +1% non-parallel(2)
shift +6% +7%
Interest rates: -1% non-parallel(2)
shift -10% -8%
Equities: -15% -8% -2%
Property: -10% -3% -2%
Foreign exchange: GBP +10%
vs. all currencies -5% -5%
Cat loss of GBP75m net -4% -4%
Credit spreads: +0.25%(3) parallel
shift -1% -2%
Credit spreads: -0.25%(3) parallel
shift -6% +2%
The above sensitivities have been considered in isolation. The
impact of a combination of sensitivities may be different to the
individual outcomes stated above. Where an IFRS valuation of a
pension scheme surplus is restricted under Solvency II, downside
pension sensitivities may be dampened relative to those shown.
Reconciliation of IFRS total capital to Eligible Own Funds
31 Dec 2019
GBPbn
Shareholders' funds (including
preference shares) 4.1
Loan capital 0.4
Non-controlling interests 0.2
Total IFRS capital 4.7
Less: Goodwill & intangibles (0.8)
Adjust technical provisions
to Solvency II basis (0.4)
Basic Own Funds 3.5
Tiering & availability restrictions (0.4)
Dividends (0.2)
Eligible Own Funds 2.9
(1) The impact of pensions depends significantly on the opening
position of the schemes and market conditions. As such, the
sensitivities shown are point-in-time estimates that will vary and
should not be extrapolated
(2) The interest rate sensitivity assumes a non-parallel shift
in the yield curve to reflect that the long end of the yield curve
is typically more stable than the short end
(3) The asymmetry in credit spread sensitivities reflects the
fact that upside pension sensitivities are restricted to the
surplus cap. Sensitivities assume that credit spreads of different
rating all move by the same amount and hence reflect an assumed
offset between the impact on assets held and the IFRS value of
pension scheme obligations which could differ
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 2019 to 31 December 2019:
UK non-UK Group
GBPm GBPm GBPm
Net pension fund surplus/ (deficit)
at 1 January 2019 232 (50) 182
Actuarial losses(1) (68) (3) (71)
Deficit funding 87 - 87
Tax movements (12) (3) (15)
Other movements(2) 16 12 28
Net pension fund surplus/ (deficit)
at 31 December 2019 255 (44) 211
At an aggregate level, the pension fund surplus under IAS 19
increased during 2019 from a GBP182m surplus at 1 January to a
surplus of GBP211m at 31 December (net of tax).
The UK IAS 19 position benefited from strong equity performance
over the year as well as deficit funding contributions paid by the
Group (GBP86m pre-tax); however, these gains were partly offset by
an increase in liabilities driven by a material (25-30bps)
tightening of AA credit spreads.
IAS 19 sensitivities on UK schemes
Assets Liabilities
IAS 19 position at 31 December 2019
(GBPbn) 8.5 (8.1)
Sensitivities (GBPbn change in assets/
liabilities):
Interest rates: -1%(3) +1.7 +1.6
Inflation: +1%(3) +1.0 +0.9
Equities: -0.2 -
-15%(4)
'AA' credit spreads: -0.25% +0.1 +0.3
(1) Actuarial gains/ (losses) are gross of tax and include
pension investment expenses, variance against expected returns,
change in actuarial assumptions and experience losses
(2) Other movements are gross of tax and include regular
contributions, service/ administration costs, expected returns,
interest costs and settlement gains/ (losses)
(3) Actual net sensitivity to changes in interest rates and
breakeven inflation will vary depending on size and direction of
stress and is also highly dependent on the level of credit spreads
at any point in time
(4) Includes 15% reduction in equities and 10% reduction in all
other 'growth' assets
REINSURANCE
On 1 January 2020, the Group Volatility Cover (GVC) entered the
third year of the three year agreement that commenced on 1 January
2018.
The key terms of the GVC are as follows:
-- Cover protects all our short tail business including
Property, Marine and Construction & Engineering
-- Events or individual net losses of GBP10m or greater are
added together across our financial year. When a loss exceeds
GBP10m it is included in full
-- Cover attaches when the total of these retained losses is greater than GBP170m
-- Limit of cover is GBP150m per year, with GBP300m maximum over the 3 year period
-- Counterparties are high credit quality reinsurers (50% AA- or better, 41% A- or better, 9% collateralised).
Alongside the GVC, we continue to purchase additional aggregate
covers for the UK, Scandinavia and Canada for losses below GBP10m.
These covers provide protection for our short tail lines of
business including Property, Marine and Construction &
Engineering. For 2020, we placed 100% of the Canada and Scandinavia
aggregate covers and chose to place 75% of the UK aggregate cover
in order to balance the cost versus benefit of this protection.
There were no other material changes to our reinsurance
retentions. Our main Catastrophe retentions remain at GBP75m for
the UK and Europe combined, GBP50m for Europe excluding the UK and
$75m for Canada. Our UK and Ireland Motor retentions remain at the
2019 level of GBP1m and EUR1m respectively.
REPORTING CHANGE
Within the UK & International segment, European business
previously shown within UK Commercial has now been presented
separately. Prior year comparatives have been presented on the same
basis.
MANAGEMENT REPORT
SEGMENTAL INCOME STATEMENT
Management basis - 12 months ended 31 December 2018
Scandinavia Canada UK & International Central Group
functions 2018
GBPm GBPm GBPm GBPm GBPm
Net written premiums 1,817 1,652 3,100 (99) 6,470
Net earned premiums 1,807 1,607 3,129 (6) 6,537
Net incurred claims (1,257) (1,148) (2,114) 39 (4,480)
Commissions (64) (211) (611) - (886)
Operating expenses (248) (223) (447) (3) (921)
Underwriting result
, 238 25 (43) 30 250
Investment income 94 65 163 - 322
Investment expenses (3) (3) (8) - (14)
Unwind of discount (23) (3) (7) - (33)
Investment result , 68 59 148 - 275
Central expenses - - - (8) (8)
Business operating result
, 306 84 105 22 517
Interest (25)
Other charges (12)
Profit before tax 480
Tax (108)
Profit after tax 372
Non-controlling interest (23)
Other equity costs(1) (23)
Net attributable profit , 326
Loss ratio (%) 69.6 71.5 67.6 - 68.5
Weather loss ratio 0.4 6.8 5.7 - 3.7
Large loss ratio 8.9 9.4 14.2 - 11.6
Current year attritional
loss ratio , 63.3 58.1 50.1 - 55.8
Prior year effect on
loss ratio (3.0) (2.8) (2.4) - (2.6)
Commission ratio (%) 3.5 13.1 19.5 - 13.6
Expense ratio (%) 13.7 13.9 14.3 - 14.1
Combined ratio (%) , 86.8 98.5 101.4 - 96.2
Earned controllable expense
ratio (%) , 21.1 17.3 21.4 - 20.4
Notes:
UK & International comprises the UK, Europe, Ireland and
Middle East.
(1) Preference dividends of GBP9m and coupons of GBP14m paid on
Restricted Tier 1 securities
COMBINED RATIO DETAIL
Group
GBPm unless stated FY 2019
Current Prior FY 2019 Group Current Prior FY 2018
year year total ex. exits year year total
Net written premiums 1 6,390 7 27 13 6,417 6,400 6,426 44 6,470
Net earned premiums 2 6,442 8 20 14 6,462 6,374 6,506 31 6,537
Net incurred claims 3 (4,352) 9 20 15 (4,332) (4,224) (4,630) 150 (4,480)
Commissions 4 (830) 10 (1) 16 (831) (807) (870) (16) (886)
Operating expenses 5 (946) 11 (7) 17 (953) (938) (921) - (921)
Underwriting result
, 6 314 12 32 18 346 405 85 165 250
CY attritional claims 19 (3,540) (3,488) (3,630)
Weather claims 20 (167) (158) (242)
Large losses 21 (645) (613) (758)
CY net incurred claims 22 (4,352) (4,259) (4,630)
Loss ratio (%) =15 / 14 23 67.0 66.3 68.5
Weather loss ratio =20 / 2 24 2.6 2.5 3.7
Large loss ratio =21 / 2 25 10.0 9.7 11.6
Current year attritional
loss ratio , =19 / 2 26 55.0 54.9 55.8
=23 - 24
Prior year effect - 25 -
on loss ratio 26 27 (0.6) (0.8) (2.6)
Commission ratio
(%) =16 / 14 28 12.9 12.6 13.6
Expense ratio (%) =17 / 14 29 14.7 14.7 14.1
Combined ratio (%) =23 + 28
, 95.1 + 29 30 94.6 93.6 96.2
Scandinavia
GBPm unless stated Current Prior FY 2019 Current Prior FY 2018
year Year total year year total
Net written premiums 1,772 (8) 1,764 1,811 6 1,817
Net earned premiums 1,774 (7) 1,767 1,802 5 1,807
Net incurred claims (1,269) 36 (1,233) (1,308) 51 (1,257)
Commissions (64) (1) (65) (64) - (64)
Operating expenses (239) (7) (246) (248) - (248)
Underwriting result 202 21 223 182 56 238
CY attritional claims (1,124) (1,141)
Weather claims (7) (7)
Large losses (138) (160)
Net incurred claims (1,269) (1,308)
Loss ratio (%) 69.8 69.6
Weather loss ratio 0.4 0.4
Large loss ratio 7.8 8.9
Current year attritional
loss ratio 63.4 63.3
Prior year effect on
loss ratio (1.8) (3.0)
Commission ratio (%) 3.7 3.5
Expense ratio (%) 13.9 13.7
Combined ratio (%) 88.6 87.4 86.8
COMBINED RATIO DETAIL
Canada
GBPm unless stated Current Prior FY 2019 Current Prior FY 2018
Year year total year year total
Net written premiums 1,735 - 1,735 1,652 - 1,652
Net earned premiums 1,723 - 1,723 1,607 - 1,607
Net incurred claims (1,190) 14 (1,176) (1,194) 46 (1,148)
Commissions (209) - (209) (211) - (211)
Operating expenses (244) - (244) (223) - (223)
Underwriting result 80 14 94 (21) 46 25
CY attritional claims (966) (934)
Weather claims (86) (110)
Large losses (138) (150)
Net incurred claims (1,190) (1,194)
Loss ratio (%) 68.2 71.5
Weather loss ratio 5.0 6.8
Large loss ratio 8.0 9.4
Current year attritional
loss ratio 56.0 58.1
Prior year effect
on loss ratio (0.8) (2.8)
Commission ratio (%) 12.1 13.1
Expense ratio (%) 14.2 13.9
Combined ratio (%) 95.3 94.5 98.5
UK&I
GBPm unless stated Current Prior FY 2019 FY 2019 Current Prior FY 2018
year year total ex. exits year year total
Net written premiums 2,847 34 2,881 2,864 3,061 39 3,100
Net earned premiums 2,955 26 2,981 2,893 3,104 25 3,129
Net incurred claims (1,855) (26) (1,881) (1,773) (2,173) 59 (2,114)
Commissions (558) - (558) (534) (595) (16) (611)
Operating expenses (457) - (457) (442) (447) - (447)
Underwriting result 85 - 85 144 (111) 68 (43)
CY attritional
claims (1,450) (1,398) (1,556)
Weather claims (74) (65) (176)
Large losses (331) (299) (441)
CY net incurred
claims (1,855) (1,762) (2,173)
Loss ratio (%) 63.1 61.3 67.6
Weather loss ratio 2.5 2.3 5.7
Large loss ratio 11.2 10.4 14.2
Current year attritional
loss ratio 49.1 48.7 50.1
Prior year effect on
loss ratio 0.3 (0.1) (2.4)
Commission ratio
(%) 18.7 18.4 19.5
Expense ratio
(%) 15.3 15.3 14.3
Combined ratio
(%) 97.1 97.1 95.0 101.4
APPIX II
Alternative Performance Measures
ALTERNATIVE PERFORMANCE MEASURES
Alternative performance measures ('APMs') are complementary to
measures defined within International Financial Reporting Standards
('IFRS') and are used by management to explain the Group's business
performance and financial position. They include common insurance
industry metrics, as well as measures management and the Board
consider are useful to enhance the understanding of its performance
and allow meaningful comparisons between periods and business
segments. The APMs reported are monitored consistently across
the Group to manage performance on a monthly basis. They are
reviewed across various functions and undergo rigorous internal
quality assurance.
Occasionally management may also report additional or adjusted
APMs when circumstance require. Reasons for doing so, definitions
and reconciliations are provided in this appendix. In Q4 2018
targeted portfolio exits were announced as part of an ongoing
strategic review of the UK & International business. Proforma
APMs were therefore provided in the 2018 preliminary announcement
excluding the impact of these exits to aid readers understanding
and assessment of future performance potential. The strategic
review concluded in 2019, with further portfolio exits announced.
Given the changes in the exit portfolios during 2019, the 2018
reported proforma impact of the UK&I exited portfolio is no longer
a comparable measure. As hindsight should not be used when presenting
restated comparatives, restated 2018 APMs excluding the impact
of UK&I exits have not been provided given that the information
was not available on this basis in 2018 and the action to exit
these portfolios was taken during 2019.
2019 APMs have been reported both including and excluding the
impacts of the UK&I exited portfolios to provide measures that
allow users to assess the future performance of UK&I and the
Group.
APMs are identifiable within Group tables by the symbol , and
are defined in the below jargon buster. Further definition, commentary
and outlook of those APMs considered important in measuring the
delivery of the Group's strategic priorities can be found on
pages 22 and 23 of the Annual Report and Accounts 2018. Detailed
reconciliations of APMs to their nearest IFRS Income Statement
equivalents and adjusted APMs can be found after the below jargon
buster. APMs used to determine management and executive remuneration
are identified below with , *.
The adoption of IFRS 16 on 1(st) January 2019 has had an immaterial
impact on the 2019 APMs. Details on the impact of transition
can be found in note 2 of the Condensed Consolidated Financial
Statements.
JARGON BUSTER
Term Definition APM Reconciliation
---------------------- ======================================= ==== =================
Affinity Selling insurance through a partner's
distribution network, usually
to a group of similar customers
e.g. store-card holders, alumni
groups, unions and utility company
customers.
======================================= ==== ====== =========
Attritional Loss This is the claims ratio (net , 1 R
Ratio incurred claims and claims handling
expense as a proportion of net
earned premium) of our business
prior to volatile impacts from
weather, large losses and prior-year
reserve developments.
======================================= ==== ====== =========
Available for A class of financial asset that
Sale (AFS) is neither held for trading nor
held to maturity.
======================================= ==== ====== =========
Best 'Best' refers to the highest
underwriting
result when comparing underwriting
performance on a like for like
basis (with central costs consistently
allocated to the underwriting
result pre 2013 back to 2000).
======================================= ==== ====== =========
Business Operating Business operating result represents , 1 AC
Result profit before tax adjusted to
add back other charges (previously
referred to as operating result).
======================================= ==== ====== =========
Claims Frequency Average number of claims per policy
over the year.
======================================= ==== ====== =========
Claims Handling The administrative cost of processing
Expenses a claim (such as salary costs,
costs of running claims centres,
allocated share of the costs of
head office units) which are separate
to the cost of settling the claim
itself with the policyholder.
======================================= ==== ====== =========
Claims Ratio Percentage of net earned premiums , 1 V
(Loss Ratio) that is paid out in claims and
claims handling expenses.
======================================= ==== ====== =========
Claims Reserve A provision established to cover
(Provision for the estimated cost of claims payments
Losses and Loss and claims handling expenses that
Adjustment Expenses) are still to be settled and incurred
in respect of insurance cover
provided to policyholders up to
the reporting date.
======================================= ==== ====== =========
Claims Severity Average cost of claims incurred
over the period.
======================================= ==== ====== =========
Term Definition APM Reconciliation
======================== ================================== ===== =================
Combined Operating A measure of underwriting , * 1 Y
Ratio (COR) performance
being the ratio of underwriting
costs (claims, commissions and
expenses) expressed in relation
to earned premiums:
COR = loss ratio + commission
ratio + expense ratio, where
Loss ratio = net incurred claims/
net earned premiums
Commission ratio = commissions/
net earned premiums
Expense ratio = operating
expenses/
net earned premiums
================================== ===== ====== =========
Commission An amount paid to an intermediary
such as a broker for introducing
business to the Group.
================================== ===== ====== =========
Prior period comparative
retranslated
Constant Exchange at current period exchange
(CFX) rates. , 4
================================== ===== ====== =========
A measure of operating expenses
incurred by the Group in
undertaking
business activities,
predominantly
underwriting and policy
acquisition
costs, excluding commission and
premium related costs such as
levies. They are adjusted to
include
claims handling costs that are
Controllable reported within net claims
Costs/ Expenses incurred. , * 5
================================== ===== ====== =========
Current Year The profit or loss earned from , 1 Q
Underwriting business for which insurance
Result cover
has been provided during the
current
financial period. This does not
include performance impacts
recognised
in the current reporting period
relating to prior accident years.
================================== ===== ====== =========
Current Year A measure of current year
Combined Operating underwriting
Ratio (CY COR) result performance calculated
as per the combined operating
ratio.
================================== ===== ====== =========
Customer Retention A measure of the amount of
business
that is renewed with us each year
================================== ===== ====== =========
Excluding exits refers to financial
results adjusted for the impact
of UK&I portfolio exits and business
lapses targeted as part of the
UK&I strategic review. The action
to exit these portfolios was taken
Ex. Exits during 2019 7
========================================= ====== =========
Expense Ratio Underwriting and policy expenses , 1 X
expressed as a percentage of net
earned premium.
================================== ===== ====== =========
Exposure A measurement of risk we are exposed
to through the premiums we have
written. For example, in motor
insurance one vehicle insured
for one year is one unit of exposure.
========================================= ====== =========
Financial Conduct The regulatory authority with
Authority (FCA) responsibility for the conduct
of the UK financial services industry.
========================================= ====== =========
Gross Written Total revenue generated through
Premium (GWP) sale of insurance products. This
is before taking into account
reinsurance and is stated irrespective
of whether payment has been received.
========================================= ====== =========
Group Volatility Reinsurance purchased by the Group
Cover (GVC) to protect against large losses.
Individual losses are covered
in full when they exceed a certain
amount and the aggregate of such
losses over the financial year
exceed an agreed limit.
========================================= ====== =========
IBNR (Incurred An estimated reserve for amounts
But Not Yet Reported) owed to all valid claimants who
have had a covered loss but have
not yet reported it and for claims
that have been reported but the
cost is not yet known.
========================================= ====== =========
Interest Costs Interest costs represent the cost
of Group debt.
========================================= ====== =========
Investment Result Investment result is the money , 1 AA
we make from our investments on
a management basis. It comprises
the major component of net
investment
return, investment income, in
addition to unwind of discount
and investment expenses.
================================== ===== ====== =========
Large Losses Single claim or all claims arising
from a single loss event with
a net cost of GBP0.5m or higher.
========================================= ====== =========
Large Loss Ratio The large loss ratio is an , 1 T
expression
of claims incurred in the period
with a net cost of GBP0.5m or
higher as a percentage of
current
year net earned premium over the
same period.
================================== ===== ====== =========
Managing General A specialised type of insurance
Agent (MGA) agent or broker that has been
granted underwriting authority
by an insurer and can negotiate
contracts on behalf of the insurer.
========================================= ====== =========
Net Asset Value Net asset value per share is , 3 E
(NAV) per Share calculated
as closing shareholders' funds,
less preference share capital,
divided by the number of shares
in issue at the end of the
period.
================================== ===== ====== =========
Term Definition APM Reconciliation
==================== ======================================= ==== ===================
Net Earned Premium The proportion of premium written,
(NEP) net of the cost of associated
reinsurance, which represents
the consideration charged to
policyholders
for providing insurance cover
during the reporting period.
======================================= ==== ====== ===========
Net Incurred The total claims cost incurred
Claims (NIC) in the period less any share that
is borne by reinsurers. It includes
both claims payments and movements
in claims reserves and claims
handling expenses in the period.
======================================= ==== ====== ===========
Net Written Premium Premium written or processed in
(NWP) the period, irrespective of whether
it has been paid, less the amount
shared with reinsurers.
======================================= ==== ====== ===========
Other Charges Other charges represent items , 1 AD
that are excluded to arrive at
business operating result and
underlying profit measures (previously
referred to as non-operating charges).
======================================= ==== ======== =========
Item Reason for , 1 AD
classification
================= ==== ======== =========
Amortisation To allow meaningful
of intangible assessment of
assets segmental
performance where
similar internally
generated assets
are not capitalised
================= ==================== ==== ====== =========
Reorganisation To allow assessment
costs of the performance
of ongoing business
activities
================= ====================
Pension Costs that are
administration dependent
and net interest on the level of
costs defined
benefit pension
scheme
plan funding and
arise from
servicing
past pension
commitments
================= ====================
Realised and To remove the
unrealised impact
gains and losses of market
on investments/ volatility
foreign exchange and investment
gains and losses rebalancing
activity
================= ====================
Gains and losses To allow assessment
arising from of the performance
the disposal of ongoing business
of businesses activities
and impairment
of goodwill
================= ====================
Economic To allow assessment
assumption of performance
changes excluding
impact of a change
in economic
assumptions
================= ==================== ==== ====== =========
Payout Ratio Ordinary dividends expressed as
a percentage of underlying profit
after tax attributable to ordinary
shareholders. This has also been
expressed excluding the impact
of UK&I exits.
======================================= ==== ======== =========
Policies in Force The number of active insurance
policies for which the Group is
providing cover.
======================================= ==== ======== =========
Prior Year Updates to premium, claims, commission , 1 P
Underwriting and expense estimates relating
Result to prior years.
======================================= ==== ======== =========
Property and Property insurance covers loss
Casualty (P&C) or damage through fire, theft,
(Non-Life Insurance floods, storms and other specified
or General risks.
Insurance) Casualty insurance primarily covers
losses arising from accidents
that cause injury to other people
or damage to the property of others.
======================================= ==== ======== =========
Prudential The regulatory authority with
Regulation responsibility for the prudential
Authority (PRA) regulation and supervision of
the UK financial services industry.
======================================= ==== ======== =========
Pull to Par The movement of a bond's price
toward its face value as it approaches
its maturity date.
======================================= ==== ======== =========
Rate The price of a unit of insurance
based on a standard risk for one
year. Actual premium charged to
the policyholder may differ from
the rate due to individual risk
characteristics and marketing
discounts.
======================================= ==== ======== =========
Term Definition APM Reconciliation
==================== ======================================= ==== =================
'Record' current 'Record' refers to the highest
year underwriting current year underwriting result
performance and current year combined operating
ratio as reported when considering
the financial years from 2006
to 2019.
======================================= ==== ======== =======
Reinsurance The practice whereby part or all
of the risk accepted is transferred
to another insurer (the reinsurer).
======================================= ==== ======== =======
Reported Exchange Prior period comparative translated
(RFX) at exchange rates applicable at
that time.
======================================= ==== ======== =======
Return on Equity Profit attributable to ordinary , 2 F
shareholders (profit after tax
excluding non-controlling interests,
coupon on tier 1 notes and preference
dividend) expressed in relation
to opening ordinary shareholders'
funds (opening ordinary shareholders
funds less preference share capital).
======================================= ==== ======== =======
Return on Tangible Profit attributable to ordinary , 2 H
Equity shareholders (profit after tax
excluding non-controlling interests,
coupon on tier 1 notes and preference
dividend) expressed in relation
to opening tangible net asset
value.
======================================= ==== ======== =======
Solvency II / Capital adequacy regime for the
Coverage Ratio European insurance industry which
commenced in 2016 and is based
on a set of EU wide capital
requirements
and risk management standards.
The coverage ratio represents
total eligible capital as a proportion
of the Solvency Capital Requirement
(SCR) under Solvency II.
======================================= ==== ======== =======
Scrip Dividend Where shareholders choose to receive
the dividend in the form of additional
shares rather than cash. The Group
would issue new shares to meet
the scrip demand.
======================================= ==== ======== =======
Tangible Net Tangible net asset value comprises , * 3 C
Asset Value (TNAV) shareholders' equity, less preference
share capital and goodwill and
intangible assets.
======================================= ==== ======== =======
Tangible Net Tangible net asset value, divided , 3 F
Asset Value (TNAV) by the number of shares in issue
per Share at the end of the period.
======================================= ==== ======== =======
Underwriting Net earned premium less net claims , 1 Z
Result and underwriting and policy
acquisition
costs.
======================================= ==== ======== =======
Underlying Profit Profit before tax adjusted for , 6 B
before Tax the add back of all other charges
except finance costs.
======================================= ==== ======== =======
Underlying Tax The Group underlying tax rate , 6 A
Rate mainly comprising the local statutory
tax rates in the Group's territories
applied to underlying regional
profits (operating profits less
finance costs).
======================================= ==== ======== =======
Underlying Profit Profit after tax, less the proportion , * 2 B
after Tax that is attributable to
non-controlling
interests, preference shareholders
and tier 1 note holders, plus
the add back of all other charges
except finance costs (reasons
for exclusion above) before an
adjustment for the tax difference
between effective and underlying
rate.
======================================= ==== ======== =======
Underlying Return Underlying profit after tax expressed , * 2 I
on Tangible Equity in relation to opening tangible
net asset value.
======================================= ==== ======== =======
Underlying Return Underlying profit after tax expressed , 2 G
on Equity in relation to opening shareholders'
funds excluding preference share
capital.
======================================= ==== ======== =======
Underlying Earnings Underlying profit after tax divided , 2 K
per Share (EPS) by the weighted average number
of shares in issue during the
period.
======================================= ==== ======== =======
Unearned Premium The portion of a premium that
relates to future periods, for
which protection has not yet been
provided, irrespective of whether
the premium has been paid or not.
======================================= ==== ======== =======
Weather Losses Weather claims incurred with a
net cost of GBP0.5m or higher
and losses of less than GBP0.5m
where extreme weather has been
identified over an extended period.
======================================= ==== ======== =======
Weather Loss The weather loss ratio is an , 1 S
Ratio expression
of weather losses in the period
as a percentage of earned premium.
======================================= ==== ======== =======
Yield Rate of return on an investment
in percentage terms.
The dividend payable on a share
expressed as a percentage of the
market price.
======================================= ==== ======== =======
ALTERNATIVE PERFORMANCE MEASURES RECONCILIATIONS
1. IFRS reconciliation to management P&L
For the 12 months ended 31 December 2019
Business Profit
Underwriting Investment Central operating Other before
result result costs result charges tax
============ ========== ======= ========= ======= =======
GBP'm IFRS Management
================ ========= ==============================================================
Income
Gross written
premiums 7,461 7,461
Less:
reinsurance
premiums (1,044) (1,044)
================ ========= ============ ========== ======= =======
Net written
premiums 6,417 6,417
========= ============ ========== ======= =======
Change in the
gross
provision for
unearned
premiums 34 34
Less: change in
provision
for unearned
reinsurance
premiums 11 11
========= ============ ========== ======= =======
Change in
provision
for unearned
premiums 45 45
================ ========= ============ ========== ======= =======
Net earned
premiums,
analysed as 6,462 A 6,462
============
Current year B 6,442
Prior year C 20
============
6,462
========= ============ ========== ======= =======
Investment
income 306 D 306
Realised gains
on investments 15 15
Gains on forex
derivatives 1 1
Unrealised
losses (26) (26)
========= ============ ========== ======= =======
Net investment
return 296
========= ============ ========== ======= =======
Other insurance
income 135 E 135
Pension net
interest
and
administration
costs 4 4
Foreign exchange
gain 1 1
========= ============ ========== ======= =======
Other operating
income 140
================ =========
Total income 6,898
================ =========
Expenses
========= ============ ========== ======= =======
Gross claims
incurred (5,059) (5,059)
Less: claims
recoveries
from reinsurers 727 727
========= ============ ========== ======= =======
Net claims,
analysed
as (4,332) F (4,332)
============
Attritional G (3,540)
Weather H (167)
Large I (645)
Prior year J 20
============
(4,332)
========= ============ ========== ======= =======
Earned CY
commission (830) K (830)
Earned PY
commission (1) L (1)
Earned CY
operating
expenses (1,081) M (1,081)
Earned PY
operating
expenses (7) N (7)
========= ============ ========== ======= =======
Underwriting and
policy
acquisition
costs (1,919) (1,919)
Unwind of
discount(1) (46) (31) (15)
========= ============ ========== ======= =======
Investment
expenses (12) (12)
Central expenses (13) (13)
Amortisation of
intangible
assets (12) (12)
Reorganisation
costs (27) (27)
========= ============ ========== ======= =======
Other operating
expenses (64)
================ =========
(6,361)
========= ============ ========== ======= =======
Interest costs (25) (25)
Interest on
lease
liabilities (7) (7)
========= ============ ========== ======= =======
Finance costs (32) O (32)
Acquisitions and
disposals (14) (14)
Net share of
profit
after tax of
associates 1 1
================ ========= ============ ========== ======= ========= ======= =======
Profit before
tax 492 346 263 (12) 597 (105) 492
============ ========== ======= ========= ======= =======
Income tax (109) Z AA AB AC AD
expense
================ =========
Profit for the
year 383
================ ========= ============
C+J+L+N P 32 PY Underwriting
Z - P Q 314 CY Underwriting
============
346
Attritional loss
ratio G/B R 55.0%
Weather loss
ratio H/B S 2.6%
Large loss ratio I/B T 10.0%
Prior year
effect
on loss ratio V-R-S-T U (0.6%)
============
Loss ratio F/A V 67.0%
Commission ratio (K+L)/A W 12.9%
Expense ratio (E+M+N)/A X 14.7%
============
Combined
operating
ratio V+W+X Y 94.6%
============
(1) 2019 also includes change in economic assumptions
1. IFRS reconciliation to management P&L
For the 12 months ended 31 December 2018
Business Profit
Underwriting Investment Central operating Other before
result result costs result charges tax
---------------- ============ ========== ======= ========= ======= =======
GBP'm IFRS Management
================ ========= ==============================================================
Income
Gross written
premiums 7,467 7,467
Less:
reinsurance
premiums (997) (997)
================ ========= ============ ========== ======= =======
Net written
premiums 6,470 6,470
========= ============ ========== ======= =======
Change in the
gross
provision for
unearned
premiums 61 61
Less: change in
provision
for unearned
reinsurance
premiums 6 6
========= ============ ========== ======= =======
Change in
provision
for unearned
premiums 67 67
================ ========= ============ ========== ======= =======
Net earned
premiums,
analysed as 6,537 A 6,537
============
Current year B 6,506
Prior year C 31
============
6,537
========= ============ ========== ======= =======
Investment
income 322 D 322
Realised gains
on investments 22 22
Unrealised gains 9 9
Impairments (10) (10)
========= ============ ========== ======= =======
Net investment
return 343
========= ============ ========== ======= =======
Other insurance
income 138 E 138
Other operating
income 138
================ =========
Total income 7,018
================ =========
Expenses
========= ============ ========== ======= =======
Gross claims
incurred (5,023) (5,023)
Less: claims
recoveries
from reinsurers 543 543
========= ============ ========== ======= =======
Net claims,
analysed
as (4,480) F (4,480)
============
Attritional G (3,630)
Weather H (242)
Large I (758)
Prior year J 150
============
(4,480)
========= ============ ========== ======= =======
Earned CY
commission (870) K (870)
Earned PY
commission (16) L (16)
Earned CY
operating
expenses (1,059) M (1,059)
Earned PY - N -
operating
expenses
========= ============ ========== ======= =======
Underwriting and
policy
acquisition
costs (1,945) (1,945)
Unwind of
discount (33) (33)
========= ============ ========== ======= =======
Investment
expenses (14) (14)
Central expenses (9) (9)
Amortisation of
intangible
assets (13) (13)
Impairment of
goodwill (7) (7)
Pension net
interest
and
administration
costs (6) (6)
Regulatory costs (4) (4)
Foreign exchange
losses (1) (1)
========= ============ ========== ======= =======
Other operating
expenses (54)
================ =========
(6,512)
========= ============ ========== ======= =======
Interest costs (25) (25)
========= ============ ========== ======= =======
Finance costs (25) O
Acquisitions and
disposals (2) (2)
Net share of
profit
after tax of
associates 1 1
================ ========= ============ ========== ======= ========= ======= =======
Profit before
tax 480 250 275 (8) 517 (37) 480
============ ========== ======= ========= ======= =======
Income tax (108) Z AA AB AC AD
expense
================ =========
Profit for the
year 372
================ ========= ============
C+J+L+N P 165 PY Underwriting
Z - P Q 85 CY Underwriting
============
250
Attritional loss
ratio G/B R 55.8%
Weather loss
ratio H/B S 3.7%
Large loss ratio I/B T 11.6%
Prior year
effect
on loss ratio V-R-S-T U (2.6%)
============
Loss ratio F/A V 68.5%
Commission ratio (K+L)/A W 13.6%
Expense ratio (E+M+N)/A X 14.1%
============
Combined
operating
ratio V+W+X Y 96.2%
============
2. Metric calculations 2019 2018
GBPm GBPm
Profit after tax 383 372
Less: non-controlling interest (24) (23)
Note 10 Less: tier 1 notes coupon payment (14) (14)
Note 10 Less: preference dividend (9) (9)
Profit attributable to ordinary
A shareholders 336 326
APM Rec
1 Add: other charges 105 37
APM Rec
1 Less: finance costs (32) (25)
APM Rec
6 (Less)/add: underlying tax differential (3) 12
Underlying profit after tax attributable
B to ordinary shareholders 406 350
Opening shareholders' funds 3,786 3,653
Less: preference share capital (125) (125)
C Opening ordinary shareholders' funds 3,661 3,528
Note 11 Less: opening goodwill and intangibles (794) (763)
Opening tangible ordinary shareholders'
D funds 2,867 2,765
Weighted average no. share issue
E during the period (un-diluted) 1,031 1,026
Return on equity
A/C F Reported 9.2% 9.2%
B/C G Underlying 11.1% 9.9%
Return on tangible equity
A/D H Reported 11.7% 11.8%
B/D I Underlying 14.2% 12.6%
APM Rec
7 J Underlying ex exits 16.0%
Earnings per share
A/E K Basic earnings per share 32.6 31.8
B/E L Underlying earnings per share 39.4 34.1
APM Rec Underlying earnings per share ex
7 M exits 44.5
3. Balance sheet reconciliations 2019 2018
GBPm GBPm
A Closing shareholders' funds 3,872 3,786
Less: preference share capital (125) (125)
B Ordinary shareholders funds 3,747 3,661
Note 11 Less: closing goodwill and intangibles (837) (794)
C Tangible net asset value 2,910 2,867
Note 17 D Shares in issue at the period end 1,032 1,027
B/D E Net asset value per share 363 357
C/D F Tangible net asset value per share 282 279
4. Net written premium movement and constant 2019 2018
exchange
GBPm GBPm
Note 7 A Net written premiums 6,417 6,470
Year-on-year movement (53) (208)
Comprised of:
Volume change including portfolio
actions and reinsurance (373) (153)
Rate increases 330 238
B Movement at constant exchange (43) (93)
C Foreign exchange (10) (115)
Total movement (53) (208)
B/(2018A-C) D % movement at constant exchange (1)% (1)%
5. Controllable expenses 2019 2018
GBPm GBPm
Underwriting and policy admin costs (1,919) (1,945)
APM Rec
1 Less: commission 831 886
Less: non controllable premium related
costs e.g. levies 146 139
Add: claims expenses within net
claims (379) (397)
Add: other (25) (26)
A Written controllable expense base (1,346) (1,343)
(Add)/less: controllable deferred
B acquisition costs (4) 11
A+B C Earned controllable expense base (1,350) (1,332)
APM Rec
1 D Add: investment expenses (12) (14)
APM Rec
1 E Add: central costs (13) (9)
Total written controllable expense
A+D+E F base (1,371) (1,366)
Total earned controllable expense
C+D+E G base (1,375) (1,355)
H Net written premiums 6,417 6,470
I Net earned premiums 6,462 6,537
A/H J Written controllable expense ratio 21.0% 20.8%
Total written controllable expense
F/H K ratio 21.4% 21.1%
C/I L Earned controllable expense ratio 20.9% 20.4%
Total earned controllable expense
G/I M ratio 21.3% 20.8%
6. Underlying tax rate 2019 2018
% %
Effective tax rate (ETR) 22 23
Less tax effect of:
Unrecognised tax losses (2) (2)
One off impact of Swedish law change - (1)
Underlying versus IFRS regional
profit mix (1) -
Other 1 -
A Underlying tax rate 20 20
GBPm GBPm
Profit before tax 492 480
APM Rec
1 Add: other charges 105 37
APM Rec
1 Less: finance costs (32) (25)
B Underlying profit before tax 565 492
AxB C Underlying tax (112) (96)
APM Rec
1 D Income tax expense (109) (108)
C-D E Underlying tax differential (3) 12
7. Adjusted APMs
Management report adjusted APMs when circumstance requires to further enhance understanding
of reported results and of future performance potential. Adjusted profitability metrics provided
show:
* The results for our ongoing business given the
portfolio exits undertaken in the UK&I business
* The impact of reinsurance purchases
Impact of UK&I exits
The UK, Europe, UK & International and Group results for the 12 months ended 31 December 2019
have been presented excluding the impact of the strategic portfolio exits, primarily including
London Market portfolios and a number of UK MGA schemes.
Central
UK Europe UK & International functions Group
2019 reported
GBPm (unless
stated)
A Net written premium 2,120 237 2,881 37 6,417
B Net earned premium 2,215 238 2,981 (9) 6,462
C Underwriting result (5) 5 77 (48) 346
(C/B)-1 COR 100.2% 97.6% 97.4% 94.6%
Business operating
D result 116 5 212 (60) 597
E Profit before tax 492
Underlying profit
F before tax 565
Underlying profit
G after tax 406
Underlying earnings
per share 39.4p
Underlying return
on tangible equity 14.2%
Weighted average
H shares 1,031
Opening tangible
ordinary shareholders'
J funds 2,867
GVC reallocation to UK&I exit
portfolio(1)
GVC recoveries in
relation to UK exit
K portfolio 8 8 (8)
Adjusted for GVC reallocation
to UK&I exit portfolio
C+K L Underwriting result 3 5 85 (56) 346
(L/B)-1 M COR 99.9% 97.6% 97.1% 94.6%
Business operating
D+K N result 124 5 220 (68) 597
UK&I exits
Exited net written
P premium 10 7 17 17
Exited net earned
Q premium 77 11 88 88
R Underwriting result (47) (12) (59) (59)
S Tax impact thereon(2) 6
Excluding exits
A-P T Net written premium 2,110 230 2,864 37 6,400
B- Q U Net earned premium 2,138 227 2,893 (9) 6,374
L-R V Underwriting result 50 17 144 (56) 405
(V/U)-1 W COR 97.7% 92.6% 95.0% 93.6%
Business operating
N-R X result 171 17 279 (68) 656
E-R Y Profit before tax 551
Underlying profit
F-R Z before tax 624
Underlying earnings
(G-R-S)/H AA per share 44.5
Underlying return
(G-R-S)/J AB on tangible equity 16.0%
(1) GBP8m of prior year GVC recoveries relating to UK exited
business has been reallocated from Central Functions to UK Exits
and therefore to total UK&I
(2) UK underlying tax rate 10% applied, reducing Group
underlying tax rate from 20% to 19% due to an increase in the UK
share of Group profit mix.
Impact of reinsurance adjustments
In 2018, the Group purchased a three year Group Volatility Cover ('GVC') and, in 2019, the
Group purchased new reinsurance covers to provide additional protection for short tail lines,
as detailed on page 27 of Appendix I. 2018 NWP and attritional loss ratio comparatives have
been restated accordingly to allow direct comparison, as detailed by region below (adjustments
also applied at Personal and Commercial level where applicable).
Group
Scandinavia Canada UK&I Re Group
A 2018 net written premium 1,817 1,652 3,100 (99) 6,470
B Foreign exchange (53) 33 10 - (10)
Add: 2019 new treaty
C purchase (11) (2) (12) (4) (29)
D Less: 2018 GVC purchase 138 138
2018 net written premium
at constant exchange
A:D E restated 1,753 1,683 3,098 35 6,569
F 2019 net written premium 1,764 1,735 2,881 37 6,417
Net written premium movement
F/E-1 G restated 1% 3% (7)% (2)%
A 2018 CY net earned premium 1,802 1,607 3,104 (7) 6,506
B 2019 new treaty purchase (11) (2) (12) (4) (29)
C Foreign exchange (52) 32 10 - (10)
2018 net earned premium
at constant exchange
A:C D restated 1,739 1,637 3,102 (11) 6.467
E 2018 attritional claims (1,141) (934) (1,556) (3,630)
F Foreign exchange 33 (19) (4) 10
2018 attritional claims
E+F G at constant exchange (1,108) (953) (1,560) (3,620)
2018 attritional loss
G/D H ratio restated (%) 63.8% 58.2% 50.3% 56.0%
2019 attritional loss
J ratio (%) 63.4% 56.0% 49.1% 55.0%
Attritional movement
H-J K restated (%) 0.4% 2.2% 1.2% 1.0%
APPIX III
Other information
REPORTING AND DIVID TIMETABLE
Reporting:
Q1 2020 trading update 7 May 2020
Annual General Meeting 7 May 2020
Dividend:
Final ordinary dividend for the year ended 31 December
2019:
Announcement date 27 February 2020
Ex-dividend date 5 March 2020
Record date 6 March 2020
Dividend payment date 14 May 2020
1(st) preference dividend:
Announcement date 27 February 2020
Ex-dividend date 5 March 2020
Record date 6 March 2020
Dividend payment date 1 April 2020
Note: The final ordinary dividend is conditional upon the
directors being satisfied, in their absolute discretion, that the
payment would not breach any legal or regulatory requirements,
including Solvency II regulatory capital requirements.
PREFERENCE SHARE DIVID
In accordance with the original subscription terms, qualifying
registered holders of the 7 3/8 percent cumulative irredeemable
preference shares of GBP1 each will receive the second preference
dividend at a rate of 3.6875p per share.
OTHER INFORMATION
LEI number: 549300HOGQ7E0TY86138
Enquiries:
Investors & analysts Press
Rupert Taylor Rea Natalie Whitty
Group Director of FP&A & Investor Communications Director
Relations
Tel: +44 (0) 20 7111 1891 Tel: +44 (0) 20 7111 7213
Email: r upert.taylorrea @gcc.rsagroup.com Email: natalie.whitty@gcc.rsagroup.com
Matt Cohen Leigh Jackson
Investor Relations Manager Senior External Relations Manager
Tel: +44 (0) 20 7111 7243 Tel: +44 (0) 7584 268945
Email: matthew.cohen@gcc.rsagroup.com Email: leigh.jackson@uk.rsagroup.com
Further information
A live webcast of the analyst presentation, including the
question and answer session, will be broadcast on the website at
08:30am on 27 February 2020. A webcast and transcript of the
presentation will be available via the company website
(www.rsagroup.com).
Important disclaimer
This press release and the associated conference call may
contain 'forward-looking statements' with respect to certain of the
Group's plans and its current goals and expectations relating to
its future financial condition , performance, results, strategic
initiatives and objectives. Generally, words such as "may",
"could", "will", "expect", "intend", "estimate", "anticipate",
"aim", "outlook", "believe", "plan", "seek", "continue" or similar
expressions identify forward-looking statements. These
forward-looking statements are not guarantees of future
performance. By their nature, all forward-looking statements are
inherently predictive and speculative and involve risk and
uncertainty because they relate to future events and circumstances
which are beyond the Group's control, including amongst other
things, UK domestic and global economic business conditions,
market-related risks such as fluctuations in interest rates and
exchange rates, the policies and actions of regulatory authorities,
the impact of competition, inflation, deflation, the timing impact
and other uncertainties of future acquisitions or combinations
within relevant industries, as well as the impact of tax and other
legislation or regulations in the jurisdictions in which the Group
and its affiliates operate. As a result, the Group's actual future
financial condition, performance and results may differ materially
from the plans, goals and expectations set forth in the Group's
forward-looking statements. Forward-looking statements in this
announcement 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 announcement
shall be construed as a profit forecast.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Table of Contents
Primary Statements 46
Basis of Preparation and Significant Accounting Policies
1 Basis of preparation 51
2 Adoption of new and revised standards 52
New accounting standards, interpretations and amendments
3 yet to be adopted 55
Risk Management
4 Risk management 56
Significant Transactions and Events
Held for sale disposal groups and loss on disposal
5 of businesses 64
6 Reorganisation costs 64
Notes to the Condensed Consolidated Income Statement, Condensed
Consolidated Statement of Other Comprehensive Income and
Dividends
7 Segmental information 65
8 Income tax 66
9 Earnings per share 68
10 Dividends paid and proposed 69
Notes to the Condensed Consolidated Statement of Financial
Position
11 Goodwill and intangible assets 70
12 Financial assets 73
13 Fair value measurement 77
14 Reinsurers' share of insurance contract liabilities 80
15 Current and deferred tax 81
16 Cash and cash equivalents 83
17 Share capital 83
18 Other equity instruments - Tier 1 notes 84
19 Issued debt 85
20 Insurance contract liabilities 86
21 Post-employment benefits and obligations 91
22 Leases 96
Notes to the Condensed Consolidated Statement of Cash Flows
23 Reconciliation of cash flows from operating activities 99
Results for the Year 2019
24 Results for the Year 2019 100
Appendix
A Exchange rates 101
Responsibility Statement of the Directors in respect of the
annual financial report 102
CONDENSED CONSOLIDATED INCOME STATEMENT
STATUTORY BASIS
for the year ended 31 December 2019
2019 2018
Note GBPm GBPm
Income
Gross written premiums 7,461 7,467
Less: reinsurance written premiums (1,044) (997)
Net written premiums 7 6,417 6,470
Change in the gross provision for unearned premiums 34 61
Less: change in provision for unearned reinsurance
premiums 11 6
Change in provision for net unearned premiums 45 67
Net earned premiums 6,462 6,537
Net investment return 296 343
Other operating income 140 138
Total income 6,898 7,018
Expenses
Gross claims incurred (5,059) (5,023)
Less: claims recoveries from reinsurers 727 543
Net claims (4,332) (4,480)
Underwriting and policy acquisition costs (1,919) (1,945)
Unwind of discount and change in economic assumptions 20 (46) (33)
Other operating expenses (64) (54)
(6,361) (6,512)
Finance costs (32) (25)
Loss on disposal of businesses 5 (14) (2)
Net share of profit after tax of associates 1 1
Profit before tax 7 492 480
Income tax expense 8 (109) (108)
Profit for the year 383 372
Attributable to:
Equity holders of the Parent Company 359 349
Non-controlling interests 24 23
383 372
Earnings per share on profit attributable to the ordinary shareholders
of the Parent Company
Basic 9 32.6p 31.8p
Diluted 9 32.5p 31.6p
Ordinary dividends paid and proposed for the year
Interim dividend paid 10 7.5p 7.3p
Final dividend proposed 10 15.6p 13.7p
The attached notes on pages 51 to 100 form an integral part of
these consolidated financial statements.
condensed CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
statutory basis
for the year ended 31 December 2019
2019 2018
GBPm GBPm
Profit for the year 383 372
Items that may be reclassified to the income statement:
Exchange losses net of tax on translation of foreign
operations (85) (13)
Fair value gains/(losses) on available for sale
financial assets net of tax 121 (149)
36 (162)
Items that will not be reclassified to the income
statement:
Pension - remeasurement of net defined benefit
asset/liability net of tax and tax credit for
scheme contributions (86) 161
Movement in property revaluation surplus net of
tax 1 2
(85) 163
Total other comprehensive (expense)/income for
the year (49) 1
Total comprehensive income for the year 334 373
Attributable to:
Equity holders of the Parent Company 316 343
Non-controlling interests 18 30
334 373
The attached notes on pages 51 to 100 form an integral part of
these consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
STATUTORY BASIS
for the year ended 31 December 2019
Foreign
Ordinary Ordinary Capital currency Share- Tier
share share Own Preference Revaluation redemption translation Retained holders' 1 Non-controlling Total
capital premium shares shares reserves reserve reserve earnings equity notes interests equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Balance at 1
January
2018 1,023 1,083 (1) 125 297 389 54 683 3,653 297 152 4,102
Total comprehensive
income
Profit for the
year - - - - - - - 349 349 - 23 372
Other
comprehensive
(expense)/income - - - - (149) - (18) 161 (6) - 7 1
- - - - (149) - (18) 510 343 - 30 373
Transactions with owners of
the Group
Contribution and
distribution
Dividends (note
10) - - - - - - - (231) (231) - (14) (245)
Shares issued
for cash (note
17) 1 4 - - - - - - 5 - - 5
Share-based
payments
(note 17) 3 - - - - - - 9 12 - - 12
4 4 - - - - - (222) (214) - (14) (228)
Changes in
shareholders'
interests in
subsidiaries - - - - 4 - - - 4 - - 4
Total transactions
with owners of
the Group 4 4 - - 4 - - (222) (210) - (14) (224)
Balance at 1
January
2019 1,027 1,087 (1) 125 152 389 36 971 3,786 297 168 4,251
Implementation
of IFRS 16 - - - - - - - (2) (2) - - (2)
Restated balance
at 1 January 2019 1,027 1,087 (1) 125 152 389 36 969 3,784 297 168 4,249
Total comprehensive
income
Profit for the
year - - - - - - - 359 359 - 24 383
Other
comprehensive
income/(expense) - - - - 107 - (64) (86) (43) - (6) (49)
- - - - 107 - (64) 273 316 - 18 334
Transactions with owners of
the Group
Contribution and
distribution
Dividends (note
10) - - - - - - - (242) (242) - (13) (255)
Shares issued
for cash (note
17) 1 3 - - - - - - 4 - - 4
Share-based
payments
(note 17) 4 - - - - - - 6 10 - - 10
Transfers - - 1 - - - 2 (3) - - - -
5 3 1 - - - 2 (239) (228) - (13) (241)
Balance at 31
December 2019 1,032 1,090 - 125 259 389 (26) 1,003 3,872 297 173 4,342
The attached notes on pages 51 to 100 form an integral part of
these consolidated financial statements.
condensed CONSOLIDATED STATEMENT OF FINANCIAL POSITION
statutory basis
as at 31 December 2019
2019 2018
Note GBPm GBPm
Assets
Goodwill and other intangible assets 11 837 792
Property and equipment 296 90
Investment property 300 310
Investments in associates 4 13
Financial assets 12 11,422 11,458
Total investments 11,726 11,781
Reinsurers' share of insurance contract liabilities 14 2,326 2,271
Insurance and reinsurance debtors 2,923 2,954
Deferred tax assets 15 209 234
Current tax assets 15 18 71
Other debtors and other assets 718 673
Other assets 945 978
Cash and cash equivalents 16 909 788
19,962 19,654
Assets of operations classified as held for sale 5 - 639
Total assets 19,962 20,293
Equity and liabilities
Equity
Shareholders' equity 3,872 3,786
Tier 1 notes 18 297 297
Non-controlling interests 173 168
Total equity 4,342 4,251
Liabilities
Issued debt 19 750 441
Insurance contract liabilities 20 12,307 12,712
Insurance and reinsurance liabilities 20 970 928
Borrowings 169 119
Deferred tax liabilities 15 84 79
Current tax liabilities 15 17 14
Provisions 147 169
Other liabilities 1,176 944
Provisions and other liabilities 1,424 1,206
15,620 15,406
Liabilities of operations classified as held for
sale 5 - 636
Total liabilities 15,620 16,042
Total equity and liabilities 19,962 20,293
The attached notes on pages 51 to 100 form an integral part of
these consolidated financial statements.
The financial statements were approved on 26 February 2020 by
the Board of Directors and are signed on its behalf by:
Charlotte Jones
Group Chief Financial Officer
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
STATUTORY BASIS
for the year ended 31 December 2019
2019 2018
Note GBPm GBPm
Cash flows from operating activities
Cash generated from operating activities 23 513 269
Tax paid (35) (80)
Net cash flows from operating activities 478 189
Cash flows from investing activities
Proceeds from sales or maturities of:
Financial assets 3,106 2,605
Investment property - 25
Property and equipment - 28
Subsidiaries and associates (net of cash disposed
of) 14 11
UK Legacy (8) -
Purchase of:
Financial assets (3,346) (2,665)
Investment property - (19)
Property and equipment (8) (22)
Intangible assets 11 (145) (123)
Subsidiaries (net of cash acquired) - (17)
Net cash flows from investing activities (387) (177)
Cash flows from financing activities
Proceeds from issue of share capital 4 5
Proceeds from issue of debt 19 348 -
Dividends paid to ordinary shareholders (219) (208)
Coupon payment on Tier 1 notes (14) (14)
Dividends paid to preference shareholders (9) (9)
Dividends paid to non-controlling interests (13) (14)
Redemption of debt instruments (39) -
Payment of lease liabilities(1) (43) -
Net movement in other borrowings 43 (12)
Interest paid (33) (25)
Net cash flows from financing activities 25 (277)
Net increase/(decrease) in cash and cash equivalents 116 (265)
Cash and cash equivalents at the beginning of
the year 781 1,049
Effect of changes in foreign exchange on cash
and cash equivalents (11) (3)
Cash and cash equivalents at the end of the year 16 886 781
(1) Reported separately following transition to IFRS 16. Payment of
lease liabilities previously reported within cash flow from operating
activities.
The attached notes on pages 51 to 100 form an integral part of
these consolidated financial statements.
BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES
RSA Insurance Group plc (the Company) is a public limited
company incorporated and domiciled in England and Wales. The
Company through its subsidiaries and associates (together the Group
or RSA) provides personal and commercial insurance products to its
global customer base, principally in the UK, Ireland, Middle East
(together UK & International), Scandinavia and Canada.
1) Basis of preparation
The consolidated financial statements within the full Annual
Report and Accounts, from which the financial information within
this preliminary announcement has been extracted, have been
prepared on a going concern basis and in accordance with
International Financial Reporting Standards (IFRSs) as adopted by
the European Union (EU) and the Companies Act 2006 where
applicable. The consolidated financial statements are prepared on
an historical cost basis. Where other bases are applied, these are
identified in the relevant accounting policy. The condensed
consolidated financial information in this report has been prepared
by applying the accounting policies used in the 2019 Annual Report
and Accounts (see note 24).
In line with industry practice, the Group's statement of
financial position is not presented using current and non-current
classifications, but broadly in increasing order of liquidity.
The assets and liabilities considered as non-current include:
investments in associates, deferred tax assets, property and
equipment, intangible assets, goodwill, deferred tax liabilities,
outstanding debt including issued debt and elements of financial
investments, insurance contract liabilities and reinsurers' share
of insurance contract liabilities.
The assets and liabilities considered as current include cash
and cash equivalents, and insurance and reinsurance debtors.
The remaining balances are of a mixed nature. The current and
non-current portions of such balances are set out in the respective
notes or in the risk management note (note 4).
Except where otherwise stated, all figures included in the
consolidated financial statements are presented in millions of
pounds sterling (GBPm).
Significant accounting estimates and judgements
In preparing these consolidated financial statements, management
has made judgements in determining estimates in accordance with
Group's accounting policies. Estimates are based on management's
best knowledge of current circumstances and expectation of future
events and actions, which may subsequently differ from those used
in determining the accounting estimates.
Estimates and their underlying assumptions are reviewed on an
ongoing basis. Revisions to estimates are recognised
prospectively.
The most significant estimates are as follows. Additional
information on estimation techniques and assumptions is presented
in the relevant note in order to provide context to the figures
presented.
-- Valuation of insurance contract liabilities: the eventual
outcome of the claims that have occurred by the end of the
reporting period but remain unsettled - refer to note 20 for
additional information
-- Measurement of defined benefit obligations: key actuarial
assumptions - refer to note 21 for additional information
-- Recognition of deferred tax assets: availability of future
taxable profits against which deductible temporary differences and
tax losses carried forward can be utilised - refer to note 15 for
additional information
-- Valuation of level 3 financial assets and investment
properties: use of significant unobservable inputs - refer to note
13 for additional information
-- Measurement and impairment of goodwill and intangible assets:
key assumptions applied in the valuation of the recoverable amount
and the estimation of useful economic life - refer to note 11 for
additional information
Management have applied judgement when deciding to classify
sovereign debt and bonds for which immediate prices are available
as being level 1 in the fair value hierarchy (see note 13) and
other debt securities for which observable prices are also
available as level 2 on the basis of a lower level of activity in
the market from which those prices are quoted.
The Group Audit Committee reviews the reasonableness of
significant judgements and estimates.
2) Adoption of new and revised standards
IFRS 16 'Leases'
IFRS 16 replaced the previous standard IAS 17 'Leases' with
effect from 1 January 2019. Its objective is to ensure that lessees
and lessors provide relevant information in a manner that
faithfully represent lease transactions.
Transition
The Group elected to use the standard's modified retrospective
approach. The right-of-use asset on transition is recognised at a
value equal to the lease liability before adjustment for any
prepaid or accrued rent payments recognised immediately prior to
transition using a discount rate at the date of the initial
application. This has been applied using the exemption not to
represent the prior reporting period.
The Group elected to use the following practical expedients on
transition:
-- Use of single discount rates to reflect similar lease terms and economic environments
-- As an alternative to performing an impairment review,
right-of-use assets have been adjusted by the value of provision
for onerous leases recognised in the Consolidated Statement of
Financial Position immediately before the date of initial
application
-- Recognition exemptions for lease contracts that at the
transition date have a remaining lease term of 12 months or
less
-- Exclusion of initial direct costs from the measurement of the right-of-use asset
-- The use of hindsight in determining the lease term for
contracts containing options to extend or terminate the lease
Recognition and measurement
The Group recognises a lease liability and right-of-use asset
for all lease obligations as a lessee, except for the following
recognition exemptions that the Group has elected to use: lease
contracts that at the commencement date have a lease term of 12
months or less and that do not contain a purchase option; lease
contracts for which the underlying asset is of low value; and lease
contracts in relation to intangible assets which will be expensed
on a straight line basis over the life of the contract.
The lease liability is recognised at the inception of a lease as
the present value of the fixed and certain variable lease payments,
plus any guaranteed residual values, any termination penalties if
the lease term assumes termination options will be exercised, and
the purchase option value if it is reasonably certain that it will
be exercised.
Interest is accrued on the lease liability based on the discount
rate at commencement of the lease, and is accounted for in finance
costs. Subsequent payments are deducted from the lease
liability.
The right-of-use asset is initially measured as the value of the
lease liability, adjusted for any indirect costs incurred to obtain
the lease (except on transition), restoration provisions and any
lease payments made before the commencement of the lease.
The right-of-use asset is depreciated over the shorter of the
useful life or the period of the contract on a straight line basis.
There are no lease contracts with purchase options or under which
the Group would acquire a right-of-use asset by the end of the
lease term.
The lease liability is subsequently re-measured when there are
changes in lease term, in the expectation regarding whether a
purchase option would be exercised or not, in any expected residual
value guarantee or changes in variable lease payments that are
dependent upon an index or rate (from the date that these take
effect).
Remeasurements in the lease liability are reflected in the
measurement of the corresponding right-of-use asset with reductions
being restricted to the carrying value with any remaining
remeasurement being recognised in the consolidated income
statement.
Where the Group act as a lessor the lease will be classified as
a finance lease if it transfers substantially all the risk and
rewards incidental to ownership of the underlying asset, or
otherwise as an operating lease.
Nature and effect of adoption of IFRS 16
On adoption the Group recognised lease liabilities in relation
to leases which had been previously classified as operating leases
under the principles of IAS 17 'Leases'. These liabilities were
measured at the present value of the remaining lease payments,
discounted using the relevant incremental borrowing rate as at 1
January 2019. These are set at a regional level. The Group's
weighted average incremental borrowing rate applied at that time
was 2.7%.
A reconciliation to the operating commitments disclosed at 31 December
2018 is as follows:
GBPm
Operating lease commitments disclosed as at 31 December
2018 311
Discounted using the lessee's incremental borrowing rate
at the initial application 278
Less: short term leases (5)
Less: low value leases (18)
Add: adjustments as a result of a different treatment of
an extension/termination option(1) 48
Less: contract elements reassessed as service agreements,
VAT and other(2) (24)
Lease liability recognised at 1 January 2019 279
(1) 2018 commitments assumed break clauses would be taken for certain
contracts, whilst lease term under IFRS 16 assessed as contract end
date.
(2) Service components and VAT within lease payments excluded from
IFRS 16.
The effect of the adoption of IFRS 16 is as follows:
Impact on the Consolidated Statement of Financial Position
(increase/(decrease))
31 December 1 January
2019 2019
GBPm GBPm
Assets
Property and equipment(1) 213 239
Other assets(2) 20 17
Total assets 233 256
Equity
Shareholders' equity (5) (2)
Total equity (5) (2)
Liabilities
Other liabilities(3) 238 258
Total liabilities 238 258
(1) The right-of-use asset primarily relates to properties. The value
at transition is made up of GBP279m equal to the lease liability, less
GBP19m derecognition of finance sub leases, less GBP21m adjustment
for the unwind of opening accruals.
(2) Primarily relates to finance sub leases, whereby the sub lease
term is for the remaining lease term of the head lease.
(3) The value at transition includes lease liabilities of GBP279m
less the GBP21m unwind of opening accruals represented against the
right-of-use asset, 31 December 2019 values GBP258m and GBP20m respectively.
Impact on the Consolidated Income Statement
(increase/(decrease))
31 December
2019
GBPm
Expenses
Underwriting and policy acquisition costs(1) 6
Other operating expenses(2) (2)
Finance costs(3) (7)
Profit before tax (3)
Income tax expense -
Profit for the period (3)
Attributable to:
Equity holders of the Parent Company (3)
(3)
(1) 2019 includes GBP42m depreciation charge, whereby GBP50m lease
payment cost and GBP2m sublease income would have been recognised in
accordance with IAS 17. 2019 also includes GBP7m costs for leases classified
as low value and short term for which the financial impact is unchanged.
(2) Right-of-use asset impairment.
(3) Lease interest which would have been recognised as part of the
lease cost within underwriting and policy acquisition costs in accordance
with IAS 17.
Impact on the Consolidated Statement of Cash Flows
(increase/(decrease))
31 December
2019
GBPm
Net cash flows from operating activities 50
Net cash flows from financing activities (50)
Lease payments in 2018 were reported in operating activities in accordance
with IAS 17, now presented within financing activities.
There is no material impact on the Consolidated Statement of
Other Comprehensive Income or on basic and diluted EPS.
IAS 19 'Employee Benefits'
An amendment to IAS 19: Plan Amendment, Curtailment or
Settlement issued by the IASB on 7 February 2018 was endorsed by
the European Union on 13 March 2019 and became effective from 1
January 2019. This requires a net defined benefit asset or
liability to be remeasured using the current assumptions and fair
value of plan assets at the time of the amendment. Current service
cost and net interest for the remainder of the period are
remeasured using the same assumptions and the same fair value of
plan assets.
This interpretation has not had a significant impact on the
Group's consolidated financial statements.
IFRIC 23 'Uncertainty over Income Tax Treatment'
IFRIC 23 'Uncertainty over income tax treatment' specifies how
to reflect the effect of uncertainty in accounting for income taxes
where it may be unclear how tax law applies to a particular
transaction or circumstance, or whether a taxation authority will
accept a tax treatment.
This interpretation has not had a significant impact on the
Group's consolidated financial statements.
There are also a small number of other narrow scope amendments
arising from annual improvements to standards that are applicable
to the Group for the first time in 2019, none of which have had a
significant impact on the consolidated financial statements.
3) New accounting standards, interpretations and amendments yet
to be adopted
IFRS 17 'Insurance Contracts'
The International Accounting Standards Board (IASB) issued IFRS
17 'Insurance Contracts' in May 2017 to replace IFRS 4 'Insurance
Contracts' for annual reporting periods beginning, at the latest,
on or after 1 January 2021. It has subsequently published an
Exposure Draft (ED) proposing targeted amendments in response to
concerns and challenges raised by stakeholders, including a
proposal to defer the implementation of IFRS 17 by one year and to
extend the exemption from applying IFRS 9 'Financial Instruments'
for the same period.
Responses to the ED are being considered by the IASB and it is
expected that subsequent amendments including the deferral
proposals will be approved and incorporated into an amended IFRS 17
standard due to be issued in the middle of 2020 resulting in both
IFRS 17 and IFRS 9 becoming effective from a provisional date of 1
January 2022.
Draft legislation has been laid before Parliament to ensure that
IFRS as endorsed by the EU at the end of the Brexit transitional
period on 31 December 2020 will be adopted for use in the UK as
well as providing the Secretary of State with the power to adopt
and endorse subsequent changes to IFRS for adoption and use in the
UK. This power will be delegated to a UK Endorsement Board (UKEB)
which will be responsible for the UK endorsement of the amended
IFRS 17. The Group is monitoring this closely.
Detailed build and testing of systems and processes to implement
IFRS 17 is in progress and remains on track to substantially
complete in 2020. Parallel run testing of reporting is scheduled to
take place in 2021 to assure reporting compliance by 1 January
2022. Contingency planning has been considered in the event that
the endorsement process adds any further delay to implementation
after 2022. It is not yet possible to quantify the impact that
implementing IFRS 17 will have on the measurement and presentation
of insurance, reinsurance and related transactions and
balances.
IFRS 9 'Financial Instruments'
IFRS 9 'Financial Instruments' has been issued to replace IAS 39
'Financial Instruments: Recognition and Measurement' and primarily
changes the classification and measurement of financial assets. As
described above the Group has elected to implement IFRS 9
'Financial Instruments' alongside IFRS 17. Further information can
be found in note 12.
Other standards
There are a number of amendments to IFRS that have been issued
by the IASB that become mandatory in a subsequent accounting
period. The Group has evaluated these changes and none are expected
to have a significant impact on the consolidated financial
statements.
RISK MANAGEMENT
4) Risk management
Insurance risk
The Group is exposed to risks arising from insurance contracts
as set out below :
A) Underwriting risk
B) Reserving risk
A) Underwriting risk
Underwriting risk refers to the risk that claims arising are
higher (or lower) than assumed in pricing due to bad experience
including catastrophes, weakness in controls over underwriting or
portfolio management, or claims management issues.
The majority of underwriting risk to which the Group is exposed
is of a short-term nature, and generally does not exceed 12 months.
The Group's underwriting strategy aims to ensure that the
underwritten risks are well diversified in terms of the type,
amount of risk, and geography in order to ensure that the Group
minimises the volatility of its insurance result.
Underwriting limits are in place to enforce appropriate risk
selection criteria and pricing with all of the Group's underwriters
having specific licences that set clear parameters for the business
they can underwrite, based on their expertise.
The Group has developed enhanced methods of recording exposures
and concentrations of risk and has a centrally managed forum
looking at Group underwriting issues, reviewing and agreeing
underwriting direction and setting policy and directives where
appropriate. The Group has a monthly portfolio management process
across all its business units where key risk indicators are tracked
to monitor emerging trends, opportunities and risks. This provides
greater control of exposures in high risk areas as well as enabling
a prompt response to adverse claims development.
Pricing for the Group's products is generally based upon
historical claims frequencies and claims severity averages,
adjusted for inflation and modelled catastrophes, trended forward
to recognise anticipated changes in claims patterns after making
allowance for other costs incurred by the Group, conditions in the
insurance market and a profit loading that adequately covers the
cost of capital.
Passing elements of our insurance risk to reinsurers is another
key strategy employed in managing the Group's exposure to insurance
risk. The Group Board determines a maximum level of risk to be
retained by the Group as a whole. The net retained risk is
distributed across the Group in accordance with Group and local
risk appetite.
The Group remains primarily liable as the direct insurer on all
risks reinsured, although the reinsurer is liable to the Group to
the extent of the insurance risk it has contractually accepted
responsibility for.
B) Reserving risk
Reserving risk refers to the risk that the Group's estimates of
future claims payments will be insufficient.
The Group establishes a provision for losses and loss adjustment
expenses for the anticipated costs of all losses that have already
occurred but have not yet been paid. Such estimates are made for
losses already reported to the Group as well as for the losses that
have already occurred but are not yet reported together with a
provision for the future costs of handling and settling the
outstanding claims.
There is a risk to the Group from the inherent uncertainty in
estimating provisions at the end of the reporting period for the
eventual outcome of outstanding notified claims as well as
estimating the number and value of claims that are still to be
notified. There is also uncertainty in the level of future costs of
handling and settling the outstanding claims.
The Group seeks to reduce its reserving risk through the use of
experienced, regional actuaries who estimate the actuarial
indication of the required reserves based on claims experience,
business volume, anticipated change in the claims environment and
claims cost. This information is used by local reserving committees
to recommend to the Group Reserving Committee the appropriate level
of reserves for each region. This will include adding a margin onto
the actuarial indication as a provision for unforeseen developments
such as future claims patterns differing from historical
experience, future legislative changes and the emergence of latent
exposures. The Group Reserving Committee review these local
submissions and recommend the final level of reserves to be held by
the Group. The Group Reserving Committee is chaired by the Group
Chief Financial Officer and includes the Group Chief Executive,
Group Underwriting Director, Group Chief Actuary and Group Chief
Risk Officer. A similar committee has been established in each of
the Group's primary operating segments. The Group Reserving
Committee monitors the decisions and judgements made by the
business units as to the level of reserves to be held. It then
recommends to the Group Board via the Group Audit Committee the
final decision on the level of reserves to be included within the
consolidated financial statements. In forming its collective
judgement, the committee considers the following information:
-- The actuarial indication of ultimate losses together with an
assessment of risks and possible favourable or adverse developments
that may not have been fully reflected in calculating these
indications. At the end of 2019, these risks and developments
include: the possibility of future legislative change having
retrospective effect on open claims; changes in claims settlement
procedures potentially leading to future claims payment patterns
differing from historical experience; the possibility of new types
of claim, such as disease claims, emerging from historical
business; general uncertainty in the claims environment; the
emergence of latent exposures; the outcome of litigation on claims
received; failure to recover reinsurance and unanticipated changes
in claims inflation;
-- The views of internal peer reviewers of the reserves and of
other parties including actuaries, legal counsel, risk directors,
underwriters and claims managers;
-- The outcome from independent assurance reviews performed by
the Group actuarial function to assess the reasonableness of
regional actuarial indication estimates;
-- How previous actuarial indications have developed.
Financial risk
Financial risk refers to the risk of financial loss
predominantly arising from investment transactions entered into by
the Group, and also to a lesser extent arising from insurance
contracts, and includes the following risks:
-- Credit risk;
-- Market risk including price, interest rate and currency rate risks;
-- Liquidity risk.
The Group undertakes a number of strategies to manage these
risks including the use of derivative financial instruments for the
purpose of reducing its exposure to adverse fluctuations in
interest rates, foreign exchange rates and long term inflation. The
Group does not use derivatives to leverage its exposure to markets
and does not hold or issue derivative financial instruments for
speculative purposes. The policy on use of derivatives is approved
by the Board Risk Committee ('BRC').
Credit risk
Credit risk is the risk of loss resulting from the failure of a
counterparty to honour its financial or contractual obligations to
the Group. The Group's credit risk exposure is largely concentrated
in its fixed income investment portfolio and to a lesser extent,
its premium receivables, and reinsurance assets.
Credit risk is managed at both a Group level and at a local
level. Local operations are responsible for assessing and
monitoring the creditworthiness of their counterparties (e.g.
brokers and policyholders). Local credit committees are responsible
for ensuring these exposures are within the risk appetite of the
local operations. Exposure monitoring and reporting for fixed
income investments and premium receivables is embedded throughout
the organisation with aggregate credit positions reported and
monitored at Group level.
The Group's credit risk strategy appetite and credit risk policy
are developed by the BRC and are reviewed and approved by the Board
on an annual basis. This is done through the setting of Group
policies, procedures and limits.
In defining its appetite for credit risk the Group looks at
exposures at both an aggregate and business unit level,
distinguishing between credit risks incurred as a result of
offsetting insurance risks or operating in the insurance market
(e.g. reinsurance credit risks and risks to receiving premiums due
from policyholders and intermediaries) and credit risks incurred
for the purposes of generating a return (e.g. invested assets
credit risk).
Limits are set at both a portfolio and counterparty level based
on likelihood of default, derived from the rating of the
counterparty, to ensure that the Group's overall credit profile and
specific concentrations are managed and controlled within risk
appetite.
The Group's investment management strategy primarily focuses on
debt instruments of high credit quality issuers and seeks to limit
the overall credit exposure with respect to any one issuer by
ensuring limits have been based upon credit quality. Restrictions
are placed on each of the Group's investment managers as to the
level of exposure to various rating categories including unrated
securities.
The Group is also exposed to credit risk from the use of
reinsurance in the event that a reinsurer fails to settle its
liability to the Group.
The Group Reinsurance Credit Committee oversees the management
of credit risk arising from the reinsurer failing to settle its
liability to the Group. Group standards are set such that
reinsurers that have a financial strength rating of less than 'A-'
with Standard & Poor's, or a comparable rating, are rarely used
and are excluded from the Group's list of approved reinsurers. The
exceptions are fronting arrangements for captives, where some form
of collateral is generally obtained, and some global network
partners. At 31 December 2019 the extent of collateral held by the
Group against reinsurers' share of insurance contract liabilities
was GBP36m (2018: GBP577m), which in the event of a default would
be called and recognised on the balance sheet. The decrease is
following the legal transfer of the UK Legacy business on 1 July
2019.
The Group's use of reinsurance is sufficiently diversified that
it is not concentrated on a single reinsurer, or any single
reinsurance contract. The Group regularly monitors its aggregate
exposures by reinsurer group against predetermined reinsurer group
limits, in accordance with the methodology agreed by the BRC. The
Group's largest reinsurance exposures to active reinsurance groups
are Berkshire Hathaway, Lloyd's of London and Talanx. At 31
December 2019 the reinsurance asset recoverable from these groups
does not exceed 4.1 % (2018: 3.9%) of the Group's total financial
assets. Stress tests are performed by reinsurer counterparty and
the limits are set such that in a catastrophic event, the exposure
to a single reinsurer is estimated not to exceed 6.6% (2018: 6.5%)
of the Group's total financial assets.
The credit profile of the Group's assets exposed to credit risk
is shown below. The credit rating bands are provided by independent
rating agencies. The table below sets out the Group's aggregated
credit risk exposure for its financial and insurance assets.
As at 31 December 2019
Credit rating relating to financial assets that are
neither past due nor impaired
Total
financial
assets
Total that are
financial Less: neither
assets Amounts past due
that are classified nor impaired
neither as held excluding
Not past due for held for
AAA AA A BBB <BBB rated nor impaired sale sale
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Debt securities 5,030 2,148 2,053 1,000 179 1 10,411 - 10,411
Of which would qualify
for SPPI under IFRS
9(1) 5,030 2,125 1,852 959 106 1 10,073 - 10,073
Loans and receivables(2) 70 - 29 210 23 6 338 - 338
Reinsurers' share
of insurance contract
liabilities - 670 1,495 78 60 23 2,326 - 2,326
Insurance and reinsurance
debtors(3) 11 17 922 42 47 1,723 2,762 - 2,762
Derivative assets - 10 25 60 - 3 98 - 98
Other debtors - 5 2 16 - 129 152 - 152
Cash and cash equivalents 364 250 261 28 - 6 909 - 909
(1) The debt securities meeting SPPI criteria under IFRS 9 which
are below investment grade are stated under IAS 39 at fair
value.
(2) Loans and receivables are measured using amortised cost and
their carrying amounts are considered to be as approximate fair
values.
(3) The insurance and reinsurance debtors classified as not
rated comprise personal policyholders and small corporate customers
that do not have individual credit ratings. The overall credit risk
to the Group is deemed to be low as the cover could be cancelled if
payment were not received on a timely basis.
As at 31 December 2018
Credit rating relating to financial assets that are
neither past due nor impaired
Total
financial
assets
Total that are
financial Less: neither
assets Amounts past due
that are classified nor impaired
neither as held excluding
Not past due for held for
AAA AA A BBB <BBB rated nor impaired sale sale
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Debt securities 5,345 1,993 2,132 854 146 - 10,470 - 10,470
Of which would qualify
for SPPI under IFRS
9(1) 5,345 1,978 2,057 816 70 - 10,266 - 10,266
Loans and receivables(2) 80 - 31 106 26 6 249 - 249
Reinsurers' share
of insurance contract
liabilities - 657 1,467 672 41 33 2,870 604 2,266
Insurance and reinsurance
debtors(3) 75 12 846 72 64 1,761 2,830 13 2,817
Derivative assets - 1 18 48 - - 67 - 67
Other debtors - - - - 15 172 187 15 172
Cash and cash equivalents 196 305 277 5 9 1 793 5 788
(1) The debt securities meeting SPPI criteria under IFRS 9 which
are below investment grade are stated under IAS 39 at fair
value.
(2) Loans and receivables are measured using amortised cost and
their carrying amounts are considered to be as approximate fair
values.
(3) The insurance and reinsurance debtors classified as not
rated comprise personal policyholders and small corporate customers
that do not have individual credit ratings. The overall credit risk
to the Group is deemed to be low as the cover could be cancelled if
payment were not received on a timely basis.
With the exception of government debt securities, the largest
single aggregate credit exposure does not exceed 3% (2018: 3%) of
the Group's total financial assets.
Ageing of financial assets that are past due but not
impaired
The following table provides information regarding the carrying
value of financial assets that have been impaired and the ageing of
financial assets that are past due but not impaired, excluding
those assets that have been classified as held for sale.
As at 31 December 2019
Financial assets that
are past due but not
impaired
Impairment
Financial Carrying losses
Neither assets value charged/(reversed)
past Six Greater that in the to the income
due Up to Three months than have statement statement
nor three to six to one one been of financial during the
impaired months months year year impaired position year
Note GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Debt securities 12 10,411 - - - - - 10,411 -
Loans and
receivables 12 338 - - - - - 338 -
Reinsurers' share
of insurance
contract
liabilities 14 2,326 - - - - - 2,326 -
Insurance and
reinsurance
debtors 2,762 84 38 26 13 - 2,923 12
Derivative assets 98 - - - - - 98 -
Other debtors 152 23 - 6 1 - 182 -
Cash and cash
equivalents 16 909 - - - - - 909 -
As at 31 December 2018
Financial assets that
are past due but not
impaired
Impairment
Financial Carrying losses
Neither assets value charged/(reversed)
past Six Greater that in the to the income
due Up to Three months than have statement statement
nor three to six to one one been of financial during the
impaired months months year year impaired position year
Note GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Debt securities 12 10,470 - - - - - 10,470 -
Loans and
receivables 12 249 - - - - - 249 -
Reinsurers' share
of insurance
contract
liabilities 14 2,266 - - - - 5 2,271 -
Insurance and
reinsurance
debtors 2,817 63 28 19 23 4 2,954 (2)
Derivative assets 67 - - - - - 67 -
Other debtors 172 8 2 1 2 - 185 -
Cash and cash
equivalents 16 788 - - - - - 788 -
Market risk
Market risk is the risk of adverse financial impact resulting,
directly or indirectly, from fluctuations from equity and property
prices, interest rates and foreign currency exchange rates. Market
risk arises in the Group's operations due to the possibility that
fluctuations in the value of liabilities are not offset by
fluctuations in the value of investments held. At Group level, it
also arises in relation to the overall portfolio of international
businesses through foreign currency risk. Market risk is subject to
the Board Risk Committee's risk management framework, which is
subject to review and approval by the Board.
Market risk can be broken down into three key components:
i. Equity and property risk
The Group classifies its investment portfolio in debt securities
and equity securities in accordance with the accounting definitions
under IFRS.
At 31 December 2019 the Group held investments classified as
equity securities of GBP673m (2018: GBP739m). These include
interests in structured entities and other investments where the
price risk arises from interest rate risk rather than from equity
market price risk. The Group considers that within equity
securities, investments with a fair value of GBP218m (2018:
GBP205m) may be more affected by equity index market price risk
than by interest rate risk. On this basis a 15% fall in the value
of equity index prices would result in the recognition of losses of
GBP33m (2018: GBP31m) in other comprehensive income.
In addition the Group holds investments in properties and in
group occupied properties which are subject to property price risk.
A decrease of 15% in property prices would result in the
recognition of losses of GBP45m (2018: GBP47m) in the income
statement and GBP3m (2018: GBP3m) in other comprehensive
income.
This analysis assumes that there is no correlation between
interest rate and property market rate risks. It also assumes that
all other assets and liabilities remain unchanged and that no
management action is taken. This analysis does not represent
management's view of future market change, but reflects
management's view of key sensitivities.
This analysis is presented gross of the corresponding tax
credits/(charges).
ii. Interest rate risk
Interest rate risk arises primarily from the Group's investments
in long-term debt and fixed income securities and their movement
relative to the value placed on insurance liabilities. This impacts
both the fair value and amount of variable returns on existing
assets as well as the cost of acquiring new fixed maturity
investments.
Given the composition of the Group's investments as at 31
December 2019, the table below illustrates the impact to the income
statement and other comprehensive income of a hypothetical 100bps
change in interest rates on fixed income securities and cash that
are subject to interest rate risk.
Changes in the income statement and other comprehensive income (OCI):
Increase in Decrease in other
income statement comprehensive
income
2020 2019 2020 2019
GBPm GBPm GBPm GBPm
Increase in interest rate markets:
Impact on fixed income securities and cash
of an increase in interest rates of 100bps 19 20 (390) (380)
The Group principally manages interest rate risk by holding
investment assets (predominantly fixed income) that generate cash
flows which broadly match the duration of expected claim
settlements and other associated costs.
The sensitivity of the fixed interest securities of the Group
has been modelled by reference to a reasonable approximation of the
average interest rate sensitivity of the investments held within
each of the portfolios. The effect of movement in interest rates is
reflected as a one time rise of 100bps on 1 January 2020 and 1
January 2019 on the following year's income statement and other
comprehensive income. The impact of an increase in interest rates
on the fair value of fixed income securities that would be
initially recognised in OCI will reduce over time as the maturity
date approaches.
iii. Currency risk
The Group incurs exposure to currency risk in two ways:
-- Operational currency risk - by holding investments and other
assets and by underwriting and incurring liabilities in currencies
other than the currency of the primary environment in which the
business units operate, the Group is exposed to fluctuations in
foreign exchange rates that can impact both its profitability and
the reported value of such assets and liabilities;
-- Structural currency risk - by investing in overseas
subsidiaries the Group is exposed to the risk that fluctuations in
foreign exchange rates impact the reported profitability of foreign
operations to the Group, and the value of its net investment in
foreign operations.
Operational currency risk is principally managed within the
Group's individual operations by broadly matching assets and
liabilities by currency and liquidity. Operational currency risk is
not significant.
Structural currency risk is managed at a Group level through
currency forward contracts and foreign exchange options within
predetermined limits set by the Group Board. In managing structural
currency risk the needs of the Group's subsidiaries to maintain net
assets in local currencies to satisfy local regulatory solvency and
internal risk based capital requirements are taken into
account.
At 31 December 2019, the Group's total shareholders' equity deployed
by currency was:
Pounds Danish Canadian Swedish
Sterling Krone/Euro Dollar Krona Other Total
GBPm GBPm GBPm GBPm GBPm GBPm
Shareholders' equity at 31
December 2019 2,496 531 645 114 383 4,169
Shareholders' equity at 31
December 2018 2,437 401 658 226 387 4,109
Shareholders' equity is stated after taking account of the
effect of currency forward contracts and foreign exchange options.
The analysis aggregates the Danish Krone exposure and the Euro
exposure as the Danish Krone continues to be pegged closely to the
Euro. The Group considers this aggregate exposure when reviewing
its hedging strategy.
The table below illustrates the impact of a hypothetical 10%
change in Danish Krone/Euro, Canadian Dollar or Swedish Krona
exchange rates on shareholders' equity when retranslating into
sterling:
10% strengthening 10% weakening 10% strengthening 10% weakening 10% strengthening 10% weakening
in Pounds in Pounds in Pounds in Pounds in Pounds in Pounds
Sterling Sterling Sterling Sterling Sterling Sterling
against against against against against against
Danish Danish Canadian Canadian Swedish Swedish
Krone/Euro Krone/Euro Dollar Dollar Krona Krona
GBPm GBPm GBPm GBPm GBPm GBPm
Movement in
shareholders'
equity at 31
December
2019 (48) 59 (59) 72 (10) 13
Movement in
shareholders'
equity at 31
December
2018 (36) 45 (60) 73 (21) 25
Changes arising from the retranslation of foreign subsidiaries'
net asset positions from their primary currencies into Sterling are
taken through the foreign currency translation reserve and so
consequently these movements in exchange rates have no impact on
profit.
Liquidity risk
Liquidity risk refers to the risk of loss to the Group as a
result of assets not being available in a form that can immediately
be converted into cash, and therefore the consequence of not being
able to pay its obligations when due. To help mitigate this risk,
the BRC sets limits on assets held by the Group designed to match
the maturities of its assets to that of its liabilities.
A large proportion of investments are maintained in short-term
(less than one year) highly liquid securities, which are used to
manage the Group's operational requirements based on actuarial
assessment and allowing for contingencies.
The following table summarises the contractual repricing or
maturity dates, whichever is earlier. Provision for losses and loss
adjustment expenses are presented and are analysed by remaining
estimated duration until settlement.
As at 31 December 2019
Carrying
value
Less Two Greater in the
than One to Three Four Five than statement
one to two three to four to five to ten ten of financial
year years years years years years years Total position
Note GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Subordinated guaranteed
US$ bonds(1) 19 - - - - - 7 - 7 6
Senior notes due
2024(1) 19 - - - - 350 - - 350 348
Guaranteed subordinated
notes due 2045(1) 19 - - - - - 400 - 400 396
Provisions for
losses and loss
adjustment expenses 20 2,878 1,761 1,160 713 514 1,149 966 9,141 9,141
Direct insurance
creditors 20 126 1 - - - - - 127 127
Reinsurance creditors 20 576 195 72 - - - - 843 843
Borrowings 169 - - - - - - 169 169
Deposits received
from reinsurers 11 - - - - - - 11 11
Derivative liabilities 4 15 - - 2 7 67 95 95
Lease liabilities(1) 45 45 43 32 26 70 31 292 258
Total 3,809 2,017 1,275 745 892 1,633 1,064 11,435 11,394
Interest on perpetual
bonds and notes 27 27 27 27 27 19 - 154
(1) Maturity profile shown on an undiscounted basis
As at 31 December 2018
Carrying
value
Less Two Greater in the
than One to Three Four Five than statement
one to two three to four to five to ten ten of financial
year years years years years years years Total position
Note GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Subordinated guaranteed
US$ bonds(1) 19 - - - - - - 7 7 6
Guaranteed subordinated
notes due 2045(1) 19 - - - - - 400 - 400 396
Guaranteed subordinated
step-up notes due
2039(1) 19 39 - - - - - - 39 39
Provisions for
losses and loss
adjustment expenses 20 3,081 1,610 1,021 717 542 1,247 1,250 9,468 9,468
Direct insurance
creditors 20 118 2 - - - - - 120 120
Reinsurance creditors 20 562 198 48 - - - - 808 808
Borrowings 119 - - - - - - 119 119
Deposits received
from reinsurers 22 - - - - - - 22 22
Derivative liabilities 51 - 14 - - 9 36 110 110
Total 3,992 1,810 1,083 717 542 1,656 1,293 11,093 11,088
Interest on perpetual
bonds and notes 23 21 21 21 21 40 1 148
(1) Maturity profile shown on an undiscounted basis
The above maturity analysis is presented on a discounted basis,
with the exception of issued debt and lease liabilities, for
consistency with the consolidated statement of financial position
and supporting notes. In prior year the analysis was presented on
an undiscounted basis including held for sale. The prior year
figures have been re-presented above on a consistent basis.
The capital and interest payable on the bonds and notes have
been included until the earliest dates on which the Group has the
option to call the instruments and the interest rates are reset.
For further information on terms of the bonds and notes, see note
19.
Pension risk
The Group is exposed to risks through its obligation to fund a
number of schemes. These risks include market risk (assets not
performing as well as expected), inflation risk and longevity risk
over the lives of the members. The Group and trustees of the
schemes work together to reduce these risks through agreement of
investment policy including the use of interest rate, inflation
rate and mortality swaps. Further information on the Group's
management of pension risk is included within note 21.
SIGNIFICANT TRANSACTIONS AND EVENTS
5) Held for sale disposal groups and loss on disposal of
businesses
The assets and liabilities of the businesses held for sale are
shown below.
2019 2018
Total UK Legacy Noble Total
GBPm GBPm GBPm GBPm
Assets classified as held for
sale
Goodwill - - 2 2
Reinsurers' share of insurance
contract liabilities - 604 - 604
Insurance and reinsurance debtors - 13 - 13
Other debtors and other assets - 15 - 15
Cash and cash equivalents - 4 1 5
Assets of operations classified
as held for sale - 636 3 639
Liabilities directly associated with assets
classified as held for sale
Insurance contract liabilities - 604 - 604
Insurance and reinsurance liabilities - 3 - 3
Provisions and other liabilities - 29 - 29
Liabilities of operations classified as
held for sale - 636 - 636
Net assets of operations classified as
held for sale - - 3 3
On 7 February 2017, the Group's UK Legacy liabilities were
disposed of to Enstar Group Limited. The transaction initially took
the form of a reinsurance agreement, effective from 31 December
2016, which substantially effected economic transfer. The legal
transfer of the business was completed on 1 July 2019. The Group's
UK Legacy business was managed as part of the UK operations. It is
not presented as a discontinued operation as it is neither a
separate geographic area nor a major line of business.
The UK Noble Marine entities were disposed of in February
2019.
Loss on disposal of businesses
In 2019, the net loss of GBP14m comprises a GBP19m loss relating
to the disposal of the UK Legacy business, consisting of a GBP15m
additional contribution to Enstar Group Limited and GBP4m costs of
disposal, offset by a GBP4m gain on the sale of Caunce O'Hara &
Company Limited.
In 2018, the net loss of GBP2m included a write down of GBP4m on
classification of the UK Noble Marine entities as Held for Sale at
fair value, offset by a gain of GBP2m on the liquidation of Royal
and Sun Alliance (Ireland) Limited.
6) Reorganisation costs
During 2019 the Group's UK business incurred costs in relation
to improving operations through ongoing process re-engineering and
other cost reduction initiatives such as office footprint
consolidation and reduction. The GBP27m incurred in 2019 (note 7)
includes GBP15m in respect of redundancy and GBP12m other
restructuring activity
NOTES TO THE CONDENSED CONSOLIDATED INCOME STATEMENT, CONDENSED
CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE INCOME AND DIVIDS
7) Segmental information
The Group's primary operating segments comprise Scandinavia,
Canada, UK & International and Central Functions which is
consistent with how the Group is managed. The primary operating
segments are based on geography and are all engaged in providing
personal and commercial general insurance services. Central
Functions include the Group's internal reinsurance function and
Group Corporate Centre.
Each operating segment is managed by a member of the Group
Executive Committee who is directly accountable to the Group Chief
Executive and Board of Directors, who together are considered to be
the chief operating decision maker in respect of the operating
activities of the Group. The UK is the Group's country of domicile
and one of its principal markets.
Assessing segment performance
The Group uses the following key measures to assess the
performance of its operating segments:
-- Net written premiums;
-- Underwriting result;
-- Combined operating ratio (COR);
-- Business operating result.
Net written premiums is the key measure of revenue used in
internal reporting.
Underwriting result, COR and business operating result are
Alternative Performance Measures (APMs) and the key internal
measures of profitability of the operating segments. The COR
reflects the ratio of claims costs and expenses (including
commission) to earned premiums, expressed as a percentage. Further
information on APMs can be found on pages 32 to 41.
Transfers or transactions between segments are entered into
under normal commercial terms and conditions that would also be
available to unrelated third parties.
Year ended 31 December 2019
Scandinavia Canada UK & International Central Total
Functions Group
GBPm GBPm GBPm GBPm GBPm
Net written premiums 1,764 1,735 2,881 37 6,417
Underwriting result(1) 223 94 77 (48) 346
Investment result 63 65 135 - 263
Central costs and other activities - - - (12) (12)
Business operating result (management
basis) 286 159 212 (60) 597
Realised gains 15
Unrealised (losses)/gains, impairments
and foreign exchange (24)
Interest costs (32)
Amortisation of intangible assets
(note 11) (12)
Pension net interest and administration
costs (note 21) 4
Reorganisation costs (note 6) (27)
Change in economic assumptions (note
20) (15)
Loss on disposal of businesses (note
5) (14)
Profit before tax 492
Tax on operations (note 8) (109)
Profit after tax 383
Combined operating ratio (%) 87.4% 94.5% 97.1% 94.6%
(1) UK & International management underwriting result, as
reported in the press release, includes an GBP8m re-classification
of claims recoveries from Central Functions. This re-classification
is not made in the Group consolidated financial statements.
Year ended 31 December 2018
Scandinavia Canada UK & International Central Total
Functions Group
GBPm GBPm GBPm GBPm GBPm
Net written premiums 1,817 1,652 3,100 (99) 6,470
Underwriting result 238 25 (43) 30 250
Investment result 68 59 148 - 275
Central costs and other activities - - - (8) (8)
Business operating result (management
basis) 306 84 105 22 517
Realised gains 22
Unrealised (losses)/gains, impairments
and foreign exchange (2)
Interest costs (25)
Amortisation of intangible assets
(note 11) (13)
Pension net interest and administration
costs (note 21) (6)
Regulatory costs (4)
Impairment of goodwill (note 11) (7)
Loss on disposal of businesses (note
5) (2)
Profit before tax 480
Tax on operations (note 8) (108)
Profit after tax 372
Combined operating ratio (%) 86.8% 98.5% 101.4% 96.2%
8) Income tax
The tax amounts charged in the income statement are as
follows:
2019 2018
GBPm GBPm
Current tax 90 94
Deferred tax 19 14
Taxation attributable to the Group 109 108
Reconciliation of the income tax expense
2019 2018
GBPm GBPm
Profit before tax 492 480
Tax at the UK rate of 19.0% (2018: 19.0%) 93 91
Tax effect of:
Income/gains not taxable (or taxed at lower rate) (15) (7)
Expenses not deductible for tax purposes 5 1
Non-taxable (profit) on sale of subsidiaries - (1)
Impairment of goodwill and amortisation of intangibles - 2
Increase/(decrease) of current tax in respect of prior
periods 5 (5)
Increase/(decrease) of deferred tax in respect of prior
periods (other than losses) - (1)
De-recognition of deferred tax asset for prior year
losses 6 4
Non-recognition of deferred tax asset for current year
losses 5 6
Different tax rates of subsidiaries operating in other
jurisdictions 8 11
Withholding tax on dividends and interest from subsidiaries 5 4
Effect of change in tax rates (1) (2)
Deductible Restricted Tier 1 coupon in equity (3) (3)
One off tax charge on Swedish Safety Reserve - 6
Other 1 2
Income tax expense 109 108
Effective tax rate 22% 23%
The Group effective tax rate of 22% (2018: 23%) is higher than
the UK statutory rate of 19% predominately due to unrecognised tax
losses in the UK and Norway, higher statutory tax rates in the
Group's core overseas jurisdictions and non-creditable withholding
tax. Income/gains not taxable largely comprises tax-exempt
investment income and non-taxable foreign exchange.
The current tax and deferred income tax credited/(charged) to each
component of other comprehensive income is as follows:
Current Tax Deferred Tax Total
2019 2018 2019 2018 2019 2018
GBPm GBPm GBPm GBPm GBPm GBPm
Exchange gains and losses (2) (3) (3) 3 (5) -
Fair value gains and losses 2 41 (10) (18) (8) 23
Remeasurement of net defined benefit
pension liability - 14 (3) (30) (3) (16)
Total credited/(charged) to other
comprehensive income - 52 (16) (45) (16) 7
Foreign exchange arising on the revaluation of current and
deferred tax balances is reported through other comprehensive
income within the foreign currency translation reserve.
The net current tax and deferred tax charged directly to equity
is GBPnil (2018: GBPnil).
The Group applies judgement in identifying uncertainties over
income tax treatments under IAS 12 and, from 1 January 2019, IFRIC
23. The introduction of IFRIC 23 on 1 January 2019 had no material
impact on the Group's provisions for uncertain tax positions.
Provisions for uncertain tax treatments are based on our assessment
of probable outcomes which take into consideration many factors,
including interpretations of tax law and prior experience. At the
end of the reporting period, provisions recognised in respect to
uncertain tax positions for the Group totalled less than GBP10m
(2018: less than GBP10m).
Tax rates
The table below provides a summary of the current tax and deferred
tax rates for the year in respect of the core tax jurisdictions in
which the Group operates.
2019 2018
Current Deferred Current Deferred
Tax Tax Tax Tax
UK 19.0% 17.0% 19.0% 17.0%
Canada 27.4% 27.4% 27.7% 27.7%
Denmark 22.0% 22.0% 22.0% 22.0%
Ireland 12.5% 12.5% 12.5% 12.5%
Sweden 21.4% 20.6% 22.0% 20.6%
Tax assets and liabilities are recognised based on tax rates
that have been enacted or substantively enacted at the balance
sheet date. The Conservative Party manifesto at the recent general
election included a commitment to cancel the reduction in the UK
corporate tax rate from 19% to 17% in April 2020. Under IAS 12 only
rate changes that have been substantively enacted at the reporting
date can be used for calculating deferred tax.
9) Earnings per share (EPS)
The earnings per ordinary share are calculated by reference to
the profit attributable to the ordinary shareholders and the
weighted average number of shares in issue during the year. These
were 1,030,648,190 (2018: 1,026,040,413) for basic EPS and
1,033,077,874 (2018: 1,030,450,240) for diluted EPS (excluding
those held in Employee Stock Ownership Plan (ESOP) and Share
Incentive Plan (SIP) trusts). The number of shares in issue at 31
December 2019 was 1,031,523,544 (2018: 1,026,814,592) (excluding
those held in ESOP and SIP trusts).
Basic EPS
2019 2018
Profit attributable to the shareholders of the Parent
Company (GBPm) 359 349
Less: cumulative preference dividends (GBPm) (9) (9)
Less: Tier 1 notes coupon payment (GBPm) (14) (14)
Profit for the calculation of earnings per share (GBPm) 336 326
Weighted average number of ordinary shares in issue
(thousands) 1,030,648 1,026,040
Basic earnings per share (p) 32.6 31.8
Diluted EPS
2019 2018
Weighted average number of ordinary shares in issue
(thousands) 1,030,648 1,026,040
Adjustments for share options and contingently issuable
shares (thousands) 2,430 4,410
Total weighted average number of ordinary shares for
diluted earnings per share (thousands) 1,033,078 1,030,450
Diluted earnings per share (p) 32.5 31.6
Note 17 includes further information of the outstanding share
options and unvested share awards to Group employees that could
potentially dilute basic earnings per share in the future.
10) Dividends paid and proposed
The final dividend to equity holders is recognised as a
liability when approved at the Annual General Meeting (AGM). The
Company and its subsidiaries may be subject to restrictions on the
amount of dividends they can pay to shareholders as a result of
regulatory requirements. However, based on the information
currently available, the Company does not believe that such
restrictions materially limit its ability to settle obligations as
and when they fall due and pay dividends. At the AGM on 7 May 2020,
a final dividend in respect of the year ended 31 December 2019 of
15.6p (2018: 13.7p) per ordinary share amounting to a total
dividend of GBP 161m (2018: GBP141m) will be recommended by the
directors (subject always to the dividend being cancelled, withheld
or deferred). The proposed dividend will be paid on 14 May 2020 to
holders of ordinary shares on the register at the close of business
on 6 March 2020, subject to ordinary shareholder approval, and will
be accounted for in shareholders' equity as an appropriation of
retained earnings in the year ending 31 December 2020.
Details of 2020 dividend dates are detailed on page 43.
The Company's preference shareholders receive a dividend at the
rate of 7.375% per annum paid in two instalments on, or as near as
practicably possible to, 1 April and 1 October each year, subject
to approval by the Board.
2019 2018 2019 2018
p p GBPm GBPm
Ordinary dividend:
Final paid in respect of prior year 13.7 13.0 141 133
Interim paid in respect of current year 7.5 7.3 78 75
21.2 20.3 219 208
Preference dividend 9 9
Tier 1 notes coupon payment 14 14
242 231
The Tier 1 notes coupon payment relates to the two floating rate notes
issued on 27 March 2017 (note 18).
NOTES TO THE CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL
POSITION
11) Goodwill and intangible assets
Intangible
assets
arising
from acquired Externally Internally Customer
claims acquired generated related
Goodwill provisions software software intangibles Total
GBPm GBPm GBPm GBPm GBPm GBPm
Cost
At 1 January 2019 441 133 83 907 262 1,826
Additions - - 2 132 11 145
Additions acquired through
business combinations - - - - - -
Disposals (15) - (5) (92) (6) (118)
Exchange adjustment (14) (7) - (16) (1) (38)
At 31 December 2019 412 126 80 931 266 1,815
Accumulated amortisation
At 1 January 2019 - 133 81 462 199 875
Amortisation charge - - 1 65 18 84
Amortisation on disposals - - (5) (86) (6) (97)
Exchange adjustment - (7) - (7) - (14)
At 31 December 2019 - 126 77 434 211 848
Accumulated impairment
At 1 January 2019 92 - - 60 5 157
Impairment charge - - - 1 - 1
Impairment on disposals (13) - - (7) - (20)
Exchange adjustment (4) - - (3) (1) (8)
At 31 December 2019 75 - - 51 4 130
Carrying amount at 31 December
2019 337 - 3 446 51 837
Intangible
assets
arising
from acquired Externally Internally Customer
claims acquired generated related
Goodwill provisions software software intangibles Total
GBPm GBPm GBPm GBPm GBPm GBPm
Cost
At 1 January 2018 441 132 82 859 256 1,770
Additions - - 1 122 17 140
Additions acquired through
business combinations 5 - - - - 5
Disposals (4) - - (71) (7) (82)
Exchange adjustment (1) 1 - (3) (4) (7)
At 31 December 2018 441 133 83 907 262 1,826
Accumulated amortisation
At 1 January 2018 - 132 77 456 189 854
Amortisation charge - - 4 67 17 88
Amortisation on disposals - - - (60) (5) (65)
Exchange adjustment - 1 - (1) (2) (2)
At 31 December 2018 - 133 81 462 199 875
Accumulated impairment
At 1 January 2018 79 - - 69 5 153
Impairment charge 7 - - 2 - 9
Impairment on disposals 4 - - (11) - (7)
Exchange adjustment 2 - - - - 2
At 31 December 2018 92 - - 60 5 157
Carrying amount at 31 December
2018 349 - 2 385 58 794
Less: Assets classified
as held for sale 2 - - - - 2
Carrying amount at 31 December
2018 net of held for sale 347 - 2 385 58 792
The carrying value of intangible assets not yet available for
use at 31 December 2019 is GBP170m (2018: GBP191m). This primarily
relates to the implementation of strategic software assets across
the Group, reported within internally generated software.
Amortisation
Amortisation expense of GBP72m (2018: GBP75m) has been charged
to underwriting and policy acquisition costs with the remainder
recognised in other operating expenses.
The Group continues to invest in strategic software assets such
as policy administration and claims management systems. These are
fundamental to the ongoing insurance operations and will remain in
use for a period in excess of seven years. Therefore in 2019 the
useful economic life of strategic software assets was extended from
seven to ten years. This did not have a material impact in the
period.
Impairments
During 2019 the software impairment charge was GBP1m ( 2018 :
GBP2m), which was recognised in underwriting and policy acquisition
costs ( 2018 : GBP2m).
When testing for goodwill impairment, the carrying value of the
Cash Generating Unit (CGU) to which goodwill has been allocated is
compared to the recoverable amount as determined by a value in use
calculation. These calculations use cash flow projections based on
operating plans approved by management covering a three year period
and using the best estimates of future premiums, operating expenses
and taxes using historical trends, general geographical market
conditions, industry trends and forecasts and other available
information as discussed in more detail in the strategic report
section. Cash flows beyond this period are extrapolated using the
estimated growth rates which management deem appropriate for the
CGU. The cash flow forecasts are adjusted by appropriate discount
rates. Where a sales price has been agreed for a CGU, the sales
proceeds less costs to sell are considered the best estimate of the
value in use.
When testing for intangible asset impairment (including those
not available for use), a consistent methodology is applied
although future cash flow projection years are not extrapolated
beyond the asset's useful economic life.
Where the value in use is less than the current carrying value
of the CGU in the statement of financial position, the goodwill or
intangible asset is impaired in order to ensure that the CGU
carrying value is not greater than its future value to the
Group.
Goodwill is allocated to the Group's CGUs, which are contained within
the following operating segments:
2019 2018
GBPm GBPm
Scandinavia (Sweden, Norway, Denmark) 138 148
Canada (Commercial, Johnson, Personal, Travel) 160 157
UK and International (Ireland, Oman) 39 42
Total Goodwill 337 347
In 2018, the goodwill allocated to the Norwegian CGU was
impaired by GBP7m. This was recognised in other operating
expenses.
Also in 2018, goodwill of GBP4m in respect of the UK Noble
Marine entities was impaired prior to its classification as Held
for Sale in order to write down the value of its net assets to fair
value less costs to sell.
The range of pre-tax discount rates used for goodwill and
intangible asset impairment testing, which reflect specific risks
relating to the CGU at the date of evaluation and weighted average
growth rates used in 2019 for the CGUs within each operating
segment are shown below. The growth rates include improvements in
trade performance, where these are forecast in the three year
operational plan for the CGU.
Pre-tax discount Weighted average
rate growth rate
2019 2018 2019 2018
Scandinavia 9%-11% 10% 1%-3% 1%-3%
Canada 11%-12% 12%-13% 3%-4% 3%-4%
UK & International 9% 10%-11% 0%-3% 1%
12) Financial assets
The following tables analyse the Group's financial assets by classification
as at 31 December 2019 and 31 December 2018.
As at 31 December 2019
At fair
value through
profit and Available Loans and
loss (FVTPL) for sale receivables Total
GBPm GBPm GBPm GBPm
Equity securities - 673 - 673
Debt securities 15 10,396 - 10,411
Financial assets measured
at fair value 15 11,069 - 11,084
Loans and receivables - - 338 338
Total financial assets 15 11,069 338 11,422
As at 31 December 2018
At fair
value through
profit and Available Loans and
loss (FVTPL) for sale receivables Total
GBPm GBPm GBPm GBPm
Equity securities - 739 - 739
Debt securities 19 10,451 - 10,470
Financial assets measured
at fair value 19 11,190 - 11,209
Loans and receivables - - 249 249
Total financial assets 19 11,190 249 11,458
The following table analyses the cost/amortised cost, gross unrealised
gains and losses, and fair value of financial assets.
2019 2018
Unrealised
Cost/amortised Unrealised losses
cost gains and impairments Fair value Fair value
GBPm GBPm GBPm GBPm GBPm
Equity securities 679 60 (66) 673 739
Debt securities 10,144 383 (116) 10,411 10,470
Financial assets measured
at fair value 10,823 443 (182) 11,084 11,209
Loans and receivables 338 - - 338 249
Total financial assets 11,161 443 (182) 11,422 11,458
Collateral
At 31 December 2019, the Group had pledged GBP557m (2018:
GBP550m) of financial assets as collateral for liabilities or
contingent liabilities, consisting of government debt securities of
GBP533m (2018: GBP475m) and cash and cash equivalents of GBP24m
(2018: GBP75m). The assets pledged are included in the balance
sheet as follows; available for sale debt securities of GBP533m
(2018: GBP475m) and other assets of GBP24m (2018: GBP75m). The
terms and conditions of the collateral pledged are market standard
in relation to letter of credit facilities and derivative
transactions.
At 31 December 2019, the Group has accepted GBP429m (2018:
GBP313m) in collateral, consisting of debt securities of GBP405m
(2018: GBP292m), which the Group is permitted to sell or repledge
in the event of default by the owner, and cash and cash equivalents
of GBP24m (2018: GBP21m) which is included in the balance sheet.
The fair value of the collateral accepted is GBP429m (2018:
GBP313m). The terms and conditions of the collateral held are
market standard. The assets held as collateral are readily
convertible into cash.
Derivative financial instruments
The following table presents the fair value and notional amount of
derivatives by term to maturity and nature of risk.
As at 31 December 2019
Notional Amount Fair Value
Less than From 1 Over 5
1 year to 5 years years Total Asset Liability
GBPm GBPm GBPm GBPm GBPm GBPm
Designated as hedging
instruments
Currency risk (net investment
in foreign operation) 1,058 - - 1,058 31 3
Currency risk (cash flow) 4 6 - 10 1 -
Cross currency interest
swaps (fair value/cash
flow) - 49 155 204 - 27
Total 32 30
At FVTPL
Currency risk mitigation 400 - - 400 7 1
Inflation risk mitigation - 60 257 317 59 64
Total 66 65
Total derivatives 98 95
As at 31 December 2018
Notional Amount Fair Value
Less than From 1 Over 5
1 year to 5 years years Total Asset Liability
GBPm GBPm GBPm GBPm GBPm GBPm
Designated as hedging
instruments
Currency risk (net investment
in foreign operation) 1,064 - - 1,064 18 11
Currency risk (cash flow) 4 11 - 15 1 -
Cross currency interest
swaps (fair value/cash
flow) 155 48 171 374 3 57
Total 22 68
At FVTPL
Currency risk mitigation 355 - - 355 1 3
Inflation risk mitigation - 60 271 331 44 39
Total 45 42
Total derivatives 67 110
The use of derivatives can result in accounting mismatches when
gains and losses arising on the derivatives are presented in the
income statement and corresponding losses and gains on the risks
being mitigated are not included in the income statement. In such
circumstances the Group may apply hedge accounting in accordance
with IFRS and the Group accounting policy on hedging.
The Group applies hedge accounting to derivatives acquired to
reduce foreign exchange risk in its net investment in certain major
overseas subsidiaries. There was no ineffectiveness recognised in
the income statement in respect of these hedges during 2019 or
2018.
The Group also applies hedge accounting to specified fixed
interest assets in its investment portfolio. In order to remove
exchange risk from these assets the Group may also acquire cross
currency interest rate swaps to swap the cash flows from the
portfolio into cash flows denominated in pounds sterling or the
functional currency of the entity acquiring the asset. The Group
applies fair value hedge accounting when using 'fixed to floating'
interest rate swaps and cash flow hedge accounting when using
'fixed to fixed' interest rate swaps. The interest rate swaps
exactly offset the timing and amounts expected to be received on
the underlying investments. The investments have a remaining term
of between 1 and 36 years, with the substantial majority having a
term of less than 10 years. There have been no defaults and no
defaults are expected on the hedged investments. The Group also
applies cash flow hedge accounting to certain foreign currency
operating expense contracts in order to reduce foreign exchange
risk on these contracts.
The total losses on cash flow hedge instruments during 2019 were
GBP2m (2018: GBPnil) in the consolidated statement of other
comprehensive income, and the amount reclassified to the income
statement was a gain of GBP1m (2018: GBP1m). There was no
ineffectiveness recognised in the income statement in respect of
these hedges during 2019 or 2018.
The total losses on the fair value hedge instruments recognised
in the income statement were GBP 52m (2018: GBP44m) and the
offsetting gains related to the hedged risk were GBP 45m (2018:
GBP45m).
The Group enters into derivative transactions under
International Swaps and Derivatives Association (ISDA) master
netting arrangements. In general, under such agreements the amounts
owed by each counterparty on a single day in respect of all
transactions outstanding in the same currency are aggregated into a
single net amount that is payable by one counterparty to the other.
In certain circumstances, such as a credit default, all outstanding
transactions under the agreement are terminated, the termination
value is assessed and only a single net amount is payable in
settlement of all transactions.
The ISDA agreements do not meet the criteria for offsetting in
the statement of financial position. This is because the Group does
not have any current legally enforceable right to offset recognised
amounts, because the right to offset is enforceable only on the
occurrence of future events. The tables below provide information
on the impact of the netting arrangements.
In addition, during 2019, the Group took out borrowings from
credit institutions under repurchase agreements of GBP 146 m ( 2018
: GBP107m). The Group continues to recognise debt securities in the
statement of financial position as the Group remains exposed to the
risks and rewards of ownership.
As at 31 December 2019
Amounts subject to enforceable netting arrangements
Effect of offsetting in Related items not offset
statement of financial
position
Amounts Net amounts Financial Financial
Gross amounts offset reported instruments collateral Net amount
GBPm GBPm GBPm GBPm GBPm GBPm
Derivative financial
assets 98 - 98 (76) (18) 4
Cash received under
repurchase arrangements 146 - 146 (146) - -
Total assets 244 - 244 (222) (18) 4
Derivative financial
liabilities 95 - 95 (76) (19) -
Repurchase arrangements
and other similar secured
borrowing 146 - 146 (146) - -
Total liabilities 241 - 241 (222) (19) -
As at 31 December 2018
Amounts subject to enforceable netting arrangements
Effect of offsetting in Related items not offset
statement of financial
position
Amounts Net amounts Financial Financial
Gross amounts offset reported instruments collateral Net amount
GBPm GBPm GBPm GBPm GBPm GBPm
Derivative financial
assets 67 - 67 (49) (15) 3
Cash received under
repurchase arrangements 107 - 107 (107) - -
Total assets 174 - 174 (156) (15) 3
Derivative financial
liabilities 110 - 110 (49) (61) -
Repurchase arrangements
and other similar secured
borrowing 107 - 107 (107) - -
Total liabilities 217 - 217 (156) (61) -
IFRS 9 'Financial Instruments'
The Group qualifies for temporary exemption from applying IFRS 9
'Financial Instruments' on the grounds that it has not previously
applied any version of IFRS 9 and its activities are predominantly
connected with insurance, with the carrying amount of its
liabilities within the scope of IFRS 4 and debt instruments
included within regulatory capital being greater than 90% of the
total carrying amount of all its liabilities at 31 December 2015
and with no subsequent change in its activities.
The fair value at 31 December 2019 and change during the year of
financial assets that are held to collect cash flows on specified
dates that are solely for payment of principle and interest (SPPI)
and are not held for trading as defined under IFRS 9, nor are
managed or evaluated on a fair value basis, is set out below,
together with the same information for other financial assets:
As at 31 December 2019
SPPI financial Other financial
assets assets Total
GBPm GBPm GBPm
Available for sale equity securities - 673 673
Available for sale debt securities 10,073 323 10,396
Debt securities at FVTPL - 15 15
Loans and receivables 338 - 338
Derivative assets held for trading - 66 66
Fair value at 31 December 2019 10,411 1,077 11,488
As at 31 December 2018
SPPI financial Other financial
assets assets Total
GBPm GBPm GBPm
Available for sale equity securities - 739 739
Available for sale debt securities 10,266 185 10,451
Debt securities at FVTPL - 19 19
Loans and receivables 249 - 249
Derivative assets held for trading - 45 45
Fair value at 31 December 2018 10,515 988 11,503
The fair value gains of SPPI financial assets and other
financial assets during the year are GBP114m (2018: GBP123m losses)
and GBP31m (2018: GBP35m losses) respectively.
Information on credit ratings relating to SPPI debt securities
can be found in note 4.
When IFRS 9 is adopted by the Group (currently expected to be
2022) an expected credit loss provision will be recognised
replacing the incurred credit loss provision under IAS 39, the
impact of which will be determined by the financial instruments
held at that time.
Companies within the Group that are applying IFRS 9 and disclose
relevant information in their own published financial statements in
addition to that already included in these consolidated financial
statements are indicated in Appendix B.
13) Fair value measurement
Fair value is used to value a number of assets within the
statement of financial position and represents their market value
at the reporting date.
Cash and cash equivalents, loans and receivables, other assets
and other liabilities
For cash and cash equivalents, loans and receivables, commercial
paper, other assets, liabilities and accruals, their carrying
amounts are considered to be as approximate fair values.
Group occupied property and investment property
Group occupied properties are valued annually on a vacant
possession basis using third party valuers. Investment properties
are valued, at least annually, at their highest and best use.
The fair value of property has been determined by external,
independent valuers, having appropriate recognised professional
qualifications and recent experience in the location and category
of the property being valued.
The valuations of buildings with vacant possession are based on
the comparative method of valuation with reference to sales of
other vacant buildings. Fair value is then determined based on the
locational qualities and physical building characteristics
(principally condition, size, specification and layout) as
appropriate.
Investment properties are valued using discounted cash flow
models which take into account the net present value of cash flows
to be generated from the properties. The cash flow streams reflect
the current rent (the gross rent) payable to lease expiry, at which
point it is assumed that each unit will be re-let at its estimated
rental value. Allowances have been made for voids and rent free
periods where applicable. The appropriate rent to be capitalised is
selected on the basis of the location of the building, its quality,
tenant credit quality and lease terms amongst other factors. The
discount rate is determined by independent valuers who take into
account a number of factors including transactions that have taken
place recently of similar properties as well as other factors
mentioned above such as the location of the building, its quality,
tenant credit quality and lease terms amongst other factors.
These cash flows are discounted at an appropriate rate of
interest to determine their present value.
In both cases the estimated fair value would increase/(decrease)
if:
-- The estimated rental value is higher/(lower);
-- Void periods were shorter/(longer);
-- The occupancy rates were higher/(lower);
-- Rent free periods were shorter/(longer);
-- The discount rates were lower/(higher).
Derivative financial instruments
Derivative financial instruments are financial contracts whose
fair value is determined on a market basis by reference to
underlying interest rate, foreign exchange rate, equity or
commodity instrument or indices.
Issued debt
The fair value measurement of the Group's issued debt
instruments, with the exception of the subordinated guaranteed US$
bonds, are based on pricing obtained from a range of financial
intermediaries who base their valuations on recent transactions of
the Group's issued debt instruments and other observable market
inputs such as applicable risk free rate and appropriate credit
risk spreads.
The fair value measurement of the subordinated guaranteed US$
bonds is also obtained from an indicative valuation based on the
applicable risk free rate and appropriate credit risk spread.
Fair value hierarchy
Fair value for all assets and liabilities which are either
measured or disclosed is determined based on available information
and categorised according to a three-level fair value hierarchy as
detailed below:
-- Level 1 fair value measurements are those derived from quoted
prices (unadjusted) in active markets for identical assets or
liabilities;
-- Level 2 fair value measurements are those derived from data
other than quoted prices included within level 1 that are
observable for the asset or liability, either directly (i.e. as
prices) or indirectly (i.e. derived from prices);
-- Level 3 fair value measurements are those derived from
valuation techniques that include significant inputs for the asset
or liability valuation that are not based on observable market data
(unobservable inputs).
A financial instrument is regarded as quoted in an active market
(level 1) if quoted prices for that financial instrument are
readily and regularly available from an exchange, dealer, broker,
industry group, pricing service or regulatory agency and those
prices represent actual and regularly occurring market transactions
on an arm's length basis.
For level 1 and level 2 investments, the Group uses prices
received from external providers who calculate these prices from
quotes available at the reporting date for the particular
investment being valued. For investments that are actively traded
the Group determines whether the prices meet the criteria for
classification as a level 1 valuation. The price provided is
classified as a level 1 valuation when it represents the price at
which the investment traded at the reporting date taking into
account the frequency and volume of trading of the individual
investment together with the spread of prices that are quoted at
the reporting date for such trades. Typically investments in
frequently traded government debt would meet the criteria for
classification in the level 1 category. Where the prices provided
do not meet the criteria for classification in the level 1
category, the prices are classified in the level 2 category.
In certain circumstances, the Group does not receive pricing
information from an external provider for its financial
investments. In such circumstances the Group calculates fair value
which may use input parameters that are not based on observable
market data. Unobservable inputs are based on assumptions that are
neither supported by prices from observable current market
transactions for the same instrument nor based on available market
data. In these cases, judgement is required to establish fair
values. Valuations that require the significant use of unobservable
data are classified as level 3 valuations and inputs are generally
determined via reference to observable inputs, historical
observations or using other analytical techniques. In addition, the
valuations used for investment properties and for Group occupied
properties are classified in the level 3 category.
The following table provides an analysis of financial
instruments and other items that are measured subsequent to initial
recognition at fair value as well as financial liabilities not
measured at fair value, grouped into levels 1 to 3. The table does
not include financial assets and liabilities not measured at fair
value if the carrying value is a reasonable approximation of fair
value.
Fair value hierarchy
2019
Level Level Level
1 2 3 Total
GBPm GBPm GBPm GBPm
Group occupied property - land and buildings - - 19 19
Investment properties - - 300 300
Available for sale financial assets:
Equity securities 394 - 279 673
Debt securities 3,725 6,296 375 10,396
Financial assets at FVTPL:
Debt securities - - 15 15
4,119 6,296 988 11,403
Derivative assets:
At FVTPL - 66 - 66
Designated as hedging instruments - 32 - 32
Total assets measured at fair value 4,119 6,394 988 11,501
Derivative liabilities:
At FVTPL - 65 - 65
Designated as hedging instruments - 30 - 30
Total liabilities measured at fair value - 95 - 95
Issued debt - 814 - 814
Total value of liabilities not measured at
fair value - 814 - 814
Fair value hierarchy
2018
Level Level Level
1 2 3 Total
GBPm GBPm GBPm GBPm
Group occupied property - land and buildings - - 19 19
Investment properties - - 310 310
Available for sale financial assets:
Equity securities 384 - 355 739
Debt securities 3,798 6,243 410 10,451
Financial assets at FVTPL:
Debt securities - - 19 19
4,182 6,243 1,113 11,538
Derivative assets:
At FVTPL - 45 - 45
Designated as hedging instruments - 22 - 22
Total assets measured at fair value 4,182 6,310 1,113 11,605
Derivative liabilities:
At FVTPL - 42 - 42
Designated as hedging instruments - 68 - 68
Total liabilities measured at fair value - 110 - 110
Issued debt - 460 - 460
Total value of liabilities not measured at
fair value - 460 - 460
The movement in the fair value measurements of level 3 financial assets
is shown in the table below:
Available for Investments at
sale investments FVTPL
Equity Equity
securities Debt securities securities Debt securities Total
GBPm GBPm GBPm GBPm GBPm
At 1 January 2018 350 327 - 18 695
Total gains recognised in:
Income statement 2 - - - 2
Other comprehensive income 1 11 - - 12
Purchases 152 90 - 1 243
Disposals (151) (18) - - (169)
Exchange adjustment 1 - - - 1
At 1 January 2019 355 410 - 19 784
Total gains/(losses) recognised
in:
Income statement 3 3 - (6) -
Other comprehensive income (6) (11) - - (17)
Purchases 35 134 - 2 171
Disposals (96) (157) - - (253)
Exchange adjustment (12) (4) - - (16)
Level 3 financial assets at 31
December 2019 279 375 - 15 669
Unrealised losses of GBP6m (2018: GBPnil) attributable to FVTPL debt
securities recognised in the consolidated income statement relate
to those still held at the end of the year.
The following table shows the level 3 available for sale
financial assets, investment properties and group occupied property
carried at fair value as at the balance sheet date, the main
assumptions used in the valuation of these instruments and
reasonably possible decreases in fair value based on reasonably
possible alternative assumptions.
Reasonably possible alternative
assumptions
2019 2018
Current Decrease Current Decrease
fair in fair fair in fair
value value value value
Available for sale financial Main assumptions GBPm GBPm GBPm GBPm
assets and property
Group occupied property -
land and buildings(1) Property valuation 19 (3) 19 (3)
Cash flows; discount
Investment properties(1) rate 300 (48) 310 (51)
Level 3 available for sale
financial assets:
Cash flows; discount
Equity securities(2) rate 279 (9) 355 (10)
Cash flows; discount
Debt securities(2) rate 375 (11) 410 (10)
Total 973 (71) 1,094 (74)
(1) The Group's property portfolio (including the Group occupied
properties) is almost exclusively located in the UK. Reasonably
possible alternative valuations have been determined using an
increase of 100bps in the discount rate used in the valuation.
(2) The Groups investment in financial assets classified at
level 3 in the hierarchy are primarily investments in various
private fund structures investing in debt instruments where the
valuation includes estimates of the credit spreads on the
underlying holdings. The estimates of the credit spread are based
upon market observable credit spreads for what are considered to be
assets with similar credit risk. Reasonably possible alternative
valuations have been determined using an increase of 100bps in the
credit spread used in the valuation.
14) Reinsurers' share of insurance contract liabilities
2019 2018
GBPm GBPm
Reinsurers' share of provisions for unearned premiums 746 739
Reinsurers' share of provisions for losses and loss adjustment
expenses 1,580 1,532
Total reinsurers' share of insurance contract liabilities
net of held for sale 2,326 2,271
To be settled within 12 months 902 964
To be settled after 12 months 1,424 1,307
The following changes have occurred in the reinsurers' share of provision
for unearned premiums during the year:
2019 2018
GBPm GBPm
Reinsurers' share of provision for unearned premiums at
1 January 739 729
Premiums ceded to reinsurers 1,044 997
Reinsurers' share of premiums earned (1,033) (991)
Changes in reinsurance asset 11 6
Exchange adjustment (4) 4
Total reinsurers' share of provision for unearned premiums
at 31 December 746 739
The following changes have occurred in the reinsurers' share of provision
for losses and loss adjustment expenses during the year:
2019 2018
GBPm GBPm
Reinsurers' share of provisions for losses and loss adjustment
expenses at 1 January 2,136 2,159
Reinsurers' share of total claims incurred 727 543
Total reinsurance recoveries received (705) (619)
Disposal of UK Legacy (572) -
Exchange adjustment (22) 23
Other movements 16 30
Reinsurers' share of provisions for losses and loss adjustment
expenses at 31 December 1,580 2,136
Less: Assets classified as held for sale - 604
Total reinsurers' share of provisions for losses and loss
adjustment expenses at 31 December net of held for sale 1,580 1,532
15) Current and deferred tax
Current tax
Asset Liability
2019 2018 2019 2018
GBPm GBPm GBPm GBPm
To be settled within 12 months 14 43 13 6
To be settled after 12 months 4 28 4 8
Current tax position at 31 December 18 71 17 14
Deferred tax
Asset Liability
2019 2018 2019 2018
GBPm GBPm GBPm GBPm
Deferred tax position at 31 December 209 234 84 79
Of the GBP209m (2018: GBP234m) deferred tax asset recognised by
the Group, GBP193m (2018: GBP204m) relates to tax jurisdictions in
which the Group has suffered a tax loss in either the current or
preceding period; GBP180m (2018: GBP189m) of which relates to the
UK. The UK deferred tax asset has reduced by GBP9m due to a
reduction in the forecast profits, with the net impact mainly due
to lower investment income forecasts.
Deferred tax assets have been recognised on the basis that
management consider it probable that future taxable profits will be
available against which these deferred tax assets can be utilised.
Key assumptions in the forecast are subject to sensitivity testing
which, together with additional modelling and analysis, support
management's judgement that the carrying value of deferred tax
assets continues to be supportable.
The majority of the deferred tax asset recognised based on
future profits is that in respect of the UK. The evidence for the
future taxable profits is a seven-year forecast based on the three
year operational plans prepared by the relevant businesses and a
further four years of extrapolation, which are subject to internal
review and challenge, including by the Board. The four years of
extrapolation assumes premium growth of 4% per annum and includes
combined operating ratio improvements for specific lines of
business where this is expected based on longer range projections.
The value of the deferred tax asset is sensitive to assumptions in
respect of forecast profits. The impact of downward movements in
key assumptions on the value of the UK deferred tax asset is
summarised below:
2019 2018
GBPm GBPm
1% increase in combined operating ratio
across all 7 years (15) (17)
1 year reduction in the forecast modelling
period (23) (23)
50 basis points decrease in bond yields (7) (6)
1% decrease in annual premium growth (1) (1)
The relationship between the UK deferred tax asset and these
sensitivities is not always linear. Therefore, the cumulative
impact on the deferred tax asset of combined sensitivities or
longer extrapolations based on the above numbers will be indicative
only.
The following table summarises the main categories of deferred tax
assets/(liabilities) recognised by the Group:
2019 2018
GBPm GBPm
Net unrealised gains on investments (52) (34)
Intangibles capitalised (25) (25)
Deferred acquisition costs (6) (8)
Tax losses and unused tax credits 85 80
Accrued costs deductible when settled 87 87
Net insurance contract liabilities (15) (15)
Retirement benefit obligations 17 20
Capital allowances 35 51
Provisions and other temporary differences (1) (1)
Net deferred tax asset at 31 December 125 155
The movement in the net deferred tax assets recognised by the continuing
Group was as follows:
2019 2018
GBPm GBPm
Net deferred tax asset at 1 January 155 220
Amounts charged to income statement (20) (15)
Amounts charged to other comprehensive income (16) (46)
Net arising on acquisition of subsidiaries and other
transfers - (5)
Exchange adjustments 5 (1)
Effect of change in tax rates - income statement 1 1
- other comprehensive income - 1
Net deferred tax asset at 31 December 125 155
At the end of the reporting period, the Group had the following unrecognised
tax assets/(liabilities):
2019 2018
Gross Gross
amount Tax effect amount Tax effect
GBPm GBPm GBPm GBPm
Trading tax losses 1,335 225 1,313 227
Capital tax losses 1,314 225 1,195 205
Deductible temporary differences 169 29 196 33
Unremitted retained earnings (505) (25) (501) (25)
Unrecognised tax assets/(liabilities)
as at 31 December 2,313 454 2,203 440
The Group's unrecognised trading losses are predominantly
located in the UK and Ireland and represent losses which are not
expected to be utilised within the forecast profit period.
Unrecognised capital losses mainly relate to the UK and have not
been recognised as it is not considered probable that they will be
utilised in the future as most UK capital gains are exempt from
tax. None of the Group's unrecognised tax losses are subject to
expiry.
Unremitted retained earnings relate to the Group's subsidiaries
in Canada. The Group can control the remittance of earnings to the
UK and there is no intention to remit the retained earnings in the
foreseeable future if the remittance would trigger a material
incremental tax liability. As such the Group has not recognised any
deferred tax in respect of the potential taxes on the temporary
differences arising on unremitted earnings of continuing overseas
subsidiaries.
16) Cash and cash equivalents
2019 2018
GBPm GBPm
Cash and cash equivalents, and bank overdrafts (consolidated
statement of cash flows) 886 781
Add: Overdrafts reported in other borrowings 23 12
Total cash and cash equivalents 909 793
Less: Assets classified as held for sale - 5
Total cash and cash equivalents (consolidated statement
of financial position) 909 788
17) Share capital
The issued share capital of the Parent Company is fully paid and
consists of two classes; Ordinary Shares with a nominal value of
GBP1 each and Preference Shares with a nominal value of GBP1 each.
The issued share capital at 31 December 2019 is:
2019 2018
GBPm GBPm
Issued and fully paid
1,031,645,294 Ordinary Shares of GBP1 each (2018: 1,026,937,928
Ordinary Shares of GBP1 each) 1,032 1,027
125,000,000 Preference Shares of GBP1 each (2018: 125,000,000
Preference Shares of GBP1 each) 125 125
1,157 1,152
During 2019, the Company issued a total of 4,707,366 new
Ordinary Shares of GBP1 each ranking pari passu with Ordinary
Shares in issue (2018: 4,102,889 new Ordinary Shares of GBP1 each)
, on the exercise of employee share options and in respect of
employee share awards. The number of Ordinary Shares in issue,
their nominal value and the associated share premiums are as
follows:
Nominal Share
value premium
Number of
shares GBPm GBPm
At 1 January 2018 1,022,835,039 1,023 1,083
Issued in respect of employee share options
and employee share awards 4,102,889 4 4
At 1 January 2019 1,026,937,928 1,027 1,087
Issued in respect of employee share options
and employee share awards 4,707,366 5 3
At 31 December 2019 1,031,645,294 1,032 1,090
Rights attaching to the shares
The rights attaching to each class of share may be varied with
the consent of the holders of 75% of the issued shares of that
class.
Ordinary Shares of GBP1 each
Each member holding an Ordinary Share shall be entitled to vote
on all matters at a general meeting of the Company, be entitled to
receive dividend payments declared in accordance with the Articles
of Association, and have the right to participate in any
distribution of capital of the Company including on a winding up of
the Company.
Preference Shares of GBP1 each
The Preference Shares are not redeemable but the holders of the
Preference Shares have preferential rights over the holders of
Ordinary Shares in respect of dividends and of the return of
capital in the event of the winding up of the Company.
Provided a resolution of the Board exists, holders of Preference
Shares are entitled to a cumulative preferential dividend of 7.375%
per annum, payable out of the profits available for distribution,
to be distributed in half yearly instalments. Preference
shareholders have no further right to participate in the profits of
the Company.
Full information on the rights attaching to shares is in the RSA
Insurance Group plc Articles of Association which are available on
the Group's website.
Employee share schemes
The Share Incentive Plan Trust is used to hold shares purchased
or issued under the company's all-employee Sharebuild plan. This
includes unvested matching shares and unallocated shares which may
subsequently be transferred to employees including Executive
Directors to satisfy Sharebuild Matching Share awards. As at 31
December 2019, 121,750 Ordinary Shares (2018: 123,336 Ordinary
Shares) are held by the Trust. These shares are presented as own
shares. Own shares are deducted from equity. No gain or loss is
recognised on the purchase, sale, issue or cancellation of the own
shares. Any consideration paid or received is recognised directly
in equity.
This Trust also holds shares that are beneficially owned by
participants in the Plan.
The Royal and Sun Alliance ESOP Trust No. 2, an employee benefit
trust, is used as a vehicle to satisfy vested awards under the
long-term incentive plan (Performance Share Plan). New issue shares
are allotted to the trust immediately prior to vesting, and
distributed to PSP participants at vesting. There was no balance of
shares in this Trust as at 1 January 2019 or 31 December 2019.
At 31 December 2019, the total number of options over Ordinary
Shares outstanding under the Group employee share option plans is
4,463,331 (2018: 4,465,067) and the total number of potential
shares outstanding under the long term incentive plan and under the
Sharebuild plan is 9,941,034 Ordinary Shares (2018: 10,897,021
Ordinary Shares).
18) Other equity instruments - Tier 1 notes
On 27 March 2017, the Company issued two floating rate
Restricted Tier 1 (RT1) notes totalling GBP297m in aggregate size
and with a blended coupon of c.4.7%. The notes are as follows:
Swedish Krona 2,500m at 3 month Stibor +525bps (equivalent to
c.4.8% coupon on issue)
Danish Krone 650m at 3 month Cibor +485bps (equivalent to c.4.6%
coupon on issue)
Interest on the notes is due and payable only at the sole and
absolute discretion of the Company, subject to certain additional
restrictions set out in the terms and conditions, and is
non-cumulative. In addition the terms and conditions of the notes
will require the Company to cancel interest payments in certain
circumstances. The notes are redeemable (subject to certain
conditions) at the option of the Company in whole but not in part
on the first call date, being the fifth anniversary of the issue
date, or any interest payment date thereafter or in the event of
certain changes in the tax, regulatory or ratings treatment of the
notes. Any redemption is subject, inter alia, to the Company giving
notice to the relevant regulator and the regulator granting
permission to redeem. The notes convert into ordinary shares of the
Company, at a pre-determined price in the event that certain
solvency capital requirements are breached, or in the event of a
winding up occurring earlier, would be entitled to a return of
capital in preference to ordinary shareholders but behind the
rights of the existing preference shareholders, as more fully set
out in the terms and conditions of the notes. Accordingly, the
notes are treated as a separate category within equity and coupon
payments are recognised as distributions, similar to the treatment
of preference share dividends.
19) Issued debt
Cash movements
2018 Redemption Issue 2019
GBPm GBPm GBPm GBPm
Subordinated guaranteed US$ bonds 6 - - 6
Guaranteed subordinated step-up notes
due 2039 39 (39) - -
Guaranteed subordinated notes due 2045 396 - - 396
Total loan capital 441 (39) - 402
Senior notes due 2024 - - 348 348
Total issued debt 441 (39) 348 750
Loan capital
The subordinated guaranteed US$ bonds were issued in 1999 and
have a nominal value of $9m and a redemption date of 15 October
2029. The rate of interest payable on the bonds is 8.95%.
The dated guaranteed subordinated step-up notes were issued on
20 May 2009 with a redemption date of 20 May 2039 and at a fixed
rate of 9.375%. On 20 May 2019 the Group exercised its right to
call the bonds and accordingly redeemed the outstanding GBP39m
nominal value of these step-up notes.
The dated guaranteed subordinated notes were issued on 10
October 2014 at a fixed rate of 5.125%. The nominal GBP400m bonds
have a redemption date of 10 October 2045. The Group has the right
to repay the notes on specific dates from 10 October 2025. If the
bonds are not repaid on that date, the applicable rate of interest
would be reset at a rate of 3.852% plus the appropriate benchmark
gilt for a further five year period.
The bonds and the notes are contractually subordinated to all
other creditors of the Group such that in the event of a winding up
or of bankruptcy, they are able to be repaid only after the claims
of all other creditors have been met.
The Group has the option to defer interest payments on the bonds
and notes, but has to date not exercised this right.
Senior notes
The nominal GBP350m senior notes were issued on 28 August 2019
for consideration of GBP349m. Interest is payable on the notes at a
fixed rate of 1.625%. The notes have a maturity date of 28 August
2024 and may be redeemed at any time from a period starting 3
months prior to the maturity date.
All issued debt
There have been no defaults on any bonds or notes during the
year.
20) Insurance contract liabilities
Estimation techniques and uncertainties
Provisions for losses and loss adjustment expenses are subject
to a robust reserving process by each of the Group's business units
and at Group Corporate Centre, as detailed in the Risk Management
note (note 4).
There is considerable uncertainty in regard to the eventual
outcome of the claims that have occurred by the end of the
reporting period but remain unsettled. This includes claims that
may have occurred but have not yet been notified to the Group and
those that are not yet apparent to the insured.
The provisions for losses and loss adjustment expenses are
estimated using previous claims experience with similar cases,
historical payment trends, the volume and nature of the insurance
underwritten by the Group and current specific case reserves. Also
considered are developing loss payment trends, the potential longer
term significance of large events, and the levels of unpaid claims,
legislative changes, judicial decisions and economic, political and
regulatory conditions.
The Group uses a number of commonly accepted actuarial
projection methodologies to determine the appropriate provision to
recognise. These include methods based upon the following:
-- The development of previously settled claims, where payments
to date are extrapolated for each prior year;
-- Estimates based upon a projection of claims numbers and average cost;
-- Notified claims development, where notified claims to date
for each year are extrapolated based upon observed development of
earlier years;
-- Expected loss ratios;
-- Bornhuetter-Ferguson method, which combines features of the above methods;
-- Bespoke methods for specialist classes of business, for
example for a Legacy Children's PA product a frequency/severity
model based upon transition matrices between the various stages of
a claim.
In selecting the method and estimate appropriate to any one
class of insurance business, the Group considers the
appropriateness of the methods and bases to the individual
circumstances of the provision class and underwriting year.
Individually large and significant claims are generally assessed
separately, being measured either at the face value of the loss
adjusters' estimates, or projected separately in order to allow for
the future development of large claims.
The level of provision carried by the Group targets the
inclusion of a total margin of 5% for the Group on top of the
actuarial indication outlined above. The appropriateness of the 5%
target is subject to regular review as part of the Group reserving
process at Group Corporate Centre.
Sensitivities
Sensitivities in the table below show the impact on the
pre-taxation result considering an increase in loss ratio of 5%,
and an increase in expenses of 10%.
2019 2018
Impact on pre-taxation result GBPm GBPm
Net loss ratio 5% (323) (327)
Expenses 10% (135) (136)
Discount assumptions
The total value of provisions for losses and loss adjustment
expenses less related reinsurance recoveries before discounting is
GBP8,081m (2018: GBP8,494m).
Claims on certain classes of business have been discounted as follows:
Average number
of years to settlement
from reporting
Discount rate date
2019 2018 2019 2018
Category % % Years Years
UK Asbestos and environmental 4.0 4.0 8 8
UK Periodic Payment Orders 4.0 4.0 19 20
Scandinavia Disability 1.2 1.3 6 6
Scandinavia Annuities 2.4 2.6 14 15
Canada Excess casualty 3.5 3.5 7 7
The impact of the reduction in the discount rate on long-term
insurance liabilities in Denmark (GBP15m) has been recognised in
unwind of discount and change in economic assumptions in the
consolidated income statement.
In determining the average number of years to ultimate claims
settlement, estimates have been made based on the underlying claims
settlement patterns.
As at 31 December 2019, the value of the discount on net claims
liability reserves is GBP69m (2018: GBP92m) excluding held for
sale, annuities and periodic payment orders. All other factors
remaining constant, a decrease of 0.5% in the discount rates would
reduce the value of the discount by approximately GBP20m (2018:
GBP30m).
As at 31 December 2019, the value of the discount on UK and
Scandinavia annuities is GBP451m (2018: 466m). A decrease of 0.5%
in the real discount rate would reduce the value of the discount by
approximately GBP50m (2018: GBP50m). The sensitivity calculation
has taken into consideration the undiscounted provisions for each
class of business and the respective average settlement period.
Gross insurance contract liabilities and the reinsurers' share
of insurance contract liabilities
The gross insurance contract liabilities and the reinsurers'
(RI) share of insurance contract liabilities presented in the
consolidated statement of financial position comprise the
following:
Gross RI Net
2019 2019 2019
GBPm GBPm GBPm
Provision for unearned premiums 3,166 (746) 2,420
Provision for losses and loss adjustment expenses 9,141 (1,580) 7,561
Total insurance contract liabilities 12,307 (2,326) 9,981
Gross RI Net
2018 2018 2018
GBPm GBPm GBPm
Provision for unearned premiums 3,244 (739) 2,505
Provision for losses and loss adjustment expenses 10,072 (2,136) 7,936
Total insurance contract liabilities 13,316 (2,875) 10,441
Less: Held for sale provisions for losses and loss
adjustment expenses 604 (604) -
Provision for unearned premiums at 31 December net
of held for sale 3,244 (739) 2,505
Provision for losses and loss adjustment expenses
at 31 December net of held for sale 9,468 (1,532) 7,936
Total insurance contract liabilities excluding held
for sale 12,712 (2,271) 10,441
Provision for unearned premiums, gross of acquisition costs
2019 2018
GBPm GBPm
Provision for unearned premiums (gross of acquisition
costs) at 1 January 3,919 3,986
Premiums written 7,461 7,467
Less: Premiums earned (7,495) (7,528)
Changes in provision for unearned premiums (34) (61)
Exchange adjustment (73) (6)
Provision for unearned premiums (gross of acquisition
costs) at 31 December 3,812 3,919
The provision for unearned premiums is shown net of deferred
acquisition costs of GBP646m (2018: GBP675m). Movements in deferred
acquisition costs during the year are as follows:
2019 2018
GBPm GBPm
Deferred acquisition costs at 1 January 675 670
Acquisition costs deferred during the year 1,058 1,035
Amortisation charged during the year (1,085) (1,028)
Exchange losses (2) (2)
Deferred acquisition costs at 31 December 646 675
The reinsurers' share of deferred acquisition costs is included within
accruals and deferred income.
Provisions for losses and loss adjustment expenses
The following changes have occurred in the provisions for losses and
loss adjustment expenses during the year:
2019 2018
GBPm GBPm
Provisions for losses and loss adjustment expenses at
1 January 10,072 10,113
Gross claims incurred and loss adjustment expenses 5,059 5,023
Total claims payments made in the year net of salvage
and other recoveries (5,196) (5,123)
Disposal of UK Legacy (572) -
Exchange adjustment (283) (5)
Other movements 61 64
Provisions for losses and loss adjustment expenses at
31 December 9,141 10,072
Less: Liabilities classified as held for sale - 604
Provisions for losses and loss adjustment expenses at
31 December net of held for sale 9,141 9,468
Claims development tables
The tables on the following pages present changes in the
historical provisions for losses and loss adjustment expenses that
were established in 2009 and prior, and the provisions for losses
and loss adjustment expenses arising in each subsequent accident
year. The tables are presented at current year average exchange
rates on an undiscounted basis and have been adjusted for
operations that have been disposed of.
The top triangle of the tables presents the estimated provisions
for ultimate incurred losses and loss adjustment expenses for each
accident year as at the end of each reporting period.
The lower triangle of the tables presents the amounts paid
against those provisions in each subsequent accounting period.
The estimated provisions for ultimate incurred losses change as
more information becomes known about the actual losses for which
the initial provisions were set up and as the rates of exchange
change.
Consolidated claims development table gross of reinsurance
2009
and
prior 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Estimate of cumulative claims
At end of accident
year 8,718 2,794 2,983 2,838 3,147 2,821 2,917 2,821 2,988 3,264 3,162
One year later 8,403 2,920 3,039 2,878 3,202 2,925 2,958 2,860 3,028 3,326
Two years later 8,053 2,865 3,067 2,848 3,124 2,837 2,948 2,782 3,035
Three years later 7,770 2,896 2,992 2,839 3,076 2,822 2,871 2,787
Four years later 7,681 2,883 2,924 2,791 3,077 2,768 2,886
Five years later 7,606 2,846 2,891 2,805 3,037 2,755
Six years later 7,714 2,807 2,887 2,780 3,025
Seven years later 7,897 2,793 2,850 2,771
Eight years later 7,766 2,778 2,855
Nine years later 7,697 2,782
Ten years later 7,696
2019 movement 1 (4) (5) 9 12 13 (15) (5) (7) (62) (63)
Claims paid
One year later 2,543 1,524 1,372 1,346 1,477 1,334 1,475 1,417 1,474 1,566
Two years later 1,268 415 514 501 556 424 547 504 615
Three years later 883 284 332 288 270 288 288 271
Four years later 753 215 194 187 206 270 179
Five years later 521 113 108 144 124 188
Six years later 259 59 77 66 69
Seven years later 216 53 49 51
Eight years later 272 15 25
Nine years later 93 27
Ten years later 163
Cumulative claims
paid 6,971 2,705 2,671 2,583 2,702 2,504 2,489 2,192 2,089 1,566
Reconciliation to the statement of financial position
Current year provision
before discounting 725 77 184 188 323 251 397 595 946 1,760 3,162 8,608
Exchange adjustment
to closing rates (161)
Discounting (80)
Annuities 774
Present value recognised
in the consolidated statement
of financial position 9,141
Consolidated claims development table net of reinsurance
2009
and
prior 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Estimate of cumulative claims
At end of accident
year 7,521 2,449 2,517 2,580 2,824 2,482 2,440 2,242 2,278 2,440 2,229
One year later 7,202 2,532 2,492 2,599 2,922 2,512 2,377 2,292 2,397 2,446
Two years later 6,866 2,494 2,471 2,578 2,848 2,468 2,336 2,247 2,396
Three years later 6,610 2,508 2,424 2,540 2,817 2,421 2,272 2,255
Four years later 6,542 2,515 2,379 2,499 2,779 2,390 2,270
Five years later 6,512 2,483 2,354 2,498 2,756 2,381
Six years later 6,569 2,460 2,340 2,479 2,743
Seven years later 6,857 2,448 2,313 2,470
Eight years later 6,793 2,431 2,311
Nine years later 6,751 2,431
Ten years later 6,743
2019 movement 8 - 2 9 13 9 2 (8) 1 (6) 30
Claims paid
One year later 2,164 1,267 1,080 1,202 1,403 1,159 1,197 1,050 1,177 1,232
Two years later 1,068 370 408 419 430 366 320 373 408
Three years later 776 264 267 244 240 215 214 207
Four years later 666 212 177 192 190 188 154
Five years later 466 98 106 121 119 126
Six years later 212 59 64 63 66
Seven years later 188 49 44 42
Eight years later 249 11 21
Nine years later 86 25
Ten years later 94
Cumulative claims
paid 5,969 2,355 2,167 2,283 2,448 2,054 1,885 1,630 1,585 1,232
Reconciliation to the statement of financial position
Current year provision
before discounting 774 76 144 187 295 327 385 625 811 1,214 2,229 7,067
Exchange adjustment
to closing rates (128)
Discounting (69)
Annuities 691
Present value recognised
in the consolidated statement
of financial position 7,561
Insurance and reinsurance liabilities
2019 2018
GBPm GBPm
Direct insurance creditors 127 120
Reinsurance creditors 843 811
Total insurance and reinsurance liabilities 970 931
Less: Liabilities classified as held for sale - 3
Total 970 928
21) Post-employment benefits and obligations
Defined contribution pension schemes
Costs of GBP65m (2018: GBP70m) were recognised in respect of
defined contribution schemes by the Group.
The Group's Swedish subsidiaries are part of a multi-employer
defined benefit scheme along with other financial institutions in
Sweden. As it is not possible to determine the assets and
liabilities in respect of any one employer under this scheme, it is
included in these accounts as a defined contribution scheme.
Contributions of GBP5m (2018: GBP6m) were paid to this scheme
during 2019 and are included in the costs shown above. The expected
contributions in 2020 are GBP5m. Total estimated contributions to
the scheme from all employers in 2019 were GBP50m. The latest
information regarding the funding of this scheme is taken from the
interim report for the first half of 2019, when the scheme funding
rate was 118% (2018: 122%).
Defined benefit pension schemes and other post-employment benefits
The amounts recognised in the consolidated statement of financial position
are as follows:
2019 2018
UK Other Total UK Other Total
GBPm GBPm GBPm GBPm GBPm GBPm
Present value of funded obligations (8,147) (435) (8,582) (7,474) (401) (7,875)
Present value of unfunded obligations (7) (92) (99) (7) (92) (99)
Fair value of plan assets 8,549 467 9,016 7,841 424 8,265
Other net surplus remeasurements (141) - (141) (129) - (129)
Net IAS19 surplus/(deficits) in the schemes 254 (60) 194 231 (69) 162
Defined benefit pension schemes 254 (15) 239 231 (21) 210
Other post-employment benefits - (45) (45) - (48) (48)
Schemes in surplus 261 29 290 238 21 259
Schemes in deficit (7) (89) (96) (7) (90) (97)
Independent actuaries calculate the value of the defined benefit
obligations for the larger schemes by applying the projected unit
credit method. The future expected cash outflows (calculated based
on assumptions that include inflation and mortality) are discounted
to present value, using a discount rate determined at the end of
each reporting period by reference to current market yields on high
quality corporate bonds ('AA' rated) identified to match the
currency and term structure of the obligations.
The actuarial valuation involves making assumptions about
discount rates, future salary increases, future inflation, the
employees' age upon termination and retirement, mortality rates,
future pension increases, disability incidence and health and
dental care cost trends.
If actual experience differs from the assumptions used, the
expected obligation could increase or decrease in future years. Due
to the complexity of the valuation and its long-term nature, the
defined benefit obligation is highly sensitive to changes in the
assumptions. Assumptions are reviewed at each reporting date. As
such, the IAS 19 valuation of the liability is highly sensitive to
changes in bond rates.
UK Schemes
The major defined benefit pension schemes are located in the UK.
The assets of these schemes are mainly held in separate trustee
administered funds. The UK defined benefit schemes were effectively
closed to new entrants in 2002 and subsequently closed to future
accruals with effect from 31 March 2017. UK schemes in surplus have
been reduced for the 35% tax cost of an authorised return of
surplus, classified as 'Other net surplus remeasurements'. Our
opinion is that the authorised refund tax charge is not an income
tax within the meaning of IAS12 and so the surplus is recognised
net of this tax charge rather than the tax charge being included
within deferred taxation.
The profile of the members of the two main UK schemes at 30 September
2019 (the latest date at which full information is available) is as
follows:
Deferred members - members no longer accruing and not yet receiving
benefits 23,639
Pensioners - members and dependants receiving benefits 18,596
Total members at 30 September 2019 42,235
Accrued benefits are revalued up to retirement in accordance
with Government indices for inflation. A cap of 2.5% per annum
applies to the revaluation of benefits accrued post March 2010 (a
cap of 5% per annum applies for benefits which accrued prior to
this date).
After retirement, pensions in payment are increased each year
based on the increases in the Government indices for inflation. A
cap of 2.5% applies to benefits accrued post 31 December 2005 (a
cap of 5% applied to benefits in excess of Guaranteed Minimum
Pension prior to this date).
The UK schemes are managed through trusts with independent
trustees responsible for safeguarding the interests of all members.
The trustees meet regularly with Group management to discuss the
funding position and any proposed changes to the schemes. The
schemes are regulated by The Pensions Regulator.
The Group is exposed to risks through its obligation to fund the
schemes. These risks include market risk (assets not performing as
well as expected), inflation risk and longevity risk over the lives
of the members. The Group and the trustees of the schemes work
together to reduce these risks through agreement of investment
policy including the use of interest rate, inflation rate and
longevity swaps.
During 2009 the Group entered into an arrangement that provides
coverage against longevity risk for 55% of the retirement
obligations relating to pensions in payment of the two largest UK
schemes at that time (c.35% coverage based on current pensioner
population). The arrangement provides for reimbursement of the
covered pension obligations in return for the contractual return
receivable on a portfolio of assets (made up of quoted Government
debt and swaps) held by the pension funds at the inception of the
arrangement and which have continued to be held by the schemes. The
swaps held are accounted for as a longevity swap, measured at fair
value under IFRS by discounting all expected future cash flows
using a discount rate consistent with the term of the relevant cash
flow. The discount rate used is subject to a degree of judgement,
due to the unique characteristics of the swap, and the rate is
selected to most closely reflect the economic matching nature of
the arrangement within a range of acceptable values obtained from
external sources. The total value of the arrangement, including
Government debt measured at prices quoted in an active market, at
31 December 2019 is GBP1,560m (2018: GBP1,523m). Management do not
believe that there is a significant risk of a material change to
the balance in the consolidated statement of financial position net
of the associated pension liabilities subject to the arrangement
within the next financial year.
Each scheme is subject to triennial valuations, which are used
to determine the future funding of the schemes by the Group
including funding to repair any funding deficit. The funding
valuations, which determine the level of cash contributions payable
into the schemes and which must be agreed between the Trustees and
the Group, are typically based on a prudent assessment of future
experience with the discount rate reflecting a prudent expectation
of returns based on actual investment strategy. This differs from
IAS 19, which requires that future benefit cash flows are projected
on the basis of best-estimate assumptions and discounted in line
with high-quality corporate bond yields. The Trustees' funding
assumptions are updated only every three years, following
completion of the triennial funding valuations. The effective date
of the most recent valuations of the main UK funds is 31 March
2018.
At the most recent funding valuations, the main UK funds had an
aggregate funding deficit of GBP468m, equivalent to a funding level
of 95%. The Group and the Trustees have agreed funding plans to
eliminate the funding deficits by 2026. Details of the deficit
contributions paid in 2019 and that are due to be paid in 2020
under these plans are disclosed below. The funding plans will be
reviewed again following the next triennial valuations which will
have an effective date of 31 March 2021.
For the two main UK defined benefit schemes, the level of
contributions in 2019 was GBP96m (2018: GBP120m) of which GBP86m
(2018: GBP110m) were additional contributions to reduce funding
deficits. Expected contributions to the two schemes for the year
ending 31 December 2020 are approximately GBP83m including GBP75m
of additional contributions to reduce the deficit.
The weighted average duration of the defined benefit obligation
of the two main UK schemes at the end of the reporting period is 17
years (2018: 16.5 years).
Non UK schemes
The Group also operates defined benefits schemes in other
countries. The most significant of these schemes are in Canada and
Ireland.
The Group also provides post-employment healthcare benefits to
certain current and retired Canadian employees. The benefits are
not prefunded. Life insurance benefits, which provide varying
levels of coverage, are provided at no cost to retirees. Healthcare
benefits, which also provide varying levels of coverage, require
retiree contributions in certain instances and benefits are
generally payable for life. Certain healthcare benefits have been
discontinued for active employees retiring after 1 November 2021,
resulting in a GBP14m plan curtailment gain.
All schemes
The estimated discounted present values of the accumulated
obligations are calculated in accordance with the advice of
independent, qualified actuaries.
Movement during the year:
2019
Present Fair value Other net
value of plan surplus Net surplus
of obligations assets remeasurements / (deficit)
GBPm GBPm GBPm GBPm
At 1 January (7,974) 8,265 (129) 162
Current service costs (5) - - (5)
Past service costs (1) - - (1)
Interest (expense) / income (225) 235 - 10
Administration costs - (6) - (6)
Gains on settlements/curtailments 14 - - 14
Total (expenses) / income recognised
in income statement (217) 229 - 12
Return on scheme assets less amounts
in interest income - 775 - 775
Effect of changes in financial assumptions (888) - - (888)
Effect of changes in demographic assumptions 32 - - 32
Experience gains and losses 18 - - 18
Investment expenses - (8) - (8)
Other net surplus remeasurements - - (12) (12)
Remeasurements recognised in other
comprehensive income (838) 767 (12) (83)
Employer contribution - 107 - 107
Benefit payments 352 (352) - -
Exchange adjustment (4) - - (4)
At 31 December (8,681) 9,016 (141) 194
Deferred tax 17
IAS 19 net surplus net of deferred
tax 211
2018
Present Fair value Other net
value of plan surplus Net surplus
of obligations assets remeasurements / (deficit)
GBPm GBPm GBPm GBPm
At 1 January (8,878) 8,799 (62) (141)
Current service costs (6) - - (6)
Past service costs (1) - - (1)
Interest (expense) / income (218) 217 - (1)
Administration costs - (7) - (7)
Gains on settlements/curtailments 2 - - 2
Total (expenses) / income recognised
in income statement (223) 210 - (13)
Return on scheme assets less amounts
in interest income - (409) - (409)
Effect of changes in financial assumptions 515 - - 515
Effect of changes in demographic assumptions 119 - - 119
Experience gains and losses 25 - - 25
Investment expenses - (6) - (6)
Other net surplus remeasurements - - (67) (67)
Remeasurements recognised in other
comprehensive income 659 (415) (67) 177
Employer contribution - 137 - 137
Benefit payments 458 (458) - -
Exchange adjustment 10 (8) - 2
At 31 December (7,974) 8,265 (129) 162
Deferred tax 20
IAS 19 net surplus net of deferred
tax 182
The value of scheme assets are as follows:
2019 2018
UK Other Total UK Other Total
GBPm GBPm GBPm GBPm GBPm GBPm
Equities 704 118 822 552 96 648
Government debt 5,919 319 6,238 5,353 163 5,516
Non-government debt 2,705 - 2,705 2,425 133 2,558
Derivatives 827 - 827 719 - 719
Property 646 - 646 644 - 644
Cash 83 7 90 194 6 200
Other (including annuity contracts,
infrastructure and growth alternatives) 456 23 479 460 26 486
Investments 11,340 467 11,807 10,347 424 10,771
Value of asset and longevity swaps (2,791) - (2,791) (2,506) - (2,506)
Total assets in the schemes 8,549 467 9,016 7,841 424 8,265
The scheme assets analysed by those that have a quoted market price
in active markets and unquoted are as follows:
2019 2018
Total Total Total Total
Quoted Unquoted Total Quoted Unquoted Total
GBPm GBPm GBPm GBPm GBPm GBPm
Equities 639 183 822 510 138 648
Government debt 5,773 465 6,238 5,121 395 5,516
Non-government debt 1,649 1,056 2,705 1,439 1,119 2,558
Derivatives - 827 827 - 719 719
Property 1 645 646 - 644 644
Cash 90 - 90 200 - 200
Other (including annuity contracts,
infrastructure and growth alternatives) - 479 479 - 486 486
Investments 8,152 3,655 11,807 7,270 3,501 10,771
Value of asset and longevity swaps - (2,791) (2,791) - (2,506) (2,506)
Total assets in the schemes 8,152 864 9,016 7,270 995 8,265
Where assets are classified as unquoted the valuations are:
- taken from the underlying managers in the case of
non-developed market equity, non-UK sovereign debt, pooled
non-government debt and other pooled funds - these funds themselves
will be subject to annual (or more frequent) audit
- provided by an independent surveyor (in the case of direct property)
- taken at the mark to market valuation used for collateral
purposes in the case of derivative contracts
Assumptions
The principal actuarial assumptions used are:
UK Other
2019 2018 2019 2018
% % % %
Assumptions used in calculation of retirement benefit obligations:
Discount rate 2.05 2.83 2.87 3.57
Annual rate of inflation (RPI) 2.96 3.18 - -
Annual rate of inflation (CPI) 1.96 2.08 1.27 1.51
Annual rate of increase in salaries n/a n/a 2.51 2.75
Annual rate of increase in pensions(1) 2.82 2.97 1.27 1.51
Assumptions used in calculation of pension net interest costs for the
year:
Discount rate 2.83 2.47 3.57 3.35
(1) For the UK the annual rate of increase in pensions shown is the
rate that applies to pensions that increase at RPI subject to a cap
of 5%. For other schemes the weighted average assumption is shown.
Mortality rate
The mortality assumptions are set following investigations of
the main schemes' recent experience carried out by independent
actuaries as part of the most recent funding valuations. The core
mortality rates assumed for the main UK schemes follow
industry-standard tables with percentage adjustments to reflect the
schemes' recent experience compared with that expected under these
tables.
Reductions in future mortality rates are allowed for by using
the CMI 2018 tables (2018: CMI 2017 tables) with a long term
improvement rate of 1.25% (2018: 1.25%). The weighted average
assumptions imply that a current pensioner aged 60 has an expected
future lifetime of 27.0 (2018: 27.2) years for males and 28.5
(2018: 28.7) years for females and a future pensioner aged 60 in 15
years' time has a future expected lifetime from age 60 of 28.0
(2018: 28.2) years for males and 29.7 (2018: 29.9) years for
females.
Sensitivity analysis
Sensitivities for the defined benefit obligations of the two main
UK schemes are shown below :
2019 2018
Changes in assumption GBPm GBPm
Discount rate Increase by 0.25% (334) (299)
Decrease by 0.25% 357 319
RPI / CPI(1) Increase by 0.25% 211 187
Decrease by 0.25% (205) (183)
Core mortality rates(2) Decrease by 12% 328 278
Increase by 12% (371) (281)
Long-term future improvements to
mortality rates Increase by 0.25% 73 61
Decrease by 0.25% (72) (61)
(1) The impact shown is for the appropriate increase in the revaluation
of deferred pensions and the increases to pensions in payment resulting
from the specified increase in RPI and CPI.
(2) Reducing the core mortality rates by 12% is the equivalent of
increasing the life expectancy of a male aged 60 years by 1 year.
22) Leases
Leases as a lessee
The Group leases land and buildings and other assets such as
vehicles, IT equipment, servers and mainframes (reported as other)
to operate its business in each of its core regions. These leases
were previously classified as operating leases under IAS 17. The
remaining lease terms for the main office premises range from 3 to
19 years.
The Group also leases office equipment such as laptops and
printers and for which certain leases are short term (1 year or
less) and/or for low value items. The Group has elected to apply
recognition exemptions as permitted by IFRS 16 for these leases
(see note 2 for accounting policy).
Information about leases for which the Group is a lessee is
presented below.
Right-of-use assets
Land and
buildings Other Total
GBPm GBPm GBPm
Amounts recognised at transition on 1
January 2019 190 49 239
Depreciation charge for the year (30) (12) (42)
Additions to right-of-use assets 28 3 31
Other(1) (14) (1) (15)
Balance at 31 December 2019 174 39 213
(1) Other includes the impact of contract modifications, impairments
and foreign exchange.
Lease liabilities
Lease liabilities of GBP258m are included within other
liabilities in the consolidated statement of financial position.
The maturity analysis of this balance can be found in note 4 on
page 62.
Two properties in Canada have lease terms ending January 2028
and December 2033 with the option to extend the leases for two
further consecutive periods of five years each. The extension
options have not been included in the determination of the lease
term and therefore the measurement of the lease liabilities.
A reconciliation of lease liabilities is presented below.
GBPm
Non-cash movements
Amounts recognised at transition on 1
January 2019 279
Additions to lease liabilities 31
Interest on lease liabilities 7
Other (1) (9)
Cash movements
Lease payments (50)
Balance at 31 December 2019 258
(1) Other includes the impact of contract modifications, impairments
and foreign exchange.
Other amounts recognised in profit or
loss
2019
Leases under IFRS 16 GBPm
Interest on lease liabilities 7
Expenses relating to short-term leases 4
Expenses relating to leases of low-value
assets 3
2018
Operating leases under IAS 17 GBPm
Lease expense 48
Amounts recognised in statement of cash
flows
2019
GBPm
Total cash outflow for leases 57
Total cash outflow for leases primarily relates to finance leases,
with the principal and interest portion recognised separately within
financing activities in the consolidated statement of cash flows. It
also includes short term lease payments and payments for leases of
low value assets which are reported within operating activities.
Leases as a lessor
The Group leases out its investment property consisting of
freehold and leasehold land and buildings. All leases are
classified as operating leases from a lessor perspective with the
exception of sub-leases, which the Group has classified as finance
sub-leases.
Finance leases
Prior to 2019, the Group has sub-let office floor space in
Canada and UK for which the head leases have been presented as part
of the land and buildings right-of-use asset upon IFRS 16
transition. The sub-leases have been classified as finance leases
because the sub-lease is for the whole remaining term of the head
lease. The net investments in the subleases have been reported
within other debtors.
During 2019, the Group recognised interest income on lease
receivables of GBP1m.
The following table sets out a maturity analysis of lease
receivables, showing the undiscounted lease payments to be received
after the reporting date.
Land and
buildings
2019
GBPm
Less than one year 3
One to two years 3
Two to three years 3
Three to four years 3
Four to five years 3
More than five years 9
Total undiscounted lease receivable 24
Unearned finance income (2)
Net investment in the lease 22
Operating leases
The Group leases out its investment property and has classified
these leases as operating leases because they do not transfer
substantially all of the risks and rewards incidental to the
ownership of the assets.
During 2019, the Group recognised GBP19m of rental income within
its net investment return (2018: GBP19m).
The following table sets out a maturity analysis of lease
receivables, showing the undiscounted lease payments to be received
after the reporting date.
Land and
buildings
2019
GBPm
Less than one year 17
One to two years 16
Two to three years 15
Three to four years 14
Four to five years 11
More than five years 51
Total 124
2018(1)
GBPm
Less than one year 16
Between one and five years 57
More than five years 42
Total 115
(1) 2018 comparatives have been presented on an IAS 17 'Leases' basis.
NOTES TO THE CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
23) Reconciliation of cash flows from operating activities
The reconciliation of net profit before tax to cash flows from
operating activities is as follows:
2019 2018
Note GBPm GBPm
Cash flows from operating activities
Profit for the year before tax 492 480
Adjustments for non-cash movements in net profit
for the year
Amortisation of available for sale assets 44 44
Depreciation and impairment of tangible assets 59 18
Amortisation of intangible assets 11 84 90
Fair value losses/(gains) on disposal of financial
assets 1 (31)
Impairment charge on available for sale financial
assets - 10
Share of profit of associates (1) (1)
Loss on disposal of businesses 14 2
Other non-cash movements 86 7
Changes in operating assets/liabilities
Loss and loss adjustment expenses (113) 10
Unearned premiums (37) (75)
Movement in working capital (63) (199)
Reclassification of investment income and interest
paid (319) (303)
Pension deficit funding (87) (111)
Cash generated from investment of insurance assets
Dividend income 37 35
Interest and other investment income 316 293
Cash flows from operating activities 513 269
RESULTS FOR THE YEAR 2019
24) Results for the year 2019
This financial information set out above does not constitute
statutory accounts for the years ended 31 December 2019 or 31
December 2018 but is derived from those accounts. Statutory
accounts for 2018 have been delivered to the Registrar of
Companies, and those for 2019 will be delivered in due course. The
auditors' have reported on those accounts; their reports were (i)
unqualified (ii) did not include reference to any matters to which
the auditors drew attention by way of emphasis without qualifying
their report and (iii) did not include a statement under section
498(2) or (3) of the Companies Act 2006.
APPENDIX A: EXCHANGE RATES
Local currency/GBP 2019 2018
Average Closing Average Closing
Canadian Dollar 1.70 1.72 1.73 1.74
Danish Krone 8.52 8.82 8.42 8.31
Swedish Krona 12.08 12.40 11.60 11.29
Euro 1.14 1.18 1.13 1.11
RESPONSIBILITY STATEMENT
We confirm that to the best of our knowledge:
A) The financial statements within the full Annual Report and
Accounts, from which the financial information within this
preliminary announcement has been extracted, are prepared in
accordance with International Financial Reporting Standards as
adopted by the EU, give a true and fair view of the assets,
liabilities, financial position and result of the Group;
B) The management report within this preliminary announcement
includes a fair review of the development and performance of the
business and the position of the Group; and
C) The risk and capital management section within this
preliminary announcement includes a description of the principal
risks and uncertainties faced by the Group.
Signed on behalf of the Board
Stephen Hester Charlotte Jones
Group Chief Executive Group Chief Financial Officer
26 February 2020 26 February 2020
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR EANAKASSEEFA
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February 27, 2020 02:00 ET (07:00 GMT)
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