25th Mar 2014 08:37
25 March 2014
RSA INSURANCE GROUP PLC
(THE “COMPANY”)
2013 ANNUAL REPORT AND NOTICE OF ANNUAL GENERAL MEETING 2014
In accordance with Listing Rule 9.6 and Disclosure and Transparency Rule (“DTR”) 4.1, the Company announces that the following documents have been posted to shareholders and have today been submitted to the UK Listing Authority via the National Storage Mechanism:
Annual Report and Accounts for the year ended 31 December 2013 Notice of the 2014 Annual General Meeting to be held on 9 May 2014 Proxy form for the 2014 Annual General MeetingThe above mentioned documents (except for the Proxy form) are available on our website at www.rsagroup.com/ar2013 and www.rsagroup.com/agm2014 and will shortly be made available for inspection at www.hemscott.com/nsm.do. Shareholders can obtain additional copies of the Proxy form from our Registrar, Equiniti Limited at Aspect House, Spencer Road, Lancing, West Sussex BN99 6DA or view online at www.shareview.co.uk.
The Notice of the 2014 Annual General Meeting includes resolutions to approve a sub-division and consolidation of the Company’s ordinary shares. Details on the proposed sub-division and consolidation are set out in full in the Notice of the 2014 Annual General Meeting available on our website at www.rsagroup.com/agm2014.
The Notice of the 2014 Annual General Meeting includes a resolution to amend the articles of association of the Company in relation to the proposed sub-division and consolidation mentioned above. The draft amendment is set out in full in the Notice of the 2014 Annual General Meeting available on our website at www.rsagroup.com/agm2014.
This announcement should be read in conjunction with the Company’s announcement issued on 27 February 2014. Together these constitute the material required by DTR 6.3 to be communicated to the media in full unedited text through a Regulatory Information Service. This material is not a substitute for reading the Company’s 2013 Annual Report and Accounts.
An indication of the important events that occurred in 2013 and their impact on the condensed consolidated financial statements, the condensed consolidated financial statements themselves and the responsibility statement were announced to the London Stock Exchange on 27 February 2014, forming part of the Preliminary Results announcement for the year ended 31 December 2013. Additional content forming part of the management report is in the Appendix below.
Enquiries:
John Mills
Deputy Group Company Secretary
RSA Insurance Group plc
Tel: +44 (0) 20 7111 7000
IMPORTANT DISCLAIMER
Visit www.rsagroup.com for more information.
This press release (together with the Annual Report and Accounts referred to herein) has been prepared in accordance with the requirements of English company law and the liabilities of the directors in connection with this press release (together with the Annual Report and Accounts referred to herein) shall be subject to the limitations and restrictions provided by such law. This press release may contain ‘forward-looking statements’ with respect to certain of the Group’s plans and its current goals and expectations relating to its future financial condition, performance, results, strategic initiatives and objectives. Generally, words such as “may”, “could”, “will”, “expect”, “intend”, “estimate”, “anticipate”, “aim”, “outlook”, “believe”, “plan”, “seek”, “continue” or similar expressions identify forward-looking statements. These forward-looking statements are not guarantees of future performance. By their nature, all forward-looking statements involve risk and uncertainty because they relate to future events and circumstances which are beyond the Group’s control, including amongst other things, UK domestic and global economic business conditions, market-related risks such as fluctuations in interest rates and exchange rates, the policies and actions of regulatory authorities (including changes related to capital and solvency requirements), the impact of competition, inflation, deflation, the timing impact and other uncertainties of future acquisitions or combinations within relevant industries, as well as the impact of tax and other legislation or regulations in the jurisdictions in which the Group and its affiliates operate. As a result, the Group’s actual future financial condition, performance and results may differ materially from the plans, goals and expectations set forth in the Group’s forward-looking statements. The Group undertakes no obligation to update any forward-looking statements, save in respect of any requirement under applicable law or regulation. Nothing in this press release (together with the Annual Report and Accounts referred to herein) should be construed as a profit forecast.
APPENDIX
References to page numbers and notes to the accounts made in this Appendix refer to page numbers and notes to the accounts in the 2013 Annual Report and Accounts.
RISK REVIEW
THE FUTURE SUCCESS OF THE GROUP IS UNDERPINNED BY OUR CONSERVATIVE RISK PROFILE AND CLEAR RISK APPETITE.
RISK MANAGEMENT APPROACH
We take a broad view of the scope of risk management which is taken to include the risk of underperformance as well as adverse events and the failure of processes. This approach is reflected in our risk appetite statement and key risk indicators which cover all aspects of our strategic objectives. The risk appetite Statement is updated annually in line with the strategic review. Our risk management system is defined in a comprehensive suite of risk management policies, supported by detailed procedures. A central task of the risk management function is to monitor adherence to these policies and procedures. The Board is closely involved in risk management via the Board Risk Committee which meets quarterly. The quarterly risk reports monitor the status of all risks and will form an integral part of our ORSA process.
Principles
Simple objectives
• Create value for all stakeholders
• Focus on general insurance in our selected markets
• Commitment to sustainable, profitable performance.
Clear risk appetite
• Underwriting and operating excellence
• Strong control environment
• Tight financial management
• Protecting and managing the Group’s reputation.
Robust governance, control and reporting
• Comprehensive policies, procedures and controls
• Clear delegation of authorities
• Robust lines of defence
• Regular and relevant reporting and assurance processes.
Strong culture
• Board set ‘tone from the top’ of open communication and engagement
• Putting the customer at the centre of what we do
• High quality and engaged staff.
OUR RISK MANAGEMENT IN PRACTICE
Rigorous review of RSA’s planning process:
The Group and regional Risk functions subjected the Operational Planning process to significant independent challenge, especially given the Group’s reduced capital strength and the importance of aligning strategic decisions with appropriate earnings expectations. This involved early and continual engagement, objective analysis (both top-down and portfolio level bottom-up), trend and peer comparisons, and cross-checking with other risk inputs. The result is increased confidence given to the Board in the robustness of the revised Plans.
Monitoring capital:
The Risk function and Board Risk Committee devoted significant time to capital during 2013, developing and approving an enhanced risk appetite to set out more consistently and explicitly the target range and buffers for each principal capital measure. This was calibrated against standard stress tests, reputational risk assessment and model risks. The Committee oversaw a reduction in risk appetite during the year to reflect the reducing capital buffers: equity exposures were reduced, additional reinsurance protection was purchased, M&A activity was halted and capital action plans were launched.
Our strategic risk profile is our forward-looking assessment of the principal risks to delivering our strategy. Towards the end of 2013 we launched our business review, and we are adjusting our strategy; as a result, as in any time of change, a key risk for us to manage is the alignment of our strategy, execution and impact on financial performance with the expectations of our shareholders. As part of the management of this risk, the Risk function conducted an independent, end-to-end challenge of our business planning process which supports its robustness and our confidence in the future.
The interrelated risks of adverse financial markets (including low yields) and low capital generation remained the greatest strategic risks during 2013. We have enhanced our capital risk appetite and capital strategy as the basis for ranking the options for improving capital strength and returns. In addition, we made targeted reductions in our risk appetite and risk profile during 2013.
There is evidence that regulators may, in the light of the introduction of Solvency II, seek to enforce greater restrictions on the fungibility of capital, in other words, whether the capital we hold across our businesses is accessible to support the risk profile over appropriate time-frames. As an internationally diversified group, we continue to monitor this risk carefully in dialogue with our regulators, and to manage the internal capital flows between our entities effectively.
| Risk | Description and impact | How we manage | Change in likelihood in year | ||||
| Low capital generation | Insufficient capital generation over medium-term to support dividend and corporate activity | • Accelerated delivery of UK strategy • Delivery of other regions’ operational plans • M&A moratorium and additional reinsurance protection • ALM and cashflow risk management • Capital strategy project to rank options | Up | ||||
| Adverse financial markets | Impact of negative long-term macroeconomic trends, financial market volatility and/or persistently adverse yield environment | • Geographic diversification • High quality, low risk investment strategy and portfolio • Tactical actions to mitigate reduction in yields • Defensive positioning to Eurozone | Constant | ||||
| Imposition of fungibility restrictions | Limited fungibility of capital following tighter regulatory measures | • Rigorous legal entity solvency management • Internal dividend policy • Regulatory dialogue | Up | ||||
| IT age and complexity limits agility | IT stability or agility limitations impair service levels or delivery of strategic change due to cost and management capacity. Constraints include risk of disruption, age and complexity of legacy estate and competing priorities | • IT Change stack oversight to track delivery of project and benefits • Development and funding of dedicated e-business capability • New Group CIO with remit to develop long-term strategic approach • IT Risk framework developed to improve oversight and governance | Constant | ||||
| Misaligned strategy and earnings expectations | Failure to align strategy, execution and financial performance with shareholder expectations | • Robust strategic and operational planning processes • Delivery of operational plans • Robust management of underperforming businesses • Management of corporate governance requirements • Investor and media relations | Up | ||||
| Systemic process failure | Systemic failure in pricing, underwriting and claims processes | • Granular MI on rating and claims trends • Underwriting strategy statements, licence and controls • Refined portfolio classification and pricing tools • Q uarterly Business Reviews and BRC governance • Accumulation management and large loss review actions | Constant | ||||
| Technical staff retention and development | Failure to attract and retain key staff for specialist technical roles | • Talent boards and Engagement programme • Review of remuneration system • Robust succession planning | Up | ||||
| Product range obsolescence | Failure to develop and distribute appropriate and/or innovative products to existing/new customers and new channels | • Group Architecture and IS Strategy • E-enablement initiatives • Customer Engagement programme | Constant | ||||
| Reinsurance failure | Failure of reinsurance programme to deliver planned benefits through e.g. counterparty failure, operational error or failed recovery processes | • Board, Exco and BRC governance • Reinsurance recovery processes • Group-wide reinsurance placement management • Reinsurance Security controls and processes | Constant | ||||
| Misaligned culture and brand | Failure to create a culture and brand that supports Group Strategy and will attract and retain diverse individuals in an environment that can harness their unique contributions | • Develop articulation of desired culture • Design indicators to assess cultural risks and enable audit • Global Diversity and Inclusion (D&I) programme underway • People and Leader Expectations in development for Brand refresh | Up | ||||
| Misaligned reward structure | Failure of reward systems to align with corporate aspirations and external stakeholder expectations | • Remuneration committee governance • Review of remuneration system • Investor and media relations | Down |
EMERGING RISKS AND GROUP STRATEGY
We keep emerging risks under regular review and assess their impact on our strategy. During 2013, we identified the following clusters of emerging risk and incorporated them as key drivers into our group strategy process.
| 1 Globalisation and economic rebalancing | • Rise of China/India/new market leaders and capital flows and international trade to fuel their growth • Next billion consumers emerging in emerging markets as they build their middle class • Risk of developed markets stagnating or declining (e.g. caused by Eurozone break up) • US resurgence and path to energy independence (e.g. driven by fracking) • China hard landing or soft landing | ||
| 2 New global security threats | • Financial volatility caused by increasingly interconnected worlds, too-big-to-fail industries and increasing competition for resources • Political volatility including terrorist threats, Middle East conflict and the ‘Arab Spring’ spreading to other emerging markets • Social volatility caused by high youth unemployment, gender imbalance in the developing world, etc. • Increase in environmental disasters (e.g. droughts, hurricanes, etc.) | ||
| 3 The digital society | • Pricing transparency by aggregators spreading to other producers • Expansion of e-commerce competitors into all areas of commerce • Increased availability of consumer data: Human genome project, Telematics, etc • Social media and increased use of mobile smart devices fuelling access to instant information • Rise of radio-frequency identification (RFID) and sensor networks enabling tracking, data gathering, etc. | ||
| 4 Changing social contract between business/ government | • Greater need for sales/price transparency • Limitation of product pricing (e.g. review of gender biased pricing in the EU) and banning of high cost products • Emerging markets regulation converging to western norms • Continued uncertainty around Solvency II/Prudential regulation • Increased backlash against business driven by compensation culture and tax avoidance scandals | ||
| 5 Environmental change and responses to it | • Environmental risks including extreme weather events and consequent higher attritional losses • Adverse government intervention in response (e.g. mandatory flood insurance at below cost prices) • Government prevention responses (e.g. renewable investment, carbon tax, etc.) • Energy and water scarcity prompting alternative energy sources, substitute materials and sustainable forms of transportation (e.g. fuel cell, hybrid, electric, rail) | ||
| 6 Social change, fragmentation and polarisation | • Ageing population in need for more health and pension related insurance products • Increased ethnic diversity → further segmentation; Polar lifestyles, obesity vs fitness → better targeting • Shifts in ‘mindset’ of workers ‘Contentment vs striving’ • Outsourcing/off-shoring developments in light of productivity/performance focus • R&D/innovation imperative driving war for talent requiring new organisational structures |
DISTRIBUTION OF QUANTIFIABLE RISKS
Our internal model provides a quantification of the total amount of risk borne by the Group, expressed as the amount of capital required to enable it to meet all liabilities to a confidence level consistent with the Group’s target ‘A’ rating.
By analysing the cashflows in our model, we can assess the extent to which the overall level of risk is attributable to broad categories of risk.
Consistent with our strategy and appetite, the majority of the Group’s risks relate to insurance, comprising higher than anticipated underwriting losses, net catastrophe losses and reserve deterioration.
Our conservative investment strategy means that investment risk forms a relatively small proportion of our overall risk compared with the industry.
Within our defined-benefit pension schemes we have progressively reduced risk over a number of years through a succession of significant de-risking actions; however, due to the large size of the schemes relative to the business, they still present a material exposure, currently exacerbated by the economic environment producing a prolonged period of low real-yields.
RISK MANAGEMENT
As an insurance company, the Group is in the business of actively seeking risk with a view to adding value by managing it. This section summarises the key risks to the Group and the steps taken to manage them.
As set out in the corporate governance report, the Group’s Board of Directors (the ‘Board’) defines the risk appetite of the organisation.
The Group employs a comprehensive Risk Management System that includes a full range of risk policies, procedures, measurement, reporting and monitoring techniques and a series of stress tests and scenario analyses to ensure that the risk exposures that arise from operating the Group’s business are managed appropriately.
For the purposes of managing risks, the Group classifies risks into the following categories:
• Insurance
• Credit
• Market
• Liquidity
• Operational
• Reputational
• Strategic
INSURANCE RISK
Underwriting and claims risks
The Group manages these risks through its underwriting strategy, adequate reinsurance arrangements and proactive claims handling. The underwriting strategy aims to ensure that the underwritten risks are well diversified in terms of type and amount of risk, industry and geography.
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. While claims remain the Group’s principal cost, the Group also makes allowance in the pricing procedures for acquisition expenses, administration expenses, investment income, the cost of reinsurance and for a profit loading that adequately covers the cost of the capital.
Underwriting limits are in place to enforce appropriate risk selection criteria. The Group generally has the right not to renew individual policies, it can impose deductibles and it has the right to reject the payment of a fraudulent claim. In certain territories, legislation imposes a minimum amount for which employers can be liable for claims for compensation from employees injured at work. These liabilities are usually insured under an employer’s liability (or similar) insurance policy. All policies issued by the Group comply with minimum statutory requirements.
All of the Group’s underwriters have specific licences that set clear parameters for the business they can underwrite, based on the experience of the individual underwriter. Additionally, the Group has a centrally managed forum looking at Group underwriting issues, reviewing and agreeing underwriting direction and setting policy and directives where appropriate. The Group has a quarterly portfolio management process across all its business units, which provides a consistent assessment of each portfolio performance against a set of key performance indicators. Under the portfolio management system, key risk indicators are tracked to monitor emerging trends, opportunities and risks and, on an annual basis, a review forum of business and underwriting leaders undertake a detailed review of each portfolio utilising data from the quarterly reviews.
The Group has developed enhanced methods of recording exposures and concentrations of risk. This means there is greater control of exposures in high risk areas and enables a prompt response to claims from policyholders should there be a catastrophic event such as an earthquake.
Reinsurance arrangements in place include proportional, excess of loss, stop loss and catastrophe coverage. The effect of such reinsurance arrangements is that the Group should not suffer total net insurance losses beyond the Group’s risk appetite in any one year.
RESERVE RISK
The Group establishes loss reserves to account for the anticipated ultimate costs of all losses and related loss adjustment expenses (LAE) on losses that have already occurred. The Group establishes reserves for reported losses and LAE, as well as for incurred but not yet reported (IBN R) losses and unallocated loss adjustment expenses (ULAE). Loss reserve estimates are based on known facts and on interpretation of circumstances including the Group’s experience with similar cases and historical claims payment trends. The Group also considers the development of loss payment trends, levels of unpaid claims, judicial decisions and economic conditions.
The Group has a Group Reserving Committee consisting of the Group Chief Executive, Group Chief Financial Officer, Group Underwriting and Claims Director, Group Chief Actuary and Group Chief Risk Officer. A similar committee has been established in each of the Group’s major operating segments. The Group Reserving Committee monitors the decisions and judgements made by the business units as to the level of reserves recommended and makes the final decision on the reserves to be included within the consolidated financial statements. In forming its collective judgement, the Committee considers the following information:
• An 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 2013 these risks and developments include: the possibility of future legislative change having retrospective effect on open claims; changes in claims settlement procedures potentially leading to future claims payment patterns differing from historical experience; the possibility of new types of claim, such as disease claims, emerging from business written several years ago; general uncertainty in the claims environment; the emergence of latent exposures such as asbestos; the outcome of litigation on claims received; failure to recover reinsurance and unanticipated changes in claims inflation
• The views of internal peer reviewers of the reserves and of other parties including actuaries, legal counsel, risk directors, underwriters and claims managers
• How previous actuarial indications have developed.
USE OF REINSURANCE
The Group is exposed to both multiple insured losses and losses arising out of a single occurrence, for example a natural peril event such as a hurricane, flood or earthquake.
All of the Group’s operations are required to purchase reinsurance within agreed local reinsurance appetite parameters. The Group Corporate Centre authorises the operations’ proposed treaty purchases to check that they at least meet the Group’s appetite, for example the ‘1 in 200 year’ standard for catastrophe risk. Group Corporate Centre also checks to see that total Group exposures are within the limits set out above and also are consistent with the required risk based capital. In addition, local facultative arrangements may be purchased where deemed appropriate.
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 ceded.
CREDIT RISK
Credit risk is the risk of loss of value of the financial assets due to counterparties failing to meet all or part of their obligations. The Board Risk Committee (BRC) is responsible for ensuring that the Board approved Group credit risk appetite is not exceeded. This is done through the setting and imposition 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. Financial assets are graded according to company standards. AAA is the highest possible rating. Investment grade financial assets are classified within the range of AAA to BBB ratings. For invested assets, 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 following table provides information regarding aggregated credit risk exposure for financial assets of the Group as at 31 December 2013:
| Credit rating relating to financial assets that are neither past due nor impaired | Total of financial assets that are neither past due nor impaired £m | ||||||||||||||
| AAA £m | AA £m | A £m | BBB £m | £m | Not rated £m | ||||||||||
| Debt Securities | 5,448 | 2,323 | 2,401 | 856 | 99 | 124 | 11,251 | ||||||||
| Loans and Receivables | 27 | - | 44 | - | 2 | 73 | 146 | ||||||||
| Reinsurer’s share of insurance contract liabilities | - | 538 | 1,235 | 202 | 44 | 1 | 2,020 | ||||||||
| Insurance and reinsurance debtors | 236 | 38 | 631 | 140 | 113 | 2,289 | 3,447 | ||||||||
| Derivative assets | - | 28 | - | - | - | 30 | 58 | ||||||||
| Other debtors | - | - | - | - | - | 313 | 313 | ||||||||
| Cash and cash equivalents | 184 | 321 | 374 | 106 | 23 | 154 | 1,162 | ||||||||
Notes:
1. The insurance and reinsurance debtors classified as not rated comprise personal policyholders and small corporate customers that do not have individual credit ratings. The overall credit risk to the Group is deemed to be low as the cover could be cancelled if payment were not received on a timely basis.
As at 31 December 2012
| Credit rating relating to financial assets that are neither past due nor impaired | Total of financial assets that are neither past due nor impaired £m | ||||||||||||||
| AAA £m | AA £m | A £m | BBB £m | £m | Not rated £m | ||||||||||
| Debt Securities | 5,985 | 2,079 | 2,585 | 835 | 81 | 159 | 11,724 | ||||||||
| Loans and Receivables | 18 | - | 21 | 3 | 3 | 41 | 86 | ||||||||
| Reinsurer’s share of insurance contract liabilities | 35 | 533 | 1,040 | 218 | 50 | 55 | 1,931 | ||||||||
| Insurance and reinsurance debtors | 121 | 23 | 695 | 136 | 104 | 2,336 | 3,415 | ||||||||
| Derivative assets | - | 12 | 31 | - | - | 3 | 46 | ||||||||
| Other debtors | - | - | - | - | - | 323 | 323 | ||||||||
| Cash and cash equivalents | 276 | 452 | 412 | 97 | 33 | 59 | 1,329 | ||||||||
With the exception of AAA rated government debt securities, the largest aggregate credit exposure does not exceed 3% of the Group’s total financial assets. Holdings of government bonds in Greece, Italy, Ireland, Spain and Portugal are £119m at 31 December 2013 and comprise around 1% (2012: around 1%) of the total bond portfolio. In addition to this the Group holds £189m of senior and subordinated bank debt and £103m of other corporate holdings in these countries.
The Group is exposed to credit and concentrations of risk with individual reinsurers, due to the nature of the reinsurance market and the restricted range of reinsurers that have acceptable credit ratings. The reinsurance strategy is to purchase reinsurance in the most effective manner from reinsurers who meet the Group’s security standards. Reinsurance counterparties are subject to a rigorous internal assessment process on an ongoing basis to ensure that their creditworthiness continues to be satisfactory and the potential impact from reinsurer default is measured regularly and managed accordingly. The Group Reinsurance Credit Committee oversees the management of these risks. Group standards are set such that reinsurers that have a financial strength rating of less than ‘A-’ with Standard & Poor’s, or a comparable rating, are removed from the Group’s authorised list of approved reinsurers unless the Group’s internal review discovers exceptional circumstances in favour of the reinsurer. Collateral is taken to mitigate exposures, where appropriate, to acceptable levels. At 31 December 2013 the Group held collateral against £165m (2012: £143m) of reinsurers’ share of insurance contract liabilities.
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 Swiss Re, Munich Re, and HDI-Gerling. At 31 December 2013 the reinsurance asset recoverable from these groups does not exceed 3% 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 3% of the Group’s total financial assets. Certain of the Group’s subsidiaries are members of government mandated pools in various parts of the world. As of 31 December 2013 the largest pool (by premium volume) is Pool Re operated by the UK Government to provide terrorism cover.
There are no material financial assets that would have been past due or impaired had the terms not been renegotiated.
The following table provides information regarding the carrying value of financial assets that have been impaired and the ageing of financial assets that are past due but not impaired as at 31 December 2013:
| Neither past due nor impaired £m | Financial assets that are past due but not impaired | Financial assets that have been impaired £m | Carrying value in the statement of financial position £m | Impairment losses charges to the income statement £m | |||||||||||||
| Up to three months £m | Three to six months £m | Six months to one year £m | Greater than one year £m | ||||||||||||||
| Debt Securities | 11,251 | - | - | - | - | - | 11,251 | - | |||||||||
| Loans and Receivables | 146 | - | - | - | - | - | 146 | (6) | |||||||||
| Reinsurer’s share of insurance contract liabilities | 2,020 | - | - | - | - | 6 | 2,026 | (4) | |||||||||
| Insurance and reinsurance debtors | 3,447 | 97 | 20 | 15 | 13 | 1 | 3,593 | (7) | |||||||||
| Derivative assets | 58 | - | - | - | - | - | 58 | - | |||||||||
| Other debtors | 313 | 8 | 2 | 11 | 8 | - | 342 | - | |||||||||
| Cash and cash equivalents | 1,162 | - | - | - | - | - | 1,162 | - | |||||||||
As at 31 December 2012
| Neither past due nor impaired £m | Financial assets that are past due but not impaired | Financial assets that have been impaired £m | Carrying value in the statement of financial position £m | Impairment losses charges to the income statement £m | |||||||||||||
| Up to three months £m | Three to six months £m | Six months to one year £m | Greater than one year £m | ||||||||||||||
| Debt Securities | 11,724 | - | - | - | - | - | 11,724 | - | |||||||||
| Loans and Receivables | 86 | - | - | - | - | 11 | 97 | (7) | |||||||||
| Reinsurer’s share of insurance contract liabilities | 1,931 | - | - | - | - | 18 | 1,949 | 1 | |||||||||
| Insurance and reinsurance debtors | 3,415 | 107 | 35 | 11 | 24 | - | 3,592 | (1) | |||||||||
| Derivative assets | 46 | - | - | - | - | - | 46 | - | |||||||||
| Other debtors | 323 | 5 | 18 | 3 | 8 | - | 357 | - | |||||||||
| Cash and cash equivalents | 1,329 | - | - | - | - | - | 1,329 | - | |||||||||
Local operations are responsible for assessing and monitoring the creditworthiness of their counterparties (e.g. brokers and policyholders). Local credit committees are responsible for ensuring these exposures are within the risk appetite of the local operations. Exposure monitoring and reporting is embedded throughout the organisation with aggregate credit positions reported and monitored at Group level.
The Group’s investments comprise a broad range of financial investments issued principally in the UK, Canada and Scandinavia.
At 31 December 2013, the Group had pledged £871m (2012: £895m) of financial assets as collateral for liabilities or contingent liabilities and had accepted £463m (2012: £827m) in collateral. The nature of the assets pledged as collateral comprises government securities of £801m (2012: £831m), cash and cash equivalents of £37m (2012: £32m) and non government debt securities of £33m (2012: £32m). The terms and conditions of the collateral pledged are market standard in relation to letter of credit facilities.
The Group is permitted to sell or repledge collateral held in the event of default by the owner, the fair value of which has been noted above at £463m. The terms and conditions of the collateral held are market standard. The assets held as collateral are readily convertible into cash.
At 31 December 2013, the Group had entered into short-term sale and repurchase agreements for UK government securities. The Group continues to recognise the debt securities in the statement of financial position as the Group remains exposed to the risks and rewards of ownership. The carrying value of these debt securities recognised in the statement of financial position is £300m (2012: £295m) and the carrying value of the associated liabilities is £300m (2012: £295m).
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 currently legally enforceable right to offset recognised amounts, because the right to offset is enforceable only on the occurrence of future events.
The following table sets out the carrying amounts of recognised financial instruments that are subject to the above agreements:
At 31 December 2013
| Amounts subject to enforceable netting arrangements | As reported in statement of financial position £m | ||||||||||||||
| Effect of offsetting in statement of financial position | Related items not offset | ||||||||||||||
| Gross amounts £m | Amounts offset £m | Net amounts reported £m | Financial instruments £m | Financial collateral £m | Net amount £m | ||||||||||
| Derivative financial assets | 52 | - | 52 | (7) | (5) | 40 | 52 | ||||||||
| Total assets | 52 | - | 52 | (7) | (5) | 40 | 52 | ||||||||
| Derivative financial liabilities | 22 | - | 22 | (6) | (36) | (20) | 22 | ||||||||
| Repurchase arrangements and other similar secured borrowing | 300 | - | 300 | (300) | - | - | 300 | ||||||||
| Total liabilities | 322 | - | 322 | (306) | (36) | (20) | 322 | ||||||||
At 31 December 2012
| Amounts subject to enforceable netting arrangements | As reported in statement of financial position £m | ||||||||||||||
| Effect of offsetting in statement of financial position | Related items not offset | ||||||||||||||
| Gross amounts £m | Amounts offset £m | Net amounts reported £m | Financial instruments £m | Financial collateral £m | Net amount £m | ||||||||||
| Derivative financial assets | 13 | - | 13 | (1) | (5) | 7 | 13 | ||||||||
| Total assets | 13 | - | 13 | (1) | (5) | 7 | 13 | ||||||||
| Derivative financial liabilities | 41 | - | 41 | (33) | (26) | (18) | 41 | ||||||||
| Repurchase arrangements and other similar secured borrowing | 295 | - | 295 | (295) | - | - | 295 | ||||||||
| Total liabilities | 336 | - | 336 | (328) | (26) | (18) | 336 | ||||||||
Notes:
1. The Group’s equity derivatives are exchange traded instruments and as such the Group treats the intermediary as a single counterparty in the above table.
MARKET RISK
The Group is exposed to the risk of potential losses from adverse movements in market prices including those of interest rates, equities, property, exchange rates and derivatives.
Exposures are controlled by the setting of investment limits and managing asset-liability matching in line with the Group’s risk appetite.
The Group Investment Committee (GIC), on behalf of the Group Board, is responsible for reviewing and approving the investment strategy for the Group’s investment portfolios. It provides approval for all major changes of the Group’s investment strategy and, in particular, approves any substantive changes to the balance of the Group’s funds between the major asset classes. Importantly, the GIC also approves the terms of reference of the Group’s main operational investment committee, the Group Asset Management Committee (GAMC). The BRC issues GAMC with investment risk limits.
Interest rate risk
The fair value of the Group’s portfolio of fixed income securities is inversely correlated to changes in the market interest rates. Thus if interest rates fall, the fair value of the portfolio would tend to rise and vice versa as set out in the sensitivity analysis on page 122.
Equity price risk
The Group’s portfolio of equity securities is subject to equity risk arising from changes in market price. Thus if the value of equities rise, so will the fair value of its portfolio and vice versa as set out in the sensitivity analysis on page 122.
The Group sets appropriate risk limits to ensure that no significant concentrations in individual companies arise. The Group takes a long-term view in selecting shares and looks to build value over a sustained period of time rather than utilising high level of purchase and sales in order to generate short-term gains from its equity holdings.
The Group makes use of derivative products as appropriate to manage equity exposure and to protect the portfolio from losses outside of its risk appetite.
Property price risk
The Group’s portfolio of properties is subject to property price risk arising from changes in the market value of properties. Further information on the valuation approach is included in note 13. Thus if the value of property falls so will the fair value of the portfolio as set out in the sensitivity analysis on page 122.
A number of the Group’s property holdings are Group occupied and therefore are reported within property and equipment. The Group’s investment in investment property is recorded as such and these investments are held as part of an efficient portfolio management strategy.
Currency risk
The Group operates in 32 countries. Accordingly, its net assets are subject to foreign exchange rate movements. The Group’s primary foreign currency exposures are to the Danish Krone, Euro, Canadian Dollar and the Swedish Krona. If the value of Sterling strengthens then the value of non Sterling net assets will decline when translated into Sterling and consolidated.
The Group incurs exposure to currency risk in two ways:
• Operational currency risk – by underwriting liabilities in currencies other than the currency of the primary environment in which the business units operate (non functional currencies)
• Structural currency risk – by investing in overseas subsidiaries and operating an international insurance group.
Operational currency risk is managed within the Group’s individual operations by broadly matching assets and liabilities by currency.
Structural currency risk is managed at a Group level through currency forward and foreign exchange option contracts within the limits that have been set. In managing structural currency risk, the needs of the Group’s subsidiaries to maintain net assets in local currencies to satisfy local regulatory solvency and internal risk based capital requirements are taken into account. These assets should prove adequate to support local insurance activities irrespective of exchange rate movements. Consequently, this may affect the value of the consolidated shareholders’ equity expressed in Sterling.
At 31 December 2013, the Group’s total shareholders’ equity analysed by currency is:
| Pounds Sterling £m | Danish Krone/Euro £m | Canadian Dollar £m | Swedish Krona £m | Other £m | Total £m | ||||||||
| Shareholders’ equity at 31 December 2013 | 482 | 610 | 494 | 393 | 914 | 2,893 | |||||||
| Shareholders’ equity at 31 December 2012 | 1,057 | 629 | 572 | 558 | 934 | 3,750 |
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 the aggregate exposures when reviewing its hedging strategy.
Shareholders’ equity is stated after taking account of the effect of currency forward contracts and foreign exchange options. On this basis, a 10% change in Sterling against Danish Krone/Euro, Canadian Dollar or Swedish Krona would have the following impact on shareholders’ equity:
| 10% strengthening in Pounds Sterling against Danish Krone/Euro £m | 10% weakening in Pounds Sterling against Danish Krone/Euro £m | 10% strengthening in Pounds Sterling against Canadian Dollar £m | 10% weakening in Pounds Sterling against Canadian Dollar £m | 10% strengthening in Pounds Sterling against Swedish Krona £m | 10% weakening in Pounds Sterling against Swedish Krona £m | ||||||||
| Movement in Shareholders’ equity at 31 December 2013 | (55) | 67 | (45) | 55 | (36) | 44 | |||||||
| Movement in Shareholders’ equity at 31 December 2012 | (57) | 70 | (52) | 64 | (51) | 62 |
Apart from the impact on derivative financial instruments covered below, the changes arise from retranslation of foreign subsidiaries’ net asset positions from their functional currencies into Pounds Sterling, with movements being taken through the translation reserve. These movements in exchange rates therefore have no impact on profit.
Derivatives
The Group may use derivative financial instruments for the purpose of reducing its exposure to adverse fluctuations in interest rates, foreign exchange rates, equity prices 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. Forward contracts and foreign exchange options are used to reduce the risk of adverse currency movements on certain forecast future cash transactions and for structural hedging. The policy on use of derivatives is approved by the BRC.
| Remaining life | Fair value | Notional principal amounts | |||||||||||||
| Less than one year £m | One to five years £m | More than five years £m | 2013 £m | 2012 £m | 2013 £m | 2012 £m | |||||||||
| Cross currency | |||||||||||||||
| Asset | 43 | - | - | 43 | 15 | 1,472 | 974 | ||||||||
| Liability | 1 | - | - | 1 | 6 | 462 | 830 | ||||||||
| Inflation | |||||||||||||||
| Asset | - | - | 9 | 9 | 21 | See below | See below | ||||||||
| Liability | - | - | 7 | 7 | 24 | See below | See below | ||||||||
| Equity index | |||||||||||||||
| Asset | 6 | - | - | 6 | 10 | See below | See below | ||||||||
| Liability | 21 | - | - | 21 | 12 | See below | See below | ||||||||
At 31 December 2013 there are derivative contracts in place to protect the value of the UK, Canadian, European, and US equity portfolios of the Group. These provide limited protection against declines in market levels whilst also capping participation in any appreciation of the market. In total, this strategy covers an underlying equity value up to approximately £379m (2012: £348m). If UK, Canadian, European and US equity markets decreased by 15%, the impact of these derivatives as at 31 December 2013, would be to decrease the impact of the decline by £28m (2012: £26m).
The Group is party to a series of swap contracts which collectively provide limited cover against a sharp increase in long-term claims inflation. In total the swap contracts provide inflation cover over a nominal value of £180m (2012: £180m) and are split over different contract terms.
At 31 December 2013 the Group holds currency forward contracts and foreign exchange options that are designated as hedging instruments to reduce structural foreign exchange risk. The derivatives are included in the table above. Further information on designated hedges can be found in note 29.
Sensitivity analysis
The Group uses a number of sensitivity or stress-test based risk management tools to understand the impact of the above risks on earnings and capital in both normal and stressed conditions. These stress tests combine deterministic shocks, analysis of historical scenarios and stochastic modelling using the internal capital model to inform the Group’s decision making and planning process and also for identification and management of risks within the business units.
The following table provides an indication of some of the single factor changes adopted within the Group. Changes in the income statement and other comprehensive income:
| Increase/(decrease) in income statement | Decrease in other comprehensive income | ||||||||
| 2013 £m | 2012 £m | 2013 £m | 2012 £m | ||||||
| Interest rate markets:2 | |||||||||
| Impact on fixed interest securities of increase in interest rates of 100bps3 | - | - | (427) | (446) | |||||
| Decrease of equity markets:4 | |||||||||
| Direct impact on equities of a 15% fall in equity markets | (6) | (25) | (87) | (84) | |||||
| Mitigating impact arising from derivatives held | 28 | 26 | - | - | |||||
| Property markets:4 | |||||||||
| Decrease of property markets of 15% | (50) | (51) | (10) | (23) | |||||
Notes:
1. This analysis assumes that there is no correlation between equity price, 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
2. 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 2014 and 1 January 2013
3. The impact on the fair value of the loan capital for a 100bps rise in interest rates is a decrease of £42m (2012: £55m)
4. The effect of movements in equity and property markets is reflected as a one time decrease of worldwide equity and property markets on 1 January 2014 and 1 January 2013 which results in a 15% decline in the value of the Group’s assets in these investment categories
5. This analysis has not considered the impact of the above market changes on the valuation of the Group’s insurance contract liabilities or retirement benefit obligations
6. This analysis is presented gross of the corresponding tax credits/(charges)
7. The equity price risk sensitivity analysis is indicative and is based on the Group’s equity portfolio as at 31 December 2013. Since 31 December 2013 the Group has significantly reduced its equity portfolio and as a result the equity price risk has substantially reduced such that a 15% fall in equity markets would result in a £6m decrease to total comprehensive income
LIQUIDITY RISK
Liquidity risk is the risk that the Group may be unable to pay obligations when due as a result of assets not being available in a form that can immediately be converted into cash. The investment risk limits set by the BRC ensure that a large part of the Group’s portfolio is kept in highly liquid marketable securities sufficient to meet its liabilities as they fall due based on actuarial assessment and allowing for contingencies. The limits are monitored at a Group level as part of the Group Risk exposure monitoring and BRC reporting process.
In addition the Group has committed credit facilities available as set out in note 23.
Maturity periods or contractual repricing
The following table summarises the contractual repricing or maturity dates (whichever is earlier) for financial liabilities that are subject to fixed and variable interest rates. Insurance contract liabilities are also presented and are analysed by remaining estimated duration until settlement.
As at 31 December 2013
| Less than one year £m | One to two years £m | Two to three years £m | Three to four years £m | Four to five years £m | Five to ten years £m | Greater than ten years £m | Total £m | Carrying value in the statement of financial position | |||||||||||
| Subordinated guaranteed US$ bonds | - | - | - | - | - | - | 15 | 15 | 13 | ||||||||||
| Subordinated guaranteed perpetual bonds | - | - | - | 375 | - | - | - | 375 | 342 | ||||||||||
| Subordinated guaranteed perpetual notes | 450 | - | - | - | - | - | - | 450 | 460 | ||||||||||
| Subordinated guaranteed dated notes | - | - | - | - | - | 500 | - | 500 | 494 | ||||||||||
| Provision for unearned premium | 3,482 | 265 | 66 | 10 | 15 | 15 | - | 3,853 | 3,853 | ||||||||||
| Provisions for losses and loss adjustment expenses | 4,096 | 1,916 | 1,243 | 840 | 584 | 1,397 | 2,218 | 12,294 | 11,148 | ||||||||||
| Direct insurance creditors | 295 | 1 | - | - | - | - | - | 296 | 296 | ||||||||||
| Reinsurance creditors | 341 | 5 | 1 | - | - | - | - | 347 | 347 | ||||||||||
| Borrowings | 300 | - | - | - | - | 1 | - | 301 | 301 | ||||||||||
| Deposits received from reinsurers | 41 | - | - | - | - | - | - | 41 | 41 | ||||||||||
| Derivative liabilities | 27 | 2 | - | - | - | - | - | 29 | 29 | ||||||||||
| Total | 9,092 | 2,189 | 1,310 | 1,225 | 599 | 1,913 | 2,233 | 18,501 | 17,324 | ||||||||||
| Interest on perpetual bonds and notes | 109 | 73 | 73 | 62 | 48 | 24 | 7 | 396 |
As at 31 December 2012
| Less than one year £m | One to two years £m | Two to three years £m | Three to four years £m | Four to five years £m | Five to ten years £m | Greater than ten years £m | Total £m | Carrying value in the statement of financial position | |||||||||||
| Subordinated guaranteed US$ bonds | - | - | - | - | - | - | 15 | 15 | 14 | ||||||||||
| Subordinated guaranteed perpetual bonds | - | - | - | - | 375 | - | - | 375 | 334 | ||||||||||
| Subordinated guaranteed perpetual notes | - | 450 | - | - | - | - | - | 450 | 470 | ||||||||||
| Subordinated guaranteed dated notes | - | - | - | - | - | 500 | - | 500 | 493 | ||||||||||
| Provision for unearned premium | 3,481 | 263 | 79 | 7 | 5 | 17 | - | 3,852 | 3,852 | ||||||||||
| Provisions for losses and loss adjustment expenses | 4,065 | 1,849 | 1,199 | 826 | 600 | 1,464 | 2,334 | 12,337 | 11,002 | ||||||||||
| Direct insurance creditors | 283 | 6 | - | - | - | - | - | 289 | 289 | ||||||||||
| Reinsurance creditors | 253 | 9 | 2 | 4 | - | - | - | 268 | 269 | ||||||||||
| Borrowings | 295 | - | - | - | - | 1 | - | 296 | 296 | ||||||||||
| Deposits received from reinsurers | 33 | - | - | - | - | - | - | 33 | 33 | ||||||||||
| Derivative liabilities | 42 | - | - | - | - | - | - | 42 | 42 | ||||||||||
| Total | 8,452 | 2,577 | 1,280 | 837 | 980 | 1,982 | 2,249 | 18,457 | 17,094 | ||||||||||
| Interest on perpetual bonds and notes | 112 | 109 | 73 | 73 | 62 | 71 | 9 | 509 |
The duration analysis above is presented on an undiscounted basis. The carrying values in the statement of financial position are discounted where appropriate in accordance with Group accounting policy.
The capital and interest payable on the bonds and notes have been included until the dates on which the Group has the option to call the instruments and the interest rates are reset. For further information on the terms of the bonds and notes see note 20 to the financial statements.
Undiscounted interest payments are calculated based on underlying fixed interest (as detailed in note 20). Year end exchange rates have been used for interest projections on loans in foreign currencies.
OPERATIONAL RISK
Operational risk is the risk of direct or indirect losses resulting from human factors, external events and inadequate or failed internal processes and systems. Operational risks are inherent in the Group’s operations and are typical of any large enterprise. Major sources of operational risk can include operational process reliability, information security, outsourcing of operations, dependence on key suppliers, implementation of strategic and operational change, integration of acquisitions, fraud, human error, customer service quality, inadequacy of business continuity arrangements, recruitment, training and retention of staff, and social and environmental impacts.
.
The Group manages operational risk using a range of techniques and tools to identify, monitor and mitigate its operational risk in accordance with the Group’s risk appetite. These tools include Risk and Control Self Assessments, Key Risk Indicators (e.g. fraud and service indicators), Scenario Analyses and Loss Reporting. In addition, the Group has developed a number of contingency plans including Incident Management and Business Continuity Plans. Quantitative analysis of operational risk exposures material to the Group is used to inform decisions on the overall amount of capital held and the adequacy of contingency arrangements.
REPUTATIONAL RISK
Reputational risk is the current or prospective risk to earnings and capital arising from adverse perception of the image of the Group on the part of customers, counterparties, shareholders, investors or regulators. The External Communications team keeps under constant review
the threats to the Group’s reputation, both internal and external, and the Risk function works with them to promote a culture of responsibility from the front line businesses to the Board. The tools used include a reputational risk register, clear and simple processes, training, external threat and perception monitoring and crisis management plans.
STRATEGIC RISK
Strategic risk is the current and prospective impact on earnings or capital arising from adverse business decisions, improper implementation of decisions, or lack of responsiveness to industry changes. This risk is a function of the compatibility of an organisation’s strategic goals, the business strategies developed to achieve those goals, the resources deployed against these goals, and the quality of implementation. The strategic risk profile is kept under continuous review by the Group Executive Committee and forms a key element of quarterly Board Risk Committee meetings. The strategic risk profile is set out on page 33.
CAPITAL MANAGEMENT
Own Risk and Solvency Assessment (ORSA)
The Solvency II directive introduces a requirement for undertakings to conduct an ORSA. In anticipation of this requirement, the Group has updated its risk and capital management processes.
The Group defines its ORSA as a series of inter-related activities by which it establishes:
• The quantity and quality of the risks which it seeks to assume
• The level of capital required to support those risks
• The actions it will take to achieve and maintain the desired levels of risk and capital.
The assessments of how much risk to assume and how much capital to hold are inextricably linked. In some situations, it may be desirable to increase the amount of risk assumed or retained in order to make the most efficient use of capital available or else to return excess capital to capital providers. In other situations, where the risks assumed give rise to a capital requirement that is greater than the capital immediately available to support those risks, it will be necessary either to reduce the risk assumed or to obtain additional capital.
The assessment of risk and solvency needs is in principle carried out continuously. In practice, the assessment consists of a range of specific activities and decisions carried out at different times of the year as part of an annual cycle, supplemented as necessary by ad hoc assessments of the impact of external events and developments and of internal business proposals.
Papers are presented to the Board throughout the year dealing with individual elements that make up the ORSA. The information contained in those papers and the associated decisions taken are summarised in an annual ORSA report.
Capital appetite
The Group’s objective is to maintain sufficient capital, which comprises shareholders’ equity and subordinated loan capital, to meet its plan and objectives. This represents sufficient surpluses for both regulatory and economic capital, as well as sufficient capital to support the Group’s aim of maintaining single ‘A’ ratings. To assist in managing its capital position, the Group has set internal target coverage ratios for each of the principal capital measures. Further discussion of capital risks and how they are monitored and managed is included in the Risk Management section of the Strategic Report.
The Group’s regulated entities aim to hold appropriate levels of capital to satisfy applicable local regulations. In certain instances this could restrict the subsidiaries’ ability to transfer funds to the UK parent where retained earnings form part of the local required regulatory capital. Additionally, regulation in certain countries in which the Group’s subsidiaries operate may also impose other limitations such as foreign exchange control restrictions.
Economic capital (unaudited)
Economic capital is the Group’s preferred measure of capital sufficiency. It is the Group’s own assessment of the amount of capital it needs to hold to meet its obligations given the Group’s risk appetite. The economic capital analysis compares available capital with the economic capital assessment (ECA). Available capital is the capital (over and above the IFRS insurance liabilities) that is available to absorb losses. It includes subordinated debt, but excludes items such as goodwill and other intangible assets, deferred tax items and pension scheme surpluses and deficits. ECA is the capital required to meet liabilities at a confidence level equivalent to Standard & Poor’s long-term A rated bond default curve.
| 2013 £bn | 2012 £bn | ||||
| Available capital | 3.1 | 3.8 | |||
| ECA | 2.4 | 3.1 | |||
| ECA surplus | 0.7 | 0.7 |
The overall position remains unchanged as losses due to issues identified in Ireland and adverse weather have been offset by profitability elsewhere in the Group.
The economic capital model is used to support, inform and improve the Group’s decision making across the Group. It is used to determine the Group’s optimum capital structure, its investment strategy, its reinsurance programme and to determine the pricing and target returns for each portfolio. The economic capital model is also used for the Group’s Individual Capital Assessment (ICA). The only adjustment made is to use the PRA’s required calibration.
Regulatory solvency position
The Group remains fully compliant with both the PRA’s risk based ICA methodology and Solvency I, which is used to calculate the Insurance Groups Directive (IGD) requirement.
For the Group’s senior regulated insurance company, Royal & Sun Alliance Insurance plc, the capital position continues to be reported under Solvency I.
As at 31 December 2013 the Group has an IGD surplus of £0.2bn (unaudited) (2012: £1.2bn). The IGD surplus has been impacted by adverse movements in investment markets with significant reductions in bond values, retained losses and an increase in requirements resulting from higher business volumes. The coverage ratio stood at 1.1 times (unaudited) at 31 December 2013 (2012: 1.9 times).
The Group received its latest Individual Capital Guidance (based on its ICA submission) from the PRA in February 2014 and at the request of the PRA remains confidential. The ICA is a forward looking, economic assessment of the capital requirements of the Group based on its assessment of the risks to which it is exposed. The models used to determine the ICA have been integrated into the Group’s business processes and are used to enhance the management of the Group.
NOTES TO THE FINANCIAL STATEMENTS
33. RELATED PARTY TRANSACTION S
The ultimate Parent Company of the Group is RSA Insurance Group plc which is incorporated in England and Wales.
The following transactions were carried out with related parties:
Key management compensation
| 2013 £m | 2012 £m | ||||
| Salaries and other short-term employee benefits | 7 | 6 | |||
| Bonus awards | 1 | 3 | |||
| Pension benefits | 1 | 1 | |||
| Share based awards | – | (1) | |||
| Total | 9 | 9 |
Key management personnel comprise members of the Group Executive Committee (including Executive Directors) and Non-Executive Directors.
Included in salaries and other short-term employee benefits is £3,116,000 (2012: £4,207,000) paid in respect of directors. These amounts exclude the value of share options granted to directors and gains made on the exercise of such options, Group contributions paid in respect of pension schemes and cash or other assets received or receivable under long-term incentive schemes. The total value of the directors’ remuneration (including values for these excluded items) and other details are disclosed in the Remuneration Report.
A number of the directors, other key managers, their close families and entities under their control have general insurance policies with subsidiary companies of the Group. Such policies are available at discounted rates to all employees including Executive Directors.
As at 31 December 2013, there are interest free loan totalling £5,000 (2012: £5,000) outstanding to members of the key management team under standard terms of the Group’s UK Car Ownership Scheme, which is open to all UK managers within a qualifying salary band.
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