TIDMRSAB
RNS Number : 2696I
RSA Insurance Group Limited
04 August 2023
4 August 2023
RSA Insurance Group Limited
(the "Company")
2023 Interim Results
In accordance with its obligations under section 4.2.2. of the
Disclosure Guidance and Transparency Rules, the Company announces
that its Interim Results for the period ended 30 June 2023 are
available on the Company's website at www.rsagroup.com . The
document has also been submitted to the National Storage Mechanism
and will shortly be available for inspection at
https://data.fca.org.uk/#/nsm/nationalstoragemechanism .
In fulfilment of its obligations under sections 6.3.3(2) and
6.3.5(1) of the Disclosure Guidance and Transparency Rules, the
Company hereby releases the unedited full text of its 2023 Interim
Results for the period ended 30 June 2023.
Enquiries:
Anthony Murtagh
Head of External Communications
RSA Insurance Group Limited
+44 (0) 7469 441622
LEI: 549300HOGQ7E0TY86138
INTERIM MANAGEMENT REPORT
For the six month period ended 30 June 2023.
RSA Insurance Group Limited (the Company) is incorporated and
domiciled in England and Wales. The Company's immediate parent
company is 2283485 Alberta Limited. The Company's ultimate parent
company and controlling party is Intact Financial Corporation (IFC)
.
Principal activity
The principal activity of the Company, its subsidiaries and
associates (together the Group or RSA) remains the transaction of
insurance and related financial services predominantly in the
United Kingdom and internationally in Ireland and Europe.
Business review
Comparatives are re-stated following the adoption of IFRS 17 -
Insurance Contracts (IFRS 17) on 1 January 2023. Refer to note 4
Adoption of new and revised accounting standards for the impact of
the adoption of IFRS 17.
For the six month period ended 30 June 2023, the Group reports a
profit before tax of GBP55m (six month period ended 30 June 2022:
GBP224m).
Profit before tax of GBP55m consists of GBP82m underwriting
profit (six month period ended 30 June 2022: GBP86m profit),
investment result GBP79m (six month period ended 30 June 2022:
GBP59m), GBP7m central costs (six month period ended 30 June 2022:
GBP10m) and (GBP99m) of other income and charges (six month period
ended 30 June 2022: GBP89m).
On 28 March 2023, the Group announced its exit from the UK
personal lines motor insurance market. Profit before tax in the six
month period to 30 June 2023 is impacted by the de-recognition of
GBP34m of software assets in relation to this withdrawal. In the
six month period ended 30 June 2022, software assets with a net
book value of GBP18m were de-recognised (refer to note 9 Goodwill
and intangible assets). In addition, other income and charges
includes GBP26m of acquisition and integration costs (six month
period to 30 June 2022: GBP45m).
Net written premiums for the six month period ended 30 June 2023
are GBP1,375m (six month period ended 30 June 2022: GBP1,561m).
Net assets of the Group as at 30 June 2023 are GBP2,209m (31
December 2022: GBP2,496m).
On 27 February 2023, the Group announced that the Trustees of
its two major defined benefits pension plans had entered into an
agreement with Pension Insurance Corporation plc (PIC), a
specialist insurer of defined benefit pension plans, to purchase
annuity buy-in insurance contracts (the buy-ins) as part of their
de-risking strategy. At the transaction date, the plans transferred
the majority of their plan assets and an upfront contribution of
GBP481m to PIC. Refer to note 15 Employee future benefits for
further information on this transaction.
The Group provides insurance to the Motability Scheme. On 22
July 2021, it was announced that Motability Operations Ltd had
decided to move their business to a different insurer. On 24 June
2023, a contract variation was signed to formalise exit
arrangements. This has resulted in the reversal of net written
premium of GBP168m. There is no impact on Insurance revenue. The
reversal of net written premiums is provided for and consequently
has no impact on the movement in earned premium (refer to note 24
Alternative performance measures).
Related party transactions
The Group received capital injections of GBP480m and GBP39m
during the six month period to 30 June 2023 from 2283485 Alberta
Limited (six month period ended 30 June 2022: GBP294m). The 2023
capital injections funded the pension fund buy-in (refer to note 15
Employee future benefits) and the repurchase of issued debt (refer
to note 14 Issued debt) respectively. The Group has not declared a
dividend in the period (six month period ended 30 June 2022: nil).
Refer to note 23 for further information on all related party
transactions.
Key performance indicators (KPIs)
The Group uses both IFRS and non-IFRS financial measures
(alternative performance measures, APMs) to assess performance,
including common insurance industry metrics.
The KPIs most relevant to the financial performance of the Group
are:
-- net written premiums(1) GBP1,375m (2022: GBP1,561m): premiums
incepted in the period, irrespective of whether they have been
paid, less the amount shared with reinsurers. The Group targets
growth without compromising underwriting performance.
-- underwriting result(1) GBP82m (six month period ended 30 June
2022: GBP86m), net earned premium and other operating income less
net claims and underwriting and policy acquisition costs. The Group
aims to provide competitive pricing to customers that delivers a
sustainable ongoing underwriting profit for the Group.
-- profit before tax GBP55m (six month period ended 30 June
2022: GBP224m), net profit generated before taxes have been
deducted. This is a key statutory measure of the earnings
performance of the Group. The Group seeks to maximise its profit
before tax.
(1) Net written premiums and the underwriting result are APMs.
Refer to note 24 for reconciliation to the nearest IFRS
measure.
Principal risks and uncertainties
The Group continues to assess its principal risks and
uncertainties and how these are managed. Any update to the risk
management information disclosed in note 6 of the 2022 Annual
Report and Accounts is provided in the below notes to the interim
condensed consolidated financial statements.
The Group adopted IFRS 17 and IFRS 9 - Financial instruments
(IFRS 9) on 1 January 2023. IFRS 17 and IFRS 9 require management
to use judgements, estimates and assumptions, further details of
which are provided in note 7 Insurance and reinsurance contracts
and note 13 Financial risk respectively.
INTERIM CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL
POSITION
As at 30 June 2023
(Unaudited) (Unaudited) (Unaudited)
30 June 2023 31 December 1 January
2022 2022
Restated(1) Restated(1)
Note GBPm GBPm GBPm
==================================== ==== ============ =========== ===========
Assets
Cash and cash equivalents 295 362 500
Financial assets 6 5,168 5,334 5,530
Investment property 300 291 371
Reinsurance contract assets 7 1,719 1,718 1,626
Income taxes receivable 1 1 2
Deferred tax assets 8 267 267 148
Property and equipment 116 121 91
Intangible assets 9 308 307 273
Goodwill 9 23 24 39
Other assets 10 280 442 732
Total assets 8,477 8,867 9,312
==================================== ==== ============ =========== ===========
Liabilities -
Insurance contract liabilities 7 5,697 5,806 5,599
Financial liabilities related to
investments 11 54 26 58
Income taxes payable 3 1 4
Debt outstanding 14 126 166 165
Other liabilities 10 388 372 355
Total liabilities 6,268 6,371 6,181
==================================== ==== ============ =========== ===========
Equity
Equity attributable to shareholders 2,209 2,496 2,975
Non-controlling interests - - 156
==================================== ==== ============ =========== ===========
Total equity and liabilities 8,477 8,867 9,312
==================================== ==== ============ =========== ===========
(1) Restated for the adoption of IFRS 17. Refer to note 4. Adoption
of new and revised accounting standards. Due to this restatement, annual
comparative information is unaudited.
The following explanatory notes form an integral part of these
interim condensed consolidated financial statements.
The interim condensed consolidated financial statements were
approved on 3 August 2023 by the Board of Directors and are signed
on its behalf by:
Ken Anderson
Chief Financial Officer
INTERIM CONDENSED CONSOLIDATED INCOME STATEMENT
For the six month period ended 30 June 2023
(Unaudited) (Unaudited)
30 June 2023 30 June 2022
Restated(1)
Note GBPm GBPm
-------------------------------------------- ----- ------------- -------------
Income
Insurance revenue 7 1,965 2,098
Insurance service expenses (1,719) (1,869)
============================================ ===== ============= =============
Insurance service result from insurance
contracts 246 229
============================================ ===== ============= =============
Allocation of reinsurance premiums 7 (450) (444)
Amounts recoverable from reinsurers 320 322
============================================ ----- ============= =============
Net expense from reinsurance contracts (130) (122)
============================================ ===== ============= =============
Insurance service result 116 107
============================================ ===== ============= =============
Net investment income 17 79 59
Net (losses) gains on investment portfolio 17 (62) 141
============================================ ===== ============= =============
Net investment return 17 200
============================================ ----- ============= =============
Insurance finance income (expense) 17 28 (6)
Reinsurance finance expense 17 (5) (18)
============================================ ===== ============= =============
Net insurance financial result 23 (24)
============================================ ===== ============= =============
Other net gains 1 19
Other income and expenses (27) (28)
Acquisition, integration and restructuring
costs (70) (45)
Other finance costs (5) (5)
============================================ ===== ============= =============
Profit before tax 55 224
============================================ ===== ============= =============
Income tax expense 18 (64) (32)
============================================ ===== ============= =============
(Loss)/profit for the period (9) 192
============================================ ===== ============= =============
Attributable to:
Owners of the Parent Company (9) 197
Non-controlling interests - (5)
============================================ ===== ============= =============
(9) 192
============================================ ===== ============= =============
(1) Restated for the adoption of IFRS 17. Refer to note 4. Adoption
of new and revised accounting standards.
The following explanatory notes form an integral part of these
interim condensed consolidated financial statements.
INTERIM CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE
INCOME
For the six month period ended 30 June 2023
(Unaudited) (Unaudited)
30 June 30 June
2023 2022
Restated
(1)
Note GBPm GBPm
----------------------------------------------------------- ----- ----------- -----------
(Loss)/profit for the period (9) 192
Items that may be reclassified to the income
statement:
Exchange (losses) gains of tax on translation
of foreign operations (3) 29
Fair value losses on available for sale financial
assets net of tax (2) - (264)
Fair value losses on FVTOCI assets net of tax
(3) (11) -
------------------------------------------------------------------ ----------- -----------
(14) (235)
Items that will not be reclassified to the income
statement:
Pension - remeasurement of defined benefit asset/liability
net of tax (777) 32
Total other comprehensive expense for the period (791) (203)
================================================================== =========== ===========
Total comprehensive expense for the period (800) (11)
================================================================== =========== ===========
Attributable to:
Owners of the Parent Company (800) (22)
Non-controlling interests - 11
------------------------------------------------------------------ ----------- -----------
(800) (11)
================================================================= =========== ===========
(1) Restated for the adoption of IFRS 17. Refer to note 4. Adoption
of new and revised accounting standards.
(2) Not applicable for the six month period ended 30 June 2023 as related
to IAS 39 Financial instruments. Refer to note 4. Adoption of new and
revised accounting standards.
(3) Not applicable for the six month period ended 30 June 2022 as related
to IFRS 9. Refer to note 4. Adoption of new and revised accounting
standards.
The following explanatory notes form an integral part of these
interim condensed consolidated financial statements.
INTERIM CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
EQUITY
For the six month period ended 30 June 2023
(Unaudited)
Ordinary Ordinary Preference Tier Revaluation Foreign Retained Equity Non-controlling Total
share share shares 1 reserves currency earnings attributable interests equity
capital premium notes translation to
reserve owners
of
the
Parent
Company
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
================== ========= ========= =========== ====== ============ ============ ========= ============= ================ ========
Balance at 31
December
2022 (as
reported) 1,563 282 125 - (224) 54 545 2,345 - 2,345
Impact of the
application
of IFRS 17 - - - - - - 151 151 - 151
================== --------- --------- ----------- ------ ------------ ------------ --------- ------------- ---------------- --------
Balance at 31
December
2022 (restated) 1,563 282 125 - (224) 54 696 2,496 - 2,496
Impact of the
initial
application of
IFRS
9 - - - - 98 - (99) (1) - (1)
================== --------- --------- ----------- ------ ------------ ------------ --------- ------------- ---------------- --------
Balance at 1
January
2023 1,563 282 125 - (126) 54 597 2,495 - 2,495
Total
comprehensive
income
--------- --------- ----------- ------ ------------ ------------ --------- ------------- ---------------- --------
Loss for the
period - - - - - - (9) (9) - (9)
Other
comprehensive
expense for the
period - - - - (11) (3) (777) (791) - (791)
- - - - (11) (3) (786) (800) - (800)
Transactions with
owners
of the Group
Contribution and
distribution
--------- --------- ----------- ------ ------------ ------------ --------- ------------- ---------------- --------
Dividends - - - - - - (5) (5) - (5)
Shares issued for
cash - 519 - - - - - 519 - 519
- 519 - - - - (5) 514 - 514
Balance at 30
June
2023 1,563 801 125 - (137) 51 (194) 2,209 - 2,209
================== ========= ========= =========== ====== ============ ============ ========= ============= ================ ========
Balance at 31
December
2021 (as
reported) 1,269 282 125 297 105 53 804 2,935 156 3,091
Impact of the
application
of IFRS 17 - - - - - - 40 40 - 40
================== ========= ========= =========== ====== ============ ============ ========= ============= ================ ========
Balance at 1
January
2022 (restated) 1,269 282 125 297 105 53 844 2,975 156 3,131
Total
comprehensive
income
--------- --------- ----------- ------ ------------ ------------ --------- ------------- ---------------- --------
Profit for the
period - - - - - - 197 197 (5) 192
Other
comprehensive
(expense)/income
for
the period - - - - (263) 12 32 (219) 16 (203)
- - - - (263) 12 229 (22) 11 (11)
Transactions with
owners
of the Group
Contribution and
distribution
--------- --------- ----------- ------ ------------ ------------ --------- ------------- ---------------- --------
Dividends - - - - - - (8) (8) (2) (10)
Shares issued for
cash 294 - - - - - - 294 - 294
Tier 1 note
redemption
(note 20) - - - (297) - - 22 (275) - (275)
--------- --------- ----------- ------ ------------ ------------ --------- ------------- ---------------- --------
294 - - (297) - - 14 11 (2) 9
Balance at 30
June
2022 (restated) 1,563 282 125 - (158) 65 1,087 2,964 165 3,129
================== ========= ========= =========== ====== ============ ============ ========= ============= ================ ========
The following explanatory notes form an integral part of these
interim condensed consolidated financial statements.
INTERIM CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the six month period ended 30 June
(Unaudited) (Unaudited)
30 June 2023 30 June 2022
Restated(1)
Note GBPm GBPm
=================================================== ===== ============= =============
Cash flows from operating activities
Income before income taxes 55 224
Income tax paid, net (2) (2)
Adjustments for non-cash items 22 92 (34)
Changes in other operating assets and liabilities 22 (678) (46)
=================================================== ===== ============= =============
Net cash flows provided by (used in) operating
activities (533) 142
=================================================== ===== ============= =============
Cash flows from investing activities
Proceeds from sale of investments 1,271 911
Purchases of investments (1,203) (1,180)
Purchases of intangibles and property and
equipment, net (67) (55)
=================================================== ===== ============= =============
Net cash flows provided by (used in) investing
activities 1 (324)
=================================================== ===== ============= =============
Cash flows from financing activities
Payment of lease liabilities (5) (8)
Redemption of long-term borrowings 14 (40) (275)
Proceeds from issuance of ordinary shares,
net 19 519 294
Payment of dividends on preferred shares
and interest on tier 1 notes (5) (8)
Payment of dividends to non-controlling interests - (2)
Interest paid (2) (1)
=================================================== ===== ============= =============
Net cash flows provided by financing activities 467 -
=================================================== ===== ============= =============
Net decrease in cash and cash equivalents (64) (182)
Cash and cash equivalents at beginning of
the period, net of held for sale 353 493
Effect of exchange rate changes on cash and
cash equivalents (3) 8
Cash and cash equivalents at end of the
period 286 319
=================================================== ===== ============= =============
Composition of cash and cash equivalents
Cash 205 249
Cash equivalents 90 87
Overdrafts (9) (17)
=================================================== ===== ============= =============
Cash and cash equivalents, end of period 286 319
=================================================== ===== ============= =============
Other relevant cash flow disclosures - operating
activities
Interest received 84 73
Dividends received 5 7
--------------------------------------------------- ----- ------------- -------------
(1) Restated for the adoption of IFRS 17. Refer to note 4. Adoption
of new and revised accounting standards.
The following explanatory notes form an integral part of these
interim condensed consolidated financial statements.
BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES
Glossary of abbreviations
12mECL 12-month expected credit loss HTC Held-to-collect
AFS Available-for-sale HTC&S Held-to-collect and sell
Accumulated other comprehensive IAS International Accounting Standard
AOCI income (loss)
Canadian Dollar, Canada's official IASB International Accounting Standards
CAD currency Board
International Financial Reporting
CPI Consumer price index IFRS Standards
DB Defined benefits LTECL Lifetime expected credit loss
ECL Expected credit losses OCI Other comprehensive income
Currency of the Euro zone countries
EUR (EUR) in Europe PAA Premium Allocation Approach
Fair value through other comprehensive
FVTOCI income RPI Retail price index
Fair value through profit or S olely payments of principal
FVTPL loss SPPI and interest
British pound sterling, UK's UK United Kingdom
GBP (GBP) official currency
GMM General Measurement Model USD US Dollar, United States official
currency
--------- -------------------------------------- ----- ----------------------------------
1. Status of the entity
These interim consolidated financial statements include the
accounts of the Company and its subsidiaries. The Company's
significant operating subsidiaries are as presented in appendix C
of the Company's annual consolidated financial statements for the
year ended 31 December 2022 . The statutory accounts of RSA
Insurance Group Limited for the year ended 31 December 2022 have
been delivered to the Registrar of Companies. The independent
auditor's report on the Group accounts for the year ended 31
December 2022 is unqualified, does not draw attention to any
matters by way of emphasis and does not include a statement under
section 498(2) or (3) of the Companies Act 2006.
The registered office of the Company is Floor 8, 22 Bishopsgate,
London, EC3M 3AU, United Kingdom.
2. Basis of presentation
2.1 Statement of compliance
These interim consolidated financial statements and the
accompanying notes are prepared in accordance with IAS 34 - Interim
Financial Reporting as adopted in the UK. They were authorised for
issue in accordance with a resolution of the Board of Directors on
3 August 2023.
2.2 Preparation and presentation of financial statements
These interim consolidated financial statements are condensed
financial statements and should be read in conjunction with the
Company's annual consolidated financial statements for the year
ended 31 December 2022.
Comparative information has been restated due to the adoption of
IFRS 17. In addition, certain comparative figures have been
reclassified to conform to the presentation adopted in the current
period.
The comparative figures for the financial year ended 31 December
2022 are not the Group's statutory accounts for that financial year
but are derived from the accounts. Those accounts have been
reported on by the Group's auditor and delivered to the registrar
of companies. The report of the auditor was (i) unqualified; (ii)
did not include a reference to any matters to which the auditor
drew attention by way of emphasis without qualifying their report;
and (iii) did not contain a statement under section 498 (2) or (3)
of the Companies Act 2006.
The Group presents its interim consolidated balance sheets
broadly in order of liquidity.
2.3 Seasonality
The personal and commercial insurance business is seasonal in
nature. While insurance revenues are generally stable from period
to period, insurance service results may vary significantly between
reporting periods, driven mainly by weather conditions.
2.4 Foreign currency translation
Spot rate as at Average rate for
the period ended
30 June 31 December 31 December 30 June 30 June
2023 2022 2021 2023 2022
===== ======== ============ ============ ========= =========
CAD 1.68 1.64 1.71 1.66 1.65
USD 1.27 1.20 1.35 1.23 1.30
EUR 1.17 1.13 1.19 1.14 1.19
===== ======== ============ ============ ========= =========
2.5 Going concern
The interim condensed consolidated financial statements have
been prepared on a going concern basis. In adopting the going
concern basis, the Board have reviewed the Group's ongoing
commitments for at least the next twelve months. The Board's
assessment included review of the Group's strategic plans and
latest forecasts, capital position and liquidity including on
demand capital funding arrangements with IFC. The risk profile,
both current and emerging, has been considered, as well as the
implications for capital. These assessments include sensitivity
analysis and stress testing of the forward-looking capital
projections, assessing a 1-in-10 year market risk shock and
reduction of longer-term underwriting profitability. Key risk
indicators demonstrate that the risk appetite is aligned to the
available capital. In making their assessment, the Board have
reviewed the latest position on business interruption losses and
availability of reinsurance to recover incurred claims and there
has been no significant change in the estimated ultimate position
based on these updates. The Board have considered the impact of
events after the balance sheet date, with none identified which
could impact the Group's ability to continue as a going
concern.
Based on this review no material uncertainties that would
require disclosure have been identified in relation to the ability
of the Group to remain a going concern for at least the next twelve
months, from both the date of the interim condensed consolidated
statement of financial position and the approval of the interim
condensed consolidated financial statements.
3. Summary of material accounting policies
The accounting policies applied during the period ended 30 June
2023 are the same as those described and disclosed in note 5 and
appendix A of the annual consolidated financial statements for the
year ended 31 December 2022 except for the new standards and
amendments to existing standards described below:
3.1 Insurance and reinsurance contracts
The Group adopted IFRS 17 on 1 January 2023. It was applied
retrospectively as at 1 January 2022 and as a result the
comparative information has been restated. Refer to note 4 -
Adoption of new accounting standards for the impact on the adoption
of IFRS 17.
IFRS 17 requires management to use judgements, estimates and
assumptions, further details of which are provided in note 7 -
Insurance and reinsurance contracts.
IFRS 17 accounting policies are described below.
a) Classification
Insurance contracts transfer significant insurance risk at the
inception of the contract. Insurance risk is transferred when the
Group agrees to compensate a policyholder on the occurrence of an
adverse specified uncertain future event. As a general guideline,
the Group determines whether it has significant insurance risks by
comparing the benefits that could become payable under various
possible scenarios relative to the premium received from the
policyholder for insuring the risk.
The Group issues insurance contracts in the normal course of
business (direct business) and holds reinsurance contracts (ceded
business), under which it is compensated by other entities for
claims arising from one or more insurance contracts issued by the
Group. The Group may acquire insurance and reinsurance contracts
through a business combination or transfer of contracts. All
references to insurance and reinsurance contracts include contracts
issued and acquired by the Group, unless otherwise stated.
b) Separating components from insurance and reinsurance contracts
Insurance and reinsurance contracts are assessed to determine
whether they contain components which must be accounted for under
an IFRS other than the insurance contract standard. The Group's
insurance and reinsurance contracts do not include any components
that require separation.
c) Level of aggregation
Insurance and reinsurance contracts are aggregated into
portfolios and groups for measurement purposes. Portfolios are
comprised of contracts with similar risks which are managed
together. The Group divides its direct and ceded business into
portfolios. Management uses judgement in considering the main
geographic areas, lines of business, distribution channels and
legal entities in which it operates as the relevant drivers for
establishing its various portfolios. Portfolios are then divided
into groups of contracts based on expected profitability. Such
groups do not contain contracts issued more than one year apart
since they are further subdivided into annual cohorts.
Portfolios of insurance contracts that are assets and those that
are liabilities and portfolios of reinsurance contracts that are
assets and those that are liabilities are presented separately in
the consolidated balance sheet.
d) Recognition
Groups of insurance and reinsurance contracts are recognised
from the earliest of the following:
i. The beginning of the coverage period (except for
proportionate coverage reinsurance that could be recognised at a
later date when any underlying insurance contract is initially
recognised);
ii. The date that the first payment is due;
iii. The date of acquisition for contracts acquired in a
business combination or transfer of contracts; or
iv. The date when facts and circumstances indicate that the
group of contracts is potentially onerous.
Groups of contracts are established on initial recognition and
their composition is not revised subsequently.
Any premiums received before the recognition of the
corresponding group of insurance contracts are recognised as
deferred revenues in Other liabilities. When the group of contracts
are recognised as per above the premiums received are reclassified
to the liability for remaining coverage.
e) Contract boundary
The measurement of a group of contracts includes all the future
cash flows within the boundary of each contract.
Cash flows are within the boundary of insurance and reinsurance
contracts if they arise from substantive rights and obligations
that exist during the reporting period in which the Group:
i. Can compel the policyholder to pay the premiums or has a
substantive obligation to provide the policyholder with insurance
contract services;
ii. Is compelled to pay amounts to the reinsurer or has a
substantive right to receive services from the reinsurer.
A substantive obligation or right ends when:
i. The Group or reinsurer has the practical ability to reassess
risks and can set a price or level of benefits that fully reflects
those risks;
ii. The reinsurer has a substantive right to terminate the coverage.
The contract boundary is reassessed at each reporting date to
include the effect of changes in circumstances on the Group's
substantive rights and obligations and, therefore, may change over
time.
f) Measurement models
The Group uses different measurement models depending on the
type of contract.
Type of contract Measurement model
--------------------------------------------------------------- ------------------
All of the Group's insurance and reinsurance contracts PAA
except for retroactive reinsurance contracts
--------------------------------------------------------------- ------------------
Retroactive reinsurance contracts to cover adverse development GMM
of existing claims
--------------------------------------------------------------- ------------------
The carrying amount of a group of insurance contracts at the end
of each reporting period is comprised of the following:
Component Description Relates to
--------------- ------------------------------------------------ ---------------
Liability The obligation to provide coverage after the Future service
for remaining reporting period for insured events that have
coverage not yet occurred.
--------------- ------------------------------------------------ ---------------
Liability The obligation to investigate and pay valid Past service
for incurred claims for insured events that have already
claims occurred, including events that have occurred
but for which claims have not been recognised,
and other incurred insurance expenses.
--------------- ------------------------------------------------ ---------------
Premium Allocation Approach
The Group applies the PAA when measuring the liability for
remaining coverage as follows:
Description
------------------ -----------------------------------------------------------------------
Overview Simplified measurement model which may be applied to insurance
contracts when:
i. The coverage period is one year or less; or
ii. For contracts longer than one year, and there is no material
difference in the liability for remaining coverage between
the PAA and the GMM.
------------------ -----------------------------------------------------------------------
Contracts All insurance and reinsurance contracts, except in limited
applying this circumstances where the GMM is required.
model
------------------ -----------------------------------------------------------------------
Initial and The liability for remaining coverage includes:
subsequent i. Premiums received;
measurement ii. Minus insurance acquisition cash flows paid net of the
amortisation of the insurance acquisition cash flows recognised;
iii. Minus amounts recognised as insurance revenue for the
services provided; and
iv. Loss component for onerous contracts.
------------------ -----------------------------------------------------------------------
Onerous contracts The Group assumes that no contracts in a portfolio are potentially
onerous at initial recognition unless facts and circumstances
indicate otherwise.
The Group has developed a methodology for identifying indicators
of possible onerous contracts, which includes internal management
information, forecast information and historic experience
(refer to Onerous contracts below).
------------------ -----------------------------------------------------------------------
Other policies The Group:
i. Does not discount the liability for remaining coverage;
ii. Allocates insurance acquisition cash flows to related
groups and amortise them over the coverage period of those
groups.
------------------ -----------------------------------------------------------------------
Reinsurance Reinsurance contracts are measured on the same basis as insurance
contracts contracts.
------------------ -----------------------------------------------------------------------
General Measurement Model
The Group applies the GMM when measuring the liability for
remaining coverage as follows:
Description
------------------ -------------------------------------------------------------------------
Overview Default model to measure insurance contracts using updated
estimates and assumptions that reflect the timing of cash
flows and any uncertainty relating to insurance contracts.
The liability for remaining coverage includes:
Fulfilment cash flows which are comprised of:
i. discounted estimates of future cash flows; and
ii. a risk adjustment for non-financial risk (risk adjustment)
which is the compensation required for bearing uncertainty.
Contractual service margin, which is the unearned profit
that is recognised as services are provided.
------------------ -------------------------------------------------------------------------
Contracts A limited number of contracts for retroactive reinsurance
applying this contracts to cover adverse development of existing claims,
model where the Group acts as the reinsurer or is reinsured.
------------------ -------------------------------------------------------------------------
Initial and At initial recognition, unless the group of contracts is
subsequent onerous, the contractual service margin is measured at an
measurement amount that results in no income or expenses arising from:
i. initial recognition of fulfilment cash flows;
ii. any cash flows arising from the contracts in the group
at that date; and
iii. any amount arising from the derecognition of assets
or liabilities previously recognised for cash flows related
to the group.
Subsequently, the contractual service margin is adjusted
for:
i. the effect of any new contracts;
ii. interest accreted at the discount rates at initial recognition
(locked-in discount rate);
iii. changes in fulfilment cash flows relating to future
service, except to the extent that such:
* increases exceed the contractual service margin, in
which case the excess is recognised as a loss in Net
income and a loss component is recognised;
* decreases are allocated to the loss component,
reversing losses previously recognised in Net income;
iv. the effect of any currency exchange differences; and
v. amounts recognised as insurance revenue for services provided,
determined by allocating the contractual service margin over
the current and remaining service coverage period.
Changes in fulfilment cash flows related to c urrent services
are recognised immediately in Net income which include:
i. changes in risk adjustment for expired risk;
ii. experience adjustments which are the difference between
estimated premiums and claims and other insurance service
expenses incurred in the period; and
iii. past services relate to prior year development.
------------------ -------------------------------------------------------------------------
Onerous contracts Groups of contracts are assessed as onerous when there is
a net outflow of fulfilment cash flows and the contractual
service margin is zero (refer to Onerous contracts below).
------------------ -------------------------------------------------------------------------
Other elections Estimates made in previous interim periods are revised therefore
cash flows are measured on a year-to-date basis.
------------------ -------------------------------------------------------------------------
Reinsurance Reinsurance contracts are measured on the same basis as insurance
contracts contracts, except:
i. they include an allowance for non-performance risk by
the reinsurer which considers collateral;
ii. the risk adjustment represents the amount of risk being
transferred to the reinsurer;
iii. day 1 gains/losses are recognised initially as a contractual
service margin and released to Net income as the reinsurer
renders services, except for day 1 loss related to events
before initial recognition; and
iv. changes in fulfilment cash flows are recognised in Net
income if changes in the related underlying ceded contracts
have been recognised in Net income as well. Otherwise, changes
in the fulfilment cash flows adjust the contractual service
margin.
------------------ -------------------------------------------------------------------------
Onerous contracts
For onerous contracts, a loss component determined based on
estimated fulfilment cash flows is included in the liability for
remaining coverage when insurance contracts are issued with a loss
recognised immediately in Net income. The loss component is
reversed to Net income over the coverage period, therefore
offsetting incurred claims. The loss component is measured on a
gross basis but may be mitigated by a loss recovery component if
the contracts are covered by reinsurance.
The loss-recovery component is calculated by multiplying the
loss recognised on the underlying insurance contracts and the
percentage of claims on the underlying insurance contracts the
Group expects to recover from the group of reinsurance contracts.
The Group uses a systematic and rational method to determine the
portion of losses recognised on the group to insurance contracts
covered by the group of reinsurance contracts where some contracts
in the underlying group are not covered by the group of reinsurance
contracts. The loss-recovery component adjusts the carrying amount
of the asset for remaining coverage.
Where, during the coverage period, facts and circumstances
indicate that a group of insurance contracts is onerous, the Group
applies the same analysis it has performed for groups potentially
onerous at initial recognition.
Liability for incurred claims
At initial recognition of a group of contracts, the liability
for incurred claims is nil as no insured events have occurred.
The Group estimates the liability for incurred claims as the
fulfilment cash flows related to incurred claims. The fulfilment
cash flows incorporate, in an unbiased way, all reasonable and
supportable information available without undue cost or effort
about the amount, timing and uncertainty of those future cash
flows. They reflect current estimates from the perspective of the
Group and include an explicit risk adjustment. The Group adjusts
the liability for incurred claims for the time value of money for
all its groups.
Liability for incurred claims includes periodic payment orders
which are settlements in the form of annuities awarded by UK courts
on some high value injury claims where the claimant's quality of
life has been impaired due to severe injuries. These annuities are
payable until death and increase annually, applying a defined index
set in the court decision, usually linked to care provider
professionals' salaries and are eligible for reinsurance where
applicable.
g) Modification and derecognition
The Group derecognises insurance contracts when:
i. The rights and obligations relating to the contract are extinguished; or
ii. The contract is modified such that it results in a change in
the measurement, substantially changes the contract boundary, or
requires the modified contract to be included in a different
group.
In such cases, the Group derecognises the initial contract and
recognises the modified contract as a new contract. When a
modification is not treated as a derecognition, the Group
recognises amounts paid or received for the modification as an
adjustment to the relevant liability for remaining coverage.
h) Insurance revenue
Insurance revenue on direct business are allocated to the period
and include:
i. Premium receipts net of cancellations and sales taxes; and
ii. Other insurance revenue which includes fees collected from
policyholders in connection with the costs incurred for the Group's
yearly billing plans.
For contracts measured under the:
i. PAA, the allocation is based on the passage of time which is usually 12 months.
ii. GMM, the allocation is based on the service coverage
provided which is the expected claims settlement pattern for
insured claims.
i) Insurance service expenses
Insurance service expenses include fulfilment and acquisition
cash flows which are costs directly attributable to insurance
contracts and are comprised of both direct costs and an allocation
of fixed and variable overhead costs. It is composed of the
following:
i. Incurred claims and other insurance service expenses, which
are fulfilment cash flows and include direct incurred claims and
non-acquisition costs directly related to fulfilling insurance
contracts;
ii. Amortisation of insurance acquisition cash flows; and
iii. Losses and reversal of losses on onerous contracts.
The Group has elected to present changes in risk adjustment
related to the non-financial portion in Insurance service result
and changes in the financial portion (unwinding and change in
discount rates) in Net insurance financial result.
j) Insurance acquisition cash flows
Insurance acquisition cash flows are costs directly attributable
to selling or underwriting a portfolio of insurance contracts and
are presented in the liability for remaining coverage. These cash
flows include direct costs such as commissions and indirect costs
such as salaries, rent and technology costs. The PAA provides the
option to expense insurance acquisition cash flows as they are
incurred. The Group has elected to amortise these costs on a
straight-line basis over the coverage period of the related
groups.
Where the insurance acquisition cash flows are paid before the
related group of insurance contracts is recognised, an asset is
recognised for each related group of insurance contracts. This
asset is derecognised when the insurance acquisition cash flows are
included in the measurement of the related group of insurance
contracts.
k) Insurance finance income and expense
Insurance finance income or expenses comprise the change in the
carrying amount of the group of insurance contracts arising from
the discount unwinding and changes in discount rates and the effect
of financial risk and changes in financial risk. The Group has
elected to record the changes in discount rates in finance income
and expenses in Net income.
l) Net income or expense from reinsurance contracts held
Net income or expense from reinsurance contracts held comprises
of the amounts expected to be recovered from reinsurers and an
allocation of the reinsurance premiums paid.
The Group treats reinsurance cash flows that are contingent on
claims of the underlying contracts as part of the amounts expected
to be recovered from reinsurers and includes commissions not
contingent on claims as a reduction of the allocation of
reinsurance premiums.
3.2 Financial instruments
The Group adopted IFRS 9 on 1 January 2023. The comparative
information was not restated and continues to be recognised under
IAS 39 - Financial instruments (IAS 39). Refer to note 4 - Adoption
of new accounting standards for the impact on the adoption of IFRS
9.
IFRS 9 requires management to use judgements, estimates and
assumptions, further details of which are provided in note 13 -
Financial risk.
IFRS 9 accounting policies are described below:
a) Classification and measurement of financial instruments
Business model assessment
The Group determines its investment business model by
considering its insurance business. In addition, judgement is used
in concluding which model aligns best with its core business
objectives and practices. Factors that are used in business model
decisions include how insurance business generate profits and cash
flow, significant risks facing the business on asset and liability
fronts, how compensation is determined for portfolio managers
responsible for managing investments, as well as historical and
projected turnover of the investment portfolio to fund insurance
business on a day-to-day basis. The Group's business models fall
into two categories, which are indicative of the key strategies to
generate returns:
i. The Group's primary business model is HTC&S which
provides a desired flexibility to support the Group's insurance
business i.e., contractual cash flows from financial assets are
collected by holding such investments, and these financial assets
are sold when required to fund insurance contract liabilities.
ii. The Group also carries certain financial assets under a HTC
business model where the emphasis is to collect contractual cash
flows. Sales are incidental to this objective and are expected to
be insignificant or infrequent.
The Group also specifically designates on an individual basis, a
portion of investments as FVTPL to reduce accounting mismatch in
Net income. This designation is irrevocable.
SPPI assessment
Financial assets which are held within HTC&S and HTC
business models are assessed to evaluate if their contractual cash
flows are comprised of SPPI. Contractual cash flows generally meet
SPPI criteria if such cash flows reflect compensation for basic
credit risk and customary returns from a debt instrument which also
includes time value for money. Where the contractual terms
introduce exposure to risk or variability of cash flows that are
inconsistent with a basic lending arrangement, the related
financial asset is classified and measured at FVTPL.
Debt instruments
The classification and measurement of debt instruments is
dependent on the business (refer to Business model assessment
above) model and cash flow characteristics of the asset as
described below. They are reclassified when and only when business
model for managing those assets changes.
Amortised cost FVTOCI FVTPL
--------------------------- --------------------------- --------------------------------------
Assets held for the Assets held for the Assets that do not meet the
collection of contractual collection of contractual criteria for amortised cost
cash flows. cash flows and for or FVTOCI are measured at FVTPL.
Cash flows represent selling the financial Irrevocable election can be
solely payments of assets. made (on an instrument-by-instrument
principal and interest. Cash flows represent basis) instead of amortised
solely payments of cost or FVTOCI if doing so
principal and interest. eliminates or significantly
reduces an accounting mismatch.
--------------------------- --------------------------- --------------------------------------
Equity instruments
There are two measurement categories under which an equity
instrument could be classified:
FVTPL FVTOCI
-------------------------------------- -----------------------------------------------------
Default classification for all equity Irrevocable election (on an instrument-by-instrument
instruments. basis) on the date of acquisition.
Designation is not permitted if the
equity instrument is held for trading.
-------------------------------------- -----------------------------------------------------
The Group's financial instruments are classified and measured as
follows:
Financial Initial and subsequent
Classification instruments Description measurement
----------------- ------------------- -------------------------------------- --------------------------------
FVTOCI Debt securities Investments intended to be Initially measured at fair
held for an indefinite period value using transaction
and which may be sold in prices at the trade date.
response to liquidity needs Subsequently measured at
or changes in market conditions. fair value using bid prices
at the end of the period
(except as noted below
for Level 3 instruments),
with changes in fair value
recognised in OCI when
unrealised or in Net gains
or losses when realised
or impaired.
----------------- ------------------- -------------------------------------- --------------------------------
Designated Debt securities A portion of the Group's Initially measured at fair
as FVTPL backing investments backing its insurance value using transaction
on initial insurance and reinsurance contracts prices at the trade date.
recognition and reinsurance has been voluntarily designated Subsequently measured at
contracts as FVTPL to eliminate the fair value using bid prices
accounting mismatch caused (for financial assets)
by fluctuations in fair values or ask prices (for financial
of underlying insurance and liabilities) at end of
reinsurance contracts due period, with changes in
to changes in discount rates. fair value recognised in
To comply with regulatory Net gains or losses.
guidelines, the Group ensures The effective portion of
that the duration of debt designated cash flow hedges
securities designated as and net investment hedges
FVTPL is approximately equal in foreign operations is
to the weighted-dollar duration recognised in foreign exchange
of insurance and reinsurance gains or losses in OCI.
contracts.
----------------- ------------------- -------------------------------------- --------------------------------
Classified Equity instruments All ordinary shares portfolios
as FVTPL and certain preferred shares.
----------------- --------------------------------
Derivative Derivatives used for economic
financial hedging purposes and for
instruments the purpose of modifying
the risk profile of the Group's
investment portfolio as long
as the resulting exposures
are within the investment
policy guidelines.
-----------------
Other instruments Investments in mutual and
private funds.
----------------- ------------------- -------------------------------------- --------------------------------
Amortised Cash and Highly liquid investments Initially measured at fair
cost - cash equivalents held to meet short-term requirements value using transaction
other financial that are readily convertible prices at the trade date.
assets into a known amount of cash, Subsequently measured at
are subject to an insignificant amortised cost using the
risk of changes in value effective interest method.
and have an original maturity
of three months or less.
Loans and Financial assets with fixed Initially measured at fair
receivables or determinable payments value using transaction
not quoted in an active market prices at the trade date.
(including securities purchased Subsequently measured at
under reverse repurchase amortised cost using the
agreements). effective interest method.
Initially measured at fair
value at the issuance date
net of transaction costs.
Subsequently measured at
amortised cost using the
effective interest method.
----------------- ------------------- --------------------------------------
Amortised Debt outstanding Financial liabilities with
cost - fixed or determinable payments
Other financial and maturity date.
liabilities
Securities The sale of securities together Initially measured at fair
sold under with an agreement to repurchase value at the amount owing.
repurchase them in the short-term, at Subsequently measured at
agreements a set price and date. amortised cost using the
effective interest method.
----------------- ------------------- -------------------------------------- --------------------------------
b) Revenue and expense recognition
Net investment income
Under IFRS 9 income on debt securities is recognised as
follows:
i. FVTOCI is recognised in Interest income using the effective
interest rate method, including the amortisation of premiums earned
or discounts incurred as well as transaction costs.
ii. FVTPL is recognised in Other interest income using a similar
methodology, except that transaction costs are expensed as
incurred.
Net gains (losses) on investment portfolio
Gains and losses on the sale of FVTOCI debt and FVTPL equity
securities under IFRS 9 are generally calculated on a first in,
first out basis, except for certain equity strategies.
Transaction costs associated with the acquisition of financial
instruments classified or designated as FVTPL are expensed as
incurred; otherwise, transaction costs are capitalised on initial
recognition and amortised using the effective interest rate
method.
c) Impairment
The Group assesses, on a forward-looking basis, the ECL
associated with its assets carried at amortised cost and FVTOCI
debt securities. The impairment methodology applied depends on
whether there has been a significant increase in credit risk or an
actual default.
Staging Debt securities
------------------- -------------------------------------------------------------
Stage 1 (12 months) Credit risk of the financial instrument is low (investment
grade) or credit risk has not increased significantly since
initial recognition (performing)
------------------- -------------------------------------------------------------
Stage 2 (Life-time) Credit risk has increased significantly since inception
(underperforming) but the financial instrument is not credit
impaired
------------------- -------------------------------------------------------------
Stage 3 (Life-time) Financial instrument is credit impaired. See note 13 -
financial risk .
------------------- -------------------------------------------------------------
At each reporting date, the Group recognises an allowance for
debt instruments measured at FVTOCI or at amortised cost:
i. The ECL does not reduce the carrying amount of FVTOCI
financial assets, which remains at their fair value. Instead, an
amount equal to the allowance and its subsequent changes is
reclassified from OCI to Net income. Refer to note 13 - financial
risk for details.
ii. The ECL for financial instruments measured at amortised cost
reduces the carrying amount of these financial assets with a
corresponding expense recognised in Net income.
IFRS 9 provides a simplification where an entity may assume that
the criterion for recognising lifetime ECL is not met if the credit
risk on the financial instrument is low (investment grade) at the
reporting date. The Group will use the low credit risk
simplification as approximatively 95% of the debt securities
portfolio consists of investment-grade financial instruments with a
quoted market price.
For trade receivables only, the Group applies the simplified
approach permitted by IFRS 9, which requires expected lifetime
losses to be recognised from initial recognition of the
receivables.
4. Adoption of new and revised accounting standards
4.1 IFRS 17 - Insurance Contracts
IFRS 17 replaces IFRS 4 - Insurance Contracts (IFRS 4) for
annual periods beginning on or after 1 January 2023. The Group has
restated comparative information for 2022 applying the transitional
provisions in Appendix C to IFRS 17. The nature and effect of the
changes in accounting policies can be summarised, as follows:
a) Changes to classification and measurement
The adoption of IFRS 17 did not change the classification of the
Group's insurance contracts. However, IFRS 17 establishes specific
principles for the recognition and measurement of insurance and
reinsurance contracts.
IFRS 17 introduces a new concept of the GMM for the recognition
and measurement of insurance contracts, which requires measuring
insurance contracts using updated estimates and assumptions that
reflect the timing of cash flows and any uncertainty relating to
insurance contracts. In addition, entities have the option to use a
simplified measurement model (the PAA), for short-duration
contracts; this model is applicable to all the Group's insurance
and reinsurance contracts except in limited circumstances where the
GMM is required.
The accounting under the PAA is similar to IFRS 4, but differs
in the following key areas:
i. IFRS 17 requires the identification of groups of onerous
contracts at a more granular level than the liability adequacy test
performed under IFRS 4. Under IFRS 17 the loss component of onerous
contracts measured based on projected profitability is recognised
immediately in Net income, resulting in early recognition compared
to IFRS 4;
ii. The liability for incurred claims includes an explicit risk
adjustment which replaces the risk margin under IFRS 4. The IFRS 4
risk margin reflected the inherent uncertainty in the net
discounted claim liabilities estimates, whereas the IFRS 17 risk
adjustment is the compensation required for bearing the uncertainty
that arises from non-financial risk. Like the risk margin, the risk
adjustment includes the benefit of diversification, therefore the
two methodologies are fairly aligned.
iii. The liability for incurred claims is discounted at a rate
that reflects the characteristics of the liabilities and the
duration of each portfolio. The Group has established discount
yield curves using risk-free rates adjusted to reflect the
appropriate illiquidity characteristics of the applicable insurance
contracts. Under IFRS 4, only claims liabilities where there is a
long period from incident to claims settlement were discounted,
using a rate that reflects the estimated market yield of the
underlying assets backing these claims liabilities at the reporting
date.
The Group's classification and measurement of insurance and
reinsurance contracts is explained in note 7 - Insurance and
reinsurance contracts.
b) Changes to presentation and disclosures
IFRS 17 provides specific guidance for the presentation and
disclosures of insurance and reinsurance contracts.
Consolidated balance sheets
Changes in the balance sheet line items are introduced by IFRS
17. The previously reported line items insurance debtors, insurance
contract liabilities, and other related assets and liabilities are
presented together by portfolio on a single line called Insurance
contract liabilities or assets. The previously reported line items
reinsurers' share of insurance contract liabilities, reinsurance
debtors, reinsurance liabilities , and other related assets and
liabilities are presented together by portfolio on a single line
called Reinsurance contract assets or liabilities.
Portfolios are composed of groups of contracts covering similar
risks and managed together. Portfolios of insurance and reinsurance
contracts issued and reinsurance contracts held are presented
separately between:
i. Portfolios of insurance and reinsurance contracts issued that are assets;
ii. Portfolios of reinsurance contracts held that are assets;
iii. Portfolios of insurance contracts and reinsurance contracts
issued that are liabilities; and
iv. Portfolios of reinsurance contracts held that are liabilities.
The portfolios referred to above are those established at
initial recognition in accordance with the IFRS 17.
Consolidated statements of income
Changes in Net income line items are introduced by IFRS 17,
which requires separate presentation of Insurance revenue,
Insurance service expenses and insurance finance income or expense.
The following previously reported line items are no longer
disclosed: gross written premiums, net earned premiums, net claims
and underwriting and policy acquisition costs.
c) Transition
On 1 January 2022, the transition date to IFRS 17, the Group
identified, recognised and measured each group of insurance
contracts as if IFRS 17 had always applied unless it was
impracticable, derecognised any existing balances that would not
exist had IFRS 17 always applied and recognised any resulting net
difference in equity.
On transition to IFRS 17 on 1 January 2022, the Group's Equity
attributable to owners of the Parent Company was positively
impacted by approximately GBP40m after tax, mainly due to the
discounting of Claims liabilities applying the principles of the
new standard. IFRS 17 also resulted in presentation changes as
described above.
The following table summarises the impact of IFRS 17 on the
Group's consolidated balance sheet on transition:
As at 1 January 2022 IFRS 4 Impact of IFRS IFRS 17
17
--------------------------------------- ------- -------------- -------
Total assets 11,898 (2,586) 9,312
Total liabilities (8,807) 2,626 (6,181)
Equity attributable to shareholders (2,935) (40) (2,975)
Equity attributable to non-controlling
interests (156) - (156)
--------------------------------------- ------- -------------- -------
Full retrospective approach
On transition, the Group has applied the full retrospective
approach to all contracts issued.
4.2 IFRS 9 - Financial instruments
The Group has adopted IFRS 9 on 1 January 2023. The comparative
information was not restated and continues to be reported under IAS
39.
On transition to IFRS 9 on 1 January 2023, the Group's Equity
attributable to owners of the Parent Company was negatively
impacted by GBP1m, which equates to the ECL calculated on its
amortised cost loans and receivables.
IFRS 9 also resulted in reclassifications from Revaluation
reserves to Retained earnings as follows:
i. Certain equity instruments previously classified as AFS were
classified as FVTPL which will result in increased volatility in
Net income subsequently;
ii. The FVTPL designation of some fixed income instruments
changed on transition date; and
iii. The ECL calculated on instruments at fair value previously
in OCI were recycled to Retained earnings (subsequently to Net
income).
As at 1 January 2023, the Group reclassified GBP98m of
unrealised losses (after tax) from Revaluation reserves to Retained
earnings.
The following table summarises the classification and
measurement impacts of IFRS 9 on transition. The adoption of IFRS 9
had no significant impact on the Group's other financial assets or
liabilities.
As at 1 January Measurement category Carrying amount
2023
------------------------ -------------------------
IAS 39 IFRS 9 IAS 39 Impact of IFRS 9
IFRS9
-------------------------- ----------- ------ --------- ------
Amortised Amortised
Cash and cash equivalents cost cost 362 - 362
Debt securities AFS FVTOCI 4,689 (2,471) 2,218
FVTPL FVTPL(1) - 2,471 2,471
Equities AFS n/a 212 (212) -
FVTPL FVTPL - 212 212
Amortised Amortised
Loans cost cost(2) 433 (1) 432
-------------------------- ----------- ----------- ------ --------- ------
5,696 (1) 5,695
-------------------------------------------------- ------ --------- ------
(1) Includes GBP304m of debt securities classified as FVTPL as
they do not pass the SPPI test.
(2) The IFRS 9 carrying amount includes an ECL impact of GBP1m.
Hedge accounting
IFRS 9 includes an accounting policy choice to continue applying
existing hedge accounting rules under IAS 39 until a project to
review macro hedging is complete. The Group has elected to apply
this policy choice.
5. Accounting standards issued but not yet effective
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 interim condensed consolidated
financial statements.
Notes to the interim condensed consolidated financial statements
(unaudited)
6. Financial assets
As at 30 June 2023 (IFRS 9) FVTOCI Amortised Total
Cost carrying
FVTPL amount
Classified Designated Designated
as FVTPL as FVTPL as FVTOCI
---------- ----------
GBPm GBPm GBPm GBPm GBPm
------------------------------- ---------- ---------- ---------- --------- ---------
Equity securities 207 - - - 207
Debt & fixed income securities 338 1,969 2,239 - 4,546
Loans and receivables - - - 415 415
------------------------------- ---------- ---------- ---------- --------- ---------
545 1,969 2,239 415 5,168
------------------------------- ---------- ---------- ---------- --------- ---------
As at 31 December 2022 (IAS 39) AFS Amortised Total carrying
cost amount
GBPm GBPm GBPm
-------------------------------- ----- --------- --------------
Equity securities 212 - 212
Debt & fixed income securities 4,689 - 4,689
Loans and receivables - 433 433
-------------------------------- ----- --------- --------------
4,901 433 5,334
-------------------------------- ----- --------- --------------
7. Insurance and reinsurance contracts
7.1 Insurance revenue
For the six month period ended 30 June 2023 2022
GBPm GBPm
------------------------------------------------------ ----- -----
Contracts measured under PAA 1,895 1,975
Contracts measured under the GMM
Amounts related to changes in liability for remaining
coverage
Risk adjustment recognised for the risk expired 2 5
Expected incurred claims and other insurance
service expense 68 118
------------------------------------------------------ ----- -----
Total insurance revenue 1,965 2,098
------------------------------------------------------ ----- -----
7.2. Reconciliation of movements in carrying amounts
The following reconciliations show how the net carrying amounts
of insurance and reinsurance contracts changed during the period as
a result of cash flows and amounts recognised in the interim
condensed consolidated income statement.
The Group presents a table that separately analyses movements in
the liability for remaining coverage and the liability for incurred
claims and reconciles these movements to the line items in the
interim condensed consolidated income statement.
A second reconciliation is presented for contracts measured
under the GMM, which separately analyses changes in the estimates
of the present value of future cash flows, the risk adjustment and
the contractual service margin.
Insurance contracts analysis by remaining coverage and incurred
claims
For the six month period ended
30 June 2023
--------------- -------------- --------- ---------- --------------- -------
Liability for Liability for incurred
remaining coverage claims
------------------------------- --------------------------------------
Contracts under
PAA
---------------------------
Excluding Loss component Contracts Present Risk adjustment Total
loss component under value
GMM of future
cash
flows
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------ --------------- -------------- --------- ---------- --------------- -------
Insurance contract balances,
beginning of period (446) (100) (29) (5,050) (196) (5,821)
Changes in comprehensive income:
Insurance revenue 1,965 - - - - 1,965
Incurred claims and other
insurance service expense - 48 (43) (1,430) (41) (1,466)
Amortisation of insurance
acquisition cash flows (332) - - - - (332)
Losses and reversal on onerous
contracts - (52) 1 - - (51)
Adjustments to liabilities
for incurred claims - - - 129 1 130
------------------------------------ --------------- -------------- --------- ---------- --------------- -------
Insurance service expense (332) (4) (42) (1,301) (40) (1,719)
Investment component 53 - - (53) - -
------------------------------------ --------------- -------------- --------- ---------- --------------- -------
Insurance service result from
insurance contracts 1,686 (4) (42) (1,354) (40) 246
------------------------------------ --------------- -------------- --------- ---------- --------------- -------
Insurance finance income 1 1 1 24 1 28
Exchange rate differences 9 (1) - 2 1 11
------------------------------------ --------------- -------------- --------- ---------- --------------- -------
Total changes in comprehensive
income 1,696 (4) (41) (1,328) (38) 285
------------------------------------ --------------- -------------- --------- ---------- --------------- -------
Cash flows
Premium received (2,048) - - - - (2,048)
Claims and other insurance
service expense paid - - 49 1,443 - 1,492
Insurance acquisition cash
flows 378 - - - - 378
------------------------------------ --------------- -------------- --------- ---------- --------------- -------
Total cash flows (1,670) - 49 1,443 - (178)
------------------------------------ --------------- -------------- --------- ---------- --------------- -------
Amounts transferred from insurance 4 - - - - 4
acquisition cash flows
------------------------------------ --------------- -------------- --------- ---------- --------------- -------
Insurance contract balances,
end of period (416) (104) (21) (4,935) (234) (5,710)
------------------------------------ --------------- -------------- --------- ---------- --------------- -------
For the six month period ended
30 June 2022
---------------------------------------------------------------------------------
Liability for Liability for incurred
remaining coverage claims
-------------------------------
Contracts under
PAA
----------------------------
Excluding Loss component Contracts Present Risk adjustment Total
loss component under value of
GMM future
cash flows
GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------------- --------------- -------------- --------- ----------- --------------- -------
Insurance contract balances,
beginning of period (613) (13) (58) (4,750) (182) (5,616)
Changes in comprehensive income:
Insurance revenue 2,098 - - - - 2,098
Incurred claims and other
insurance service expense - 9 (66) (1,412) (30) (1,499)
Amortisation of insurance
acquisition cash flows (384) - - - - (384)
Losses and reversal on onerous
contracts - (63) - - - (63)
Adjustments to liabilities
for incurred claims - - - 49 28 77
----------------------------------- --------------- -------------- --------- ----------- --------------- -------
Insurance service expense (384) (54) (66) (1,363) (2) (1,869)
Investment component 40 - - (40) - -
----------------------------------- --------------- -------------- --------- ----------- --------------- -------
Insurance service result from
insurance contracts 1,754 (54) (66) (1,403) (2) 229
----------------------------------- --------------- -------------- --------- ----------- --------------- -------
Insurance finance income (expense) (28) 1 (4) 22 3 (6)
Exchange rate differences (6) 1 - (14) (1) (20)
----------------------------------- --------------- -------------- --------- ----------- --------------- -------
Total changes in comprehensive
income 1,720 (52) (70) (1,395) - 203
----------------------------------- --------------- -------------- --------- ----------- --------------- -------
Cash flows
Premium received (2,122) - - - - (2,122)
Claims and other insurance
service expense paid - - 98 1,273 - 1,371
Insurance acquisition cash
flows 469 - - - - 469
----------------------------------- --------------- -------------- --------- ----------- --------------- -------
Total cash flows (1,653) - 98 1,273 - (282)
----------------------------------- --------------- -------------- --------- ----------- --------------- -------
Disposal of business (9) - - 7 - (2)
Amounts transferred from insurance
acquisition cashflows (6) - - - - (6)
----------------------------------- --------------- -------------- --------- ----------- --------------- -------
Insurance contract balances,
end of period (561) (65) (30) (4,865) (182) (5,703)
----------------------------------- --------------- -------------- --------- ----------- --------------- -------
Insurance contract balances,
held for sale (26) - - (94) - (120)
----------------------------------- --------------- -------------- --------- ----------- --------------- -------
Insurance contract balances,
end of period, net held for
sale (535) (65) (30) (4,771) (182) (5,583)
----------------------------------- --------------- -------------- --------- ----------- --------------- -------
7.3. Insurance contracts
Insurance contract liabilities
30 June 2023 31 December
2022
GBPm GBPm
------------------------------------------------- ------------ -----------
Insurance contract liabilities
Insurance contract balances 5,710 5,821
Assets for insurance acquisition cash flows (13) (15)
------------------------------------------------- ------------ -----------
5,697 5,806
------------------------------------------------- ------------ -----------
Assets for insurance acquisition cash flows
30 June 2023 31 December
2022
GBPm GBPm
----------------------------------------------------- ------------ -----------
Opening balance 15 17
Amounts incurred during the year 2 12
Amounts derecognised and included in the measurement
of insurance contracts (4) (12)
Impairment losses and reversals - (2)
Closing balance 13 15
----------------------------------------------------- ------------ -----------
Insurance contracts analysis by measurement component -
Contracts measured under the GMM
For the six month period ended 30
June 2023
------------------------------------------------
Present Risk adjustment Contractual Total
value of service
future margin
cash flows
GBPm GBPm GBPm GBPm
-------------------------------------------- ----------- --------------- ----------- -----
Insurance contract liabilities, beginning
of period (319) (9) - (328)
Changes in comprehensive income:
Changes that relate to current services:
Risk adjustment recognised for the - 2 - 2
risk expired
Experience adjustments 40 - - 40
Changes that relate to future services:
Changes in estimates that do not
adjust the contractual service margin (31) (1) - (32)
-------------------------------------------- ----------- --------------- ----------- -----
Insurance service result from insurance
contracts 9 1 - 10
-------------------------------------------- ----------- --------------- ----------- -----
Insurance finance income 4 - - 4
Total changes in comprehensive income 13 1 - 14
-------------------------------------------- ----------- --------------- ----------- -----
Cash flows:
Claims and other insurance service
expenses paid 49 - - 49
-------------------------------------------- ----------- --------------- ----------- -----
Total cash flows 49 - - 49
-------------------------------------------- ----------- --------------- ----------- -----
Insurance contract liabilities, end
of period (257) (8) - (265)
-------------------------------------------- ----------- --------------- ----------- -----
For the six month period ended 30 June
2022
------------------------------------------------
Present Risk adjustment Contractual Total
value of service
future margin
cash flows
GBPm GBPm GBPm GBPm
-------------------------------------------- ----------- --------------- ----------- -----
Insurance contract liabilities, beginning
of period (465) (16) - (481)
Changes in comprehensive income:
Changes that relate to current services:
Risk adjustment recognised for the
risk expired - 5 - 5
Experience adjustments 52 - - 52
Changes that relate to future services:
Changes in estimates that do not
adjust the contractual service margin (47) (2) - (49)
-------------------------------------------- ----------- --------------- ----------- -----
Insurance service result from insurance
contracts 5 3 - 8
-------------------------------------------- ----------- --------------- ----------- -----
Insurance finance income (expense) (25) 1 - (24)
Total changes in comprehensive income (20) 4 - (16)
-------------------------------------------- ----------- --------------- ----------- -----
Cash flows:
Claims and other insurance service
expenses paid 99 - - 99
-------------------------------------------- ----------- --------------- ----------- -----
Total cash flows 99 - - 99
-------------------------------------------- ----------- --------------- ----------- -----
Insurance contract liabilities, end
of period (386) (12) - (398)
-------------------------------------------- ----------- --------------- ----------- -----
Reinsurance contracts analysis by remaining coverage and
incurred claims
For the six month period ended
30 June 2023
------------------------------------------------------------------
Asset for remaining Asset for incurred
coverage claims
-----------------------------
Contracts under
PAA
----------------------------
Excluding Loss recovery Present Risk adjustment Total
loss recovery component value of
component future
cash flows
GBPm GBPm GBPm GBPm GBPm
-------------------------------------- -------------- ------------- ----------- --------------- -----
Reinsurance contract assets,
beginning of period (76) 5 1,736 53 1,718
Changes in comprehensive income:
Allocation of reinsurance premiums (481) - - - (481)
Commissions Ceded 31 - - - 31
-------------------------------------- -------------- ------------- ----------- --------------- -----
Allocation of reinsurance premiums
net of commissions ceded (450) - - - (450)
-------------------------------------- -------------- ------------- ----------- --------------- -----
Amounts recoverable for incurred
claims and other expenses - (3) 383 10 390
Loss recoveries and reversals
on onerous contracts - (1) - - (1)
Adjustments to liabilities for
incurred claims - - (78) 9 (69)
Amounts recoverable from reinsurers - (4) 305 19 320
-------------------------------------- -------------- ----------- -----
Net (expense)/income from reinsurance
contracts (450) (4) 305 19 (130)
-------------------------------------- -------------- ------------- ----------- --------------- -----
Reinsurance finance expense (4) - - (1) (5)
Exchange rate differences (1) - (5) - (6)
-------------------------------------- -------------- ------------- ----------- --------------- -----
Total changes in comprehensive
income (455) (4) 300 18 (141)
-------------------------------------- -------------- ------------- ----------- --------------- -----
Cash flows
Premium paid 510 - - - 510
Amounts received - - (368) - (368)
-------------------------------------- -------------- ------------- ----------- --------------- -----
Total cash flows 510 - (368) - 142
-------------------------------------- -------------- ------------- ----------- --------------- -----
Reinsurance contract assets,
end of period (21) 1 1,668 71 1,719
-------------------------------------- -------------- ------------- ----------- --------------- -----
For the six month period ended
30 June 2022
------------------------------------------------------------------
Asset for remaining Asset for incurred
coverage claims
-----------------------------
Contracts under
PAA
----------------------------
Excluding Loss recovery Present Risk adjustment Total
loss recovery component value of
component future
cash flows
GBPm GBPm GBPm GBPm GBPm
-------------------------------------- -------------- ------------- ----------- --------------- -----
Reinsurance contract assets,
beginning of period (62) - 1,651 37 1,626
Changes in comprehensive income:
Allocation of reinsurance premiums (456) - - - (456)
Commissions Ceded 12 - - - 12
-------------------------------------- -------------- ------------- ----------- --------------- -----
Allocation of reinsurance premiums
net of commissions ceded (444) - - - (444)
-------------------------------------- -------------- ------------- ----------- --------------- -----
Amounts recoverable for incurred
claims and other expenses - - 324 7 331
Loss recoveries and reversals
on onerous contracts - 2 - - 2
Adjustments to liabilities for
incurred claims - - (19) 8 (11)
Changes in non-performance risk - - - - -
of reinsurers
-------------------------------------- -------------- ------------- ----------- --------------- -----
Amounts recoverable from reinsurers - 2 305 15 322
-------------------------------------- -------------- ------------- ----------- --------------- -----
Net (expense)/income from reinsurance
contracts (444) 2 305 15 (122)
-------------------------------------- -------------- ------------- ----------- --------------- -----
Reinsurance finance expense (4) - (13) (1) (18)
Exchange rate differences (3) - 9 - 6
-------------------------------------- -------------- ------------- ----------- --------------- -----
Total changes in comprehensive
income (7) - (4) (1) (12)
-------------------------------------- -------------- ------------- ----------- --------------- -----
Cash flows
Premium paid 454 - - - 454
Amounts received - - (288) - (288)
-------------------------------------- -------------- ------------- ----------- --------------- -----
Total cash flows 454 - (288) - 166
-------------------------------------- -------------- ------------- ----------- --------------- -----
Reinsurance contract assets,
end of period (59) 2 1,664 51 1,658
-------------------------------------- -------------- ------------- ----------- --------------- -----
Reinsurance contract assets,
end of period, held for sale (16) - 30 - 14
-------------------------------------- -------------- ------------- ----------- --------------- -----
Reinsurance contract assets,
end of period, net held for sale (43) 2 1,634 51 1,644
-------------------------------------- -------------- ------------- ----------- --------------- -----
Reinsurance contracts analysis by measurement component -
Contracts measured under the GMM
For the six month period ended 30
June 2023
------------------------------------------------
Present Risk adjustment Contractual Total
value of service
future margin
cash flows
GBPm GBPm GBPm GBPm
-------------------------------------------- ----------- --------------- ----------- -----
Reinsurance contract assets, beginning
of period 2 11 - 13
Changes in comprehensive income:
Changes that relate to future services
Changes in estimates that do not
adjust the contractual service margin (2) - - (2)
Net expense from reinsurance contracts (2) - - (2)
-------------------------------------------- ----------- --------------- ----------- -----
Total changes in comprehensive income (2) - - (2)
-------------------------------------------- ----------- --------------- ----------- -----
Reinsurance contact assets, end of
period - 11 - 11
-------------------------------------------- ----------- --------------- ----------- -----
For the six month period ended 30 June
2022
-------------------------------------------- ------------------------------------------------
Present Risk adjustment Contractual Total
value of service
future margin
cash flows
GBPm GBPm GBPm GBPm
-------------------------------------------- ----------- --------------- ----------- -----
Reinsurance contract assets, beginning
of period 5 36 - 41
Changes in comprehensive income:
Changes that relate to future services
Changes in estimates that do not
adjust the contractual service margin (1) (16) - (17)
Net expense from reinsurance contracts (1) (16) - (17)
-------------------------------------------- ----------- --------------- ----------- -----
Reinsurance finance expense (1) (8) - (9)
Total changes in comprehensive income (2) (24) - (26)
-------------------------------------------- ----------- --------------- ----------- -----
Reinsurance contact assets, end of
period 3 12 - 15
-------------------------------------------- ----------- --------------- ----------- -----
7.4. Significant accounting judgments, estimates and
assumptions
Discount rates
The liability for incurred claims under the PAA and GMM and the
liability for remaining coverage of contracts under the GMM
approach and under the PAA approach when onerous contract
liabilities is calculated by discounting expected future cash flows
at a risk-free rate, plus an illiquidity premium where applicable.
Risk-free rates are determined by reference to the yields of highly
liquid sovereign securities in the currency of the insurance
contract liabilities. The illiquidity premium is determined by
reference to observable market rates of investment grade bonds that
the Group believes reflect the nature of the liabilities and are a
suitable proxy for assessing the value of the illiquidity.
Discount rates applied for discounting of future cash flows are
listed below:
Yield curves used to discount cash flows for insurance and
reinsurance contracts for major currencies
30 June 2023 31 December
2022
------ ----------------- -------- ------ ----------------- --------
1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years
----------------- ------ ------- -------- -------- ------ ------- -------- --------
CAD 5.49% 5.05% 4.79% 4.53% 5.03% 4.77% 4.65% 4.60%
USD 5.57% 5.24% 5.00% 4.92% 5.00% 4.89% 4.87% 5.01%
GBP 6.07% 6.26% 6.00% 5.64% 4.88% 4.95% 4.99% 5.05%
EUR 3.94% 3.93% 3.83% 3.73% 3.33% 3.59% 3.76% 3.93%
Periodic payment
orders 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%
----------------- ------ ------- -------- -------- ------ ------- -------- --------
Liability for incurred claims - Estimate of undiscounted future
cash flows
The Group establishes claims liabilities to cover the estimated
liability for the cash flows associated with incurred losses,
including loss adjustment expenses incurred with respect to
insurance contracts underwritten and reinsurance contracts placed
by the Group. The ultimate cost of claims liabilities is estimated
using a range of standard actuarial claims projection techniques in
accordance with generally accepted actuarial methods.
The main assumption underlying these techniques is that the
Group's past claims development experience can be used to project
future claims development and hence ultimate claims costs. As such,
these methods extrapolate the development of paid and incurred
losses, average costs per claim (severity) and average number of
claims (frequency) based on the observed development of earlier
years and expected loss ratios. Historical claims development is
analysed by accident year, geographical area, as well as
significant business line and claim type. Catastrophic events are
separately addressed, either by being reserved at the face value of
loss adjuster estimates in the case of very large losses, or
separately projected to reflect their future development that might
differ from historical data in the case of catastrophic events.
Additional qualitative judgment is used to assess the extent to
which past trends may not apply in the future (e.g., to reflect
one-off occurrences, changes in external or market factors such as
public attitudes to claiming, economic conditions, levels of claims
inflation, judicial decisions and legislation, as well as internal
factors such as portfolio mix, policy features and claims handling
procedures) to arrive at the estimated ultimate cost of claims that
present the probability weighted expected value outcome from the
range of possible outcomes, taking account all the uncertainties
involved.
Risk adjustment
The risk adjustment is the compensation that the Group requires
for bearing the uncertainty about the amount and timing of the cash
flows of groups of insurance contracts.
The Group has estimated the risk adjustment based on the loss
distribution from the Group's economic capital model. The loss
distribution is estimated using standard statistical techniques in
accordance with generally accepted actuarial principles. The Group
estimates that the risk adjustment is at the 75th percentile of the
assessed loss distribution. Percentile estimates for loss
distributions are highly uncertain.
The main assumptions underlying these techniques are:
-- Historical claims development can be used to generate the
full range of potential outcomes; and
-- Expert judgments to allow for the correlation between line of business and region.
Additional qualitative judgment is used to assess the extent to
which there are events not included in the historic data.
Liability for remaining coverage under GMM and PAA when onerous
- Estimate of undiscounted future cash flows
The Group calculates the best estimate of the future cash flows
which represents a probability-weighted mean, taking into account
the likely distribution.
When estimating future cash flows, the Group includes all cash
flows on a probability-weighted basis that are within the contract
boundary. The Group incorporates, in an unbiased way, all
reasonable and supportable information available without undue cost
or effort about the amount, timing and uncertainty of those future
cash flows.
Coverage units
Recognition of deferred revenue in Net income through the
amortisation of the contractual service margin is dictated by
coverage units which quantify the amount of insurance service
provided in any given period. In the context of retrospective
reinsurance contracts held and acquired contracts, the Group deems
the expected pay-out pattern of outstanding future cash flows to be
the best representative of service provided.
7.5. Sensitivity analysis
The liability for incurred claims' sensitivity to certain key
assumptions is outlined below. It is not possible to quantify the
sensitivity to certain assumptions such as legislative changes or
uncertainty in the estimation process. The analysis is performed
for possible movements in the assumptions with all other
assumptions held constant, showing the impact on Net income.
Movements in these assumptions may be non-linear and may be
correlated with one another.
Sensitivity analysis (liability for incurred claims) - Impact on
Net income
30 June 2023 31 December 2022
-------------- -------------------------------------------------- --------------------------------------------------
Gross of reinsurance(1) Net of reinsurance(2) Gross of reinsurance(1) Net of reinsurance(2)
Reserves Discount Reserves Discount Reserves Discount Reserves Discount
rate rate rate rate
+5% +1% +5% +1% +5% +1% +5% +1%
Liability
for incurred
claims (308) 143 (190) 80 (313) 143 (191) 79
(1) Represents the liability for incurred claims before net payables
included in incurred claims and the reclass of claims reported under
the GMM.
(2) Represents the net liability for incurred claims before net payables
included in incurred claims and the reclass of net claims reported
under the GMM.
7.5. Insurance risk
The adoption of IFRS 17 has not changed the way the Group
manages insurance risk. Please refer to Risk Management information
in note 6 in the 2022 Annual Report and Accounts for more
details.
8. Deferred tax
Asset Liability
====================== ======================
30 June 31 December 30 June 31 December
2023 2022 2023 2022
GBPm GBPm GBPm GBPm
======================= ======== ============ ======== ============
Deferred tax position 267 267 - -
======================= ======== ============ ======== ============
There has been no movement in deferred tax assets during the
period.
Tax assets and liabilities are recognised based on tax rates
that have been enacted or substantively enacted at the balance
sheet date.
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 recognition approach is
consistent with that applied at 31 December 2022.
The majority of the deferred tax asset recognised based on
future profits is in respect of the UK. The evidence for the future
taxable profits is a five-year forecast based on the three-year
operational plans prepared by the relevant businesses and a further
two years of extrapolation, which are subject to internal review
and challenge, including by the Board. The two years of
extrapolation assumes UK premium growth of 4.0% per annum (31
December 2022: 1.9% across UK business lines) and no overseas
premium growth where relevant to UK profit projections. The
forecasts incorporate a contingency of GBP35m per annum (31
December 2022: GBP35m per annum) as well as including prudent COR
assumptions and the impact of forecast future transactions where
appropriate. The three year operational plans prepared by the
relevant businesses and a further two years of extrapolation is the
basis of the future profits in all jurisdictions in which a
deferred tax asset is recognised.
A deferred tax asset of GBP46m is recognised in respect of
temporary differences arising from unrealised losses on the
FVTOCI/AFS bond portfolio (31 December 2022: GBP83m). On adoption
of IFRS 9 on 1 January 2023, a portion of the AFS bond portfolio
was re-designated as FVTPL, triggering a tax transitional
adjustment. The GBP34m deferred tax asset previously recognised on
these bonds in the AFS reserve was transferred to retained earnings
on 1 January 2023. There was no impact on the total amount of
deferred tax recognised. The impact of the tax transitional
adjustment will be relieved over 10 years.
On transition to IFRS 17, the Group measured each group of
insurance contracts as if the standard had always applied and
recognised the resulting net difference in equity (see note 4). The
deferred tax effect of the retrospective application of IFRS 17 was
included in the adjustment to equity. In the UK, a deferred tax
liability was recognised on transition together with an offsetting
deferred tax asset, resulting in no net impact. The current tax
treatment of the IFRS 17 transitional adjustment differs between
territories. In the UK, the full transitional adjustment is subject
to tax in 2023, whereas for others the current tax impact is spread
over a number of periods; for example, in Ireland, over five years.
The UK IFRS 17 deferred tax liability is reversed in 2023 on the
transitional adjustment coming into the charge to current tax. The
offsetting deferred tax asset is also reversed in 2023. The
deferred tax asset and liability are being reversed in the income
statement proportionally over the year. The net UK deferred tax
asset is shown on the balance sheet in accordance with IAS 12. This
results in no change in the net UK deferred tax asset on the
statement of financial position.
The tax relief for a portion of the 2023 pension contributions
paid to RSA's pension schemes is deferred under UK tax rules and
becomes deductible in years 2024-26 (on a straight-line basis). The
2023 contributions are significantly higher than previous periods
because of the buy-in transaction (refer to note 15.4 for
transaction details). The deferred contributions create a new
category of deferred tax asset which is recognised in OCI where the
underlying transaction is accounted for. Due to restrictions on
deferred tax asset recognition and its priority of use, the new OCI
deferred tax asset (GBP40m) has displaced previously recognised
temporary differences in the income statement. This results in no
change in the net UK deferred tax asset on the statement of
financial position.
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 UK deferred tax asset is summarised below.
The relationship between the UK deferred tax asset and the
sensitivities below is not always linear. Therefore, the cumulative
impact on the deferred tax asset combined sensitivities or longer
extrapolations based on the table below will be indicative
only.
30 June 2023 31 December
2022
GBPm GBPm
============================================ ------------- ============
1% increase in combined operating ratio(1)
across all 5 years (18) (18)
50 basis points decrease in bond yields (7) (7)
No annual premium growth(2) (9) (7)
============================================ ------------- ============
(1) Combined operating ratio (COR) is a measure of underwriting
performance and is the ratio of underwriting costs expressed in
relation to earned premiums (refer to note 24 Alternative
performance measures).
(2) In respect of the extrapolated years, four to five only.
In October 2021, various countries and jurisdictions, including
Canada, the UK and Ireland, agreed to implement the Organization
for Economic Co-operation and Development's Pillar Two rules. The
proposed rules are designed to ensure that large multinational
enterprises pay a minimum effective corporate tax rate (currently
agreed upon at 15%) on the income arising in each jurisdiction
where they operate.
In order to implement these rules, each country has to enact
them into its local legislation. As such, the Group is actively
monitoring the status of Pillar Two legislation in jurisdictions in
which it operates. In June 2023, the UK substantively enacted
legislation in respect of accounting periods beginning on or after
31 December 2023.
In May 2023, the IASB issued International Tax Reform - Pillar
Two Model Rules, which amended IAS 12 Income taxes, for fiscal
years beginning as of 31 December 2023. The amendments include a
temporary exception to the requirements to recognise and disclose
information about deferred tax assets and liabilities related to
Pillar Two income taxes. For jurisdictions in which legislation has
been substantively enacted, the Group has applied this exception as
it is currently continuing to assess its potential impacts.
9. Goodwill and intangible assets
30 June 2023 31 December
2022
GBPm GBPm
============================================= ============= ============
Goodwill 23 24
Internally generated software 308 306
Customer related intangibles - 1
--------------------------------------------- ------------- ------------
Total goodwill and other intangible assets 331 331
--------------------------------------------- ------------- ------------
Intangible assets not yet available for use 121 146
--------------------------------------------- ------------- ------------
Following the announcement of the Group's exit from the UK
personal motor insurance market, GBP34m of associated software
under development has been de-recognised in the period to 30 June
2023.
During the period to 30 June 2022, an ongoing strategic
reassessment of programme plans for internally generated software
assets following the acquisition of the Group by IFC resulted in
assets with a net book value of GBP18m being de-recognised.
Following the adoption of IFRS 17, these charges are recognised
in Acquisition, integration and restructuring costs in the
Consolidated income statement.
10. Other assets and liabilities
10.1. Other assets
30 June 2023 31 December
2022
GBPm GBPm
--------------------------------------------- ------------ -----------
Derivatives designated as accounting hedging
instruments 21 18
Other derivatives 36 32
Other debtors 99 86
Pension plan surplus 26 225
Accrued interest and rent 50 45
Prepayments 48 36
--------------------------------------------- ------------ -----------
280 442
--------------------------------------------- ------------ -----------
10.2. Other liabilities
30 June 2023 31 December
2022
GBPm GBPm
-------------------- ------------ -----------
Other creditors 102 93
Accruals 149 163
Deferred income 6 6
Lease liabilities 69 71
Pension liabilities 22 4
Overdrafts 9 8
Provisions 31 27
-------------------- ------------ -----------
388 372
-------------------- ------------ -----------
11. Financial liabilities related to investments
30 June 2023 31 December
2022
GBPm GBPm
---------------------------------------------------- ------------ -----------
Accounts payable to investment brokers on unsettled
trades 42 1
Derivative financial liabilities 12 25
---------------------------------------------------- ------------ -----------
54 26
---------------------------------------------------- ------------ -----------
12. 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.
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 other 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. Market
traded securities only reflect the possible impact of climate
change to the extent that this is built into the market price at
which securities are trading.
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. Changes in assumptions about these factors could affect the
reported fair value of financial instruments.
The principal assets classified as Level 3, and the valuation
techniques applied to them, are described below.
Private fund structures
Loan funds are principally valued at the proportion of the
Group's holding of the Net Asset Value (NAV) reported by the
investment vehicle. Several procedures are employed to assess the
reasonableness of the NAV reported by the fund, including obtaining
and reviewing periodic and audited financial statements and
estimating fair value based on a discounted cash flow model that
adds spreads for credit and illiquidity to a risk-free discount
rate. Discount rates employed in the model at 30 June 2023 range
from 2.5% to 10.1% (31 December 2022: 3.0% to 11.6%). If necessary
the Group will adjust the fund's reported NAV to the discounted
cash flow valuation where this more appropriately represents the
fair value of its interest in the investment.
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.
12.1. Fair value hierarchy
As at 30 June 2023 Level 1 Level 2 Level 3 Total
GBPm GBPm GBPm GBPm
---------------------------- -------- -------- -------- ------
Equity securities 125 - 82 207
Debt securities 711 3,497 338 4,546
Derivative assets - 57 - 57
Total assets measured
at fair value 836 3,554 420 4,810
---------------------------- -------- -------- -------- ------
Derivative liabilities - 12 - 12
Issued debt - 126 - 126
---------------------------- ======== ======== ======== ======
Total liabilities measured
at fair value - 138 - 138
---------------------------- ======== ======== ======== ======
As at 31 December 2022 Level 1 Level 2 Level 3 Total
GBPm GBPm GBPm GBPm
---------------------------- -------- -------- -------- ------
Equity securities 122 - 90 212
Debt securities 806 3,598 285 4,689
Derivative assets - 50 - 50
Total assets measured
at fair value 928 3,648 375 4,951
---------------------------- -------- -------- -------- ------
Derivative liabilities - 25 - 25
Issued debt - 166 - 166
---------------------------- ======== ======== ======== ======
Total liabilities measured
at fair value - 191 - 191
---------------------------- ======== ======== ======== ======
12.2. Fair value categorisation
As at 30 June 2023 (IFRS 9) Classified Designated
as FVTPL as FVTPL
------------------ ----------------
Equity securities Debt securities Total
GBPm GBPm GBPm
--------------------------------- ------------------ ---------------- ------
Balance, beginning of period 89 285 374
Total gains/(losses) recognised
in:
Income statement (3) 2 (1)
Other comprehensive income - - -
Purchases - 112 112
Disposals (4) (50) (54)
Exchange adjustment - (11) (11)
================================= ================== ================ ======
Balance, end of period 82 338 420
================================= ================== ================ ======
As at 30 June 2022 (IAS 39) AFS
----------------------------------
Equity securities Debt securities Total
GBPm GBPm GBPm
--------------------------------- ----------------- --------------- -----
Balance, beginning of the period 111 250 361
Total gains/(losses) recognised
in:
Income statement (1) - (1)
Other comprehensive income 8 (1) 7
Purchases 16 109 125
Disposals (21) (12) (33)
Exchange adjustment 1 17 18
================================= ================= =============== =====
Balance, end of period 114 363 477
================================= ================= =============== =====
13. Financial risk
The adoption of IFRS 17 and IFRS 9 has not changed the way the
Group manages financial risk. Please refer to Risk Management
information in note 6 in the 2022 Annual Report and Accounts for
more details.
13.1. Net foreign currency and translation exposure
30 June 2023 31 December 2022
------------------------------------ ------------ ----------------
EUR EUR
GBPm GBPm
------------------------------------ ------------ ----------------
Consolidated net assets of foreign
operations 285 273
Less: foreign-currency derivatives,
notional amount (146) (167)
------------------------------------ ------------ ----------------
Total net currency exposure 139 106
------------------------------------ ------------ ----------------
13.2. Credit risk
Impairment assessment
The Group's ECL assessment and measurement method is set out
below:
Expected credit loss
The Group assesses the possible default events within 12 months
for the calculation of the 12mECL for investments in stage 1 of the
ECL. Given the investment policy, the probability of default for
new instruments acquired is generally determined to be minimal.
Lifetime ECL is required to be calculated for instruments in stages
2 or 3. In all instances, the expected loss given default is based
on external historical data.
Significant increase in credit risk and default
The Group continuously monitors all assets subject to ECLs. To
determine whether an instrument or a portfolio of instruments is
subject to 12mECL or LTECL, the Group assesses whether there has
been a significant increase in credit risk since initial
recognition.
The Group considers that there has been a significant increase
in credit risk when any contractual payments are more than 30 days
past due. In addition, the Group also considers a variety of
instances that may indicate unlikeliness to pay by assessing
whether there has been a significant increase in credit risk. Such
events include:
-- The internal rating of the counterparty indicating default or near-default;
-- The counterparty having past due liabilities to public creditors or employees;
-- The counterparty (or any legal entity within the debtor's group) filing for bankruptcy application/protection; and
-- The counterparty's listed debt or equity suspended at the
primary exchange because of rumours or facts about financial
difficulties.
The Group considers a financial instrument credit impaired for
ECL calculations in all cases when the counterparty becomes 90 days
past due on its contractual payments. The Group may also consider
an instrument to be in default when internal or external
information indicates that the Group is unlikely to receive the
outstanding contractual amounts in full. In such cases, the Group
recognises a LTECL.
Forward looking information
In its ECL models, the Group relies on a broad range of
forward-looking information as economic inputs, such as GDP growth,
unemployment, equity markets indexes and other economic inputs
.
The Group's debt instruments measured at FVTOCI and loans
measured at amortised cost are in stage 1 of the ECL model. Due to
the high credit quality of the Group's investment portfolio, the
allowance for ECL is not significant as at 30 June 2023.
14. Issued debt
Carrying amount
(net of fees)
--------------------
Maturity Initial Fixed Coupon Principal 30 June 31 December
date term rate payment amount 2023 2022
(years)
========= ======== ===== ======== =========
GBPm GBPm
======================= ========= ======== ===== ======== ========= ======= ===========
GBP notes Oct-45 31 5.13% Oct. GBP120m 119 159
Apr. &
US bonds Oct-29 30 8.95% Oct. $9m 7 7
======================= --------- -------- ----- -------- --------- ======= ===========
Total loan capital 126 166
Credit facility May-27 9 17
======================= ========= ======== ===== ======== ========= ======= ===========
Total debt outstanding 135 183
================================== ======== ===== ======== ========= ======= ===========
The dated guaranteed subordinated notes were issued on 10
October 2014 at a fixed rate of 5.125%. The nominal bonds, with a
GBP160m nominal value, have a redemption date of 10 October 2045.
The Group has the right to repay the notes on specific dates from
10 October 2025. If the bonds are not repaid on that date, the
applicable rate of interest would be reset at a rate of 3.852% plus
the appropriate benchmark gilt for a further five year period.
GBP40m of these bonds (nominal value) were repurchased and
cancelled in June 2023 (remaining notional GBP120m).
The subordinated guaranteed US$ 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 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.
There have been no defaults on any bonds or notes during the
year.
15. Employee future benefits
15.1. Funded status
The DB obligation, net of the fair value of plan assets, is
recognised on the consolidated balance sheet as an asset when the
plan is in a surplus position, or as a liability when the plan is
in a deficit position. This classification is determined on a
plan-by-plan basis.
31 December
30 June 2023 2022
GBPm GBPm
------------------------------------------------ ------------ -----------
Defined benefit obligation (5,246) (5,461)
Fair value of plan assets 5,252 5,792
------------------------------------------------ ------------ -----------
6 331
------------------------------------------------ ------------ -----------
Other net surplus remeasurements (2) (110)
------------------------------------------------ ------------ -----------
Net DB asset 4 221
------------------------------------------------ ------------ -----------
Recognised in:
Other assets - plans in a surplus position 26 225
Other liabilities - plans in a deficit position
and unfunded plans (22) (4)
------------------------------------------------ ------------ -----------
4 221
------------------------------------------------ ------------ -----------
The Group completed the purchase of annuity buy-in insurance contracts
(buy-ins) for its two major UK DB pension plans during the six-month
period ended 30 June 2023. Refer to Note 15.6 - Purchase of annuity
buy-in insurance contracts for more details.
15.2. Employee future benefit expense recognised in the Income
statement
30 June 2023 30 June 2022
GBPm GBPm
----------------------------------------------- ------------ ------------
Current service cost - (1)
Net interest expense:
Interest expense on defined benefit obligation (130) (79)
Interest income on plan assets 148 86
Other (4) (4)
----------------------------------------------- ------------ ------------
14 2
----------------------------------------------- ------------ ------------
15.3. Actuarial gains/losses on employee future benefits
30 June 2023 30 June 2022
GBPm GBPm
---------------------------------------------------- ------------- -------------
Remeasurements related to:
Change in discount rate used to determine the
benefit obligation 268 2,261
Actual return on plan assets (287) (2,226)
Plan experience and change in other financial
assumptions (69) 47
Annuity buy-in insurance contracts(1) (854) -
Other net surplus remeasurements(1) 108 (60)
---------------------------------------------------- ------------- -------------
(834) 22
---------------------------------------------------- ------------- -------------
(1)The buy-in transaction completed on 27 February 2023 resulted in
a net impact of GBP727 million, composed of a remeasurement loss on
plan assets of GBP854 million included in annuity buy-in insurance contracts
and the derecognition of a tax expense on surplus of GBP127 million
included in other net surplus remeasurements. Refer to Note 15.6 - Purchase
of annuity buy-in insurance contracts for more details.
15.4 Composition of pension plan assets
The pension plan assets were mainly composed of annuity buy-in
insurance contracts as at 30 June 2023 and of securities from the
government and financial sectors as at 31 December 2022. The change
in composition in pension plans was due to the buy-in transaction
completed during the six-month period ended 30 June 2023. Refer to
Note 15.6 - Purchase of annuity buy-in insurance contracts for more
details.
30 June 2023 31 December
2022
GBPm GBPm
----------------------------------- ------------ -----------
Cash and cash equivalents 184 1,278
Debt securities:
Government 49 4,048
Non-government 13 1,781
----------------------------------- ------------ -----------
Debt securities 62 5,829
----------------------------------- ------------ -----------
Equity securities 15 23
Annuity buy-in insurance contracts 5,169 -
Derivative financial instruments (6) (18)
Investment property 61 421
Other 85 303
----------------------------------- ------------ -----------
Total investments 5,570 7,836
----------------------------------- ------------ -----------
Value of asset and longevity swaps - (2,044)
Deferred premium payable to PIC (318) -
----------------------------------- ------------ -----------
Total net plan assets 5,252 5,792
----------------------------------- ------------ -----------
15.5 Assumptions used
The following table presents changes of certain key
assumptions.
30 June 2023 31 December
2022
To determine the defined benefit obligation:
Discount rate 5.26% 4.86%
Rate of inflation (RPI) 3.19% 3.11%
Rate of inflation (CPI) 2.57% 2.46%
--------------------------------------------- ------------ -----------
15.6. Purchase of annuity buy-in insurance contracts
On 27 February 2023 the Trustees of the Group's two major UK DB
pension plans (the UK plans) entered into an agreement with PIC, a
specialist insurer of defined benefit pension plans, to purchase
buy-ins, as part of its de-risking strategy. The buy-in agreement
transferred the remaining economic and demographic risks associated
with these plans to PIC and removed the volatility in relation to
these plans from the Group's consolidated statement of financial
position. The main risks that the Group retains are the
counterparty risk and the market risk on the assets remaining in
the UK plans described below.
At the transaction date, the UK plans transferred the majority
of their plan assets and an upfront contribution of GBP481m to PIC.
Of the total buy-in premium of GBP6,307m, an amount of GBP550m was
deferred and will be paid through the sale of certain less liquid
assets retained by the UK plans which are expected to be mostly
liquidated by the end of 2023. During the period ended 30 June
2023, the UK plans paid GBP237m of the deferred annuity premium,
including the interest accrued since the transaction date. The
Group has committed to the UK plans to fund any shortfall in the
deferred annuity premium obligation resulting from the liquidation
of the assets. In addition, the UK plans retained longevity swaps
that were already in place. Refer to Asset and longevity swaps
below for more details.
The buy-in comprised of various contracts which were considered
in aggregate as one single contract because they form a structure
designed together to exactly match the amount and timing of all the
benefits payable by the UK plans. The Group was not legally
relieved of the primary responsibility for the obligation since the
contracts simply cover the benefit payments that continue to be
payable by the UK plans. The contracts provide the option to
convert the buy-ins into individual policies which would transfer
the UK plan assets and obligation to PIC (known as a buy-out).
While this course of action may be considered in the future, a
separate decision would be required, and certain significant
conditions would need to be met before any buy-out can be executed.
Consequently, the transaction was considered a buy-in as opposed to
a buy-out under IAS 19. As a result, an initial actuarial loss of
GBP727m net of tax was recognised in OCI during the period ended 30
June 2023. The fair value of annuity buy-in insurance contracts
subsequently fluctuates based on changes in the value of the
associated DB obligation.
The buy-in transaction was funded through the injection of share
capital from the Group's immediate parent company, 2283485 Alberta
Limited of GBP480m (note 19. Share capital).
Assets and longevity swaps
In 2009, the Group had entered into an arrangement that provided
coverage against longevity risk for 55% of the retirement
obligations relating to pensions in payment of the UK plans at that
time. The arrangement provided for reimbursement of the covered
pension obligations in return for the contractual return receivable
on a portfolio made up of quoted government debt which was offset
by asset swaps and longevity swaps held by the pension funds. On
the UK buy-in transaction date, the portfolio and asset swaps were
novated to PIC and the longevity swaps remained in place with
another counterparty, as plan assets of the UK plans. In
combination with the other buy-in insurance policies purchased from
PIC, these longevity swaps were accounted for as qualifying
insurance policies at the UK buy-in transaction date, based on the
value of the associated DB obligation under IAS 19. PIC are
providing the plans with the funding required to support the
longevity swaps. As at 30 June 2023 GBP123m of collateral was being
posted by the plans to the longevity swap counterparty.
Funding arrangement
As part of its funding arrangements in place prior to the UK
buy-ins transaction, the Group paid its final annual contribution
of GBP75m plus expenses and regulatory levies during the period
ended 30 June 2023. As agreed with the Trustees of the UK plans,
the Group will not be required to make any additional annual
mandatory funding contribution but will continue to provide a
parental guarantee of the obligations.
During the six month period ended 30 June 2023, the Group
contributed a total of GBP604m to the UK plans, including the
annual contribution and upfront contribution to PIC.
Other net surplus remeasurement
Prior to the UK buy-ins transaction, the net DB asset
(liability) of the UK plans was presented net of a 35% tax expense
of an authorised return of surplus, which was classified with Other
net surplus remeasurements. Since the surplus of the UK plans was
derecognised through the UK buy-ins transaction, the 35% tax
provision totalling GBP127m has also been derecognised through OCI
during the period ended 30 June 2023.
16. Operating segments
The Group's primary operating segments comprise UK,
International and Central Functions. The primary operating segments
are based on geography and are all engaged in providing personal
and commercial general insurance services. International comprises
operating segments based in Ireland, and Europe. Central Functions
includes the Group's internal reinsurance function.
Each operating segment is managed by individuals who are
accountable to the Group Chief Executive and the Group 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.
16.1 Assessing segment performance
The Group uses the following key measures to assess the
performance of its operating segments:
-- Net written premiums
-- Underwriting result
Net written premiums is the key measure of revenue used in
internal reporting.
Underwriting result is the key internal measure of profitability
of the operating segments.
Net written premiums, underwriting result and business operating
result are APMs. Refer to note 24 for a reconciliation to the
nearest IFRS measure. A 'Jargon buster' can also be found in the
RSA Insurance Group Limited Annual Report and Accounts 2022.
Transfers or transactions between segments are entered into
under normal commercial terms and conditions that would also be
available to unrelated third parties.
16.2 Segment revenue and results
For the six month period ended 30 June 2023
UK International Central Total
Functions
GBPm GBPm GBPm GBPm
============================================= ===== ============== =========== ======
Net written premiums (management
basis) 923 290 162 1,375
============================================= ===== ============== =========== ======
Underwriting result 11 63 8 82
Investment result 79
Central costs and other activities (7)
============================================= ===== ============== =========== ======
Business operating result (management
basis) 154
Realised losses (1)
Unrealised losses, impairments and
foreign exchange (37)
Interest costs (5)
Pension net interest and administration
costs 14
Integration, acquisition and reorganisation
costs (26)
Changes in economic assumptions (44)
Profit before tax 55
Tax on operations (64)
============================================= ===== ============== =========== ======
Loss after tax (9)
============================================= ===== ============== =========== ======
For the six month period ended 30 June 2022 (restated) (1)
UK International Central Total
Functions
GBPm GBPm GBPm GBPm
============================================= ====== ============== =========== ======
Net written premiums (management
basis) 1,002 363 196 1,561
============================================= ====== ============== =========== ======
Underwriting result 47 20 19 86
Investment result 59
Central costs and other activities (10)
============================================= ====== ============== =========== ======
Business operating result (management
basis) 135
Realised losses (1)
Unrealised gains, impairments and
foreign exchange 129
Interest costs (5)
Pension net interest and administration
costs 4
Integration, acquisition and reorganisation
costs (45)
Profit on disposal of business 7
============================================= ====== ============== =========== ======
Profit before tax 224
Tax on operations (32)
============================================= ====== ============== =========== ======
Profit after tax 192
============================================= ====== ============== =========== ======
(1) Restated for the adoption of IFRS 17 - Insurance contracts. Refer
to Note 4 Adoption of new accounting standards.
17. Net investment return and net insurance financial result
17.1 Net investment return and net insurance financial
result
2023 2022
(IFRS 9) (IAS 39)
GBPm GBPm
------------------------------------------- -------- --------
Net investment income 79 59
Net gains (losses) on investment portfolio (62) 141
------------------------------------------- -------- --------
Net investment return 17 200
Net insurance financial result 23 (24)
------------------------------------------- -------- --------
40 176
------------------------------------------- -------- --------
17.2 Net investment income
2023 2022
(IFRS 9) (IAS 39)
GBPm GBPm
----------------------------------------------- -------- --------
Interest income calculated using the effective
interest method:
Debt securities designated or classified as
FVTOCI (1) 26 -
Debt securities classified as AFS (2) - 42
Loans and cash and cash equivalents 11 6
Interest and similar income on securities
designated or classified as FVTPL 36 1
----------------------------------------------- -------- --------
Interest income 73 49
----------------------------------------------- -------- --------
Dividend income:
AFS (2) - 7
FVTPL 5 -
----------------------------------------------- -------- --------
5 7
----------------------------------------------- -------- --------
Investment property rental income 6 7
----------------------------------------------- -------- --------
Investment income 84 63
----------------------------------------------- -------- --------
Expenses (5) (4)
----------------------------------------------- -------- --------
Net investment income 79 59
----------------------------------------------- -------- --------
(1) Not applicable for the six month period ended 30 June 2022,
as related to IFRS 9. Refer to note 4 Adoption of new accounting
standards.
(2) Not applicable for the six month period ended 30 June 2023,
as related to IAS 39. Refer to note 4 Adoption of new accounting
standards.
17.3 Net gains/(losses) on investment portfolio
2023 (IFRS 9) 2022 (IAS 39)
Fixed Equity, Total Fixed Equity, Total
income property income property
and derivatives and derivatives
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------ ------- ---------------- ----- ------- ---------------- -----
Net gains (losses) from:
Financial instruments:
Classified or designated
as FVTOCI(1) (18) - (18) - - -
Classified as AFS(2) - - - (287) (17) (304)
Classified as FVTPL (26) 2 (24) - - -
------------------------------------ ------- ---------------- ----- ------- ---------------- -----
(44) 2 (42) (287) (17) (304)
Derivatives(3) - 4 4 - 8 8
Investment property - 7 7 - 36 36
Net foreign currency gains/(losses) (49) - (49) 98 - 98
ECL expense - - - - - -
Impairment losses from
equities - - - - (1) (1)
------------------------------------ ------- ---------------- ----- ------- ---------------- -----
(93) 13 (80) (189) 26 (163)
------------------------------------ ------- ---------------- ----- ------- ---------------- -----
(1) Not applicable for the six month period ended 30 June 2022,
as related to IFRS 9. Refer to Note 4 Adoption of new accounting
standards.
(2) Not applicable for the six month period ended 30 June 2023,
as related to IAS 39. Refer to Note 4 Adoption of new accounting
standards.
(3) Excluding foreign currency contracts, which are recognised
in Net foreign currency gains/(losses) on investments.
17.4 Net insurance financial result
2023 2022
For the six month period ended 30 June GBPm GBPm
---------------------------------------------- ----- -----
Change in the carrying amount of insurance
contracts due to:
Unwind of discount (111) (65)
Changes in discount rates and other financial
assumptions 61 179
Net foreign currency gains (losses) 78 (120)
---------------------------------------------- ----- -----
Insurance finance income (expense) 28 (6)
---------------------------------------------- ----- -----
Change in the carrying amount of reinsurance
contracts due to:
Unwind of discount 37 25
Changes in discount rates and other financial
assumptions (21) (59)
Net foreign currency (losses) gains (21) 16
---------------------------------------------- ----- -----
Reinsurance expense (5) (18)
---------------------------------------------- ----- -----
18. Income tax
The Group reported an income statement tax charge for the six
months ended 30 June 2023 of GBP64m (six months ended 30 June 2022:
GBP32m), giving an effective tax rate of 115.6% (six months ended
30 June 2022: 29.6%).
Current and deferred tax are recognised in the consolidated
income statement, except to the extent that the tax arises from a
transaction or event recognised either in other comprehensive
income or directly in equity. The income statement tax charge is
made up of a current tax charge of GBP20m (six months ended 30 June
2022: GBP16m) and a deferred tax charge of GBP44m (six months ended
30 June 2022: GBP16m).
The main components of the Group's income statement charge (and
high effective tax rate) for the six months to 30 June 2023 are as
follows:
-- The significant contributions paid to the UK pension plans in
respect of the buy-ins (refer to note 15 Employee future benefits)
means that the tax relief for a portion of the 2023 contributions
is deferred and becomes deductible in years 2024-26 under UK tax
rules. These deferred contributions create a new deferred tax asset
which is recognised in OCI, where the underlying transaction is
accounted for. Due to restrictions on UK deferred tax asset
recognition, the new OCI deferred tax asset has displaced
previously recognised temporary differences in the income
statement. This de-recognition results in a GBP40m deferred tax
charge in the income statement, with an offsetting GBP40m deferred
tax credit in OCI. There is no change in the net deferred tax asset
on the statement of financial position. See note 8 Deferred tax for
further details.
-- Cash contributions to RSA's UK pension schemes result in a
tax deduction on a paid basis. The deduction may be capped in the
current year under specific UK tax rules. The pension contributions
funding the deficit arising from changes in actuarial assumptions
are accounted for in OCI as was the pension buy-in transaction. The
related tax credit for the contributions therefore arises in OCI
with an offsetting tax charge in the income statement for use of
this deduction against income statement profits. At 30 June 2023,
the impact is a current tax charge of GBP16m (with no current tax
impact on the statement of financial position). The current tax
charge in the income statement arises principally as a result of
the taxable profits on the IFRS17 transitional adjustment coming
into the charge to tax in the income statement in 2023. The quantum
of current year pension contributions mean that deferred tax assets
are not utilised against the IFRS 17 profit, and the related
deferred tax asset is being derecognised via the income statement
rather than reversing into current tax (unlike the DTL). See
below.
-- A deferred tax credit related to the reversal of the deferred
tax liability was created on transition to IFRS 17 in the UK (see
note 8 Deferred tax). This is offset by an equivalent current tax
charge on the IFRS 17 transitional adjustment coming into the
charge to tax in 2023 (with no net income statement impact). This
is recognised in the income statement because of the retrospective
application of IFRS 17. The deferred tax asset set up to offset the
deferred tax liability in the opening balance sheet has also been
unwound in the income statement creating an offsetting deferred tax
charge. The net result is therefore a current tax charge in the
income statement. There is no change in the net UK deferred tax
asset on the statement of financial position.
19. Share capital
The issued share capital of the Parent Company is fully paid and
is summarised in the following table:
30 June 2023 30 June 2022
-------------------- --------------------
Number GBPm Number GBPm
------------------------------- ------------- ----- ------------- -----
Ordinary Shares of GBP1 each 1,563,286,978 1,563 1,563,286,790 1,563
Preference shares of GBP1 each 125,000,000 125 125,000,000 125
------------------------------- ------------- ----- ------------- -----
1,688,286,978 1,688 1,688,286,790 1,688
------------------------------- ------------- ----- ------------- -----
The movement of Ordinary Shares in issue, their nominal value
and the associated share premiums during the period are as
follows:
Nominal
Number value Share premium
of shares GBPm GBPm
---------------------------------------------- ------------- ------- -------------
At 1 January 2023 1,563,286,973 1,563 282
Capital injection from 2283485 Alberta
Limited 5 - 519
---------------------------------------------- ------------- ------- -------------
At 30 June 2023 1,563,286,978 1,563 801
---------------------------------------------- ------------- ------- -------------
Nominal
Number of value Share premium
shares GBPm GBPm
---------------------------------------------- ------------- ------- -------------
At 1 January 2022 1,269,484,814 1,269 282
Capital injection from Regent Bidco Limited 293,801,976 294 -
At 30 June 2022 1,563,286,790 1,563 282
---------------------------------------------- ------------- ------- -------------
20. Tier 1 notes
On 27 March 2022, the Group redeemed the restricted Tier 1 notes
at their principal amount (GBP275m) together with accrued and
unpaid interest. The Tier 1 notes had a carrying value of GBP297m
with the resulting gain of GBP22m being recognised directly in
retained earnings.
The redemption of the Tier 1 notes was financed by a capital
injection from the Group's parent company (see note 19).
21. Capital management
As at 30 June 2023 and 31 December 2022, the Group and its
regulated insurance subsidiaries were in compliance with regulatory
capital requirements. Refer to note 6 Risk and capital management
of the 2022 Annual Report and Accounts for more details on the
management of the Group's capital.
22. Additional information on the interim consolidated statement
of cash flows
30 June 30 June 2022
2023
For the six month period ended GBPm GBPm
------------------------------------------------------- -------- -------------
Adjustments for non-cash items
Net losses (gains) on investment portfolio (Note
17) 62 (141)
Depreciation and impairment of property and equipment 11 10
Amortisation and impairment of intangible assets 25 21
Amortisation of investments 7 16
Defined benefit pension expense (Note 15) 14 4
Gain on disposal of business - (7)
Derecognition and disposal of intangibles 34 19
Foreign exchange gain (loss) (62) 45
Other 1 (1)
------------------------------------------------------- -------- -------------
92 (34)
------------------------------------------------------- -------- -------------
Changes in operating assets/liabilities
Contributions to the defined benefit pension plans (604) (75)
Changes in insurance and reinsurance contracts (46) (66)
Other operating assets (31) 68
Other operating liabilities 3 27
(678) (46)
------------------------------------------------------- -------- -------------
23. Related party transactions
23.1 Transactions with parent company
The Group's parent company is 2283485 Alberta Limited (2022:
Regent Bidco Limited), a wholly owned subsidiary of IFC, the
ultimate controlling party.
During the six month period to 30 June 2023, the following
related party transactions have taken place with 2283485 Alberta
Limited:
-- On 3 March, the Group received a capital injection from
2283485 Alberta Limited of GBP444m to fund contributions to the
Group's two UK defined benefit pension plans.
-- On 23 March, the Group received a capital injection from
2283485 Alberta Limited of GBP36m to fund contributions to the
Group's two UK defined benefit pension plans.
-- On 5 June, the Group received a capital injection from
2283485 Alberta Limited of GBP39m to fund the repurchase of issued
debt.
During the six month period to 30 June 2022, the following
related party transactions took place with Regent Bidco
Limited:
-- On 27 March 2022, the Group received a capital injection from
2283485 Regent Bidco Limited of GBP294m to fund repurchase of Tier
1 notes.
23.2 Other related party transactions
The Group has a reinsurance arrangement with Unifund Assurance
Company (Unifund), a member of the IFC Group. Under the terms of
the arrangement the insurance risk of Unifund's business is
transferred to the Group. The Group pays a reinsurance commission
in relation to the quota share agreement and the agreement covers
Unifund's existing insurance liabilities and new written premium
for all lines of business at a rate of 60%. The outstanding
balances are secured against collateral assets, made up of assets
held in trust and a letter of credit.
The Group has other reinsurance arrangements (some of which are
secured against collateral assets) and transactions with Roins
Holdings Limited and other entities that are part of the IFC Group,
including its associates.
The Group holds ordinary shares in a company in which a Director
of the Group is also a Director. The shares were purchased from a
third party in the open market as part of the Group's routine
investment strategy.
The amounts relating to the above related party transactions
included in the interim condensed consolidated income statement for
the six month period ended 30 June are provided in the table
below:
30 June 30 June
2023 2022
Restated(1)
GBPm GBPm
--------- ------- -----------
Income 176 179
Expenses 212 157
--------- ------- -----------
The amounts relating to the above related party transactions
included in the interim condensed consolidated statement of
financial position and the collateral pledged for the six month
period ended 30 June are provided in the table below:
30 June 31 December
2023 2022
Restated(1)
GBPm GBPm
-------------------------------------- -------------- ----------------------
Assets 77 66
Liabilities 639 666
-------------------------------------- -------------- ----------------------
(1)Restated for the adoption of IFRS 17. Refer to note 4. Adoption
of new and revised accounting standards. Due to this restatement, annual
comparative information is unaudited.
------------------------------------------------------------------------------
Collateral pledged 951 960
-------------------------------------- -------------- ----------------------
24. Alternative Performance Measures
IFRS reconciliation to management P&L
For the six month period ended 30 June 2023
Underwriting Investment Central Business Other Profit
result result costs operating income before
result and charges tax
GBPm IFRS
=============================== ------- --------------------------------------------------------------------
Insurance revenue 1,965 1,965 1,965 1,965
Insurance service expenses (1,719) (1,719) (1,719) (1,719)
------------------------------- -------
Insurance service result
from insurance contracts 246
------------------------------- -------
Allocation of reinsurance
premiums (450) (450) (450) (450)
Amounts recoverable from
reinsurers 320 320 320 320
------------------------------- -------
Net expense from reinsurance
contracts (130)
------------------------------- -------
Insurance service result 116
------------------------------- -------
Net investment income 79 79 79 79
Net losses on investment
portfolio (62) (62) (62)
------------------------------- -------
Net investment return 17
------------------------------- -------
Insurance finance income 28 28 28
Reinsurance finance expense (5) (5) (5)
------------------------------- -------
Net insurance financial
result 23
------------------------------- -------
Other net gains 1 1 1
Other income and expenses (27) (34) (7) (41) 14 (27)
Acquisition, integration
and restructuring costs (70) (70) (70)
Other finance costs (5) - (5) (5)
------------------------------- ------- ------------ ---------- ------- ---------- ------------ -------
Profit before tax 55 82 79 (7) 154 (99) 55
------------------------------- ------- ------------ ---------- ------- ---------- ------------ -------
Income tax expense (64)
------------------------------- -------
Loss for the period (9)
------------------------------- -------
Attributable to:
Owners of the Parent Company (9)
Reconciliation of Insurance revenue to Net written premiums 2023
GBPm
------------------------------- ------- ------------ ---------- ------- ---------- ------------ -------
Insurance revenue 1,965
------------------------------- ------- ------------ ---------- ------- ---------- ------------ -------
Movement in gross earned
premium (420)
Other income (35)
Reinsurance written premiums (115)
Revenue for internal contracts 50
Revenue measured under GMM (70)
------------------------------- ------- ------------ ---------- ------- ---------- ------------ -------
Net written premiums 1,375
------------------------------- ------- ------------ ---------- ------- ---------- ------------ -------
For the six month period ended 30 June 2022 (restated)
Underwriting Investment Central Business Other Profit
result result costs operating income before
result and charges tax
GBPm IFRS
================================== ------- ====================================================================
Insurance revenue 2,098 2,098 2,098 2,098
Insurance service expenses (1,869) (1,869) (1,869) (1,869)
================================== =======
Insurance service result
from insurance contracts 229
================================== =======
Allocation of reinsurance
premiums (444) (444) (444) (444)
Amounts recoverable from
reinsurers 322 322 322 322
================================== =======
Net expense from reinsurance
contracts (122)
================================== =======
Insurance service result 107
================================== =======
Net investment income 59 59 59 59
Net gains on investment portfolio 141 141 141
================================== =======
Net investment return 200
================================== =======
Insurance finance expense (6) (6) (6)
Reinsurance finance expense (18) (18) (18)
================================== =======
Net insurance financial
result (24)
================================== =======
Other net gains 19 19 19
Other income and expenses (28) (21) (10) (31) 3 (28)
Other finance costs (5) (5) (5)
Acquisition, integration
and restructuring costs (45) (45) (45)
================================== ======= ------------ ---------- ------- ---------- ------------ -------
Profit before tax 224 86 59 (10) 135 89 224
================================== ======= ------------ ---------- ------- ---------- ------------ -------
Income tax expense (32)
================================== =======
Profit for the period 192
================================== =======
Owners of the Parent Company 197
Non-controlling interests (5)
================================== =======
192
================================== =======
Reconciliation of Insurance revenue to Net written premiums 2022
GBPm
-------------------------------------------------------------------------------------------------------- -------
Insurance revenue 2,098
---------------------------------- ------- ------------ ---------- ------- ---------- ------------ -------
Movement in gross earned
premium 127
Other income (26)
Reinsurance written premiums (569)
Revenue for internal contracts 54
Revenue measured under GMM (123)
---------------------------------- ------- ------------ ---------- ------- ---------- ------------ -------
Net written premiums 1,561
---------------------------------- ------- ------------ ---------- ------- ---------- ------------ -------
RESPONSIBILITY STATEMENT OF THE DIRECTORS IN RESPECT OF THE
HALF-YEARLY FINANCIAL REPORT
We confirm that to the best of our knowledge:
The condensed set of financial statements has been prepared in
accordance with the UK-adopted IAS 34 'Interim Financial Reporting'
and gives a true and fair view of the assets, liabilities,
financial position and profit or loss of the Group.
The interim management report includes a fair review of the
information required by:
a) DTR 4.2.7R of the Disclosure Guidance and Transparency Rules,
being an indication of important events that have occurred during
the first six months of the financial year and their impact on the
condensed set of financial statements; and a description of the
principal risks and uncertainties for the remaining six months of
the year; and
b) DTR 4.2.8R of the Disclosure Guidance and Transparency Rules,
being related party transactions that have taken place in the first
six months of the current financial year and that have materially
affected the financial position or performance of the entity during
that period; and any changes in the related party transactions
described in the last annual report that could do so.
Signed on behalf of the Board
Ken Norgrove Ken Anderson
Chief Executive Officer Chief Financial Officer
3 August 2023 3 August 2023
INDEPENDENT REVIEW REPORT TO RSA INSURANCE GROUP LIMITED ('the
Company' and 'the Group')
Conclusion
We have been engaged by the Company to review the condensed set
of financial statements in the half-yearly financial report for the
six month period ended 30 June 2023 which comprises the condensed
consolidated statement of financial position, the condensed
consolidated income statement, the condensed consolidated statement
of comprehensive income, the condensed consolidated statement of
changes in equity, , the condensed consolidated statement of cash
flows and the related explanatory notes.
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements
in the half-yearly financial report for the six month ended 30 June
2023 is not prepared, in all material respects, in accordance with
IAS 34 Interim Financial Reporting as adopted for use in the UK and
the Disclosure Guidance and Transparency Rules ("the DTR") of the
UK's Financial Conduct Authority ("the UK FCA").
Basis for conclusion
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410 Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity issued by the Auditing Practices Board for use in the
UK. A review of interim financial information consists of making
enquiries, primarily of persons responsible for financial and
accounting matters, and applying analytical and other review
procedures. We read the other information contained in the
half-yearly financial report and consider whether it contains any
apparent misstatements or material inconsistencies with the
information in the condensed set of financial statements.
A review is substantially less in scope than an audit conducted
in accordance with International Standards on Auditing (UK) and
consequently does not enable us to obtain assurance that we would
become aware of all significant matters that might be identified in
an audit. Accordingly, we do not express an audit opinion.
Conclusion relating to going concern
Based on our review procedures, which are less extensive than
those performed in an audit as described in the Basis for
conclusion section of this report, nothing has come to our
attention that causes us to believe that the directors have
inappropriately adopted the going concern basis of accounting, or
that the directors have identified material uncertainties relating
to going concern that have not been appropriately disclosed.
This conclusion is based on the review procedures performed in
accordance with ISRE (UK) 2410. However, future events or
conditions may cause the Company to cease to continue as a going
concern, and the above conclusions are not a guarantee that the
Company will continue in operation.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and
has been approved by, the directors. The directors are responsible
for preparing the half-yearly financial report in accordance with
the DTR of the UK FCA.
As disclosed in note 2, the latest annual financial statements
of the Group were prepared in accordance with UK-adopted
international accounting standards. The directors are responsible
for preparing the condensed set of financial statements included in
the half-yearly financial report in accordance with IAS 34 as
adopted for use in the UK.
In preparing the condensed set of financial statements, the
directors are responsible for assessing the Company and the Group's
ability to continue as a going concern, disclosing, as applicable,
matters related to going concern and using the going concern basis
of accounting unless the directors either intend to liquidate the
Company or to cease operations, or have no realistic alternative
but to do so.
Our responsibility
Our responsibility is to express to the Company a conclusion on
the condensed set of financial statements in the half-yearly
financial report based on our review. Our conclusions, including
our conclusion relating to going concern, are based on procedures
that are less extensive than audit procedures, as described in the
Basis for conclusion section of this report.
The purpose of our review work and to whom we owe our
responsibilities
This report is made solely to the Company in accordance with the
terms of our engagement to assist the Company in meeting the
requirements of the DTR of the UK FCA. Our review has been
undertaken so that we might state to the Company those matters we
are required to state to it in this report and for no other
purpose. To the fullest extent permitted by law, we do not accept
or assume responsibility to anyone other than the Company for our
review work, for this report, or for the conclusions we have
reached.
Thomas Tyler
for and on behalf of KPMG LLP
Chartered Accountants
15 Canada Square
London
E14 5GL
3 August 2023
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END
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