RSA # RSA Insurance Group Limited Consolidated financial statements for the year ended 31 December 2022 an [intact] company ![img-0.jpeg](img-0.jpeg) --- . --- 1 # Our Purpose To help people, businesses and society prosper in good times and be resilient in bad times. We built our business with help in mind – it's why we exist. # Our Values ![img-1.jpeg](img-1.jpeg) ![img-2.jpeg](img-2.jpeg) ![img-3.jpeg](img-3.jpeg) ![img-4.jpeg](img-4.jpeg) ![img-5.jpeg](img-5.jpeg) Our purpose and values are shared with our parent company, Intact Financial Corporation. # Contents ## Strategic Report - Business review 2 - Risk management 5 - Section 172 statement 10 - Environmental, social and governance 13 - Environmental risk management 16 ## Directors' and Corporate Governance Report - Directors and officers 20 - Corporate governance 21 - Report of the directors 26 ## Financial Statements - Directors' responsibilities 29 - Independent auditor's report 30 - Primary statements 39 - Basis of preparation and significant accounting policies 44 - Risk and capital management 59 - Significant transactions and events 69 - Notes to the consolidated income statement, consolidated statement of comprehensive income and dividends 72 - Notes to the consolidated statement of financial position 83 - Notes to the consolidated statement of cash flows 117 - Notes – Other commitments, contingent liabilities and events after the reporting period 119 - Notes – Appendices 120 - Jargon buster (unaudited) 128 - Alternative performance measures reconciliations (unaudited) 131 - Parent Company financial statements 133 - Notes to the Parent Company financial statements 137 --- RSA Insurance Group Limited Strategic report for the year ended 31 December 2022 # RSA UK & International In accordance with the Companies Act 2006, the Directors present their Strategic Report for the year ended 31 December 2022. RSA Insurance Group Limited is a subsidiary of Intact Financial Corporation (IFC). Its parent company up to 20 September 2022 was Regent Bidco Limited, and thereafter 2283485 Alberta Limited (a Canadian incorporated company), both wholly owned subsidiaries of IFC, the ultimate controlling party. RSA Insurance Group Limited and its subsidiaries operate in the UK, Ireland and Continental Europe (known as the Group, RSA or UK&I). On 7 July 2022, the Group disposed of its operations in the Middle East. Several of the Group's subsidiaries are regulated by the Financial Conduct Authority and/or the Prudential Regulation Authority. # Principal activity The principal activity of the Group is the transaction of insurance and related financial services. In the UK, RSA holds a top 5 market share position in each of domestic commercial lines, personal property and pet insurance. Personal motor, property, and pet insurance is offered to our customers through MORE TH>N and affinity partners, which include major retailers and large banks. Commercial lines in the UK are offered through the RSA brand via brokers. In Ireland, RSA is one of the largest multi-line insurers in the market, distributing through 123.ie (our direct to consumer brand), affinity partnerships and brokers. In addition, we are Ireland's largest commercial wind energy insurer. # Business Model a. Products that protect our customers: Our customers are our business. We strive to address their changing needs and continually improve our service. b. Effective product distribution: We need to reach our target customers effectively and efficiently to continue to develop as a business. Our products are distributed directly to customers, through brokers and affinity partnerships. c. Understanding risk to price correctly: To help ensure we offer the right products, at the right price on the right terms, we work hard to increase our understanding of our customers' risks and their evolving needs. d. Proactively managing claims: We aim to settle legitimate claims quickly and smoothly, delivering good outcomes for our customers. # Our strategy Our ambition is to build on RSA's strengths to deliver a consistently outperforming underwriting result. We will achieve this by leveraging our strong UK domestic Commercial lines and Specialty businesses, growing our direct channels in Personal lines, and continuing to improve our productivity. We are therefore continuing to focus on simplifying our business and distribution channels, investing in our technical and digital capabilities, and building a customer-driven culture that values high performance and develops talent. In Personal lines, work is continuing to finalise the footprint, with scale being required to drive towards outperformance. This is more challenging for Motor than for other Personal lines of business. We will build the customer proposition and grow our European businesses through alignment with IFC's specialty businesses in North America and the London Market, while continuing to focus on the underwriting excellence which has enabled the performance improvement of recent years. # Business review The Group reports a profit before tax of £65m for the year ended 31 December 2022 (31 December 2021: £228m loss from continuing operations and £4,531m profit from discontinued operations). Profit before tax of £65m consists of £16m underwriting profit (2021: £137m loss), investment result of £140m (2021: £110m), £24m central costs (2021: £11m) and £67m of other income and charges (2021: £190m). Profit before tax includes a £31m gain on the disposal of the Group's operations in the Middle East. Refer to note 8 for further information. --- The underwriting result is impacted by a £30m de-recognition of software assets (2021: £72m) (refer to note 23), and other charges include £61m of integration costs (2021: £40m) (refer to note 13). In personal lines, the results include losses related to prolonged sub-zero temperatures in December, which resulted in burst pipes in thousands of homes across the UK. In addition, there were a number of non-catastrophe large losses, and inflationary pressures continue to weigh on both Motor and Home. Net written premiums are £3,110m (2021: £3,293m continuing operations and £1,181m discontinued operations). Net assets of the Group are £2,345m (2021: £3,091m). ## 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 as follows: - Net written premiums for continuing operations £3,110m (2021: £3,293m): premiums incepted in the period, irrespective of whether they have been paid, less the amount shared with reinsurers. They represent how much premium the Group gets to keep for assuming risk. The Group targets growth that does not compromise underwriting performance. - Underwriting result for continuing operations £16m profit (2021: £137m loss): net earned premium and other operating income less net claims and underwriting and policy acquisition costs. The Group aims to achieve an underwriting result that is as sustainably high as possible – that is without uncompetitive pricing or compromising reserves. The Group targets further improvements to its underwriting result. - Profit/loss before tax for continuing operations £65m (2021: £228m loss): net profit/loss generated before taxes have been deducted. This is a key statutory measure of the earnings performance of the Group. The impact of tax can vary from company to company, therefore excluding this enhances comparability. The Group seeks to maximise its profit before tax. ## Non-Financial KPIs Customer: From a customer perspective, we have aligned our UK customer advocacy ambitions to the IFC strategic objectives to have three out of four customers as advocates and four out of five brokers who value our specialised expertise. We have developed a flightpath to the number over five years, as we improve the service we provide to our customers and brokers. We measure the amount of business that is renewed with us each year. Personal lines renewal was 80% on a premium retention rate basis. For Commercial and Specialty lines, policy retention was 86%. Climate: Our ambition is to achieve Net zero by 2050 and halve operations by 2030. We are working on building plans towards this with IFC across all our geographies. Further information can be found in the Environmental, Social and Governance (ESG) section in the Director's Report on pages 13 to 15. Employees: We aim to be a best employer and have made good progress on our Diversity, Equity and Inclusion agenda. We are proud to have achieved our Women in Finance target of 34% representation in the Management Group by 2023 a year early and we have recalibrated our future targets. We are aiming to achieve 40% female representation in Management by 2025 and gender parity by 2030. Our principal risks below also form the non-financial information statement. ## Our operations The Group's operations remained resilient during the year. Where and when government guidelines permitted, we began a voluntary return to office working supported by hybrid arrangements (a mix of home and office working) and, following a successful trial period, this was adopted as our business as usual. Significant resource has been deployed to ensure our people have received the appropriate support regarding physical and mental well-being during remote working. Operationally, we have continued to make improvements to our IT architecture and successfully migrated to a new cloud based mainframe to support our UK systems and processes. ## Principal risks and uncertainties The principal risks and uncertainties of the Group are set out in note 6 Risk and capital management¹. Further detail on how the Group manages its principal risks and uncertainties is set out in the risk management report on pages 5 to 9. ## Our customers We strive to provide tailored products to meet the evolving needs of our customers by analysing trends and keeping pace with digital developments. A core pillar of our strategy is focused on customer experience and delivering good outcomes – this involves improving products and propositions, omni-channel customer journeys, service levels, and claims experience. Our customer policy sets out standards for the business to help ensure that we treat all customers fairly, that we check products and services continue to offer fair value and meet their needs, and that we monitor customer outcomes to understand performance and take action, where needed. Planning for the delivery of the FCA's Consumer Duty has been a key area of focus during the second half of 2022 and will continue to be a focus for 2023. Further information on how we support and engage with our customers is contained in the Section 172 statement on pages 10 to 12. --- We define customer retention as a measure of the amount of business that is renewed with us each year. Strong customer satisfaction translates to high retention levels and improved underwriting results. Our customer-driven value means we focus on our customers' needs and make sure we are there for them in both the good times and the bad. We target improving retention over time. ## Related party transactions On March 27 2022, the Group received a capital injection from Regent Bidco Limited of £294m to fund the repurchase of the Tier 1 notes. Refer to note 17 for further information on all related party transactions. ## Future outlook We evolve our products and services to ensure that we continue to meet customers' changing needs. We continue to improve the performance and resilience of the business. An ongoing focus is to further simplify what we do and drive and further invest in areas of strength. Markets remain competitive but the Group has the right foundation to target sustainable growth in certain product lines and customer types. The continuation of our programme of business simplification aligned to customer driven values will assist this growth further. ## Events after the reporting period Subsequent to the year-end, on 27 February 2023, the Trustees of the two major defined benefit pension schemes in the UK, the Royal Insurance Group Pension Scheme and the Sal Pension Scheme ("the Schemes"), entered into an agreement with Pension Insurance Corporation plc ("PIC") to purchase bulk annuity insurance policies that operate as investment assets. Such arrangements are commonly referred to as a "buy-in". The Schemes made up around 99% of total defined benefit assets and obligations on the balance sheet at 31 December 2022. The buy-in removes all remaining material pension exposure from the balance sheet, while maintaining the security of benefits to the Scheme members. The buy-in premium has initially been funded through the transfer of the majority of the Schemes' assets to PIC, as well as by an upfront contribution from the Company of approximately £480m. The Schemes have retained ownership of various assets, including some less liquid investments, which will be liquidated over the next 12-18 months in order to settle the remainder of the buy-in premium, and cash, some of which will be required to meet ongoing expenses. In addition, the annual pension deficit funding contribution of £75m was paid in January 2023. The upfront contribution of the Company was part funded through a capital injection by IFC, via a subscription of one share in the Company at a premium of approximately £480m. The Schemes already had coverage against longevity risk for around 30% of the existing pensioner population through an insurance policy entered into in 2009 with Rothesay Life. Together with the newly purchased PIC annuity assurance policies, the Schemes will now have protection against longevity risk and market risk for the material obligations of all deferred and pensioner members. As a result, the pension surplus on the balance sheet at 31 December 2022 of £200m net of tax is expected to be largely removed as the fair value of these insurance policies, held as assets of the Schemes, will be set equal to the value of the defined benefit obligations covered under IAS 19. An initial net loss of approximately £700m, based on recent market conditions, is expected to be recognised through OCI. The fair value of the insurance policies will then fluctuate going forward based on changes in the value of the defined benefit obligations covered. The transaction will temporarily increase the income tax expense as the deductibility of the upfront contribution will be spread out over three years. This results in deferred tax assets being reclassified to Other Comprehensive Income from income tax expense, with a neutral net impact on shareholder's equity. 1. Refer to Financial Statements 2. The underwriting result is an Alternative Performance Measure (APM). Refer to Further information – Jargon buster and Alternative Performance Measures. --- 5 # Managing Risk Managing risk to deliver for our customers and achieve our goals The Group's aim is to deliver consistently for our customers while delivering outperformance. The Group's operating plan provides a platform for ensuring the business remains aligned with its strategic goals, including strong delivery for our customers and sustainable performance with a robust capital base. The Risk function takes an active role in challenging the business on its development of our plans and delivery against our objectives and those of our customers. ## Approach to managing risk and our appetite in 2022 Our risk management and controls frameworks were created to ensure that we identify, assess and respond to risks across the Group before they adversely impact on our customers or the business. This information, together with the strength of the Group's capital position, allows the Board to set a risk strategy and appetite that articulates the level of risk it is prepared to take in delivering its strategic objectives. Risks are managed within risk appetite, using a risk maturity view. For material financial risks, this was achieved throughout the year and three-year plans assume this will continue. From time to time, certain risks stray outside target and action is taken to manage them back to acceptable positions. This year saw continued progress in some key risk areas, including customer, underwriting discipline, IT and cyber. ## Risk culture – culture of accountability and openness We consider the foundation of an effective risk management framework to be the cultivation of a risk culture that promotes accountability and openness (a willingness to admit mistakes and learn from the past). At RSA, the Board and senior management team has been instrumental in setting the right 'tone from the top', and we gain insights from quarterly culture health reviews and periodic workforce surveys. A key part of our culture is ensuring our customers are at the heart of all we do. We give considerable attention to ensuring our customers are treated fairly and our colleagues are passionate about achieving good customer outcomes. --- Emerging risk – monitoring the future threats ## Emerged risk | Cyber risk Cyber threats arise on a frequent basis; however, there is an increasing risk of hostile states and organised crime to engineer severe attacks. | Terrorism / Social unrest Attacks could impact a large number of our customers and colleagues. Growing concern that the cost-of-living crisis could drive increasing unrest. | Stagflation The current economic climate carries a risk of prolonged stagflation, where inflation levels are high but real economic growth is slow or negative. Potential impacts include higher claims and repair costs, increased liabilities, reduced consumer spending and social unrest or political instability. | Geopolitical tensions New political, economic, cyber, or political conflicts could occur, or stem from escalation to, or contagion from, the Ukraine conflict. Other factors to monitor include trade disputes, tensions or conflicts in other regions, relations with China, and EU stability, potentially influenced by impending elections. | | --- | --- | --- | --- | ## Near-term risk | Changing market conditions Current interest rate environment which has supported growth is fragile, competitive landscape could change leading to softening of the market. | Solar storms Solar flares could potentially impact on electronics and the electricity supply, with broad economic impact and a range of insurance claims. | Persistent or more extreme weather There is potential for further deterioration of more extreme weather patterns from a warming planet. | Climate change litigation There are a growing number of litigation cases globally relating to climate change against organisations and governments. | | --- | --- | --- | --- | ## Medium-term risk | Small particles and hazardous chemicals Risk associated with long-term health implications from a range of particles and substances that could cause harm when ingested, inhaled, or come into contact with skin. Impacts include potential for significant long-tail future liability claims. | Chemical, biological, radiological and nuclear (CBRN) threats Malicious actors including terrorists, hostile states or criminals remain interested in CBRN attack methods. | Animal pandemic / epidemic A new pathogen crosses species and spreads quickly across the household pet population, resulting in costly treatment. Outbreaks such as foot & mouth or bird flu create disruption in the food supply chain resulting in material economic loss for the food industry. | Climate change transition Economic effects are starting to materialise. There remains uncertainty about the scale of disruption to the economy or asset valuations as actions are taken to deliver on Net zero targets. | Technological advances Shift to autonomous vehicles and advancing automation are likely to change insurance needs and could affect both frequency and severity of losses. | | --- | --- | --- | --- | --- | ## Long-term risk | Climate change accelerates While transition risk is nearer term, the physical risks will take longer to fully materialise and come with even greater uncertainty. We are already experiencing some volatility in global weather patterns that are being reflected in weather assumptions but there are substantial risks that these physical effects could accelerate. | Discriminatory pricing As markets evolve and the use of 'big data' and algorithms in setting prices becomes more prevalent, there is a risk that these inequalities are perpetuated and amplified. The insurance industry (and regulator) need to continue to have the right controls in place to ensure good and fair customer outcomes. | | --- | --- | --- Risk management approach ## Risk management system | The Board sets business strategy The Board sets the business strategy which is incorporated in the three-year operational plan. Risk strategy, combined with the Risk function challenge of the operational plan, provides robust challenge of validity and achievability of plan. | Board sets risk appetite The Board sets risk appetite, limits and indicators which aligns to our business strategy. | Policies set a framework for operating within appetite Our extensive policy suite sets out the required business processes and controls to deliver the operational plan within appetite. Robust control testing and monitoring is used to identify risks out of appetite. | Monitor appetite and action tracking Business leaders manage their own risks and define actions, where out of appetite, with oversight provided by Risk and Control Committees and escalation to the Board via the Risk Committee. | | --- | --- | --- | --- | ![img-6.jpeg](img-6.jpeg) | Own Risk and Solvency Assessment (ORSA) reported to Board Forward looking assessment of risks and capital requirements are combined to inform decision making on the strategy, planning and risk appetite for the next cycle. | Model outputs used in ORSA The internal model is run regularly throughout the year in order to assess the risks impacting the RSA Group and determines how much capital the RSA Group needs to hold to remain solvent, even after a major stress event(s). This forms part of the ORSA process. | Model outputs inform business decision making Validated model outputs are used to assess and inform business decision making, including capital planning, reinsurance analysis and risk-weighted returns for pricing. | Risk assessment and update internal model Significant changes in risk assessments are considered by the Internal Model Governance Committee and, where appropriate, the Group's internal model is updated. The model is validated by the Risk function, informed by stress and scenario testing. | | --- | --- | --- | --- | --- 8 | Key risks and exposures | Key mitigants and controls | | --- | --- | | **Catastrophe risk** Arises from the risk of large natural disasters, with our main exposure being to European windstorms and UK flood. | • Our reinsurance programme significantly reduces our exposure to catastrophe risks, with modelled extreme losses and historic experience being well covered by our programme. The programme is designed to cover at least 1-in-200-year events and is stress-tested for extreme weather events. | | **Reserving risk** This is the risk that the Group's estimate of future claims is insufficient, such that gross losses could be higher than projected or reinsurance does not respond as anticipated. The size of future claims payments is uncertain, with the main sources being increasing claims inflation trends, post-pandemic disruption such as supply chain constraints, economic uncertainty, long-tail lines of business, and Covid-19 business interruption claims (due to interpretation of policy wordings still being debated in high profile legal cases.) The timing of future claims payments is another key uncertainty especially for our long-tail liabilities arising from motor injury, liability and professional indemnity. | • Reserves are reviewed and challenged at the Reserving Committee meeting, which is attended by the Chief Actuary, Chief Risk Officer, Chief Underwriting Officer, Chief Operating Officer, Chief Financial Officer and Chief Executive Officer. Reserves are also reviewed and challenged by the Audit Committee. • During 2022, we continued to carry out detailed monitoring of claims, regulatory developments, settlement delay, supply chain, legal and reinsurance developments, both within RSA and the industry, to help form assessments and make appropriate allowance for the impact on our experience of potential operational, economic or other disruptions arising from Covid-19, inflation increases and war in Ukraine. • The Adverse Development Cover mitigates the risk of adverse development in 2020 and prior years ultimate claims cost estimates. • IFC Group's reserve assurance programme and independent external reserve reviews have independently verified material segments of the net Actuarial Indication during the past three years. • Claims case reserves are set based on best estimate and reviewed at quarterly Case Reserving Committee meetings. • Management consider and seek legal advice on the implications of all open legal cases and judgements across the industry relating to interpretation of policy wordings in Covid-19 claims. It is expected that any significant adverse change beyond our existing assumptions would be protected by reinsurance cover. | | **Underwriting and claims risk** This is the risk that underwritten business is not in line with appetite or is less profitable than planned due to insufficient pricing and setting of claims case reserves. Key exposures arise from large portfolios where claims trends are slow to emerge, such as UK Commercial and Marine. | • Controlled through well-defined risk appetite statements (including climate change factors) which are rigorously monitored quarterly. • Risks to inflation and the economic environment are actively monitored with appropriate response taken. • Regular control validation and assurance activities are performed over underwriting pricing and claims. | | **Market and credit** This is the risk to our insurance funds arising from movements in macroeconomic variables, including widening credit spreads, fluctuating bond yields and, to a lesser extent, currency fluctuations. | • RSA adopts a prudential investment strategy favouring high-quality fixed income bonds, a modest allocation to equities and selected less liquid assets subject to strong internal and external governance. • RSA ensures assets are closely duration and currency matched with insurance liabilities to hedge volatility. • Investment positions are regularly monitored to ensure limits remain within quantitative and qualitative appetite (including ESG factors). • Asset Managers position assets to align to the Low Carbon Position Statement. | | **Pension risk** Our defined benefit pension schemes are exposed to longevity and market risks. Some of these, for example credit spread movements, are partly hedged through offsetting exposures in the Insurance Investment Fund. | • Funding assets are well matched to liabilities in the pension schemes, including the use of swap arrangements. • A long-term funding plan is in place to further de-risk the schemes. • Possible market impacts are examined and well understood with a specific focus on Pension risk. • On 27 February 2023 a buy-in removed all remaining material pension exposure from the balance sheet. Further information is contained in Events after the reporting period on page 4. | | **Operational risk** This risk relates to the risks arising from human factors, external events, regulatory matters and inadequate or failed internal processes and systems, including cyber risks. Operational risks are inherent in the Group's operations and are typical of any large enterprise and have the potential to impact on our customers. | • Operational risk and resilience processes and procedures are in place, including incident management. • Continued improvement to our Operational Resilience capabilities are being delivered through a dedicated programme, supported by simulation exercises which test the adequacy of our approach. • Control effectiveness is monitored through formal Validation and Assurance. • IT and data risks remain a key focus, especially cyber threat, and we have | --- | | made some significant progress over the year, while remediating some of the legacy IT estate. | | --- | --- | | **Customer risk** The risk that customers do not receive good outcomes and suffer harm as a result of products & services that are not fit-for purpose, offer poor value, are poorly explained or inadequately supported. | • The UK Executive Customer Committee oversees key matters and decisions relating to good customer outcomes, supported by our Customer Outcomes Monitoring. • Successful implementation of Product Governance requirements in line with regulatory deadline. • RSA’s business strategy has been assessed and aligned to Consumer Duty requirements. Delivery of Consumer Duty is in progress and a focus for 2023. | 9 --- Section 172(1) Companies Act 2006 statement The Board has balanced the views and interests of our stakeholders, alongside the need to promote the long-term success of the Group. The Board has acted in a way that it considers, in good faith, would be most likely to promote the success of the Group for the benefit of its members as a whole. This section sets out how the Board, in doing so, has had regard to the matters set out in Section 172 of the Companies Act 2006. A balanced and collaborative approach to stakeholder engagement The Board recognises the importance of positive relationships between RSA and its stakeholders and is committed to fostering strong engagement with them. Open and collaborative dialogue and interaction is in the best interests of RSA and helps us to make a positive contribution to society. Throughout 2022, the Directors and senior management engaged with key stakeholder groups across the business, including IFC as the business further integrated with the wider Group. The Board is committed to maintaining a range of direct and indirect engagement with its stakeholders and has approved the stakeholder engagement plan for 2023. As part of its decision-making throughout the year, the Board has considered and balanced the views and interests gained through its stakeholder engagement, as well as the need to promote the long-term success of the Group. Customers Why the Board engages Good business starts with our customers and we strive to keep them at the heart of what we do. The Board works hard to increase its understanding of risks to our customers' so that we continue to provide tailored products and services that meet their diverse and evolving needs. Customer satisfaction and customer retention are critical to the long-term sustainable prospects of the Group. How the Board engages The Board receives regular updates from senior management on customer and conduct matters, including key indicators that monitor customer outcomes and insights on customer-driven decision-making. These updates keep the Board informed on customer priorities and key risks to the consistent delivery of good customer outcomes, and future areas of focus. During the year, the Board appointed a Non-Executive Director as a "Customer Champion" to support the Chair and the CEO in ensuring that our customer ambitions and the FCA's Consumer Duty requirements are regularly discussed and considered by the Board. The Board was kept well informed on how management was responding to Business Interruption Claims following the Covid-19 pandemic and taking steps to support customers during the cost of living crisis. During the year, the Board received deep-dive updates on customer and market insight and how the business is responding to customer expectations around customer service and digital offerings. The Board has closely monitored RSA's implementation of the FCA's rules on Pricing Practices and Product Governance and preparations for the new Consumer Duty rules, which will further heighten industry focus on customer outcomes. These business reviews have been a forum for the Board and management to discuss long-term strategic goals on customer matters. Long-term implications Customer satisfaction and retention are critical to the long-term sustainable prospects of RSA. The Board has engaged with and responded to the needs of customers with this in mind. During the second half of 2022, Board members have reviewed and approved management's plan to implement the FCA's Consumer Duty rules as part of the strategic focus of the Group. Workforce Why the Board engages The Board recognises that a values-driven, open culture and an engaged workforce are central to achieving our strategic goals. As such, the Board is committed to setting the tone from the top and engaging in a meaningful way with our people. How the Board engages The Board has supported management's communication approach to ensure the workforce is informed of, and engaged in, business strategy and performance. This has included regular intranet articles and 'vlogs', email and online messaging, and team meetings. Employees are encouraged to engage in our financial performance through various means described in Principle 6 of our Corporate Governance section. Alongside our People and Diversity, Equity & Inclusion Strategies, group-wide Employment Practices and Speaking-up & Whistleblowing Policies drive our approach on people matters and are reviewed annually under the governance of our Risk Management Framework. During the year, the Board received and supported a number of updates on people priorities including: activities to further embed our Purpose and Values in day-to-day practice, strengthened succession and development planning, trials of hybrid working patterns, trends from our speaking-up channel, and progress against inclusion ambitions; for example, our UK Gender Pay Gap and Women in Finance representation targets. 10 --- The Board also received insights from employee feedback gained through frequent leadership meetings, employee surveys and focus groups, and formal and informal dialogue with employee representation groups, including a European Works Council. The Board hosted a lunch with individuals in our talent succession plans to directly exchange views. In addition, some Board members are paired with an employee from an ethnic minority background to directly champion an Enable Me initiative designed by our REACH Employee Resource Group for multicultural inclusion. ## Long-term implications The Board understands that enabling our people and creating an open and transparent culture is key to our long-term success. The Board reflected on the workforce's views on ways of working and engaged in key decisions to adopt hybrid patterns that support both personal wellbeing and excellent service for our customers. The Board also responded to workforce concerns about cost-of-living pressures through pay enhancements for colleagues at greatest risk of impact. ## Regulators and rating agencies ### Why the Board engages RSA is regulated by the PRA and the FCA and committed to working with its regulators in an open, cooperative and transparent manner. We seek to ensure a strong regulatory compliance culture throughout RSA in order to pre-empt and, where necessary, resolve regulatory issues and to avoid or minimise business impact and the risk of customer harm. The Board continues to have constructive engagement with our regulators, ensuring that they gain a comprehensive view of the Group's financial soundness, strategic and operational priorities, governance and culture, and that we understand the issues of interest to them. The Board regularly engages with RSA's regulators across all the regions that it operates. The PRA and the FCA attended Board meetings in 2022 to discuss regulatory priorities. Senior management interacts regularly with key rating agencies. Board members are kept informed of the current views of the rating agencies through regular commentary and financial metric reporting at Board meetings. ### How the Board responds We believe that open and regular dialogue promotes transparency between the Group and its regulators and ensures that we are in a position to reflect the views of our regulators when setting strategy. The outcomes of our engagement with our regulators influence RSA's priorities and focus for the year are set out in the regulatory compliance plan, which is considered and approved by the Governance, Conduct & Remuneration (GCR) Committee. ### Long-term implications The Board is committed to engagement with the Group's regulators in order to ensure that we maintain positive relationships and take account of their views and interests. ## Environmental, Social and Governance issues (ESG) ### Why the Board engages The Board is committed to high standards in ESG matters. This is manifested by our contribution to communities and how we work to mitigate the impact of our business on the environment, in particular how we work with business partners, suppliers and customers in relation to our shared response to the challenges posed by climate change. ### How the Board responds The Board has oversight of RSA's policies on climate change and is engaged on how the business is supporting the transition to a low carbon economy. Further information on the Board's oversight and engagement on ESG matters and its oversight of non-financial KPIs is set out in the ESG Report and Environmental Risk Management Report on pages 13 to 19. ### Long-term implications The Board recognises that stakeholders have an interest in understanding how our business is responding to issues that concern wider society. The Board has been particularly engaged in understanding both the near and long-term risks associated with climate change and in preparing our business to respond to the associated physical, regulatory, social and economic impacts. ## Shareholder The Group's ultimate owner is IFC, a public company listed on the Toronto Stock Exchange. During 2022, RSA adopted the Purpose and Values of IFC and is aligned with IFC's strategic objectives to deliver outperformance and value for its shareholders. The Group's Board has an equal balance of independent and non-independent Directors. There are three shareholder-nominated Directors on the Board; this supports the Board's understanding and integration with IFC. Further detail on the composition of the Board is included in the Governance Report on pages 24 and 25. ## Suppliers Our suppliers are critical to our business and the long-term success of RSA. We are committed to the principles of the Prompt Payment code and aim to treat suppliers fairly and consistently – for example, by offering equivalent payment terms between suppliers, in order to build strong and lasting relationships. We have structured supplier management practices in place across all regions and are investing in further tools and processes to manage risk in the supply chain and ensure that our supplier relationships are managed in a cooperative and proportionate manner. --- 12 # Pension schemes The Board continues to view the pension trustees as a key stakeholder group. In 2022, the UK pension trustees were provided with quarterly updates on RSA performance and offered meetings with RSA and IFC senior executives. RSA also continued to engage with and support the development of investment strategy in the pension schemes (noting that this is ultimately controlled by the trustees). --- 13 # Environmental, social and governance ## Building resilient communities Helping society is core to our strategy. We believe that financial performance and helping society are equally important and therefore, we have integrated both into our strategic objectives. We believe that strengthening relationships with colleagues, customers, suppliers and communities through addressing issues of mutual concern helps to create value that is sustainable and ultimately benefits both RSA and the society in which we operate. This work is encapsulated in RSA's approach to Social Impact and ESG. ## Environment The business, government and community level approach to climate change is rapidly evolving in response to more frequent and severe weather events and the transition to a low carbon economy. RSA is an active participant in business and industry groups such as ClimateWise, the Association of British Insurers and the Climate Financial Risk Forum, sharing best practice on climate risk and strategies that will help to mobilise finance towards low carbon industries, technologies and services. In 2022, we launched our global climate change strategy. Workstreams have been mobilised across our business, including in operations, supply chain, underwriting, investments and social impact to establish the foundations and milestones necessary to achieve our goals, which comprise: - a commitment to achieve Net zero by 2050 in line with the Paris Agreement and an interim goal to halve emissions from our operations by 2030 using 2019 data as a baseline; - doubling down on helping people adapt to the extreme weather impacts of climate change in Canada, the US and the UK; - shaping climate-friendly behaviour among customers by incentivising green behaviour, creating and scaling green products, and providing information and education; - enabling the transformation of businesses and industries key to the transition and supporting new industries that will be created to build a sustainable future; and - collaborating with governments and industry to accelerate climate action. This year we have made a further commitment to achieving our climate change strategy by enhancing our Climate Change and Low Carbon Policy position. First implemented in 2020 our Low Carbon Policy is key to helping us demonstrate our commitment to responsible investment and underwriting. The policy is a framework for assessing the carbon intensity of our Scope 3 emissions and a baseline for long-term ambitions towards our goal of achieving Net-zero by 2050. In 2022, our Board approved a refreshed policy with an enhanced commitment to target an underwriting portfolio for energy production that is over 75% low carbon by 2030. Greenhouse Gas (GHG) emissions from RSA's corporate real estate have reduced this year by 18%. This has been achieved by a continuing reduction in the floor area of UK offices in 2022 to nearly 40% less compared to 2019, together with energy efficiency featuring as a design choice in the fit out or move to new office locations. Our office footprint in Ireland has also reduced by 22% since 2019. In addition, of the electricity we purchase directly in the UK, 100% is now procured from renewable sources. We observed an overall increase in emissions of 3.7% in 2022 on the previous year. This is primarily due to the increase in business travel following the easing of Covid-19 restrictions. However, the impact of business travel is still significantly below pre-pandemic levels and our overall GHG emissions have reduced by 53% since 2018. More details are available on pages 26 and 27 in the Streamlined Energy and Carbon Reporting (SECR) section. To support our employees to make sustainable choices we have introduced a new Essential Car User scheme, where employees on the scheme can only choose between a plug-in hybrid electric vehicle (PHEV) or an electric vehicle (EV). This is one component of our strategy to achieve a 70% reduction in the emissions from our global fleet by 2030. At year end, total orders of vehicles in the UK number 137 (74% EV, 26% PHEV). EV charging facilities are now available at our Peterborough, Chelmsford, Horsham and Bristol sites. ## Communities Our community programme continues to harness the generosity and enthusiasm of employees to support some of the most vulnerable in society. Food distribution, education and learning, mental health services and projects to combat loneliness are among those having received more than £1.25m million in cash, the value of volunteering time and in-kind support. £0.92m of this total community charitable contribution was in the form of cash donations from RSA, an increase of 6.5% on the previous year. Volunteering hours totalled 3,370 hours in 2022, an increase of 188% compared to 2021 following the successful relaunch of the programme in May 2022. Beneficiaries include families, children and young people, older people, asylum seekers and refugees through volunteering at schools, charities tackling poverty, and support for food banks. We will be looking to build on this encouraging platform of impact as we look to engage even more employees in 2023. Employees raised a total of £0.24m for charitable causes, an increase of 22% on the previous year. 284 employees are signed up to our Give As You Earn benefit, which allows our people to give to charity in a tax efficient way and where RSA also provides matched donations of up to £10/month, with participants making an average donation of £30/month. RSA donated £36,319 in match funding to support this team. --- In 2022 we funded new research into workplace slips, trips and falls (STF) with our partner The Royal Society for the Prevention of Accidents (RoSPA), which found that these incidents represent a significant risk to businesses and employees. The research, which canvassed the opinions of nearly 3,000 people, found that 60% of decision makers do not have a dedicated STF prevention programme in place. A number of businesses reported losing in excess of 100,000 hours (4,167 days) working time per year due to STF and data from RSA indicates that the average claim for a slip, trip or fall is £25,000. RSA also donated £25,000 to suicide prevention charity R;pple to support our people, their families and our communities with mental health and wellbeing challenges. R;pple is an online interceptive tool designed to ensure more help is provided to individuals who are conducting searches relating to self-harm or suicide. The donation from RSA supported the development of a smartphone and tablet version of the tool. ## People Our people are central to achieving our core purpose, and our culture of support for personal well-being, diversity and equal opportunity to excel is important to us. RSA actively promotes inclusivity, including ensuring there is no less favourable treatment on the grounds of sex, sexual orientation, gender re-assignment, marital or civil partnership status, race (including colour, nationality, ethnic or national origin), disability, religion or belief, age, and pregnancy and maternity, and that reasonable adjustments are provided for people with disabilities who are applying to or already working with us. An executive-led Diversity, Equity & Inclusion (DEI) Council oversees our diversity strategy which aligns to our commitments as signatories to the Women in Finance Charter, Race at Work Charter, and the Valuable 500. In June 2022 RSA welcomed 23 interns over 6-weeks and retained four candidates in permanent positions after participating in the 10,000 Black Interns scheme, which aims to transform the horizons of young Black talent and improve workplace diversity. Our network of Employee Resource Groups, mental health first-aiders and memberships of both the UK Business Disability Forum and Employers Initiative on Domestic Abuse all contribute to how we can best support colleagues. Our volunteer led Employee Resource Groups are a key enabler of our DEI strategy and champion awareness and proposition enhancement aligned to our key priority areas. This year we were proud to expand our suite of support for employees which included the extension of our maternity, adoption and paternity leave provisions and enhanced guidance and support for those transitioning. We also introduced a new policy to support employees who are impacted by domestic abuse and achieved Menopause Friendly Accreditation – a mark of excellence for menopause support in the workplace. This year we were proud to achieve our target of 34% female representation in our management group a year ahead of plan and have since agreed a new target to achieve 40% by 2025. We recognise the value of hybrid working in supporting inclusivity and trust our people to deliver good outcomes for our customers and our business, regardless of where they work; we can collaborate and solve problems wherever we are. As always, protecting the health, safety and well-being of colleagues is a priority and this will continue to be at the top of our agenda by listening to our people, understanding what they need to be effective at work and providing resources for practical and emotional support. ## Suppliers Our suppliers are critical to the service we provide to our customers and make an important contribution to our business. In 2022, we built on the work in previous years to continue to engage with our suppliers through structured supplier management practices, across a range of ESG topics. We are continually evolving the approach to third party management to ensure that our supplier relationships are managed in a cooperative and proportionate manner. ## Human rights As a signatory to the UN Global Compact, RSA is committed to aligning its operations with the ten universal principles that together cover our approach to environment, human rights, labour and anti-corruption. Our Human Rights Policy is designed to operationalise the Universal Declaration of Human Rights, the International Labour Organization's Declaration on Fundamental Principles and Rights at Work, and the UN Guiding Principles on Business and Human Rights. It sets the standard we expect for our employment practices, the actions of our supply chain, and principles we apply to our investment and underwriting portfolios. All relevant policies are reviewed on an annual basis, including our Modern Slavery and Human Trafficking Statement, which was published in April 2022 and is linked to a number of policies that provide confidence we are helping to raise awareness of modern slavery with our people and suppliers. This includes policy standards outlining how we recruit, manage and support our people in a working environment that promotes diversity, respect, integrity, safety and wellbeing; our Third Party Contracts & Outsourcing Policy which exists to ensure that appropriate assessments of risks associated with services are undertaken to meet our human rights commitments; and our Speaking-up & Whistleblowing Policy, which encourages our people to raise concerns, without fear of retaliation, about how we do business or operate as an employer. Our due diligence programme monitors the approach of our supply chain to human rights and engages with suppliers to improve transparency where necessary. We are subscribers to the Financial Services Qualification System (FSQS) operated by Hellios, a community of over 50 financial institutions collaborating to agree a single standard for managing supplier compliance, including ESG policy areas such as modern slavery and environmental impact. Supplier Relationship Managers can also complete our e-learning module, which addresses the potential risks of modern slavery and human trafficking in the supply chain, raises awareness of this issue with our people and the circumstances under which they should seek specialist advice. 14 --- 15 # Anti-bribery and corruption We do not tolerate bribery and corruption anywhere in our business. Our Anti-Bribery and Corruption Policy and Personal Conflicts of Interest, Gifts and Hospitality Policy apply across our business. Directors, people leaders and others with supervisory responsibility must ensure that employees, contractors, business partners and suppliers are aware of these policies and comply with them. The policies establish detailed guidance on facilitation payments, gifts, hospitality and relationships with third parties, as well as the systems and controls to ensure effective implementation. All employees, contractors, business partners and suppliers are expected to comply with applicable laws of the UK and countries in which we conduct business, as well as with our Broker Remuneration Policy and Third-Party Contracts & Outsourcing Policy, which set out requirements for payments to brokers and procurement activity. All colleagues complete a mandatory e-learning training module covering anti-bribery and corruption. The training is an annual assignment to all staff and is translated into a number of different languages for our colleagues in different parts of the world. Employees are encouraged to identify and escalate concerns to management or through our confidential third-party whistleblowing hotline in line with our Speaking-up & Whistleblowing Policy. Operating countries complete risk assessments that are reviewed and updated annually, supported by a central team to enable continuous improvement to controls. Together with regular reports from the Compliance team to the Risk Committee and Audit Committee throughout the year, the Audit Committee periodically reviews Internal Audit findings in relation to our Anti-Bribery and Corruption Policy. --- 16 # Environmental risk management ## Task force on climate-related financial disclosures (TCFD) RSA is committed to contributing to efforts that reduce greenhouse gas (GHG) emissions and accelerate the transition to a low carbon future, helping to limit the global temperature rise this century to well below 2°C above pre-industrial levels, as outlined in the Paris Agreement. As noted above, we have set a target to achieve Net-zero by 2050 in line with the Paris Agreement and an interim goal to halve emissions from our operations by 2030 using 2019 data as a baseline. We also believe that addressing climate change presents an opportunity to both help society manage the impacts, and for RSA and IFC to win in the marketplace with innovative products and services. ## Governance ### Board of directors oversight RSA is committed to delivering the strategic direction and initiatives of our parent company, IFC, including our global Climate Strategy. Our Board is responsible for overseeing the strategic direction and initiatives of the Group with regards to climate change. Climate change is an integral accountability of the Board's Committees. These Committees oversee the assessment of the risks related to climate change. Our Board is engaged in shaping the approach to Enterprise Risk Management, including the Group's risk appetite, governance structures and policies. Our board considers the potential impact of insured losses resulting from damage to property and assets arising from climate related natural catastrophe events and the development of strategies to manage the business sensitivity to these risks. The Board provides oversight of climate change risks and opportunities, through the RSA management level Catastrophe Modelling, and the Board Risk Committee, and the Governance, Conduct and Remuneration Committees. ### Management oversight Climate risk is incorporated into Enterprise Risk Management, which is integrated into all business activities and strategic planning, including subsidiaries and operations. This framework includes the identification, assessment, response, monitoring and reporting of risks. Climate risks are regularly discussed with the leadership of commercial, personal and specialty lines of business to ensure proper risk assessment and mitigation plans are in place. Our CEO and Executive Committee oversee RSA's management of climate change risks and opportunities, including delivery of the Climate Strategy in the UK. Further, responsibility for climate change action is integrated into the roles, responsibilities and compensation of senior managers including the Chief Financial Officer, the Chief Underwriting Officer and the Chief Risk Officer. There are also a number of senior management committees and operational teams that have climate risk management accountability. ### Climate change oversight Governance and oversight of climate risk at RSA is aligned with the Board and Committee governance at IFC level. Physical and transition risks related to climate change influence standard risk categories and its treatment is fully integrated into the wider RSA system of governance: - Relevant committees include climate change in their responsibilities. - Senior Manager Certification Regime (SMCR) responsibilities have been allocated to the Chief Financial Officer, Chief Risk Officer and Chief Underwriting Officer. - The Risk Strategy and Risk Appetite includes climate change related limits for financial risk and insurance risk types. - The policy framework includes reference to management of climate change risks – within the Risk Management and Internal Controls Policy and referenced within other relevant policies. - Climate change is considered within risk and capital processes including for emerging risks and the ORSA. | **Board risk committee:** Advises the Board on risk management issues, recommends the framework of risk limits and risk appetite to the Board for approval, and oversees the risk management arrangements of RSA, including in relation to climate change. This includes: Monitoring the emerging and principal material risks facing RSA, ensuring appropriate arrangements are in place to identify, manage and mitigate risks effectively, and that appropriate levels of capital are held in relation to these risks. Recommending RSA's risk strategy and risk appetite. Reviewing the outputs of the ORSA, the internal model and the conclusions of model validation, making recommendations to the Board on capital adequacy and the ORSA Report. | **Governance, conduct and remuneration committee:** Oversees the compliance function and the Group's governance. The GCR provides oversight of the global ESG framework, associated performance and disclosure as it relates to the RSA business, including: • ESG emphasis and priorities for the RSA region, drawing on IFC global priorities. • Oversight of delivery of ESG communications and disclosure strategy in the RSA region. • RSA ESG stakeholder engagement. • Delivery of Social Impact Strategy and Performance Scorecard in RSA. • ESG topics not covered by other Committees. | | --- | --- | --- 17 # Strategy The IFC Climate Change Strategy, released in 2022, is owned by IFC's Chief People, Strategy and Climate Officer, and operationalised at the IFC group-level. RSA executives and teams actively deliver the Global strategy across the business. Our Climate Strategy focuses on our expertise, scale and resources to address all aspects of climate change, including our strategy to achieve Net zero, through which we believe we can effectively manage risks, take advantage of market opportunities and help society. Our Climate Strategy is guided by the following principles: - We will help people, businesses, and society de-risk the transition to a sustainable future, by leveraging our strengths. - We will take an inclusionary approach to supporting our stakeholders, not an exclusionary one. - We will focus our actions on areas that maximise the overlap between helping and winning. Our Climate Strategy comprises five big intentions: - Commit: Commit to Net zero by 2050, including an accelerated goal to halve corporate emissions by 2030 from a 2019 baseline. - Adapt: Double down on helping people and society Adapt to climate change. - Shape: Leverage our platform to Shape behaviour - Enable: Enable the transformation of industries key to the transition - Collaborate: Collaborate with governments and industry to help accelerate climate action RSA plays an important role in enabling the energy transition through the provision of products and services supporting Net-zero energy generation, supporting clients on their Net-zero transition pathways, and in aligning our underwriting activities with our Low Carbon Policy. Additionally, we have an opportunity to influence our customers and suppliers to improve their resilience to climate change through engagement and education, and to place increased focus on adaptation in the geographies and communities in which we operate. We work to align our business activities with our commitment to support the development of renewable energy and other clean energy technologies through our products and services while limiting capacity available to and investments in fossil fuels. # Risk management Climate change is a challenge that has been faced by the personal and commercial insurance industry for decades. The risk is constantly evolving and has increased in importance as many global industries and societies address the energy transition shift, and the frequency and severity of extreme weather events increase. We have a proven ability to manage climate risks in our operations. Beyond the short-term nature of insurance contracts, which enables us to respond to a dynamic weather environment and changing climate, we take a number of actions to protect our business and our customers. Our risk and operational teams regularly review the emerging risk landscape. We analyse Group-wide data, exposure and trends, and external research to identify a management approach to climate-related risks. Climate risk is managed through our operational policies and standards, and categorised by pricing and selection, product innovation, supply chain and claims, prevention and investments. Some of our key risk management activities for physical risks include: - Annual insurance policies mean we can respond to changing weather patterns. - Reinsurance provides protection against losses from severe weather events. - We work with our customers to promote measures that improve resilience to extreme weather. - We use weather peril models and geolocation tools to support risk assessments and underwriting of residential and commercial properties. Reinsurance and operational planning processes are our primary means of reducing the financial impacts of climate-related losses associated with the physical risks of changing weather patterns. - Our catastrophe reinsurance covers flood, windstorms, hurricanes, wildfires and other severe weather events, with special provisions providing additional protection for prolonged or greater frequency events. - Our operational planning processes also consider changing weather patterns. Using up-to-date catastrophe models and building identifiable trends into our weather planning, technical pricing and exposure management are key parts of our underwriting guidance. Policies are reviewed to ensure that climate change is integrated through relevant requirements and controls. We have also integrated climate change into our Risk Appetite Statement and ORSA. --- From a transition risk perspective, in 2022 we reviewed and revised our Low Carbon Policy underwriting guidelines to align more closely with IFC's Climate Strategy. This policy formalises our position on investments and underwriting of GHG-intensive sectors. We target an underwriting portfolio for energy production that is over $75\%$ low GHG by 2030. We have a dynamic underwriting strategy to support this $75\%$ ambition, that will reflect the needs of the communities in which we operate. # Stress testing RSA's stress tests are designed to help the business understand the potential financial consequences of complex risk events, including climate change-related extreme weather events, where the impacts can be broad, far-reaching and with a range of outcomes. Global catastrophe risk is a material part of RSA's risk profile, and extensive reinsurance arrangements are in place to manage and mitigate this risk. The results of previous stress testing highlighted the importance of reinsurance protection to mitigate extreme weather events that occur over an extended period of time. The outcome of any stress testing is considered as part of RSA's reinsurance strategy. Increased severity of weather events is likely to be well covered by our existing catastrophe reinsurance cover. During 2021, we were one of only 18 firms to participate in the Bank of England's Climate Biennial Exploratory Scenario (CBES) exercise, which explored the financial risks posed by climate change and tested the resilience of the financial services sector. Subsequent management actions to mitigate the risks associated with CBES climate pathways are in line with our Climate Strategy. These include supporting the drive for internal catastrophe modelling of flood risk in the UK, to facilitate better understanding of the developing risk. # Climate risks We have identified climate-related risks and opportunities to our business. Risks and opportunities are presented in the tables below. Included in the information presented are the ways in which we manage those risks, and how we take advantage of potential opportunities. The key climate-related risks with the potential to impact our business include: | Risk Type | Time Horizon | Risk Description | Risk Management | | --- | --- | --- | --- | | Physical | Short-term | Increased operating costs from short-term changing weather patterns and increased severity of extreme events | Managed through underwriting actions and reinsurance | | | Long-term | Increased operating costs from damage caused by increased severity and/or duration of extreme weather events such as cyclone, floods, wildfire and/or cumulative gradual climatic changes – for example, in precipitation or sea level | Managed through underwriting actions and reinsurance | | | Long-term | Reduction in demand (and associated revenues) for insurance products/services due to increasing costs of premiums, reducing affordability | Managed through product offering, innovation and portfolio management | | Transition | Medium-term | Changes in the operational cost base or claims profile due to new or unproven technologies associated with the switch to electric vehicles, larger turbine size, battery storage etc. | Managed through underwriting actions and reinsurance | | | Long-term | Reduction in investment returns due to early retirement of assets, reduced demand for products or increased costs of business for GHG-intensive industries | Managed through diversified investment portfolio and risk appetite on GHG-intensive sectors | | Liability Risk | Short/Medium-term | Compensation could be sought for losses resulting from the physical or transition risks outlined above. | Managed with annual policies, underwriting actions and reinsurance | | | Short/Medium-term | Although in its very early stages globally, climate-related litigation could increase with implications for certain liability coverages, as well as litigation against companies perceived to be using “greenwashing” techniques to improve reputation. | Managed through the application of our financial disclosure practices to our Net zero commitment, disclosing our progress in a timely manner. We will be transparent with any changes to our strategy or ambition with our targets. | | | Long-term | Net zero commitments are contingent on many variables, including the role of governments and their ability to meet climate commitments. There is a risk that companies have overstated their ability to meet their target or miss their interim Net zero targets. | Managed through the application of our financial disclosure practices to our Net zero commitment, disclosing our progress in a timely manner. We will be transparent with any changes to our strategy or ambition with our targets. | --- 19 # Climate opportunities The key climate-related opportunities with the potential to impact our business include: | Type | Time Horizon | Opportunity Description | Opportunity Management | | --- | --- | --- | --- | | Physical | Medium-term | Development of climate adaptation and resilience solutions | Managed through product/service offering, risk management expertise and customer engagement | | | Long-term | Increased demand (and revenues) for insurance as changes to weather patterns increase public awareness of the need for cover | Managed through product/service offering and customer engagement | | Transition | Short/Medium-term | Increased investment in renewable energy technologies, increasing demand for renewable energy insurance and increasing revenue | Managed through product/service offering, renewables centre of excellence and our Climate Change and Low Carbon Policy position | | | Short/Medium-term | New product and service offerings to provide insurance for new technologies, resource efficiency or infrastructure, such as electric vehicles and rail | Managed through product/service offering, customer engagement and ongoing market analysis | # Targets and metrics We recognise the importance of understanding, measuring and managing the impact of our own operations. Our Climate Strategy outlines our commitment to achieve Net-zero emissions by 2050 and halve operational emissions by 2030. We are committed to optimising the efficiency of our corporate real estate and observed a reduction in emissions associated with our office footprint of 18% in 2022. Overall emissions have increased by 3.7% (using the Location-Based methodology), which is primarily due to an increase in business travel following the easing of the Covid-19 travel restrictions. More information on how we measure the environmental impact of our own operations, including a breakdown of Scope 1, 2 and 3 emissions, can be found in the Streamlined Energy and Carbon Reporting section on pages 26 to 27. | Metrics | 2022 | 2021 | 2020 | 2019 | | --- | --- | --- | --- | --- | | Weather and subsidence related losses (£m) | 174 | 112 | 83 | 60 | | Weather and subsidence loss ratio | 6.8% | 4.5% | 3.3% | 2.4% | | Energy portfolio GWP in renewable energy | 59% | 61% | 37% | 58% | | Total GHG emissions (Scopes 1, 2 and 3) | 4,710 tonnes CO₂e | 4,543 tonnes CO₂e | 5,461 tonnes CO₂e | 9,670 tonnes CO₂e | # Notes: All figures have been restated to account for the sale of operations previously under RSA control. Weather-related losses and weather-loss ratio figures represent ongoing continued business, excluding those areas which have been exited. Total GHG emissions reported re using the Location-Based methodology. For notes relating to Scope 1, 2 and 3 emissions please see the section on Streamlined Energy and Carbon Reporting on pages 26 to 27. Energy portfolio GWP in renewable energy demonstrates performance up to the end of 2022 against the previous Climate Change and Low Carbon Policy. This policy set a target for an underwriting portfolio that is over 50% low carbon energy production, well ahead of the IEA's Sustainable Development Scenario targeted energy mix for 2040. ![img-7.jpeg](img-7.jpeg) # Ken Anderson Chief Financial Officer 02 March 2023 --- RSA Insurance Group Limited Governance for the year ended 31 December 2022 # Directors and Executive Officers¹ ## Directors Mark Hodges (Chair) Ken Anderson (appointed 1 April 2022) Alastair Barbour Sally Bridgeland Claude Dussault Robert Leary Louis Marcotte (appointed 30 June 2022) Susan McInnes (appointed 1 April 2022) Ken Norgrove (appointed 10 January 2022) Andy Parsons ## General Counsel & Company Secretary Jonathan Cope ## Executive Team Ken Norgrove – Chief Executive Officer Ken Anderson – Chief Finance Officer Jonathan Cope – General Counsel & Company Secretary John Crooks – Chief Actuary Paul Dilley – Director of Underwriting Yasemin Dogu – Chief Internal Auditor Nathalie Dufresne – Chief Underwriting Officer Georgina Farrell – Chief People Officer Karl Helgesen – Chief Operating Officer Ollie Holden – Chief Information Officer Dave Howell – Chief Risk Officer Louisa Leonard – Managing Director, Personal Lines Lee Mooney – Managing Director, Commercial Lines Lynn O'Leary – CEO RSA Luxembourg Kevin Thompson – CEO RSA Ireland Steve Watson – Managing Director, UK Speciality ## Independent Auditor KPMG LLP 15 Canada Square London E14 5GL ## Registered Office² Floor 8 22 Bishopsgate London United Kingdom EC2N 4BQ ## Company Registration Number 02339826 ¹Changes to the Board during the year are detailed on page 26. ²The Company’s registered office was 20 Fenchurch Street, London, EC3M 3AU until 11th October 2022. --- 21 # Corporate Governance The Company is a wholly owned subsidiary of IFC. The Company applies the Wates Corporate Governance Principles for Large Private Companies (published by the Financial Reporting Council in December 2018 and available at www.frc.org.uk). ## Principle 1: Purpose and leadership The values of RSA and IFC are strongly aligned. ### Purpose Our purpose is to help people, business and society prosper in good times and be resilient in bad times. ### Values and culture In line with our purpose, the Group's values are (i) integrity, (ii) respect, (iii) customer-driven, (iv) excellence; and (v) generosity. Our values are designed to guide our decision-making and everything that we do. They underpin how we seek to deliver for our customers and other stakeholders. We are a people-centred business which aims for a culture of high performance, where working together as a team is valued and the business invests in its people. There are various mechanisms in place to monitor our culture, including employee surveys and cultural health assessments. ## Principle 2: Board composition ### Chair and Chief Executive Officer The roles of Chair and Chief Executive Officer (CEO) are separate and clearly defined. The independent non-executive Chair is responsible for leading the Board, its overall effectiveness and for facilitating open debate and constructive challenge. The CEO is responsible for implementing the strategy and decisions of the Board and its committees and leading the Executive Committee. ### Size and structure An overview of the composition of the Board has been included on pages 24 and 25. The Board considers that it has an appropriate combination of skills, backgrounds, experience and knowledge, and that there is an effective balance of independent Directors to ensure constructive challenge. ### Balance and diversity Ensuring an appropriate balance of skills and experience has been a key focus of the Board. A thorough and detailed recruitment process was undertaken to appoint two new non-executive Directors as well as a new CEO and a new CFO during 2022. This process required careful consideration of the Group's strategy and the interests of its key stakeholders. The Board has approved a Board Diversity Policy which is available to view on the RSA website www.rsainsurance.co.uk and sets the objective of at least 40% female representation and at least 40% male representation on the Board and at least one Black, Asian or other ethnic minority Board member. The Board currently has two female Directors representing 20% of the Board. At the Executive level there are five women, representing 33% of the Executive Committee. The Board recognises that its current membership does not currently meet its own aspirational targets and is committed to improving its diversity. This will be taken into account when new directors are appointed as part of the succession planning process. The Board keeps under regular review the Board's composition in terms of its balance of skills, experience and length of service, and industry knowledge as well as wider diversity considerations. The non-executive Directors bring a broad range of experience and skills which are highly relevant to the Group's operations and the sectors in which it operates. The shareholder-nominated Directors also bring experience and knowledge of the wider Group. ### Effectiveness A governance framework has been established to ensure that independent decision-making by the Board is clear. The Board has approved a Matters Reserved for the Board and adopted a Matters Reserved for the Shareholder, as approved by the IFC Board, and independent non-executive Directors have been appointed who are fully independent from IFC as well as the RSA Group. On joining the Board, Directors are provided with a tailored induction programme. With the high volume of change to the composition of the Board and within the Executive leadership team, detailed handovers were provided by the Chair, the Committee Chairs and from the exiting Executive Directors to ensure effective handovers and continuity. The Board sets the strategy for the business and during the year has overseen a review of strategy for the Group's new perimeter and role as part of IFC. The Board has received deep-dive presentations on customer and conduct matters as well as pricing and underwriting. It has also received updates and reports throughout the year on the regulatory change agenda and outcomes for customers. The Board conducts an annual review of its effectiveness, including engagement of an external provider to carry out a review every three years. An externally-facilitated review was completed in the second half of 2022. The results of the review were shared with the Board and the Board Committees and with regular attendees, and action plans to address the areas highlighted in the review were agreed. --- 22 # Principle 3: Director responsibilities ## Accountability The Board is committed to effective governance, sound risk management and a robust control environment. The Board considers that the foundation of an effective risk management framework is the cultivation of a risk culture that promotes accountability and openness. The Board periodically reviews and approves the Group's governance documents including the System of Governance, UK Corporate Governance Framework, Delegated Authority Framework, and a suite of governance policies. The Board has also reviewed and adopted its own constitutional documents including the Matters Reserved for the Board and Conflicts of Interest policy. These documents set out the policies and practices that govern the internal affairs of the Group. The responsibilities of the Directors are set out in their letters of appointment and role profiles. All Directors are expected to report any potential conflicts of interest. The Conflicts of Interest register is reviewed at each Board meeting and the Directors declare any actual conflicts of interest at each Board meeting. ## Board committees In order that it can operate efficiently and give the appropriate level of attention and consideration to relevant matters, the Board delegates certain activities to the Audit Committee, the Risk Committee and the GCR Committee. The Chair and membership of each Board Committee is compiled of non-executive Directors. Each Committee has terms of reference that have been approved by the Board which set out its authority and responsibilities. Further information on the Board committees including their membership and responsibilities can be found on pages 24 and 25 of this report. ## Integrity of information The Board receives regular and timely information on all aspects of the Group's business. This includes financial performance, strategy, performance against the operational plan, internal audit, risk and compliance, customer metrics, governance, and people and culture matters. Internal processes and systems are robust and this ensures that management information is accurate and timely. Reporting to the Board includes consideration of the impact on stakeholders, where appropriate, and includes an assessment of any potential risks to the success of the business. The Group's financial statements are audited by KPMG LLP on an annual basis. # Principle 4: Opportunity and risk ## Opportunity The Group strategy is aligned with IFC's purpose and strategy. RSA's strategic opportunities were carefully assessed and analysed during 2022 and those aspects decided upon have been incorporated into the 3-year operational plan. Any proposed changes in strategic focus are reviewed and approved by the Board. ## Risk RSA's Risk Management System provides a framework for the management of risks by management. The Board sets the risk strategy and appetite that articulates the level of risk the Board is prepared to take in delivering its strategic objectives. The Board delegates to the Risk Committee oversight of both current and emerging risks that the business faces. The Chief Risk Officer is a member of the Executive Committee. The Chief Risk Officer is supported by the Risk function, which is responsible for providing expert review and challenge of Line 1's management of risks within their own operating segment. There is a clear governance structure for the oversight, management and escalation of risks that fall outside risk appetite. This structure is based on clear processes and a risk culture that promotes accountability and openness. Further details on risk management are included in the Risk Management section on pages 5 to 9. ## Responsibilities The Matters Reserved for the Board states that the Board will: - approve the Group's overall risk appetite and high-level business strategy, including portfolio risk, claims management and financial controls, and capital management; - approve the Group's approach to Own Risk Solvency Assessment (ORSA); - review the effectiveness of the Group's system of risk management and internal controls, including all material controls, and including financial, operational and compliance controls; and - when considering the Group's overall strategy and risk appetite, understand, assess and have oversight on the financial risks and impacts associated with climate change that affect the Group. The Risk Management Internal Controls Policy documents the requirements for the identification, measurement, management, monitoring and reporting of all risk types. It sets out the processes and procedures for the effective operation of the Risk Management and Internal Control systems. --- The Risk Committee supports the Board to ensure that the key risks to the Group are identified, understood and effectively managed within risk appetite. The Risk Committee advises the Board on risk management matters, including solvency needs and the risk management arrangements for the Group. It monitors the Group's solvency by reviewing the outputs of the ORSA process, the Internal Model and conclusions of model validation, making recommendations to the Board on capital adequacy. The Risk function, alongside the business functions and Conduct Risk function, facilitate the determination of the principal risks facing the business, through application of the Risk Management Framework and the Conduct Risk Framework. These frameworks are subject to debate and challenge by various management committees and the Risk Committee, which also oversee plans to mitigate and manage high and medium rated risks. There are clear internal communication channels on the identification of risk factors. Externally, the Group's risk profile is outlined in the Annual Report and the Solvency and Financial Condition Reports of its regulated insurance subsidiaries. ## Principle 5: Remuneration decisions The GCR Committee is responsible for the oversight of remuneration principles, policy and practices, as well as determining policy and setting remuneration in respect of the Chair of the Board, Executive Directors and other executives within its scope. Membership of the GCR Committee is set out on page 25 and includes independent non-executive Directors. The GCR Committee discharges its responsibilities in line with the Wates Principles. ## Policies The GCR Committee ensures appropriate remuneration arrangements are in place through the adoption of a Remuneration Policy, which is designed to support the business strategy by appropriately rewarding performance and promoting sound and effective risk management, compliance with external regulatory requirements and alignment to long-term interests of the Group. ## Setting remuneration The remuneration principles that the Committee follows are: - Competitiveness and cost effectiveness: remuneration packages are set at competitive levels to attract, retain and reward high calibre talent in the context of market conditions. - Fair-minded: appropriate reward complying with principles of good risk management (including deferral and malus arrangements), inclusivity and avoiding conflicts of interest and unconscious bias. Information on our Gender Pay Gap figures and our actions in this area can be found at www.rsainsurance.co.uk. The Group has been accredited by the UK's Living Wage Foundation as a Living Wage Employer since 2016. - Pay for performance: variable remuneration that strongly aligns employees with shareholders and/or is fully contingent on the achievement of stretching objectives which support strategic priorities and adherence to our organisational values. - Open and transparent: remuneration components that are simple and transparent, to be effective and understood by employees and other stakeholders. All employees are eligible to be considered for a performance-related bonus, and those in the UK and Ireland can participate in all-employee share plans. General remuneration arrangements for our employees (for example, salary increases and pension and incentive opportunities) are considered by the GCR Committee when determining total remuneration for senior executives. Consideration is also given to the reputational and behavioural risks to the Group that can result from inappropriate incentives and excessive reward and the GCR Committee can adjust rewards based on consideration of risk factors. A significant proportion of senior-level remuneration is variable, long term and at risk, with an emphasis on share-based remuneration; bonus deferral is operated (and also where required by Solvency II), as is participation in the long-term incentive plan. Remuneration for the Chair, Executive Directors and heads of key governance functions is set in agreement with IFC. IFC's compensation framework can be found at www.intactfc.com. PricewaterhouseCoopers (PwC) is appointed by the Committee as its independent adviser. PwC is a member of the Remuneration Consultants' Group and a signatory to its Code of Conduct. In addition, the Committee has satisfied itself that the advice it receives is objective and independent as PwC has confirmed there are no conflicts of interest arising between it, its advisers and RSA. ## Principle 6: Stakeholder relationships and engagement ### External impacts The broad social impact and responsibility of the Group to its customers is core to the policies and practices of the Group. The key objective of the Group is to ensure good outcomes for customers, and this is a central principle of the Board decision making processes. Further information on the Group's approach to ESG matters can be found on pages 13 to 15. ### Stakeholders The Group has a number of material stakeholders, which includes its workforce, customers, partners and brokers, suppliers and regulators. Information on the Group's stakeholder relationships and engagement can be found in the s172 statement on pages 10 to 12 of the Strategic Report. ### The Board and its committees An overview of the responsibilities of the Board and its committees for the year ended 31 December 2022 is set out on pages 24 and 25. --- The Board and its committees The Board The Board is led by Mark Hodges, the independent non-executive Chair of the Group. The Board is composed of the independent non-executive Chair, seven non-executive Directors and two Executive Directors. The primary responsibility of the Board is to provide effective leadership to ensure it promotes the success of the Group for the benefit of all stakeholders. Committees The Board has established a number of committees to which it has delegated responsibility for oversight of some of its activities. Each committee has adopted Terms of Reference, which are reviewed annually, and any changes proposed by the committee are approved by the Board. Audit Committee Members: Andy Parsons (Chair), Alastair Barbour, Robert Leary The Audit Committee is a committee of the Board. Membership of the Committee is composed of three non-executive Directors, one of whom acts as Chair. The Committee members have experience and competence in accounting and auditing and also within the insurance sector. At the invitation of the Committee, the Chair of the Board, Chief Executive Officer, Chief Finance Officer and representatives from functions within the business attend to advise the Committee. Attendees also include representatives from Finance, Actuarial, the external auditors, the Head of Corporate Audit Services (Internal Audit) and a representative from the Corporate Audit Function of IFC. The Audit Committee plays an important role in assisting the Board in its oversight and monitoring of the Group's financial statements and the robustness of RSA's systems of internal control. The Committee oversees the effectiveness and objectivity of the internal and external auditors. The Audit Committee is responsible for: - monitoring the financial reporting process and making recommendations or proposals to ensure its integrity; - monitoring the effectiveness of internal quality control and risk management systems and internal audit; - monitoring the statutory audit of the financial statements; - reviewing and monitoring the independence of the external auditors; and - reporting to the Board the outcome of the external audit and the integrity of financial reporting. Auditor tenure The Committee is responsible for overseeing relations with the external auditor, including the proposed external audit plan and the approval of fees. The Committee assesses the independence and effectiveness of the external auditor each year and makes a recommendation to the Board on their appointment or re-appointment. KPMG was appointed as the Group's external auditor in 2013 and has been re-appointed each subsequent year. During 2021, the Committee had considered its position on the external audit services contract and following engagement with the Group's regulator received dispensation from the need to conduct a tender in 2022 due to the context of the Acquisition by IFC and timing of IFRS 17 implementation. The audit tender process will take place in 2023. The Group has complied with the Statutory Audit Services for Large Companies Market Investigation (Mandatory Uses of Competitive Tender Process and Audit Committee Responsibilities) Order 2014 for the year ended 31 December 2022. Risk Committee Members: Robert Leary (Chair), Sally Bridgeland, Susan McInnes & Andy Parsons The Risk Committee is a committee of the Board. Membership of the Committee comprises four non-executive Directors, one of whom acts as Chair of the Committee. The Risk Committee has a pivotal role in ensuring the key risks to the Group are identified and understood, are effectively managed within risk appetite with regard to the views and interests of stakeholders, and are appropriately reflected in the Internal Model. The Risk Committee is responsible for: - Advising the Board on risk management matters, including solvency needs. - Overseeing the risk management arrangements of the Group. - Monitoring the emerging and principal material risks facing the Group, ensuring appropriate arrangements are in place to identify, manage and mitigate risks effectively, and that appropriate levels of capital are held in relation to these risks. - Recommending the Group's risk strategy and risk appetite for approval by the Board. - Approval of the Risk Management Plan. - Reviewing the outputs of the ORSA process, the internal model and the conclusions of model validation, making recommendations to the Board on capital adequacy and the ORSA. - Reviewing the Group's investment strategy framework and investment portfolio disposition and performance to ensure these remain within risk appetite and consistent with the Group's investment strategy. 24 --- - Oversight of the Risk function. ## Governance, Conduct & Remuneration Committee Members: Alastair Barbour (Chair), Claude Dussault, Sally Bridgeland & Susan McInnes The GCR Committee is a committee of the Board. Membership of the Committee comprises four non-executive Directors, one of whom acts as Chair of the Committee. The Committee plays an important role in assisting the Board in its oversight of customer, conduct, compliance and ESG matters and has oversight of the robustness of the governance framework, delivery of the ESG strategy and internal policies for the Group. The Committee is responsible for the oversight of RSA's Remuneration Policy and ensuring this promotes the long-term sustainable success of the Group. This includes reviewing and setting the remuneration of executive directors and the Chair of the Board. The Committee also reviews workforce remuneration and related policies and the alignment of incentives and rewards with culture and takes these into account when setting the policy for executive director remuneration. The Committee appointed PwC as its independent adviser during the year. The Committee also has oversight of customer and conduct risks. ## Executive Committee The Executive Committee is the management committee that assists the Chief Executive Officer in discharging his responsibilities and delegated authority. It is not a committee of the Board. The Executive Committee is collectively responsible for implementing strategy and delivering performance. The members have a broad range of skills and expertise that are updated through training and development. Membership of the Executive Committee is set out on page 20 and comprises Ken Norgrove and Ken Anderson, as well as the Chief Executive Officers of the European and Ireland businesses and key functional and business leaders. 25 --- Report of the Directors Directors Mark Hodges (Chair) Ken Anderson (appointed 1 April 2022) Alastair Barbour Clare Bousfield (resigned 31 March 2022) Sally Bridgeland Charles Brindamour (resigned 30 June 2022) Claude Dussault Charlotte Jones (resigned 1 April 2022) Rob Leary Louis Marcotte (appointed 30 June 2022) Susan McInnes (appointed 1 April 2022) Ken Norgrove (appointed 10 January 2022) Andy Parsons Corporate Governance Statement An overview of the corporate governance code applied by the RSA Insurance Group Limited (the Company) is set out in the Corporate Governance Report on pages 21 to 23. Dividend No interim dividend was paid during the year ended 31 December 2022. The Company paid a dividend to its preference shareholders during the period. The Directors do not recommend the payment of a final dividend for the year ended 31 December 2022. Going concern The consolidated financial statements have been prepared on a going concern basis. In adopting the going concern basis, the Board has reviewed the Group's ongoing commitments for the next twelve months and beyond. 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. Current economic uncertainty has been considered, including the war in Ukraine, rising inflation, post Covid-19 impacts and transition to a post Brexit environment. These assessments include stress and scenario testing and consider significant areas of risk and uncertainty for the Group in the current challenging economic environment. Scenarios considered include a market risk shock involving several component stresses, plus deterioration of the underwriting result and a subsequent catastrophe loss. 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 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 and the approval of the consolidated financial statements. Share capital More information on the Company's share capital can be found in note 34 on page 99. Preference shareholders are only entitled to receive notice of, attend, speak and vote at general meetings if the dividend payable on the preference shares is in arrears at the date of the Notice, a resolution is proposed that affects the rights of the preference shareholders, a resolution is proposed to wind-up the Company, a resolution is proposed to reduce the capital of the Company (other than a redemption or purchase of shares), or in such other circumstances as the Board shall determine. In any of these situations, the preference shareholders may only vote on the relevant resolution and not on all the business of the general meeting. Streamlined Energy and Carbon Reporting We have reported on all sources of greenhouse gas (GHG) emissions as required by the Companies Act 2006 (Strategic Report and Directors' Report) Regulations 2013 and the Companies (Directors' Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018. Our reporting has been conducted in accordance with the World Resources Institute's GHG Protocol Corporate Accounting and Reporting Standard. We have consolidated our organisational boundary according to the operational control approach, which includes emissions from all operations with 50 or more full-time equivalent employees. Where data is not provided by an operating entity, values have been estimated using either extrapolation of intensities from similar sites within RSA or using the previous data as a proxy. All conversion factors have been sourced from recognised public sources, including the UK's Department for Business, Energy & Industrial Strategy, the International Energy Agency and the GHG Protocol's stationary combustion tool. The 2022 data covers the period 1 January to 31 December. Data from 2022 and previous years has been restated to account for the sale of RSA's Scandinavian and Middle East businesses. Emissions from RSA's legacy Canadian business are reflected in IFC's global reporting of its GHG emissions. IFC has committed to Net-zero emissions by 2050 and halving operations emissions by 2030. We are now integrating carbon emissions data and reporting systems with IFC as part of the global climate change strategy. 26 --- We are reporting our Scope 2 market-based emissions to reflect our purchase of REGOs at UK sites where we are directly responsible for energy procurement or have engaged with landlords to switch to a renewable supply. We now secure REGOs for 100% of the electricity we purchase directly in the UK. Emissions from our corporate real estate have decreased 18% year on year. Indirect energy efficiency measures have been achieved through a continuing reduction in the floor area of UK offices in 2022 to nearly 40% less than 2019, together with featuring as a design choice in the fit out or move to new office locations. Whilst overall emissions have increased on the previous year by 3.7% (using a Location-Based methodology), this is primarily due to an increase in business travel following the easing of Covid-19 restrictions. Data has been subject to quality control by our external carbon footprint verifiers and consultants, EcoAct. EcoAct has supported RSA in our GHG emissions disclosures for over five years. We continue to consolidate our approach to the capturing and reporting of environmental data across IFC and reconcile the potential impact of associated carbon reduction strategies across the global business. We expect to resume formal assurance of GHG emissions data in future IFC Group level disclosure. As we progress further with this consolidation, we will then embark on assurance of our GHG inventory. | tCO_{2}e emissions | 2022^{1} | 2021^{1} | 2020^{1} | 2019^{1} | 2018^{1} | | --- | --- | --- | --- | --- | --- | | Scope 1 | 1,408 | 1,535 | 1,437 | 2,194 | 1,655 | | Scope 2 (location-based^{LB})^{1} | 2,060 | 2,613 | 3,058 | 4,066 | 4,598 | | Scope 2 (market-based^{MB})^{1} | 1,685 | 1,968 | 1,981 | N/A | N/A | | Scope 3^{1} | 1,242 | 395 | 965 | 3,410 | 3,787 | | Business travel | 888 | 125 | 641 | 3,042 | 3,381 | | Total emissions (Scope 1, 2, 3)^{LB} | 4,710 | 4,543 | 5,460 | 9,670 | 10,040 | | Total emissions (Scope 1, 2, 3)^{MB} | 4,335 | 3,898 | 4,383 | N/A | N/A | | Intensity ratio: | | | | | | | Gross tonnes CO_{2}e per FTE^{LB} | 0.80 | 0.79 | 0.87 | 1.52 | 1.60 | | Gross tonnes CO_{2}e per FTE^{MB} | 0.74 | 0.68 | 0.70 | N/A | N/A | | Global energy use (kWh) | 2022 | 2021 | 2020 | | --- | --- | --- | --- | | Electricity (kWhs) | 15,456,712 | 17,764,683 | 19,047,094 | | Gas Combustion (kWhs) | 7,000,746 | 8,058,297 | 7,425,908 | | Transportation - vehicles (kWhs) | 1,209,955 | 474,527 | 1,078,085 | | Total energy use | 23,667,413 | 26,297,507 | 27,551,087 | Notes The emissions reported above have been restated versus numbers previously disclosed, in accordance with GHG Protocol guidelines. 1. Calculations have been amended to include data that was not available at the time of publication and reflect improvements in methodology (including updated emissions factors). The GHG referenced in the table cover: Scope 1: Direct emissions from RSA's activities, including natural gas consumption, diesel and company-owned vehicles. Scope 2: Indirect emissions from purchased electricity, district cooling and district heating. This year we are reporting Scope 2 emissions according to two different methodologies (dual reporting): (i) the location-based method, using average emissions factors for the country in which the reported operations take place; and (ii) the market-based method, which uses the actual emissions factors of the energy procured. Scope 3: Emissions relating to RSA activities not within our direct control, including business travel, water supply, wastewater treatment, paper consumption and waste generated. These are the only Scope 3 categories included. Business travel: Emissions from flights, trains and vehicles not owned by the organisation. ## Charitable donations During the year donations to charities were made amounting to £0.92m (2021: £0.87m). £nil political donations were made during the year (2021: £nil). --- 28 # Conflicts of interest In accordance with section 175 of the Companies Act 2006, each director has a duty to avoid conflicts of interest. Under Articles 15.1 and 15.2 of the Company's Articles of Association, conflicts of interest may be authorised by the Board or a Board committee. Directors are required to notify the Company Secretary when a potential conflict of interest arises. Each Director's conflicts of interest are reviewed on an annual basis. Any director who has declared a conflict of interest shall not count towards the quorum or vote on any resolution to authorise the conflict of interest and, at the Board's discretion, may be excluded from any meeting at which the conflict of interest is under consideration. Where a conflict of interest is authorised, restrictions may be imposed on the conflicted director, such as excluding the director from the discussion or restricting the receipt of information in connection with the conflict of interest. The Board confirms that it has reviewed the schedule of directors' conflicts of interest during the year and that the procedures in place operated effectively in 2022. None of the Directors had an interest in any contract of significance with the Company or any of its subsidiaries during 2022. The Board also considers at each meeting whether there is any potential conflict of interest for the shareholder-nominated Directors. # Directors' Indemnity Article 84 of the Articles of Association provides that, among other things and insofar as permitted by law, the Company may indemnify its directors against any liability and may purchase and maintain insurance against any liability. The Company has granted an indemnity to each of the directors pursuant to the power conferred by Article 84.1 of the Articles of Association. The indemnities granted constitute qualifying third-party indemnity provisions, as defined by section 234 of the Companies Act 2006, and is in addition to appropriate insurance cover. The Company believes that it promotes the success of the Company to provide this indemnity to its Directors in order to ensure that RSA attracts and retains high calibre Directors through competitive terms of employment in line with market standards. The Directors and Officers of the Company and its subsidiaries also have the benefit of Directors & Officers insurance which provides suitable cover in respect of legal actions brought against them. In addition, the Company maintains a pension trustee liability insurance policy for the directors of SAL Pension Fund Limited and Royal & Sun Alliance Pension Trustee Limited, subsidiaries of the Group, in relation to such person's role as a trustee of an occupational pension scheme. This insurance constitutes a qualifying pension scheme indemnity provision under section 235 of the Companies Act 2006. These insurances were in force during the year ended 31 December 2022 and remain in force as at the date of this report. # Workforce and stakeholder engagement statements An overview of how the Directors have fostered relations with the Group's suppliers, customers and other key stakeholders is included in the Company's s.172 statement on pages 10 to 12 in the Strategic Report. Further information on workforce engagement, as required by the Companies Act 2006 is also included in the Company's s.172 statement on pages 10 to 12. # Modern slavery As per section 54(1) of the Modern Slavery Act 2015, our Slavery and Human Trafficking Statement is published annually on our website. The statement covers the activities of the RSA Group and details policies, processes and actions we have put in place to ensure that appropriate steps are taken to protect against slavery and human trafficking in our supply chains and all parts of our own business. # Management report The Strategic Report is considered to form the management report for the purpose of DTR 4.1.8.R. # Directors' Report The Directors' Report for the year ended 31 December 2022, was approved by order of the Board and signed on its behalf. ![img-8.jpeg](img-8.jpeg) Jonathan Cope General Counsel and Company Secretary 02 March 2023 --- 29 # STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT AND THE FINANCIAL STATEMENTS The directors are responsible for preparing the Annual Report and the RSA Insurance Group Limited ('Group') and parent company financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare Group and parent company financial statements for each financial year. Under that law they are required to prepare the Group financial statements in accordance with UK-adopted International Accounting Standards (IAS) and the requirements of the Companies Act 2006 and applicable law and have elected to prepare the parent company financial statements on the same basis. Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and parent company and of the Group's profit or loss for that period. In preparing each of the Group and parent company financial statements, the directors are required to: - select suitable accounting policies and then apply them consistently - make judgements and estimates that are reasonable, relevant and reliable - state whether they have been prepared in accordance with UK-adopted IAS and the requirements of the Companies Act 2006 and applicable law - assess the Group and parent company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern - use the going concern basis of accounting unless they either intend to liquidate the Group or the parent company or to cease operations, or have no realistic alternative but to do so The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent company's transactions and disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that its financial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. Under applicable law and regulations, the directors are also responsible for preparing a Strategic Report, Directors' Report and Corporate Governance Statement that complies with that law and those regulations. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. In accordance with Disclosure Guidance and Transparency Rule 4.1.14R, the financial statements will form part of the annual financial report prepared using the single electronic reporting format under the Technical Detail European Single Electronic Format (ESEF) Regulation. The auditor's report on these financial statements provides no assurance over the ESEF format. ## Responsibility statement We confirm that, to the best of our knowledge: - The financial statements on pages 29 to 141, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Parent Company and the undertakings included in the consolidation taken as a whole. - The Strategic Report on page 2 to 19 includes a fair review of the development and performance of the business and the position of the parent company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. We consider the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group's position and performance, business model and strategy. ![img-9.jpeg](img-9.jpeg) Ken Anderson Chief Financial Officer 02 March 2023 ![img-10.jpeg](img-10.jpeg) Ken Norgrove Chief Executive Officer 02 March 2023 --- 30 # INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF RSA INSURANCE GROUP LIMITED ## 1 Our opinion is unmodified We have audited the financial statements of RSA Insurance Group Limited (“the Company” and collectively with its subsidiaries “the Group”) for the year ended 31 December 2022 which comprise the consolidated income statement, consolidated and parent company statement of comprehensive income, consolidated and parent company statement of changes in equity, consolidated and parent company statement of financial position, consolidated and parent company statement of cash flows, and the related notes, including the accounting policies in note 5 for the group and note 4 for the parent company. In our opinion: - the financial statements give a true and fair view of the state of the Group’s and of the parent company’s affairs as at 31 December 2022 and of the Group’s profit for the year then ended; - the Group financial statements have been properly prepared in accordance with UK-adopted international accounting standards; - the parent company financial statements have been properly prepared in accordance with UK-adopted international accounting standards, as applied in accordance with the provisions of the Companies Act 2006; and - the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. ## Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities are described below. We believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion. Our audit opinion is consistent with our report to the Audit Committee. We were first appointed as auditor by the shareholders on 13 May 2013. The period of total uninterrupted engagement is for the ten financial years ended 31 December 2022. We have fulfilled our ethical responsibilities under, and we remain independent of the Group in accordance with, UK ethical requirements including the FRC Ethical Standard as applied to listed public interest entities. No non-audit services prohibited by that standard were provided. ## 2 Key audit matters: our assessment of risks of material misstatement Key audit matters are those matters that, in our professional judgement, were of most significance in the audit of the financial statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit and directing the efforts of the engagement team. We summarise below the key audit matters, in decreasing order of audit significance, in arriving at our audit opinion above, together with our key audit procedures to address those matters and, as required for public interest entities, our results from those procedures. These matters were addressed, and our results are based on procedures undertaken, in the context of, and solely for the purpose of, our audit of the financial statements as a whole, and in forming our opinion thereon, and consequently are incidental to that opinion, and we do not provide a separate opinion on these matters. --- 31 | **Valuation of insurance liabilities** Insurance contract liabilities 2022: £5,671 million gross, £3,890 million net; 2021: £5,276 million gross, £3,628 million net, relating to provision for losses and loss adjustment expenses Risk vs 2021 ←► *Refer to page 52 (accounting policy) and page 101-106 (financial disclosures)* | | | --- | --- | | The risk | Our response | | **Subjective valuation:** Insurance liabilities represent the single largest liability for the Group. Valuation of incurred but not reported claims (IBNR) is highly subjective, requiring a number of assumptions to be made with high estimation uncertainty. Certain lines of business have greater inherent uncertainty, such as those where claims emerge slowly over time, or where there is greater potential exposure to large losses due to the effect of uncertain or unknown incurred events. Additional uncertainty remains as a result of the Covid-19 pandemic and the resulting claims and reinsurance recoveries. For business interruption cases (BI) the result of the FCA Test Case ruling, and other legal decisions and pending appeals on such judgements, whilst not significant in isolation do, alongside the uncertain long term distortion to claims experience, continue to evolve. Further uncertainty arises in classes more sensitive to the assumptions made around future inflation rates. A margin is added to the actuarial best estimate of insurance liabilities to make allowance for specific risks and uncertainties that are not specifically allowed for in establishing the actuarial best estimate. The appropriate margin to recognise is a subjective judgment and estimate taken by the directors, based on the perceived uncertainty and potential for volatility in the underlying claims. The effect of these matters is that, as part of our risk assessment, we determined that the valuation of insurance liabilities in relation to IBNR, has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole, and possibly many times that amount. The financial statements (note 39) disclose the sensitivity estimated by the Group. | With the assistance of our own actuarial specialists at Group and component level, our procedures included: **Independent re-performance:** We performed independent re-projections of reserve balances using our own models for certain classes of business. The determination of which classes to re-project was based on risk assessment and consideration of the evidence available from other alternative data analysis procedures; **Our sector experience:** We applied our industry experience and market benchmarks to support our consideration and challenge of the Group’s reserving methodology, key judgements and assumptions for the most significant and subjective classes of business. **Challenge of key assumptions:** Our audit approach responded to the increased uncertainty in the current economic environment, making explicit allowance for inflation in our independent re-projections. We performed incremental tests to separate the impacts on frequency and severity, including inflation and other factors such as changes in driving patterns since Covid-19. **Assessing principles:** We inspected the legal advice received by management in relation to Covid-19 business interruption (BI) claims and considered the appropriateness of judgements against this advice. We agreed a sample of reinsurance recoveries received in the year to appropriate evidence. **Tests of details:** We compared samples of claims case reserves to appropriate documentation, such as reports from loss adjusters in order to test the valuation of individual claims reserves focused on portfolios deemed higher risk, whether that be due to size, complexity or uncertainty. This covered the accuracy of the relevant policy data elements relied upon within actuarial methods in their testing of the valuation of insurance liabilities. Further, we have sample tested other data elements relevant to the valuation of insurance liabilities such as premium inputs and relevant reinsurance contracts, and recalculated the resulting reinsurance recoveries. From a completeness perspective, we reconciled the policy level claims listing subject to sampling, to the actuarial triangles used for our independent reprojections, with the output then reconciled to the financial statements. **Margin evaluation:** We evaluated the appropriateness of the margin to be applied to the actuarial best estimate. In order to do this we assessed management’s approach to setting the margin. In particular we considered the allowance for uncertainties inherent in the data and assumptions in developing the actuarial best estimate through inquiry with management and with respect to our understanding of any changes in the Group’s risks. We also applied our broader sector experience of approaches to setting the margin and the level of margin held by the Group’s peers. **Assessing transparency:** We considered the adequacy of the Group’s disclosures in respect of the sensitivity of the insurance liabilities and key assumptions applied to key areas of judgement and estimation uncertainty. | --- 32 | | Control design and implementation: We assessed the design and implementation of controls in relation to the above valuation. We did not seek to place reliance on the Group's controls because the nature of the balance is such that we would expect to obtain audit evidence primarily through the detailed procedures described. | | --- | --- | | | Our results We found the valuation of the insurance liabilities to be acceptable (2021 result: acceptable). | | Valuation of deferred tax assets 2022: £186 million of the total deferred tax assets of £267 million; 2021: £146 million of £148 million Risk vs 2021 ← | | | --- | --- | | Refer to page 56 (accounting policy) and pages 97-98 (financial disclosures). | | | The risk | Our response | | Forecast-based assessment: The recoverability of the recognised deferred tax asset is dependent on the future profitability of the UK business, in particular Royal & Sun Alliance Insurance Limited, as the taxable legal entity. There is inherent uncertainty involved in developing the Group's operational plan upon which forecast future taxable profits are based and further judgement in assessing to what extent the deferred tax assets can be recovered against those forecast taxable profits, particularly following the acquisition of the Group in 2021. These forecasts determine the extent to which deferred tax assets are, or are not, recognised in the financial statements. The effect of these matters is that, as part of our risk assessment, we determined that the recoverable amount of deferred tax assets has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole. The financial statements (note 31) disclose the sensitivity estimated by the Group. | Our procedures included: - Historical comparisons: We assessed the accuracy of the Group's approved operating plan in relation to the forecasting process in the past. We considered whether projected margins are achievable with reference to recent business performance, operating plans, and allowing for adjustments including the contingency applied in determining the value of the deferred tax asset. - Our experience: We assessed the Group's approach to the assessment of recoverability and challenged the approach with reference to our understanding of the business, forecast periods used by peers, and the requirements of the relevant accounting standards. - Sensitivity analysis: We carried out independent sensitivity analyses of taxable profits to assumptions such as expected weather losses, the development of claims reserves and claims inflation and projected future growth rates. - Our tax expertise: With the support of our own tax specialists and their knowledge of tax legislation, we also assessed the extent to which projected profits were taxable, in particular the Group's assumptions about how accumulated tax losses and other similar items can be utilised within the Group against the UK business, and Royal & Sun Alliance Insurance Limited as the taxable legal entity, in particular. - Assessing transparency: We assessed the adequacy of the Group's disclosures in respect of the assumptions applied in the calculation and the adequacy of the Group's disclosures in respect of the sensitivity of the valuation of the deferred tax asset to key assumptions. - Control design and implementation: We assessed the design and implementation of controls in relation to the above valuation. We did not seek to place reliance on the Group's controls because the nature of the balance is such that we would expect to obtain audit evidence primarily through the detailed procedures described. Our results As a result of our work, we found the level of deferred tax assets recognised to be acceptable (2021 result: acceptable). | --- 33 | Valuation of post-employment benefits and obligations 2022: £5,461 million; 2021: £8,679 million Risk vs 2021 ←► Refer to page 56 (accounting policy) and pages 107 - 113 (financial disclosures). | | | --- | --- | | The risk | Our response | | Subjective valuation: The value of the UK defined benefit pension schemes obligations is significant and, being long-dated liabilities, the valuations are particularly sensitive to small changes in assumptions such as the discount rate, RPI inflation rate and mortality rate, which are highly sensitive to market and geographic circumstances. The effect of these matters is that, as part of our risk assessment, we determined that the valuation of post-employment benefits and obligations has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole and possibly many times that amount. The financial statements (note 41) disclose the sensitivity estimated by the Group. | With the assistance of our own pension actuarial specialists, our procedures included: - Benchmarking assumptions and our experience: We compared the key assumptions such as discount rate, RPI inflation rate and mortality rate against our independent models, using external data and information relating to the pension schemes' liability and demographic profile. - Assessing valuer's credentials: We evaluated the Group's external valuer's competence, objectivity, capability and scope of work. - Assessing principles: We assessed the Group's methodology against the requirements of IAS 19. - Assessing transparency: We considered the adequacy of the Group's disclosures in respect of the sensitivity of the defined pension obligation to these assumptions and of the post balance sheet event disclosed in note 49. - Control design and implementation: We assessed the design and implementation of controls in relation to the above valuation. We did not seek to place reliance on the Group's controls because the nature of the balance is such that we would expect to obtain audit evidence primarily through the detailed procedures described. Our results We found the valuation of the post-employment benefits and obligations to be acceptable (2021 result: acceptable). | | Valuation of parent company's investment in subsidiaries 2022 £2,595 million; 2021: £2,405 million Risk vs 2021 ←► Refer to page 137 (accounting policy, Investments in Subsidiaries) and page 139 (financial disclosures). | | | --- | --- | | The risk | Our response | | Forecast-based assessment: The carrying amount of the parent company's (' The Company') investment in subsidiaries represents 97% (2021: 63%) of the company's total assets. Fair value for the key operating subsidiaries is calculated by applying the income approach which uses discounted cash flow models to assess the present value of expected future economic benefits. There is inherent uncertainty involved in developing the Company's operational plan upon which the discounted cash flow models are based such that the valuation is sensitive to the underlying assumptions impacting the assessment of future cashflows and the discount rate applied. The effect of these matters is that, as part of our risk assessment, we determined that the valuation of investment in subsidiaries has estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the parent company's financial statements as a whole. The parent company's financial | With the assistance of our own valuation specialists, our procedures included: - Historical comparisons: We assessed the accuracy of the Company's approved operating plan in relation to the forecasting process in the past. We considered whether projected margins are achievable with reference to recent business performance, operating plans, and allowing for adjustments including the contingency applied in determining the valuation of investment in subsidiaries. - Assessing valuer's credentials: We evaluated the Company's external valuer's competence, objectivity, capability and scope of work. - Our experience and benchmarking assumptions: We applied our market experience and knowledge of the operating subsidiaries to challenge the methodology and key assumptions applied by the Company's valuer and benchmark the valuation against the Company's competitors. - Test of details: We agreed net asset values to underlying financial reporting for less material subsidiaries. We also | --- 34 | statements (note 8) disclose the sensitivity estimated by the Company. | evaluated and challenged the underlying data used in the cash flow forecasts, on which the valuations were based. - **Sensitivity analysis:** We carried out independent sensitivity analysis of the impact on the valuation of changes to assumptions such as expected weather losses, the development of claims reserves and claims inflation, projected future growth rates and the discount rate applied. - **Assessing transparency:** We considered the adequacy of the Company's disclosures in respect of the sensitivity of the valuation to the key assumptions. - **Control design and implementation:** We did not seek to place reliance on the Company's controls because the nature of the balance is such that we would expect to obtain audit evidence primarily through the detailed procedures described. **Our results:** We found the assessment of the valuation of the parent company's investment in subsidiaries to be acceptable (2021 result: acceptable). | | --- | --- | # 3 Our application of materiality and an overview of the scope of our audit Materiality for the Group financial statements as a whole was set at £29m (2021: £34m), determined with reference to a benchmark of net earned premiums (of which it represents 0.9% (2021: 0.8%)). We continue to consider net earned premiums to be the most appropriate benchmark and a fair reflection of revenue from the Group's operations because it is a revenue metric per the accounting standards is less distorted by seasonal fluctuations and takes into account the reinsurance programme in place. Materiality for the parent company financial statements as a whole was set at £26m (2021: £30m), which is capped at 90% of Group materiality and with reference to a benchmark of net assets of which it represents 1.1% (2021: 0.9%). In line with our audit methodology, our procedures on individual account balances and disclosures were performed to a lower threshold, performance materiality, so as to reduce to an acceptable level the risk that individually immaterial misstatements in individual account balances add up to a material amount across the financial statements as a whole. Performance materiality for the Group was set at 75% (2021: 65%) of materiality for the financial statements as a whole, which equates to £21.7m (2021: £22.1m). We applied this percentage in our determination of performance materiality based on the improved control environment. Performance materiality for the parent company was set at 75% (2021: 75%) of materiality, which equates to £19.5m (2021: £22.5m). We applied this percentage in our determination of performance materiality because we did not identify any factors indicating an elevated level of risk for the parent company. We agreed to report to the Audit Committee any corrected or uncorrected identified misstatements exceeding £1.4m (2021: £1.7m) in the Group financial statements; and £1.3m (2021: £1.5m) in the parent company financial statements, in addition to other identified misstatements that warranted reporting on qualitative grounds. In assessing our scoping, we considered the Group's reporting units as five (2021: seven) components. We subjected the UK component to a full scope audit. The Ireland component was instructed to perform specific risk-focused audit procedures relating to insurance liabilities and cash during the year. Specified risk-focused audit procedures were also performed over investments and cash balances within one of the UK-based components, where specific risks were identified. This scoping decision was made in order to provide further coverage over the Group's results. The components for which we performed specified risk-focused procedures were not financially significant enough to subject to a full scope audit for group reporting purposes, but did present specific individual risks that needed to be addressed. Following the disposal of Canada and Scandinavia in 2021, they are no longer in scope of our audit. --- The components within the scope of our work accounted for the percentages illustrated below. For calculation of our scope in relation to profit presented below, we have included only the full scope component. For the residual components, we performed analysis at an aggregated group level to re-examine our assessment that there were no significant risks of material misstatement within these. | The components within the scope of our work accounted for the following percentages of the Group's results (comparatives in bracket): | | | | | | | --- | --- | --- | --- | --- | --- | | | Number of components | Group net earned premium | Group insurance contract liabilities | Total profits and losses that made up Group profit before tax | Group total assets | | Audits for group reporting purposes | 1 (3) | 92% (93%) | 82% (77%) | 53% (96%) | 87% (84%) | | Specified risk-focused audit procedures over reinsurance debtors, insurance liabilities, cash and investments | 2 (2) | 0% (2%) | 10% (18%) | 0% (0%) | 2% (10%) | | Total | 3 (5) | 92% (95%) | 92% (95%) | 53% (96%) | 89% (94%) | The Group team instructed component auditors as to the significant areas to be covered, including the relevant risks detailed above, and the information to be reported back. The Group team approved the component materialities, which ranged from £12m to £27m (2021: £10m to £27m), having regard to the mix of size and risk profile of the Group across the components. The audit procedures over the Irish component (2021: Canada, Scandinavia and Ireland) were performed by a component audit team. The audit procedures over the completeness and accuracy of the investment balances within the in-scope UK reporting components were conducted by EY's Intact Financial Corporation audit team in Canada. We communicated our audit risk assessment, participated in the scoping of planned audit procedures, agreed the information to be reported back and auditor oversight procedures were performed, including review of the audit documentation. All other audit procedures, as well as the parent company audit, were performed by the Group team. The scope of the audit work performed was predominately substantive as we placed limited reliance upon the Group's internal control over financial reporting. The Group team visited nil (2021: nil) component overseas locations during the year and instead maintained the virtual interactions with overseas teams. Video and telephone conference meetings were held with the component auditors and local management. At these meetings, the findings reported to the Group team were discussed in more detail, and any further work required by the Group team was then performed by the component auditor. We reviewed the component team's audit documentation. ## 4 Going concern The directors have prepared the financial statements on the going concern basis as they do not intend to liquidate the Group or the Company or to cease their operations, and as they have concluded that the Group's and the Company's financial position means that this is realistic. They have also concluded that there are no material uncertainties that could have cast significant doubt over their ability to continue as a going concern for at least a year from the date of approval of the financial statements ("the going concern period"). We used our knowledge of the Group, its industry, and the general economic environment to identify the inherent risks to its business model and analysed how those risks might affect the Group's and Company's financial resources or ability to continue operations over the going concern period. The risks that we considered most likely to adversely affect the Group's and Company's available financial resources over this period were: - adverse insurance reserves development and operational performance --- - a deterioration in claims experience, potentially caused by market wide catastrophe event(s) or economic factors such as inflation; - a deterioration in the valuation of the Group's investments arising from a significant change in the economic environment and any resulting impact on liquidity and capital strength; and - the impact of post balance sheet event as disclosed in note 49. We considered whether these risks could plausibly affect the Group's regulatory capital or liquidity in the going concern period by assessing the directors' sensitivities over the level of available financial resources indicated by the Group's financial forecasts taking account of severe but plausible adverse effects that could arise from these risks individually and collectively. Our procedures also included: - Evaluation of the consistency, arithmetical accuracy and reasonableness of the data and assumptions used in management's Going Concern assessment paper. - Consideration of whether the going concern disclosure in note 1 to the financial statements gives a full and accurate description of the directors' assessment of going concern, including the identified risks, dependencies, and related sensitivities. Our conclusions based on this work: - we consider that the directors' use of the going concern basis of accounting in the preparation of the financial statements is appropriate; - we have not identified, and concur with the directors' assessment that there is not, a material uncertainty related to events or conditions that, individually or collectively, may cast significant doubt on the Group's or Company's ability to continue as a going concern for the going concern period; and - we found the going concern disclosure in note 1 to be acceptable. However, as we cannot predict all future events or conditions and as subsequent events may result in outcomes that are inconsistent with judgements that were reasonable at the time they were made, the above conclusions are not a guarantee that the Group or the Company will continue in operation. ## 5 Fraud and breaches of laws and regulations – ability to detect ### Identifying and responding to risks of material misstatement due to fraud To identify risks of material misstatement due to fraud ("fraud risks") we assessed events or conditions that could indicate an incentive or pressure to commit fraud or provide an opportunity to commit fraud. Our risk assessment procedures included: - Enquiring of directors, the Audit Committee, internal audit and management and inspection of policy documentation as to the Group's high-level policies and procedures to prevent and detect fraud, including the internal audit function, and the Group's channel for "whistleblowing", as well as whether they have knowledge of any actual, suspected or alleged fraud. - Reading Board, Audit Committee and Risk Committee minutes. - Considering remuneration incentive schemes and performance targets for management and directors. - Using professionals with forensic knowledge to assist us in identifying fraud risks and designing appropriate procedures based on discussions of the circumstances of the Group and Company. - Performing analytical procedures to identify any unusual or unexpected fluctuations and relationships in the account balances. We communicated identified fraud risks throughout the audit team and remained alert to any indications of fraud throughout the audit. This included communication from the Group to the full scope component audit team of relevant fraud risks identified at the Group level and request to the full scope component audit team to report to the Group audit team any instances of fraud that could give rise to a material misstatement at the Group level. As required by auditing standards, we perform procedures to address the risk of management override of controls, in particular the risk that Group and component management may be in a position to make inappropriate accounting entries, and the risk of bias in accounting estimates and judgements. In view of the overall quantum of pipeline premium as a proportion of total premiums, and the minimal judgement and estimation involved in the recognition of the remaining premium income, we rebutted the presumed risk of fraud in revenue recognition. We also identified fraud risks related to the valuation of insurance contract liabilities and the valuation of deferred tax assets, in response to the level of estimation and judgement in these balances and possible pressures to meet profit targets. Further detail in respect of insurance contract liabilities and the deferred tax asset is set out in the key audit matter disclosures in section 2 of this report. 36 --- We performed procedures including: - Identifying journal entries to test for the full scope component, based on risk criteria and comparing the identified entries to supporting documentation. These included those posted to seldom-used accounts and those posted by individuals who do not typically post journals. - Assessing significant accounting estimates for bias. Identifying and responding to risks of material misstatement due to non-compliance with laws and regulations We identified areas of laws and regulations that could reasonably be expected to have a material effect on the financial statements from our general commercial and sector experience, and through discussion with the directors and other management (as required by auditing standards), and from inspection of the Group's regulatory and legal correspondence and discussed with the directors and other management the policies and procedures regarding compliance with laws and regulations. As the Group is regulated, our assessment of risks involved gaining an understanding of the control environment including the entity's procedures for complying with regulatory requirements. We communicated identified laws and regulations throughout our team and remained alert to any indications of non-compliance throughout the audit. This included communication from the Group to the full scope component audit team of relevant laws and regulations identified at Group level, and a request for full scope component auditors to report to the group team any instances of non-compliance with laws and regulations that could give rise to a material misstatement at Group. The potential effect of these laws and regulations on the financial statements varies considerably. Firstly, the Group is subject to laws and regulations that directly affect the financial statements including financial reporting legislation (including related companies legislation), distributable profits legislation, pension legislation and taxation legislation, and we assessed the extent of compliance with these laws and regulations as part of our procedures on the related financial statement items. Secondly, the Group is subject to many other laws and regulations where the consequences of non-compliance could have a material effect on amounts or disclosures in the financial statements, for instance through the imposition of fines or litigation or the loss of the Group's licence to operate. We identified the following areas as those most likely to have such an effect: regulatory capital and liquidity, conduct regulation and certain aspects of company legislation recognising the financial and regulated nature of the Group's activities. Auditing standards limit the required audit procedures to identify non-compliance with these laws and regulations to enquiry of the directors and other management and inspection of regulatory and legal correspondence, if any. Therefore if a breach of operational regulations is not disclosed to us or evident from relevant correspondence, an audit will not detect that breach. Context of the ability of the audit to detect fraud or breaches of law or regulation Owing to the inherent limitations of an audit, there is an unavoidable risk that we may not have detected some material misstatements in the financial statements, even though we have properly planned and performed our audit in accordance with auditing standards. For example, the further removed non-compliance with laws and regulations is from the events and transactions reflected in the financial statements, the less likely the inherently limited procedures required by auditing standards would identify it. In addition, as with any audit, there remained a higher risk of non-detection of irregularities, as these may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal controls. Our procedures are designed to detect material misstatement. We are not responsible for preventing non-compliance and cannot be expected to detect non-compliance with all laws and regulations. ## 6 We have nothing to report on the other information in the Annual Report The directors are responsible for the other information presented in the Annual Report together with the financial statements. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except as explicitly stated below, any form of assurance conclusion thereon. Our responsibility is to read the other information and, in doing so, consider whether, based on our financial statements audit work, the information therein is materially misstated or inconsistent with the financial statements or our audit knowledge. Based solely on that work we have not identified material misstatements in the other information. --- 38 # Strategic report and directors' report Based solely on our work on the other information: - we have not identified material misstatements in the strategic report and the directors' report; - in our opinion the information given in those reports for the financial year is consistent with the financial statements; and - in our opinion those reports have been prepared in accordance with the Companies Act 2006. # 7 We have nothing to report on the other matters on which we are required to report by exception Under the Companies Act 2006, we are required to report to you if, in our opinion: - adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or - the parent company financial statements are not in agreement with the accounting records and returns; or - certain disclosures of directors' remuneration specified by law are not made; or - we have not received all the information and explanations we require for our audit. We have nothing to report in these respects. # 8 Respective responsibilities ## Directors' responsibilities As explained more fully in their statement set out on page 29, the directors are responsible for: the preparation of the financial statements including being satisfied that they give a true and fair view; such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; assessing the Group and Parent company'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 they either intend to liquidate the Group or the parent company or to cease operations, or have no realistic alternative but to do so. ## Auditor's responsibilities Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue our opinion in an auditor's report. Reasonable assurance is a high level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. A fuller description of our responsibilities is provided on the FRC's website at www.frc.org.uk/auditorsresponsibilities. The Company is required to include these financial statements in an annual financial report prepared using the single electronic reporting format specified in the TD ESEF Regulation. This auditor's report provides no assurance over whether the annual financial report has been prepared in accordance with that format. # 9 The purpose of our audit work and to whom we owe our responsibilities This report is made solely to the Company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an auditor's 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 and the Company's members, as a body, for our audit work, for this report, or for the opinions we have formed. ![img-11.jpeg](img-11.jpeg) Thomas Tyler (Senior Statutory Auditor) for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants 15 Canada Square London, E14 5GL 02 March 2023 --- # Consolidated income statement For the year ended 31 December 2022 | | Note | 2022 £m | 2021 £m | | --- | --- | --- | --- | | Continuing operations | | | | | Income | | | | | Gross written premiums | | 4,181 | 4,294 | | Less: reinsurance written premiums | | (1,071) | (1,001) | | Net written premiums | 9 | 3,110 | 3,293 | | Change in the gross provision for unearned premiums | | (78) | (44) | | Change in provision for unearned reinsurance premiums | | 93 | (42) | | Change in provision for net unearned premiums | | 15 | (86) | | Net earned premiums | | 3,125 | 3,207 | | Net investment return | 10 | 89 | 160 | | Other operating income | 12 | 99 | 82 | | Total income | | 3,313 | 3,449 | | Expenses | | | | | Gross claims incurred | | (2,817) | (2,959) | | Less: claims recoveries from reinsurers | | 740 | 759 | | Net claims | 11 | (2,077) | (2,200) | | Underwriting and policy acquisition costs | | (1,109) | (1,223) | | Unwind of discount | | 3 | (6) | | Other operating expenses | 13 | (93) | (172) | | | | (3,276) | (3,601) | | Finance costs | 14 | (11) | (76) | | Profit on disposal of businesses | 8 | 39 | - | | Profit/(loss) before tax from continuing operations | 9 | 65 | (228) | | Income tax credit/(expense) | 19 | 16 | (33) | | Profit/(loss) after tax from continuing operations | | 81 | (261) | | Profit from discontinued operations, net of tax | 7 | - | 4,531 | | Profit for the year | | 81 | 4,270 | | Attributable to: | | | | | Owners of the Parent Company from continuing operations | | 86 | (263) | | Owners of the Parent Company from discontinued operations | | - | 4,531 | | Total Owners of the Parent Company | | 86 | 4,268 | | Non-controlling interests | | (5) | 2 | | | | 81 | 4,270 | The attached notes form an integral part of these consolidated financial statements. --- # Consolidated statement of comprehensive income For the year ended 31 December 2022 | | Note | 2022 £m | 2021 £m | | --- | --- | --- | --- | | Profit/(loss) for the year from continuing operations | | 81 | (261) | | Profit for the year from discontinued operations | | - | 4,531 | | Profit for the year | | 81 | 4,270 | | Items from continuing operations that may be reclassified to the income statement: | | | | | Exchange gains/(losses) net of tax on translation of foreign operations | 22 | 20 | (14) | | Fair value losses on available for sale financial assets net of tax | 22 | (329) | (79) | | | | (309) | (93) | | Items from continuing operations that will not be reclassified to the income statement: | | | | | Pension – remeasurement of net defined benefit asset/liability net of tax | 22 | (355) | (70) | | Movement in property revaluation surplus net of tax | 22 | (2) | - | | Other comprehensive expense for the year from continuing operations | | (666) | (163) | | Other comprehensive expense for the year from discontinued operations | 7 | - | (129) | | Total other comprehensive expense for the year | 22 | (666) | (292) | | Comprehensive expense for the year from continuing operations | | (585) | (424) | | Comprehensive income for the year from discontinued operations | 7 | - | 4,402 | | Total comprehensive (expense)/income for the year | | (585) | 3,978 | | Attributable to: | | | | | Owners of the Parent Company from continuing operations | | (597) | (426) | | Owners of the Parent Company from discontinued operations | | - | 4,402 | | Total Owners of the Parent Company | | (597) | 3,976 | | Non-controlling interests | | 12 | 2 | | | | (585) | 3,978 | The attached notes form an integral part of these consolidated financial statements. --- # Consolidated statement of changes in equity For the year ended 31 December 2022 | | Ordinary share capital | Ordinary share premium | Preference shares | Tier 1 notes | Revaluation reserves | Capital redemption reserve | Foreign currency translation reserve | Retained earnings | Equity attributable to owners of the Parent Company | Non-controlling interests | Total equity | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | £m | £m | £m | £m | £m | £m | £m | £m | £m | £m | £m | | Balance at 1 January 2021 | 1,035 | 1,095 | 125 | 297 | 371 | 389 | 20 | 1,232 | 4,564 | 166 | 4,730 | | Total comprehensive income | | | | | | | | | | | | | Profit for the year | - | - | - | - | - | - | - | 4,268 | 4,268 | 2 | 4,270 | | Other comprehensive income/(expense) (note 22) | - | - | - | - | (267) | - | 33 | (58) | (292) | - | (292) | | | - | - | - | - | (267) | - | 33 | 4,210 | 3,976 | 2 | 3,978 | | Transactions with owners of the Group | | | | | | | | | | | | | Contribution and distribution | | | | | | | | | | | | | Dividends (note 21/36) | - | - | - | - | - | - | - | (6,938) | (6,938) | (10) | (6,948) | | Shares issued for cash (note 34) | 1,023 | 282 | - | - | - | - | - | - | 1,305 | - | 1,305 | | Share-based payments (note 34) | 11 | - | - | - | - | - | - | 17 | 28 | - | 28 | | Transfers | - | - | - | - | 1 | - | - | (1) | - | - | - | | Capital reduction1 | (800) | (1,095) | - | - | - | (389) | - | 2,284 | - | - | - | | | 234 | (813) | - | - | 1 | (389) | - | (4,638) | (5,605) | (10) | (5,615) | | Changes in shareholders' interests in subsidiaries | - | - | - | - | - | - | - | - | - | (2) | (2) | | Total transactions with owners of the Group | 234 | (813) | - | - | 1 | (389) | - | (4,638) | (5,605) | (12) | (5,617) | | Balance at 1 January 2022 | 1,269 | 282 | 125 | 297 | 105 | - | 53 | 804 | 2,935 | 156 | 3,091 | | Total comprehensive income | | | | | | | | | | | | | Profit/(loss) for the year | - | - | - | - | - | - | - | 86 | 86 | (5) | 81 | | Other comprehensive (expense)/income (note 22) | - | - | - | - | (329) | - | 1 | (355) | (683) | 17 | (666) | | | - | - | - | - | (329) | - | 1 | (269) | (597) | 12 | (585) | | Transactions with owners of the Group | | | | | | | | | | | | | Contribution and distribution | | | | | | | | | | | | | Dividends (note 21/36) | - | - | - | - | - | - | - | (12) | (12) | (2) | (14) | | Shares issued for cash (note 34) | 294 | - | - | - | - | - | - | - | 294 | - | 294 | | Tier 1 notes redemption note (35) | - | - | - | (297) | - | - | - | 22 | (275) | - | (275) | | | 294 | - | - | (297) | - | - | - | 10 | 7 | (2) | 5 | | Changes in shareholders' interests in subsidiaries | - | - | - | - | - | - | - | - | - | (166) | (166) | | Total transactions with owners of the Group | 294 | - | - | (297) | - | - | - | 10 | 7 | (168) | (161) | | Balance at 31 December 2022 | 1,563 | 282 | 125 | - | (224) | - | 54 | 545 | 2,345 | - | 2,345 | The attached notes form an integral part of these consolidated financial statements. --- Consolidated statement of financial position As at 31 December 2022 Company number 02339826 | | Note | 2022 £m | 2021 £m | | --- | --- | --- | --- | | Assets | | | | | Goodwill and other intangible assets | 23 | 331 | 312 | | Property and equipment | 24 | 121 | 91 | | Investment property | 25 | 291 | 371 | | Financial assets | 26 | 5,334 | 5,530 | | Total investments | | 5,625 | 5,901 | | Reinsurers' share of insurance contract liabilities | 29 | 2,516 | 2,291 | | Insurance and reinsurance debtors | 30 | 1,929 | 1,916 | | Deferred tax assets | 31 | 267 | 148 | | Current tax assets | 31 | 1 | 2 | | Other debtors and other assets | 32 | 448 | 737 | | Other assets | | 716 | 887 | | Cash and cash equivalents | 33 | 362 | 500 | | Total assets | | 11,600 | 11,898 | | Equity and liabilities | | | | | Equity | | | | | Equity attributable to owners of the Parent Company | | 2,345 | 2,935 | | Non-controlling interests | | - | 156 | | Total equity | | 2,345 | 3,091 | | Liabilities | | | | | Issued debt | 37 | 166 | 165 | | Insurance contract liabilities | 39 | 7,607 | 7,185 | | Insurance and reinsurance liabilities | 40 | 904 | 842 | | Borrowings | 38 | 8 | 8 | | Current tax liabilities | 31 | 1 | 4 | | Provisions | 42 | 31 | 50 | | Other liabilities | 43 | 538 | 553 | | Provisions and other liabilities | | 570 | 607 | | Total liabilities | | 9,255 | 8,807 | | Total equity and liabilities | | 11,600 | 11,898 | The attached notes form an integral part of these consolidated financial statements. The financial statements were approved on 02 March 2023 by the Board of Directors and are signed on its behalf by: ![img-12.jpeg](img-12.jpeg) Ken Anderson Chief Financial Officer 42 --- # Consolidated statement of cash flows For the year ended 31 December 2022 | | Note | 2022 £m | 2021 £m | | --- | --- | --- | --- | | Cash flows from operating activities | | | | | Cash generated from operating activities | 45 | 366 | 357 | | Tax paid | | (4) | (99) | | Net cash flows from operating activities | | 362 | 258 | | Cash flows from investing activities | | | | | Proceeds from sales or maturities of: | | | | | Financial assets | | 1,790 | 1,738 | | Property and equipment | | - | 1 | | Subsidiaries and associates (net of cash disposed of) | | 77 | 6,559 | | Dividends from associates | | - | 1 | | Purchase of: | | | | | Financial assets | | (2,225) | (2,615) | | Property and equipment | 24 | (27) | (13) | | Intangible assets | 23 | (107) | (104) | | Subsidiaries | | - | (1) | | Net cash flows from investing activities | | (492) | 5,566 | | Cash flows from financing activities | | | | | Proceeds from issue of share capital | | 294 | 1,305 | | Dividends paid to ordinary shareholders | 21 | - | (6,914) | | Coupon payment on Tier 1 notes | 21 | (3) | (15) | | Dividends paid to preference shareholders | 21 | (9) | (9) | | Dividends paid to non-controlling interests | 36 | (2) | (10) | | Redemption of debt instruments | 46 | (275) | (642) | | Payment of lease liabilities | 46 | (13) | (24) | | Movement in other borrowings | 46 | - | (71) | | Interest paid | 46 | (11) | (26) | | Net cash flows from financing activities | | (19) | (6,406) | | Net decrease in cash and cash equivalents | | (149) | (582) | | Cash and cash equivalents at the beginning of the year | | 492 | 1,083 | | Effect of changes in foreign exchange on cash and cash equivalents | | 11 | (9) | | Cash and cash equivalents at the end of the year | 33 | 354 | 492 | The attached notes form an integral part of these consolidated financial statements. --- # Basis of preparation and significant accounting policies RSA Insurance Group Limited (The Company), formerly RSA Insurance Group plc, was re-registered as a private limited company on 26 May 2021 and the Company's ordinary share capital was purchased by Regent Bidco Limited (a wholly owned subsidiary of IFC) on 1 June 2021 (the acquisition). Regent Bidco Limited was placed into liquidation on 20 September 2022 and the Company's ordinary share capital was purchased by Alberta Limited (a wholly owned subsidiary of IFC) on 20 September 2022. The Company's ultimate parent company and controlling party is IFC. The Company is incorporated and domiciled in England and Wales and, through its subsidiaries and associates (together the Group or RSA), provides personal and commercial insurance products to its global customer base, principally in the UK, Ireland and Europe. On 1 June 2021, the Group disposed of its operations in Scandinavia (Codan A/S) and Canada (Roins Holdings Limited), and these were classified as discontinued operations (refer to note 7 for further information). ## 1) Basis of preparation The consolidated financial statements have been prepared in accordance with UK-adopted International Accounting Standards and the requirements of Companies Act 2006. The consolidated financial statements are prepared on a historical cost basis. Where other bases are applied, these are identified in the relevant accounting policy. The consolidated financial statements have been prepared on a going concern basis. In adopting the going concern basis, the Board has reviewed the Group's ongoing commitments for the next twelve months and beyond. The Board's assessment included the review of the Group's strategic plans and latest forecasts, capital position and liquidity including on demand capital funding arrangements with IFC. Current economic uncertainty has been considered, including the war in Ukraine, rising inflation, post Covid-19 impacts and transition to a post Brexit environment. These assessments include stress and scenario testing and consider significant areas of risk and uncertainty for the Group in a current challenging economic environment. Scenarios considered include a market risk shock involving several component stresses, plus deterioration of the underwriting result and a subsequent catastrophe loss. 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 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 consolidated statement of financial position and the approval of the consolidated financial statements. In line with industry practice, the Group's consolidated statement of financial position is not presented using current and non-current classifications, but broadly in increasing order of liquidity. The assets and liabilities considered as non-current include: deferred tax assets, property and equipment, intangible assets, goodwill, deferred tax liabilities, outstanding debt including issued debt and elements of financial investments, insurance contract liabilities and reinsurers' share of insurance contract liabilities. The assets and liabilities considered as current include cash and cash equivalents, insurance and reinsurance debtors, and elements of financial investments, insurance contract liabilities and reinsurers' share of insurance contract liabilities. The remaining balances are of a mixed nature. The current and non-current portions of such balances are in the notes or in the risk and capital management note (note 6). Except where otherwise stated, all figures included in the consolidated financial statements are presented in millions of pounds sterling (£m). Accounting policies that are significant to understanding the performance, financial position and cash flows of the Group are set out in note 5 with other policies presented in Appendix A. The notes are grouped together by their nature. In preparing the financial statements, the Directors have considered the impact of climate change, particularly in the context of the risks identified in the TCFD disclosure on pages 16 to 19. The potential impact of climate change on the valuation of insurance contract liabilities is considered in the significant accounting estimates and judgements note (note 2). The potential impact of climate change is also considered in the measurement of the deferred tax asset. Otherwise, there has been no material impact identified on the financial reporting judgements and estimates. The Directors are aware, however, of the ever-changing risks attached to climate change and will regularly assess these risks against judgements and estimates made in preparation of the Group's financial statements. 44 --- 2) Significant accounting estimates and judgements In preparing these consolidated financial statements, management has made judgements and calculated estimates in accordance with the Group's accounting policies. Estimates are based on management's best knowledge of current circumstances and expectation of future events and actions, which may subsequently differ from those used in determining the accounting estimates. Estimates and their underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are recognised prospectively. The most significant estimates are described below. Additional information on estimation techniques and assumptions is presented in the relevant note in order to provide context to the figures presented. - Valuation of insurance contract liabilities: the assumptions used in the estimation of the ultimate outcome of the claim events that have occurred but remain unsettled at the end of the reporting period. Key assumptions include prior experience and trends to the extent they are a reliable guide to future outcomes, changes in various key areas such as pricing, underwriting, claims, reinsurance, inflation and the wider economic environment, which could affect claims experience, and Covid-19 estimates which remain a heightened area of uncertainty with respect to the valuation of the insurance contract liabilities. Covid-19 business interruption (BI) gross claims cost uncertainty remains high but reduced over the past couple of years as initial estimates are replaced with maturing claims, case and reinsurance information, updates for which have been included in the claims estimates at 31 December 2022. Key points which could give rise to significant changes in the BI claims cost estimates continue to be challenged (and appealed) in high profile industry court cases such as Stonegate. These uncertainties are likely to persist for some time and, in the meantime, our booked reserves reflect our up-to-date views on the expected outcomes and are supported by our latest legal advice. The ultimate Covid-19 BI claims liability could be materially different from the current estimate as claims information develops further, as legal and regulatory interpretations throughout the industry evolve and clarify the criteria for eligible claims and the level of cover available and as claims information matures given the complexity. Whilst the Group has considerable reinsurance protection against changes in gross estimate, the net estimate is dependent on the extent to which losses are recoverable under the reinsurance contracts and how this compares to the Group's expectations. Aside from direct BI losses, Covid-19 has increased the level of estimation uncertainty for many classes of business and loss types with key assumptions impacted such as frequency, severity and claims development patterns. Many of the drivers of the uncertainty in these areas are external factors and require estimation to assess the impact. In addition, management continually monitors claims experience, emerging trends and changes in the business or in the external environment to help ensure the key assumptions and estimation techniques used to determine best estimate provisions reflect up-to-date information and remain appropriate. As a result of management's review given the current uncertain economic environment, including inflationary increases, and in alignment with IFC practice, relevant reserve assumptions have been strengthened during 2022 and margin is held above best estimates given the uncertainty. Given the emergence of significantly increased inflation trends over the past 1-2 years, our Inflation Committee and Working Groups have increased the frequency of meetings and depth of analysis, new methods have been adopted in some areas, increasing weight has been assigned to more recent trends where appropriate, and extensive sensitivity analysis has been carried out to help inform selections. Our judgements have been mindful of the uncertainty arising from the combined impacts of post-pandemic effects (such as supply chain disruption) combined with inflation pressure. An external reserve review was commissioned and completed on major segments of our reserves during 2022 to give management additional comfort that our internal estimates were robust and reflected external perspectives. The Adverse Development Cover (ADC) reinsurance contract placed in 2021 provides significant protection against inflation increases on 2020 and prior accident years. Climate change trends are giving rise over time to different weather patterns and therefore general insurance claims experience. During 2022, the UK observed severe windstorms in February, record high temperatures in the summer and a severe prolonged freeze event in December, leading to heightened storm, subsidence, escape of water and fire loss experience in the year. It is possible that climate change is a factor in this weather experience. The judgements made in respect of claims reserves and claims provisions take our observed reported experience into account and use common actuarial techniques to estimate ultimate costs. When selecting our future weather event claims experience assumption for our operational plan, we consider average experience over a recent period plus a judgmental allowance in recognition of climate change trends, along with any other relevant considerations such as exposure changes. Refer to note 39 for additional information. 45 --- - Measurement of defined benefit obligations: the use of key actuarial assumptions, such as discount rates, inflation rates and mortality rates. The valuation of the defined benefit pension schemes is sensitive to small changes in key assumptions. The setting of assumptions involves significant judgement by management. Updates to the inflation and mortality assumptions have been made at 31 December 2022 following advice from management's in house pension specialists, supported by independent third party actuarial advice. These updates result in a net balance sheet gain of £30m. The asset valuation on the UK pension scheme requires assumptions to be made around the complex and bespoke arrangement that provides coverage against longevity risk. Refer to note 41 for additional information. - Recognition of deferred tax assets: availability of future taxable profits against which deductible temporary differences and tax losses carried forward can be utilised. Management apply judgement in the application of contingency on the estimation of future forecast taxable profits in determining the value of deferred tax asset to be recognised. Management use a 5 year forecast period when calculating future forecast taxable profits (previously 7 years). There has been a £119m increase in the deferred tax asset at 31 December 2022. This has been predominantly driven by the recognition of a deferred tax asset of £83m in respect of unrealised losses on the available-for-sale bond portfolio in the UK and Ireland and £36m relating to the increase in forecast profits. The increase in forecast profits includes the UK impact of the transition to IFRS17. Refer to note 31 for additional information. - Valuation of level 3 financial assets and investment properties: use of significant unobservable inputs. The current ongoing economic uncertainty means that asset valuation techniques that rely on unobservable inputs have a greater degree of estimation uncertainty. Refer to note 27 for additional information. - Measurement and impairment of goodwill and intangible assets: management apply judgement in the valuation of the recoverable amount and the estimation of the useful economic life. The value in use calculations are based on management's latest operational plans and consider management's future intent. Refer to note 23 for additional information. The areas where management has applied judgement are as follows: - Classification of financial assets in the fair value hierarchy: management apply judgement when deciding to classify financial instruments for which immediate prices are available as being level 1 in the fair value hierarchy and financial assets for which observable prices are also available as level 2 on the basis of a lower level of activity in the market from which those prices are quoted. Refer to note 27 for additional information. - Impairment of financial assets: determining if there is objective evidence of impairment requires judgement and, in the year to 31 December 2022, £10m of impairments have been recognised on a continuing operations basis (31 December 2021: £7m). Refer to note 10 for additional information. The value of unrealised losses from continuing operations in the revaluation reserve at 31 December 2022 is £329m (31 December 2021: losses of £79m). Refer to note 22 for additional information. - Valuation of intangible assets: Strategic reassessment of programme plans for internally generated software assets. Determining if existing internally generated software would no longer generate future economic benefit and should therefore be derecognised requires judgement. In the year to 31 December 2022, £30m of internally generated software assets were identified as no longer generating future economic benefit and were derecognised (12 months to 31 December 2021: £72m). Refer to note 23 for additional information. The Audit Committee reviews the reasonableness of significant judgements and estimates. ## 3) Adoption of new and revised accounting standards The following narrow scope amendments have been adopted by the Group: ### Extension of the temporary exemption from applying IFRS 9 IFRS 9 has been issued to replace IAS 39 'Financial Instruments: Recognition and Measurement' (IAS 39). IFRS 4 'Insurance Contracts' (IFRS 4) permits an insurance company that meets the criteria a temporary exemption from applying IFRS 9 and continue to apply IAS 39. The exemption has been extended by two years to annual periods beginning before 1 January 2023. The Group meets the criteria and has elected to defer the application of IFRS 9 to the reporting period beginning on 1 January 2023, alongside IFRS 17. ### Interest Rate Benchmark Reform (IBOR) - Phase 2 In August 2020, the IASB issued amendments to IAS 39, IFRS 7 'Financial instruments: Disclosures' (IFRS 7), IFRS 4 and IFRS 16 'Leases' (IFRS 16). The amendments complement those issued in 2019 and focus on the effects on financial statements when an entity replaces an old interest rate benchmark with an alternative risk-free rate (ARRs) as part of the IBOR reform. The amendments clarify that, if the contractual cash flows of a financial instrument are modified as a result of the reform, an entity updates the effective interest rate to reflect the change instead of derecognising it or adjusting its carrying amount. In addition, hedge accounting relationships shall not be discontinued if changes are required by the reform, as long as the hedge meets other hedge accounting criteria. --- The Group's exposure to IBORs (Interbank Offered Rates) that have yet to transition from LIBOR and USD IBOR to Sterling Overnight Index Average (SONIA) and Secured Overnight Financing Rate (SOFR) is £34m at 31 December 2022 and relates to illiquid investments. Given the transition to ARRs has no significant impact on the Group, there has been no significant change in the risk management strategies as result of the IBOR reform. The amendments did not impact the consolidated financial statements. ## Other standards Other amendments to UK-adopted IAS became mandatory as of 1 January 2022. The Group has evaluated these changes, none of which have had a significant impact on the consolidated financial statements. ## 4) New accounting standards, interpretations and amendments yet to be adopted IFRS 17 'Insurance Contracts' and IFRS 9 'Financial Instruments' | Glossary of abbreviations | | | | | --- | --- | --- | --- | | CSM | Contractual service margin | LIC | Liabilities for incurred claims | | ECL | Expected credit loss | LRC | Liability for remaining coverage | | FVTOCI | Fair value through other comprehensive income | PAA | Premium allocation approach | | FVTPL | Fair value through profit and loss | AFS | Available For Sale | | GMM | General measurement model | SPPI | Solely payments of principal and interest | The Group will adopt IFRS 17 – Insurance Contracts ("IFRS 17") in conjunction with IFRS 9 – Financial instruments ("IFRS 9") on the required effective date of 1 January 2023, which will replace IFRS 4 – Insurance Contracts ("IFRS 4") and IAS 39 – Financial instruments: recognition and measurement ("IAS 39"), respectively. While IFRS 9 was effective for annual periods beginning on or after January 1, 2018, IFRS 4 allows a temporary exemption to delay the implementation of IFRS 9 until IFRS 17 is applied. The Group's 2023 interim financial statements will be prepared under IFRS 17 and IFRS 9. IFRS 17 will be applied retrospectively as at 1 January 2022 to each group of insurance contracts. As a result comparative information will be restated. Where full retrospective application is impracticable, the modified retrospective approach has been applied. The Group will recognise any IFRS 9 measurement differences by adjusting its Consolidated statement of financial position on 1 January 2023. As a result comparative information will not be restated. ## Financial impact ### IFRS 17 On transition to IFRS 17 on 1 January 2022, the Group's Equity attributable to owners of the Parent Company will be positively impacted by approximately £40m (IFRS 4: £3,091m; IFRS 17: £3,131m), mainly due to the discounting of Claims liabilities applying the principles of the new standard. IFRS 17 will result in presentation reclassifications as insurance related assets and liabilities are presented together on a single line, and reinsurance related assets and liabilities and presented together on a single line. ### IFRS 9 On transition to IFRS 9 on 1 January 2023, the Group's Equity attributable to owners of the Parent Company will be negatively impacted by £1m, which corresponds to the ECL calculated on its amortised cost loans and receivables. IFRS 9 will also result in reclassifications from Revaluation Reserve to Retained Earnings as follows: - Certain equity instruments currently classified as AFS will be classified as FVTPL, which will increase volatility in the Income statement; - The FVTPL designation of some fixed income instruments will change on transition date; and - The ECL calculated on instruments at fair value currently in Other Comprehensive Income (OCI) will be recognised in Retained earnings. As at 1 January 2023, the Group will reclassify approximately £100m of unrealised gains or losses (after tax) from Revaluation reserves to Retained earnings. --- The table below summarises the preliminary classification and measurement impacts of IFRS 9 on the Group's investments on transition. | | Measurement category | | Carrying amount | | | | | --- | --- | --- | --- | --- | --- | --- | | As at 1 January, 2023 | IAS 39 | IFRS 9 | IAS 39 | Reclassification | Measurement | IFRS 9 | | Cash and cash equivalents | Amortised cost | Amortised cost | 362 | - | - | 362 | | Debt securities | AFS | FVOCI | 4,689 | (2,471) | - | 2,218 | | | n/a | FVTPL | - | 2,471 | - | 2,471 | | Equities | AFS | n/a | 212 | (212) | - | - | | | n/a | FVTPL | - | 212 | - | 212 | | Loans and receivables | Amortised cost | Amortised cost | 433 | - | (1) | 432 | ## IFRS 17 'Insurance Contracts' The following summarises the Group's main accounting policies under IFRS 17 compared to IFRS 4: | Topic | Description | Impact | | --- | --- | --- | | Scope and separating components | Similar to IFRS 4, under IFRS 17 the Group will evaluate if a contract is in scope of the insurance contract standard and will separate its components if necessary. | As a result, the Group will continue to assess its insurance and reinsurance contracts to determine whether they contain components which must be accounted for under an IFRS standard other than the insurance contract standard. The Group's insurance policies do not include any components that require separation. | | | 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. | | | | The Group issues insurance contracts in the normal course of business (direct business). The Group also 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. | | | Level of aggregation of insurance contracts | IFRS 17 introduces a new concept of aggregating insurance and reinsurance contracts 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 businesses, 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. Groups do not contain contracts issued more than one year apart since they are further subdivided into annual cohorts. This is the level at which the Group will apply the requirements of IFRS 17. | Portfolios of insurance contracts issued that are assets and those that are liabilities and portfolios of reinsurance contracts held that are assets and those that are liabilities will be presented separately in the Consolidated statement of financial position, resulting in presentation changes when compared to IFRS 4, as described below in Presentation and disclosures. | --- 49 | Measurement models | IFRS 17 introduces a new concept of the GMM for the measurement of insurance contracts. Entities also have the option to use a simplified measurement model (the PAA), for contracts that have a coverage period of one year or less or if the resulting LRC, which represents insurance coverage to be provided after the reporting period, is not expected to materially differ from the LRC measured using the GMM. The accounting under the PAA is similar to the current approach under IFRS 4 for the LRC. The GMM is required for a limited number of contracts within the Group, primarily in relation to retroactive reinsurance which covers adverse development of existing claims. The GMM requires measuring insurance and reinsurance contracts using updated estimates and assumptions that reflect the timing of cash flows and any uncertainty relating to insurance and reinsurance contracts. Under this model the LRC is the sum of discounted expected future cash flows, risk adjustment and CSM representing the unearned profit the Group will recognise as it provides service under the insurance contracts in the group. | The Group does not have any significant contracts with coverage periods that are greater than one year and has developed a methodology for determining whether those contracts are eligible to apply the PAA. Based on its models the PAA will be applicable to all the insurance and reinsurance contracts except in limited circumstances where the GMM is required. | | --- | --- | --- | | Onerous contracts | 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 the PAA, the Group assumes that no contracts in the 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 on planning information, forecast information and historic experience. The Group has developed models for measuring potential onerous contract losses. For onerous contracts, a loss component determined based on estimated fulfilment cash flows is included in the LRC when insurance contracts are issued with a loss recognised immediately in the Income statement, resulting in early recognition of the loss compared to IFRS 4. The loss component will be reversed to the Income statement over the coverage period, therefore offsetting incurred claims. The loss component is measured on a gross basis but a loss recovery component may be recognised to the extent that the gross loss component is covered by reinsurance contracts held. | The Group has developed a methodology for determining onerous contracts and calculated the impact on transition to IFRS 17. This will be assessed on an ongoing basis as part of the Group's reporting processes. | | Discount rate | IFRS 17 requires estimates of future cash flows to be discounted to reflect the time value of money and financial risk that reflects the characteristics of the liabilities and the duration of each group of contracts. The Group has established discount yield curves using risk-free rates adjusted to reflect the appropriate illiquidity characteristics of each group of the applicable insurance contracts. The LRC of contracts measured under the GMM approach and the LIC will be discounted using this methodology. The Group will not discount the LRC of contracts measured under the PAA approach on the basis that it does not have contracts with significant financing components. Under IFRS 4, claims liabilities are discounted using a rate that reflects the estimated market yield of the underlying assets backing these claims liabilities at the reporting date. | The changes in discount rate methodology will have a significant impact on the measurement of groups of insurance contracts at transition and on an ongoing basis. | | Risk adjustment | The measurement of insurance contract liabilities includes an explicit risk adjustment which will replace the implicit risk margin included under IFRS 4. The IFRS 4 risk margin reflects 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 closely aligned. | --- 50 Insurance revenue Under IFRS 17, direct premiums written will no longer be presented in the Consolidated income statement, instead insurance revenues on direct business will be allocated to the period and will include allocations of: - Premium receipts net of cancellations, promotional returns, and sales taxes, similar to IFRS 4; and - Other insurance revenue currently recognised in Other operating income under IFRS 4. This includes fees collected from policyholders in connection with the costs incurred for the Group's monthly payment plans and fees received for the administration of other policies. For contracts measured under the PAA, the allocation will be based on the passage of time which is usually 12 months, similar to earned premiums. Insurance service expenses Insurance service expenses will 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 will be composed of the following: - 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; - Amortisation of insurance acquisition cash flows (see below); and - Losses and reversal of losses on onerous contracts (see above). IFRS 17 will result in presentation changes to IFRS 4's Underwriting and policy acquisition costs since expenses will be classified either as insurance acquisition cash flows and fulfilment cash flows within insurance service expenses or as other expenses when they are not directly attributable to insurance contracts. As a result, a portion of expenses currently classified as Underwriting and policy acquisition costs under IFRS 4 will be presented as other expenses under IFRS 17. Insurance acquisition cash flows Insurance acquisition cash flows are costs directly attributable to selling or underwriting a portfolio of insurance contracts and are included in the LRC. These cash flows include direct costs such as commissions and indirect costs such as salaries, rent and technology costs. Under IFRS 17, the PAA provides the option to expense insurance acquisition cash flows as they are incurred. The Group will elect to amortise these costs on a straight-line basis over the coverage period of the related groups. Insurance acquisition cash flows are similar to IFRS 4's deferred acquisition costs except they also include a portion of indirect costs. The impact on transition will not be significant in proportion to Shareholders' equity and will have a limited impact on an ongoing basis. Presentation and disclosures IFRS 17 introduces significant changes to the disclosure and presentation of insurance items in the financial statements including: - Changes in presentation in the Consolidated statement of financial position where the premiums receivable, deferred acquisition costs, claims liabilities, unearned premiums and other related assets and liabilities will be presented together by portfolio on two lines called insurance contract liabilities or assets. Reinsurance assets, reinsurance receivables, deferred acquisition costs ceded, and other related assets and liabilities will be presented together by portfolio on two lines, reinsurance contract assets or liabilities; - Changes in presentation in the Consolidated income statement where direct insurance results will be presented separately from reinsurance results; - Underwriting performance will be presented in the Consolidated income statement under insurance service result which will be composed of: - Insurance revenue which includes revenues related to direct business as described above; - Insurance service expenses which include expenses related to direct business as described above; and - net income (expenses) from reinsurance contracts held which includes revenues and expenses related to ceded business. - The insurance service result will be presented without the impact of discount unwinding which will be shown separately under insurance finance income and expenses; and - Extensive disclosures are required on the recognised amounts from insurance contracts and the nature and extent of risks arising from these contracts. --- 51 # IFRS 9 'Financial Instruments' The following summarises the Group's main accounting policies under IFRS 9 compared to IAS 39: ## Classification and measurement ### Business model Under IFRS 9, the classification of debt instruments is dependent on the business model under which the Group manages its investments as well as their cash flow characteristics. The Group's primary business model will be held-to-collect and sell because debt securities (except non-rated investments that are not liquid) are held to collect contractual cash flows and sold when required to fund insurance contract liabilities. These financial assets will be classified as FVTOCI with changes in fair value recognised in OCI (when unrealised) or in net investment gains/(losses) when realised or impaired. A portion of the debt securities used to back insurance liabilities will also be voluntarily designated as FVTPL to reduce an accounting mismatch caused by fluctuations in fair values of the underlying insurance liabilities due to changes in discount rates. Changes in fair value will be recognised in net investment gains/(losses). This designation will be done on an individual basis on 1 January 2023 and will be irrevocable. The Group's cash and cash equivalents and loans and receivables will fall under the held-to-collect business model where the emphasis is to collect contractual cash flows. These financial assets will be classified as amortised cost. Equities will be classified at FVTPL. ### Solely payments of principal and interest assessment Financial assets which are held within held-to-collect and sell and held to collect 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 will be classified and measured at FVTPL. ### Impairment model - Expected credit loss The new impairment model applies only to financial assets classified as amortised cost and debt securities classified as FVTOCI. The ECL model is forward looking, resulting in a loss allowance being recognised earlier as described below rather than on an incurred credit losses basis under IAS 39. | Staging | Debt securities | | --- | --- | | Stage 1 (12 months ECL)^{1} | Credit risk of the financial instrument is low (investment grade) or credit risk has not increased significantly since initial recognition (performing) | | Stage 2 (Lifetime ECL)^{2} | Credit risk has increased significantly since inception (underperforming) but the financial instrument is not credit impaired | | Stage 3 (Lifetime ECL)^{2} | Financial instrument is credit impaired | 1Forward looking for 12 months following the balance sheet date. 2Forward looking over the lifetime of the instrument. 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. The ECL model will not have a significant impact, due to the high quality of the Group's investment portfolio. Information required by IFRS 4 when applying the temporary exemption can be found in note 26 and note 6. ## Other standards There are a number of amendments that have been issued by the IASB that have not yet been adopted for use in the UK. The Group has evaluated the impact of these amendments and none are expected to have a significant impact on the consolidated financial statements. --- 5) Significant accounting policies The significant accounting policies used in the preparation of these consolidated financial statements, as set out below, have been applied consistently to all periods presented in these consolidated financial statements, unless otherwise stated. There have been no significant changes to the Group's accounting policies during 2022. Following the Group's disposal of its operations in Scandinavia and Canada in 2021, the policy relating to discontinued operations has been included as a significant accounting policy. Discontinued operations A discontinued operation is a component of the Group that has been disposed of and represents a separate major line of business or geographical area of operation. The profit from discontinued operations is shown separately on the face of the consolidated income statement as a single amount. It comprises the profit or loss after tax from discontinued operations together with the gain or loss after tax recognised on disposal. Further information can be found in note 7. In the year in which an operation is first classified as discontinued, the consolidated income statement and consolidated statement of other comprehensive income for the comparative prior period is re-presented to present those operations as discontinued. Where intragroup arrangements between continuing and discontinued operations continue after the point of disposal, the continuing operations are presented as if the income/expense had always been an external party, with the result of the discontinued operation being reduced to offset. Where the arrangement ceased at the point of disposal the income/expense of the continuing operation in relation to the arrangement with the discontinued operation is eliminated. Premium income Written premium is recognised in the period in which the Group is legally bound through a contract to provide insurance cover. It represents the full amount of premiums receivable under the contract, including estimates where the amounts are not known at the date they are written. These are deferred as a provision for unearned premiums until recognised as revenue principally computed on a monthly or daily pro-rata basis. Net earned premiums are stated net of amounts passed ('ceded') to reinsurers. Premiums are shown before deduction of commission and exclude any sales-based taxes or duties. Insurance receivables Premium receivables due from policyholders or intermediaries at the end of the reporting period are presented within insurance and reinsurance debtors in the consolidated statement of financial position. The amount recoverable is reduced when there is an event arising after the initial recognition that provides objective evidence that the Group may not receive all amounts due under the insurance contract. Impairment losses for non-recoverable amounts are charged to underwriting and policy acquisition costs in the consolidated income statement and directly reduce the carrying amount of insurance debtors in the consolidated statement of financial position. Gross claims incurred and insurance contract liabilities Gross claims incurred represent the cost of agreeing and settling insurance claims on insurance contracts underwritten by the Group. Provisions for losses and loss adjustment expenses are recognised at the estimated ultimate cost, net of expected salvage and subrogation recoveries when a claim is incurred. The provisions for losses and loss adjustment expenses, and related reinsurance recoveries, are discounted where there is a long period from incident to claims settlement or when nominal interest rates are high and where there exists a suitable claims payment pattern from which to calculate the discount. In defining those claims with a long period from incident to claims settlement, an average period of settlement of six years or more has been used as a guide. The discount rate used is based upon an investment return expected to be earned by financial assets which are appropriate in value and duration to match the provisions for insurance contract liabilities being discounted during the period expected before the final settlement of such claims. Differences between the estimated cost and subsequent settlement of claims or re-estimated costs are recognised in the consolidated income statement in the year in which they are settled or in which the insurance contract liabilities are re-estimated. Acquisition costs comprise the direct and indirect costs of obtaining and processing new insurance business. Levies payable are treated as costs of underwriting business. These costs are recognised as deferred acquisition costs (DAC) and are deducted from the provision for unearned premium. DAC is amortised on the same basis as the related unearned premiums are earned. 52 --- At the end of each reporting period tests are performed to ensure the adequacy of the Group's insurance contract liabilities by considering the cash flows associated with the provision for unearned premium net of related DAC. In performing these tests, best estimates of future contractual cash flows, including loss adjustment and administrative expenses as well as investment income on financial assets backing such liabilities are used. Any deficiency is charged to the consolidated income statement immediately by establishing a provision for liability adequacy known as the unexpired risk provision. The requirement for an unexpired risk provision is assessed in aggregate for business classes which are managed together and where there are no restraints on the ability to use assets held in relation to such business to meet any of the associated liabilities. Further information on net claims can be found in note 11, and insurance contract liabilities in note 39. ## Reinsurance Written premiums ceded to a reinsurer are recognised in the period in which the reinsurance contract is entered into and include estimates where the amounts are not finalised at the end of the reporting period. The ceded written premiums are recognised in the consolidated income statement over the period of the reinsurance contract, based on the expected earning pattern in relation to the underlying insurance contract(s). Gains or losses on buying retroactive reinsurance are recognised in the income statement immediately at the date of purchase and are not amortised. Premiums ceded and claims reimbursed are presented on a gross basis in the consolidated income statement and statement of financial position as appropriate. Reinsurers' share of insurance contract liabilities within the consolidated statement of financial position includes the reinsurers' share of provisions for losses and loss adjustment expenses and unearned premiums. The Group reports third party reinsurance balances on the consolidated balance sheet on a gross basis to present the exposure to credit risk related to third party reinsurance. The amount recoverable is reduced when there is an event arising after the initial recognition that provides objective evidence that the Group may not receive all amounts due under the reinsurance contract. Annuities purchased by the Group to provide for payments under structured settlement arrangements are accounted for as reinsurance ceded and a corresponding reinsurers' share of insurance contract liabilities in cases where the Group remains liable for the settlement in the event of default by the annuity provider. Any gain or loss arising on the purchase of an annuity is recognised in the consolidated income statement at the date of purchase. Further information can be found in note 29. ## Financial instruments ### Classification and measurement of financial assets and financial liabilities The Group initially recognises financial instruments at their fair value on the date at which they are purchased. At initial measurement, the Group classifies its financial assets and financial liabilities in one of the following categories: - Designated at FVTPL - Held for trading - AFS - Cash and cash equivalents - Loans and receivables - Financial liabilities - Derivatives designated as hedging instruments Transaction costs that are directly attributable to the acquisition of financial assets and financial liabilities that are not FVTPL are added to their fair value in their initial measurement. Further information can be found in notes 26, 27 and 28. --- The table below summarises the classification and treatment of the Group's financial assets and financial liabilities. | Category | Financial instrument | Description | Subsequent measurement | Recognition of change in fair value | | --- | --- | --- | --- | --- | | Designated at FVTPL on initial recognition | Debt securities | Where the investment return is managed on the basis of the total return on investment (including unrealised investment gains) | Fair value using prices at the end of the period | Income statement - net investment gains/(losses) | | AFS | Debt securities, equity securities | Where the investment return on equity or debt securities is managed on the basis of the periodic cash flows arising from the investment | Fair value using prices at the end of the period | OCI - unrealised gains/(losses) Income statement - net investment gains/(losses) when realised or impaired | | Cash and cash equivalents | Cash and cash equivalents | Consist of cash and highly liquid investments that are readily convertible into a known amount of cash, are subject to insignificant risk of changes in value and have a maturity date of 90 days or less from the date of acquisition | Carrying amounts at amortised cost | | | Loans and receivables | Loans, reinsurance deposits, other deposits and financial assets arising from non-investment activities, and loans made for investment purposes | Financial assets with fixed or determinable payments not quoted in an active market | Amortised cost using the effective interest method | Income statement - net investment gains/(losses) when realised or impaired | | Financial liabilities | Other borrowings | Financial liabilities with fixed or determinable payments | Amortised cost using the effective interest method | Income statement - net investment gains/(losses) when settled | | | Issued debt | Financial liabilities with fixed or determinable payments and maturity date | Amortised cost using the effective interest method | Income statement - net investment gains/(losses) when settled | | Derivative assets/(liabilities) not designated as hedging instruments | Derivative assets/(liabilities) not designated as hedging instruments | Economic hedges that do not qualify for hedge accounting | Carried at fair value Derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative | Income statement - net investment gains/(losses) | --- | Category | Financial instrument | Description | Subsequent measurement | Recognition of change in fair value | | --- | --- | --- | --- | --- | | Derivatives designated as hedging instruments | Derivative assets/(liabilities) designated as hedging instruments | Hedge of a net investment in a foreign operation or hedge of future cash flows or hedge of fair value of fixed interest securities | Carried at fair value Derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative | Hedge of future cash flows – effective portion is initially recognised in other comprehensive income (OCI); subsequently recognised in the income statement when the hedged cash flows affect profit or loss Hedge of a net investment in a foreign operation - effective portion is recognised in OCI, ineffective portion is immediately recognised in the income statement Hedge of fair value – recognised in the income statement. The change in fair value of the hedged investments (classified as AFS) attributable to the hedged risk is transferred from the revaluation reserve to the income statement | ## Investment income Dividends on equity investments are recognised as investment income in the consolidated income statement on the date at which the investment is priced 'ex dividend'. Interest income is recognised in the consolidated income statement using the effective interest rate method. Unrealised gains and losses on AFS investments are recognised in OCI, except for impairment losses and foreign exchange gains and losses on monetary items which are recognised in the consolidated income statement. On derecognition of an investment classified as AFS, the cumulative gain or loss previously recognised in OCI is recognised in the consolidated income statement. Further information can be found in note 10. ## Impairment of financial instruments The Group determines, at each reporting date, whether there is evidence that the value of a financial asset or a group of financial assets, other than those measured as FVTPL are impaired. A financial asset is impaired if there is objective evidence that indicates that an event has occurred after the initial recognition of the asset that may have resulted in a loss of value as a result of having a negative effect on the estimated future cash flows generated by that asset which can be estimated reliably. Financial assets are impaired according to either a debt, equity, or loans and receivables impairment model. The appropriate impairment model is determined based on the characteristics of each instrument. An impairment loss in respect of debt instruments is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate of the instrument and is recognised in the consolidated income statement. Interest on the impaired asset continues to be recognised using the effective interest rate method. An equity security is considered impaired if there is objective evidence that the cost may not be recovered. In addition to qualitative impairment criteria, a significant or prolonged decline in fair value below cost is considered as indication of potential impairment. Impairment is considered to have occurred when the decline in fair value relative to cost has been more than 25% for a continuous nine-month period. Unless there is evidence to the contrary, an equity security is also considered impaired when the decline in fair value relative to cost is more than 50% at the end of the reporting period, or when it has been in an unrealised loss position for a continuous fifteen-month period. Where there is objective evidence that impairment exists, the cumulative unrealised loss previously recognised in other comprehensive income is reclassified to the consolidated income statement. If the fair value of a previously impaired debt security increases and the increase can be objectively related to an event occurring after the impairment loss was recognised, the impairment loss is reversed and the reversal recognised in the consolidated income statement. Impairment losses on equity investments are not reversed. Further information can be found in note 10. When financial assets are impaired by credit losses, the impairment charge directly reduces the carrying amount of the asset. --- 56 # Current and deferred tax 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 OCI or directly in equity. Any exceptions permitted under IAS 12 - 'Income Taxes' are disclosed in the notes. To the extent that deferred tax assets are recognised or derecognised in the period and it is not possible to attribute this directly to either the consolidated income statement or OCI, as is the case typically for brought forward tax losses, then these amounts are attributed between the income statement and OCI transactions using a reasonable pro rata split based on historical movements. Current taxation is based on profits and income for the year as determined in accordance with the relevant tax legislation, together with adjustments for prior years. Deferred tax is provided in full using the liability method on temporary differences arising between the tax bases of assets and liabilities and the carrying amounts in the consolidated financial statements. However, if the deferred tax arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting, nor taxable profit or loss, it is not accounted for. Deferred tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the end of the reporting period and are expected to apply when the related deferred tax asset is realised or the related deferred tax liability is settled. Deferred tax in respect of the unremitted earnings of overseas subsidiaries and principal associated undertakings is recognised as an expense in the year in which the profits arise, except where the remittance of earnings can be controlled and it is probable that remittance will not take place in the foreseeable future, in which case the tax charge is recognised on the dividends received. Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which unused tax losses and temporary differences can be utilised. IFRIC 23 is applied to the recognition and measurement of both current and deferred tax assets and liabilities. In cases where the applicable tax regulation is subject to interpretation, the positions taken in tax returns are recognised in full in the determination of the tax charge in the financial statements, if the Group considers that it is probable that the taxation authority will accept those positions. Otherwise, provisions are established based on management's estimate and judgement of the likely amount of the liability/recovery by providing for the single best estimate of the most likely outcome or the weighted average expected value where there are multiple outcomes. # Post-employment benefits and obligations The Group operates both defined contribution and defined benefit schemes. A defined contribution scheme is a pension scheme under which the Group pays fixed contributions and has no further payment obligations once the contributions have been paid. Contributions to defined contribution pension schemes are charged in the consolidated income statement in the period in which the underlying employment services are provided to the Group. A defined benefit scheme refers to any other pension scheme; specifically, the Group's defined benefit schemes define an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and salary. The value of the net defined benefit liability/asset recognised in the consolidated statement of financial position for each individual post-employment scheme is calculated as the difference between the present value of the defined benefit obligations of the scheme and the fair value of the scheme assets out of which the obligations are to be settled. For those schemes in a net liability (deficit) position, the net liability is recognised in the consolidated statement of financial position in provisions. For those schemes in a net asset (surplus) position, the net asset is recognised in the consolidated statement of financial position in other debtors and other assets only to the extent that the Group can realise an economic benefit, in the form of a refund or a reduction in future contributions, at some point during the life of the scheme or when the scheme liabilities are settled. The amounts charged (or credited where relevant) in the consolidated income statement relating to post-employment defined benefit schemes are as follows: - The current service cost: this is the present value of additional benefits payable for employees' services provided during the reporting period. - The past service costs and gains or losses on settlement: these are changes to the obligations already established for past service costs that have arisen from an amendment to the terms of the scheme or a curtailment of the benefits payable by the scheme. These are recognised at the earlier of when the terms of the scheme are amended or the curtailment occurs or, where applicable, when the Group recognises related restructuring costs or termination benefits. - Net interest on the net defined benefit liability/asset: this is determined by applying the discount rate applied to the defined benefit obligation for the period to the net defined benefit liability/asset, and results in a net interest expense/income. - The administration costs of operating the pension schemes. --- Remeasurements of the net defined benefit liability/asset recognised in OCI comprises actuarial gains and losses as a result of changes in assumptions and experience adjustments in the calculation of the defined benefit obligation, and return on scheme assets excluding interest during the year. The most significant of these is the selection of the discount rate used to calculate the defined benefit obligation, details of which are set out in note 41. ## Intangible assets and goodwill ### Goodwill Goodwill is the difference between the cost of a business acquisition and the net fair value of the identifiable assets, liabilities and contingent liabilities acquired. Goodwill is initially capitalised in the consolidated statement of financial position at cost and is subsequently recognised at cost less accumulated impairment losses (see below). The cost of the acquisition is the amount of cash paid and the fair value of other purchase consideration. ### Customer related intangible assets Customer related intangible assets are valued at cost less accumulated amortisation, and less any accumulated impairment losses. Customer related intangible assets comprise acquired renewal rights and customer lists. The useful economic lives are generally between one and ten years and are estimated considering relevant metrics such as customer retention rates and contract length. The asset is amortised on a basis which reflects usage of economic benefit. ### Internally developed and externally acquired software The Group capitalises internal and external software development costs where the software is separately identifiable; the Group has control over the software; and where it can be demonstrated that they provide future economic benefits for the Group through facilitating revenue or improved processes. In respect of internally developed software, the costs capitalised include administrative and other general overhead expenditure when they can be directly attributed to the software development and preparing it for use. Amortisation is calculated on a straight line basis and commences when the asset is available for use in the manner intended by management. The useful economic life of externally acquired and internally generated software is normally estimated to be between three and ten years, and is reviewed on an annual basis. Where no future economic benefits are expected from its use or disposal, the software asset is derecognised. Any gain or loss arising from the derecognition of the asset is determined as the difference between the net disposal proceeds, if any, and the carrying amount of the asset and is recognised in profit or loss when the asset is derecognised. Further information on goodwill and other intangibles can be found in note 23. ### Impairment of goodwill, other intangible assets, and internally developed and externally acquired software Goodwill and intangible assets not yet available to use are subject to an impairment test on an annual basis or more frequently if there has been an indication of impairment. Other intangible assets, and internally developed and externally acquired software, are reviewed for indications of impairment on an annual basis and are subject to an impairment test only if there is an indication of impairment. Goodwill, other intangible assets, and internally developed and externally acquired software are allocated to cash generating units (CGUs) for the purpose of impairment testing. When testing for impairment, the recoverable amount of a CGU is determined based on value in use calculations. Further information on how the value in use is calculated can be found in note 23. Where the carrying amount is more than the recoverable amount, impairment of goodwill or intangible assets is recognised in the consolidated income statement. Impairment losses previously recognised on other intangible assets may be reversed in subsequent periods provided that the revised carrying amount does not exceed the value that would have been determined (net of amortisation) had no impairment loss been recognised. An impairment loss recognised for goodwill is not reversed in a subsequent period. ### Reorganisation, acquisition and integration costs Reorganisation costs represent external and clearly identifiable internal costs that are necessarily incurred and directly attributable to the Group's restructuring programme that was completed in 2020. The aim of the restructuring programme was to both reduce operating costs and improve profitability. Acquisition costs represent expenses incurred to effect the acquisition of RSA by IFC and include restructuring costs incurred prior to the acquisition. Integration costs represent expenses directly attributable to the integration of the Group into IFC. They include restructuring costs incurred following the acquisition. 57 --- 58 Employee termination costs are only recognised when they are part of a restructuring programme or a detailed plan of redundancies that has been communicated to those affected. Reorganisation, integration or acquisition costs that are uncertain in terms of their amount and timing are included within provisions (see note 42). Provisions for onerous contracts are recognised when action is taken by the Group as part of a restructuring programme that reduces any remaining benefit expected under a contract to below its remaining unavoidable costs. Further information can be found in note 13. --- 59 # Risk and capital management ## 6) Risk and capital management ### Insurance risk The Group is exposed to risks arising from insurance contracts as set out below: A) Underwriting risk B) Reserving risk ### A) Underwriting risk Underwriting risk refers to the risk that claims arising are higher (or lower) than assumed in pricing due to bad experience including catastrophes, weakness in controls over underwriting or portfolio management, claims management issues or policy wording interpretation issues. The majority of underwriting risk to which the Group is exposed is of a short-term nature, and generally does not exceed 12 months. Annual policies allow the Group to respond to changing weather patterns when managing the global catastrophe risk. The Group's underwriting strategy aims to ensure that the underwritten risks are well diversified in terms of the type, amount of risk, and geography in order to ensure that the Group minimises the volatility of its insurance result. The Group's exposure to concentration of Insurance risk in terms of the geographical area in which risks have been underwritten has been provided in note 9 - Operating segments. Underwriting limits are in place to enforce appropriate risk selection criteria and pricing with all of the Group's underwriters having specific licences that set clear parameters for the business they can underwrite, based on their expertise. The Group has developed enhanced methods of recording exposures and concentrations of risk and has a centrally managed forum looking at Group underwriting issues, reviewing and agreeing underwriting direction and setting policy and directives where appropriate. The Group has a monthly portfolio management process across all its operating segments where key risk indicators are tracked to monitor emerging trends, opportunities and risks. This provides greater control of exposures in high risk areas as well as enabling a prompt response to adverse claims development. Pricing for the Group's products is generally based upon historical claim frequencies and claim severity averages, adjusted for inflation and modelled catastrophes, trended forward to recognise anticipated changes in claim patterns after making allowance for other costs incurred by the Group, conditions in the insurance market and a profit loading that adequately covers the cost of capital. For climate risk exposures, weather peril models and geolocation tools are employed to support sophisticated risk assessments and underwriting of residential and commercial properties. Passing elements of our insurance risk to reinsurers is another key strategy employed in managing the Group's exposure to insurance risk, including protection against losses from severe weather events (see more details for the catastrophe reinsurance treaty in note 39). The Group Board determines a maximum level of risk to be retained by the Group as a whole. The net retained risk is distributed across the Group in accordance with Group and local risk appetite. The strategy is dependent on being able to secure reinsurance cover on appropriate commercial and contractual terms and the nature of the programme presents risks in that recoveries are contingent on the particular pattern of losses and aggregation across the Group. The Group remains primarily liable as the direct insurer on all risks reinsured, although the reinsurer is liable to the Group to the extent of the insurance risk it has contractually accepted responsibility for. ### B) Reserving risk Reserving risk refers to the risk that the Group's estimates of future claims payments will be insufficient. The Group establishes a provision for losses and loss adjustment expenses for the anticipated costs of all losses that have already occurred but have not yet been paid. Such estimates are made for losses already reported to the Group as well as for the losses that have already occurred but are not yet reported together with a provision for the future costs of handling and settling the outstanding claims. There is a risk to the Group from the inherent uncertainty in estimating provisions at the end of the reporting period for the eventual outcome of outstanding notified claims as well as estimating the number and value of claims that are still to be notified. This is especially true due to the heightened uncertainty from the economic and inflationary environment combined with post-pandemic distortions. There is also uncertainty in the level of future costs of handling and settling the outstanding claims. --- The Group seeks to reduce its reserving risk through the use of experienced, regional actuaries who estimate the actuarial indication of the required reserves based on claims experience, business volume, anticipated change in the claims environment and claims cost. This information is used by local reserving committees to recommend to the RSA Reserving Committee the appropriate level of reserves for each region. This will include adding a margin onto the actuarial indication as a provision for unforeseen developments such as future claims patterns differing from historical experience or assumed trends, future legislative changes and the emergence of latent exposures beyond levels assumed. The RSA Reserving Committee reviews these regional submissions and recommends the final level of reserves to be held by the Group. The RSA Reserving Committee is chaired by the Chief Actuary and includes the Chief Executive, Underwriting Director, Claims Director, Managing Directors for key operating segments, Chief Actuary and Chief Risk Officer. A similar committee has been established in each of the Group's primary operating segments. The RSA Reserving Committee monitors the decisions and judgements made by the operating segments as to the level of reserves to be held. It then recommends to the Board via the Audit Committee the final decision on the level of reserves to be included within the consolidated financial statements. In forming its collective judgement, the committee considers the following information: - The actuarial indication of ultimate losses together with an assessment of risks and possible favourable or adverse developments that may not have been fully reflected in calculating these indications. These risks and developments include: the possibility of future legislative change having a retrospective effect on open claims or changes in interpretation or regulatory application of existing legislation; changes in claims settlement practice or procedures and supply chain delays potentially leading to future claims payment patterns differing from historical experience; the possibility of new types of claim arising either from changes in business mix, or, such as disease claims emerging from historical business; general uncertainty in the claims environment and emerging claims trends; the emergence of latent exposures; the outcome of litigation on claims received; failure to recover reinsurance as the Group expects and unanticipated changes in claims inflation. - How previous actuarial indications have developed as claims experience has evolved. - The views of internal peer reviewers of the reserves and of other parties including actuaries, legal counsel, risk directors, underwriters and claims managers. - The outcome from independent assurance reviews performed by both external actuarial consultants and the IFC Group Actuarial Function to assess the reasonableness of regional actuarial indication estimates. - Changes in the external claims environment in areas such as legal and medical activities, settlement & supply chain delays which impact the speed of claims development. The distortions in data caused by the Covid 19 pandemic means identification of trends is more difficult than normal. Claims experience may exhibit different characteristics and runoff trends compared to historic experience, resulting in increased uncertainty relating to actuarial indications of ultimate losses. - Covid-19 claims experience, which continues to be monitored closely and the Group is engaging with its reinsurers as payment and settlement activity grows. Whilst experience has tracked in line with the Group's expectations to this stage, many key areas of uncertainty remain such as the value of eligible claims and the extent to which reinsurance will ultimately respond compared to how the Group expects. The current assessment of Claims liabilities reflects court judgements across the jurisdictions that the business operates in, including those recently announced in the UK in October 2022. These most recent judgements are complex and create a number of uncertainties and the Company will continue to monitor the progression of the judgements, including the appeals. - There is considerable uncertainty in the economic environment beyond 2022, and changes such as ongoing inflationary pressure could have an impact on claims costs. This is a key uncertainty that is monitored by the RSA Reserving Committee with sensitivity testing to monitor, assess and understand potential impacts should the risks manifest. 60 --- 61 # Financial risk Financial risk refers to the risk of financial loss predominantly arising from investment transactions entered into by the Group, and also to a lesser extent arising from insurance contracts, and includes the following risks: - Credit risk - Market risk, including price, interest rate and currency rate risks - Liquidity risk The Group undertakes a number of strategies to manage these risks including the use of derivative financial instruments for the purpose of reducing its exposure to adverse fluctuations in interest rates, foreign exchange rates and long-term inflation. The Group does not use derivatives to leverage its exposure to markets and does not hold or issue derivative financial instruments for speculative purposes. The policy on use of derivatives is approved by the Board Risk Committee (BRC). # Credit risk Credit risk is the risk of loss resulting from the failure of a counterparty to honour its financial or contractual obligations to the Group. RSA ensures that assets are broadly matched in duration and currency with insurance liabilities to hedge volatility. The Group's credit risk exposure is largely concentrated in its predominantly investment grade fixed income investment portfolio reducing the risk of default. Also to a lesser extent credit risk exists in its premium receivables and reinsurance assets. Credit risk is managed at both a Group level and at an operational level. Local operations are responsible for assessing and monitoring the creditworthiness of their counterparties (e.g. brokers and policyholders). Local credit committees are responsible for ensuring that these exposures are within the risk appetite of the local operations. Exposure monitoring and reporting for fixed income investments and premium receivables is embedded throughout the organisation with aggregate credit positions reported and monitored at Group level. In addition, the Credit Ratings Review Committee reviews the credit ratings of material investment exposures and unrated investments. The Group's credit risk appetite and credit risk policy are developed by the BRC and are reviewed and approved by the Board on an annual basis, to ensure limits remain within its quantitative appetite. This is done through the setting of Group policies, procedures and limits. In defining its appetite for credit risk the Group looks at exposures at both an aggregate and operating segment level, distinguishing between credit risks incurred as a result of offsetting insurance risks or operating in the insurance market (e.g. reinsurance credit risks and risks to receiving premiums due from policyholders and intermediaries) and credit risks incurred for the purposes of generating a return (e.g. invested assets' credit risk). Limits are set at both a portfolio and counterparty level based on likelihood of default, derived from the credit rating of the counterparty, to ensure that the Group's overall credit profile and specific concentrations are managed and controlled within risk appetite. The Group's investment management strategy primarily focuses on debt instruments of investment grade issuers and seeks to limit the overall credit exposure with respect to any one issuer by ensuring limits have been based upon credit quality. Restrictions are placed on the Group's core fixed income investment manager as to the level of exposure to various credit rating categories including unrated securities. The Group is also exposed to credit risk from the use of reinsurance in the event that a reinsurer fails to settle its liability to the Group. The Reinsurance Credit Committee oversees the management of credit risk arising from the reinsurer failing to settle its liability to the Group. Group standards are set such that reinsurers that have a financial strength rating of less than 'A-' with Standard & Poor's, or a comparable rating, are rarely used and are excluded from the Group's list of approved reinsurers. The exceptions are fronting arrangements for captives, where some form of collateral is generally obtained, and some global network partners. At 31 December 2022 the extent of collateral held by the Group against reinsurers' share of insurance contract liabilities was £47m (2021: £40m), which in the event of a default would be called and recognised on the balance sheet. The Group's use of reinsurance is sufficiently diversified that it is not concentrated on a single reinsurer, or any single reinsurance contract. The Group monitors its aggregate exposures by reinsurer group, being total exposure (as defined in the Reinsurance Risk Management Policy (RRMP)) as a percentage of IFC's shareholders' equity, the maximum percentages allowed depending on the Reinsurer's financial credit rating. The Group regularly monitors its aggregate exposures by reinsurer group against predetermined reinsurer group limits, in accordance with the RRMP. The Group's largest reinsurance exposures to active reinsurance groups are Berkshire Hathaway, Lloyd's of London and Talanx. At 31 December 2022 the reinsurance asset recoverable from these groups does not exceed 7.8% (2021: 7.8%) of the Group's total financial assets. --- The credit profile of the Group's assets exposed to credit risk is shown below. The table below sets out the Group's aggregated credit risk exposure for its financial and insurance assets. As at 31 December 2022 | | Credit rating relating to financial assets that are neither past due nor impaired | | | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | | | AAA £m | AA £m | A £m | BBB £m |