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RSA: RSA Insurance Group Plc: Findings of PwC and other reviews into Irish control failures and update on reserve review



  RSA: RSA Insurance Group Plc: Findings of PwC and other reviews into Irish
  control failures and update on reserve review

UK Regulatory Announcement

LONDON

                           RSA Insurance Group plc
 Findings of PwC and other reviews into Irish control failures and update on
                                reserve review

RSA Insurance Group plc today announces the outcome of reviews by PwC, KPMG
and RSA’s Internal Audit function into the financial and claims irregularities
totalling £72m identified in Ireland in November 2013.

  * Independent review from PwC describes RSA Group Control Framework as
    appropriate in terms of structure and design.
  * RSA has adopted PwC’s recommendations to enhance the operational
    effectiveness of Group-wide assurance processes and Irish financial
    controls.
  * PwC’s work supports the Board’s view that inappropriate collaboration
    amongst a small number of senior executives in Ireland undermined control
    effectiveness over claims.
  * Additional assurance testing from newly appointed external auditor KPMG
    and RSA Group Internal Audit confirms that the financial and claims
    irregularities were isolated to Ireland.

RSA also confirms the impact of financial and claims irregularities and the
reserve review in Ireland at £72m and £128m respectively; totalling a combined
£200m and that good progress is being made on the business review announced in
December.

PwC review describes RSA Group Control Framework as appropriate in terms of
structure and design

Following the announcement on 8 November^1, RSA appointed PwC to undertake an
independent review into the financial and regulatory reporting processes and
controls within the Irish business and Group oversight and controls of the
Irish business. This review focused on the £72m of financial and claims
irregularities identified.

The PwC review has described the Group System of Governance, which includes
the Control Framework, as appropriate in terms of structure and design  for an
international insurance group of RSA’s size and complexity, and elements of
its design compare favourably across the market. The effectiveness of the
framework as it related to Ireland was weakened due to independent controls
not operating effectively.

The framework is built on the good market practice of three lines of defence,
is designed to have multiple reinforcing layers, with a comprehensive network
of policies, clear accountability including through self-certification, a
framework of business controls and a range of additional assurance processes.

The PwC report identifies some weaknesses in the local implementation of the
large loss claims policy and Financial Control Policies. The controls within
the Irish finance function did not operate effectively allowing inappropriate
accounting for Net Earned Premium and pipeline earnings. A local programme of
remediation has already begun and we continue to work with the Irish
regulator, the Central Bank of Ireland.

PwC concluded that there were no obvious indicators relating to the issues
identified in the Irish business that were ignored, at either Regional or
Group level, and neither external audit or independent reserve review during
2013 and prior years identified the specific issues that have led to the
reported losses in our Irish business.

The PwC report makes a number of recommendations including conducting a review
into the verification of policy adherence, enhancing the clarity of control
standards and effectiveness of local implementation, and improving the balance
of trust, integrity and accountability with challenge and independent
verification.

These recommendations have already been incorporated into a refresh of
assurance processes across the Group, many elements of which were already
underway, and we will continue to engage with the UK Prudential Regulation
Authority as this work progresses.

PwC work supports the Board’s view that inappropriate collaboration relating
to claims irregularities amongst a small number of senior executives in
Ireland undermined control effectiveness

The PwC review of electronic documents of circa 60 individuals has identified
documentary evidence that supports the Board’s view that there has been
inappropriate collaboration involving a small number of senior executives in
Ireland. Specifically, this evidence suggests that certain individuals acted
in such a way as to intentionally circumvent parts of the existing Control
Framework.

In particular the large claim reserving policy was circumvented. By so doing,
financial records did not fully reflect the financial position of the business
and reports made to Group and Regional Management were inaccurate and
potentially misleading. This undermined the effectiveness of controls which
placed significant reliance on senior management integrity.

Additional KPMG and Group Internal Audit assurance testing completed with no
material issues identified elsewhere in the Group

In order to further establish that the financial irregularities encountered in
Ireland have not occurred elsewhere we commissioned extensive additional work
from our auditors KPMG and also our own Internal Audit department.

The KPMG work, which extended to 29 territories, was an early commencement and
deepening of the work to support their year-end audit to test that certain
balance sheet items, and income recognition, have not been inappropriately
accounted for as occurred in Ireland. We have now received their report and on
the basis of the findings, we are satisfied that these issues have not been
repeated elsewhere in the Group.

Group Internal Audit was commissioned to examine the effectiveness of controls
over Large Loss Case Reserving. That report, which covers 20 territories, has
been received. It concludes that those controls are adequate and effective,
and found no evidence of suppression of, or delays in adjusting, large claims
reserves.

Martin Scicluna, RSA Executive Chairman said:

“The issues which emerged in our Irish business in 2013 were completely
unacceptable and I have made it my personal priority to ensure that this never
happens again. The Board is now confident that the financial and claims
irregularities were isolated to Ireland and do not reflect the quality of our
control framework elsewhere in the world.

“Our investigations have confirmed that the claims irregularities in Ireland
were, in large part, the result of deliberate collaboration between a small
number of executives there. These actions do not reflect the culture, ethos
and values of our business that have served us well. We acknowledge that there
are lessons to be learnt and we are tightening elements of our Control and
Financial Framework in response to these events.

“The Board has always believed that the Group’s Control Framework is
comprehensive and appropriate. The work undertaken by PwC, KPMG and our own
internal audit team has been valuable in providing comfort to the Board, and
we hope to our shareholders and regulators.”

Impact of financial irregularities and reserve review in Ireland confirmed at
£200m

During Q4 2013, RSA announced a total of c.£200m of losses within RSA
Insurance Ireland. These losses comprise:

  * £72m arising from irregularities within the claims and finance functions,
    as announced previously on 8 November 2013^2. These losses were the focus
    of the PwC investigation and comprise:

       * £37m from inappropriate collaboration on large loss and claims
         accounting; and
       * £35m primarily from inappropriate accounting for net earned premiums
         and pipeline earnings.

  * £128m from the completion of the internal reserve review of the Irish
    Business, announced on 13 December 2013. These losses comprise:

       * £62m relating to reserve strengthening for business written in 2013,
         of which c.80% is due to adverse bodily injury claims trends; and
       * £66m relating to reserve strengthening for business written in
         previous years, of which 70% is due to adverse bodily injury claims
         trends.

The end of year Group reserve review is currently underway and we will report
its findings as normal in our preliminary results in February.

Business update

Following his appointment as Executive Chairman on 13 December, Martin
Scicluna commenced a review of the business with the objectives of improving
the capital strength of the Group, optimising the Group’s business portfolio
and delivering a sustainable dividend into the future. The review is ongoing.

During December 2013, the Group suffered further weather losses from an ice
storm in Toronto on 20 December and severe flooding in the UK and Ireland over
the Christmas period. It is too early to quantify losses from these events but
they will impact the 2013 result.

Within the context of the overall 2013 results and the Board’s desire to
improve RSA’s capital position, the impact of this further extreme weather in
December 2013 will be taken into consideration in the Board's dividend
decision in February.

The search for a new Group CEO is progressing.

Following an internal disciplinary process, the RSA Ireland CFO, Rory O’Connor
and the RSA Ireland Claims Director, Peter Burke, were dismissed for their
roles in relation to large loss and claims accounting irregularities. Both
dismissals were confirmed yesterday following the completion of appeal
processes. The disciplinary processes ran parallel to and independent of the
PwC review.

Martin Scicluna, RSA Executive Chairman concluded:

“The underlying business continues to perform in line with our expectations
and I am making good progress on the review of the Group. The Board and I
remain confident that RSA will re-emerge as a stronger group during 2014.”

ENDS

Analysts & Investors                        Press
Matt Hotson                                 Louise Shield
020 7111 7212                               020 7111 7047
07711 956 077                               07786 114 662
matt.hotson@gcc.rsagroup.com                louise.shield@gcc.rsagroup.com
 
Rupert Taylor Rea                           Jon Sellors
020 7111 7140                               020 7111 7327
07881 677 400                               07711 701 806
rupert.taylorrea@gcc.rsagroup.com           jon.sellors@gcc.rsagroup.com
                                             

Conference Call

A conference call for analysts and investors will be held at 8:15am on
Thursday 9^thJanuary. Please ring 0808 237 0030 or 0203 139 4830 and use
participant Code: 99520556#

About RSA

With a heritage of over 300 years, RSA is one of the world’s leading
multinational quoted insurance groups. RSA has major operations in the UK,
Scandinavia, Canada, Ireland, Latin America, Asia and the Middle East and
Central and Eastern Europe and has the capability to write business in around
140 countries. Focusing on general insurance, RSA has around 23,000 employees
and, in 2012, its net written premiums were £8.4 billion.

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

^1 http://news.rsagroup.com/pressrelease/view/1450

^2 http://news.rsagroup.com/pressrelease/view/1450

Contact:

RSA Insurance Group Plc
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