ANNUAL REPORT AND ACCOUNTS 2012 - RSA, Annual Report ...

RISK MANAGEMENT CONTINUED
Structural currency risk is managed at a Group level through currency forward and foreign exchange option contracts within the limits that
have been set. In managing structural currency risk, the needs of the Group’s subsidiaries to maintain net assets in local currencies to satisfy
local regulatory solvency and internal risk based capital requirements are taken into account. These assets should prove adequate to
support local insurance activities irrespective of exchange rate movements. Consequently, this may affect the value of the consolidated
shareholders’ equity expressed in Sterling.
At 31 December 2012, the Group’s total shareholders’ equity analysed by currency is:
Pounds
Sterling
£m
Danish
Krone/Euro
£m
Canadian
Dollar
£m
Shareholders’ equity at 31 December 2012 1,057 629 572 558 934 3,750
Shareholders’ equity at 31 December 2011 876 681 745 568 931 3,801
Swedish
Krona
£m
Other
£m
Total
£m
Shareholders’ equity is stated after taking account of the effect of currency forward contracts and foreign exchange options. On this basis, a 10%
change in Pounds Sterling against Danish Krone/Euro, Canadian Dollar or Swedish Krona would have the following impact on shareholders’ equity:
10%
strengthening
in Pounds
Sterling
against
Danish
Krone/Euro
£m
10%
weakening
in Pounds
Sterling
against
Danish
Krone/Euro
£m
10%
strengthening
in Pounds
Sterling
against
Canadian
Dollar
£m
10%
weakening
in Pounds
Sterling
against
Canadian
Dollar
£m
10%
strengthening
in Pounds
Sterling
against
Swedish
Krona
£m
10%
weakening
in Pounds
Sterling
against
Swedish
Krona
£m
Movement in shareholders’ equity at 31 December 2012 (57) 70 (52) 64 (51) 62
Movement in shareholders’ equity at 31 December 2011 (62) 75 (68) 83 (52) 63
The analysis aggregates the Danish Krone exposure and the Euro exposure as the Danish Krone continues to be pegged closely to the Euro.
The Group considers the aggregate exposures when reviewing its hedging strategy.
Apart from the impact on derivative financial instruments covered below, the changes arise from retranslation of foreign subsidiaries’ net
asset positions from their functional currencies into Pounds Sterling, with movements being taken through the translation reserve. These
movements in exchange rates therefore have no impact on profit.
Derivatives
The Group may use derivative financial instruments for the purpose of reducing its exposure to adverse fluctuations in interest rates, foreign
exchange rates, equity prices and long-term inflation. The Group does not use derivatives to leverage its exposure to markets and does not
hold or issue derivative financial instruments for speculative purposes. Forward contracts and foreign exchange options are used to reduce
the risk of adverse currency movements on certain forecast future cash transactions and for structural hedging. The policy on use of
derivatives is approved by the BRC.
Cross currency
Less than
one year
£m
Remaining life Fair value Notional principal amounts
One to
five years
£m
More than
five years
£m
Asset 14 1 – 15 15 974 900
Liability 6 – – 6 14 830 760
Inflation
Asset – – 21 21 10 see below see below
Liability – – 24 24 13 see below see below
Equity index
Asset 10 – – 10 34 see below see below
Liability 12 – – 12 27 see below see below
2012
£m
2011
£m
2012
£m
2011
£m
98
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