Ensuring Compliance in Hedge Accounting at RSA
by Daniel Ferguson, Treasury Manager, Group Corporate Centre, RSA
RSA Group has a proud heritage dating back almost 300 years. The current company structure was created in 1996, following the merger of two of the largest insurance companies in the UK, Royal Insurance and Sun Alliance. In 2008, the combined business, Royal Sun Alliance, shortened its name to RSA and simplified and refreshed its corporate brand. RSA provides insurance products and services to over 20 million customers in over 130 countries and has operations in more than 33 countries. In 2008, it wrote net premiums of nearly £6.5bn, an increase of 11% on the previous year, and earned post-tax profits of £586m.The Group currently manages £14.7bn in investments and has shareholders’ funds of £3.8bn.
RSA provides insurance products and services to over 20 million customers in over 130 countries and has operations in more than 33 countries.
Approach to Hedging
As an insurance company, RSA’s hedging needs to differ in some respects to other types of company. For example, to comply with FSA regulations for the insurance sector, we need to take an integrated approach to risk management and capital requirements, hence assets and liabilities are required to be broadly matched by both currency and duration. As a general insurer (as opposed to a life insurer) our liability profile is pretty short, typically around 3 years, so we have not sought to implement a specific interest rate hedging policy.
As an international group, with 58% of our business sourced from outside the UK, particularly in Scandinavia, which represents 25% of the RSA Group, our primary area of risk management from a hedge accounting perspective is foreign exchange risk. We have a vanilla approach to hedging, currently using only FX forward contracts. We hedge certain transaction exposures and certain cash flow exposures, but only for cash flows with 100% certainty, most of which have been announced publicly, such as merger and acquisition cash flows.
When we first started to seek hedge accounting treatment for our hedging activity under IAS 39, we had some concerns that the standards were open to interpretation. This could lead to difficulties in agreeing with our auditors how hedge relationships should be designated and hedge effectiveness calculated. Consequently, in 2006, we decided that we needed a specialist system to manage these activities. We opted for Reval® as it was a highly credible solution which was also used by our auditors, giving us greater reassurance about the way in which we were applying and monitoring hedge accounting.
Another factor in our decision was that Reval publish annual SAS70 reporting. This was an important IT consideration to ensure compliance with internal and external audit and security requirements.