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RSA - Turnaround continues

Nicholas Hyett | 4 August 2016 | A A A
RSA - Turnaround continues

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RSA Insurance Group Ltd Ord 100p

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RSA shares traded up 1.8% following positive interim results, driven by a strong underwriting performance and lower costs. Underlying earnings per share increased to 17.8p (H115: 13.8), with the interim dividend increasing 43% to 5p.

Group operating profit rose 20% to £312m. Group underwriting profit rose 72% to £174m, with investment income of £187m (H115 £206m). Core net written premiums rose 5%. Annualised underlying return on tangible equity improved markedly to 12.8% (H112: 9.7%), meeting the group's 12-15% medium term target a year ahead of schedule.

The combined ratio fell to 94.3% (H1 15: 96.4%), boosted by a very strong performance in Scandinavia which delivered a combined operating ratio of 88.5%. Weather and large losses were £59m worse than expected, £49m worse than H115, impacted by £39m of cost associated with wildfires in Canada and £35m relating to UK and European floods.

The group completed the disposals of it Russian and Latin American businesses in the first half, completing the group's disposal plan (which has raised £1.2bn since 2014). Controllable costs in the core business were down 3% year-on-year to £702m.

CEO Stephen Hester commented:

"The impact of Brexit will take time to play out. But RSA is well placed, with a majority of earnings in foreign currencies.

"Our agenda for the second half is clear; a continued drive to raise performance through better underwriting, lower costs and strong focus on customers. We expect that 2016 will be another year of great progress for RSA."

Our view:

Stephen Hester's turnaround plan at RSA appears to be working. The balance sheet has been painstakingly restored, £200m of cost savings have already been delivered, with a further £150m expected by 2018. The completion of the asset disposal programme means that RSA is now a much more focused operation.

These self-help measures have enabled RSA to overcome a very challenging operating environment and analysts are forecasting double-digit earnings growth out to 2018. Historically the dividend has proved about as reliable as an English summer, but now looks more secure, given RSA's much stronger balance sheet position. The yield for FY16 is 2.7% rising to 4.5% by FY18 on current analyst estimates.

We are impressed with the job Mr Hester has done in the short time he has been there. The dramatic improvements in underwriting performance, RSA's bread and butter, should make investors sit up and take notice. However, the other element of the strategy, cost cutting, cannot continue indefinitely without damaging the business, and we still struggle to get excited about RSA's long term prospects.

Commercial and personal insurance markets are immensely competitive and there is nothing particularly special about what RSA does. In today's increasingly transparent world of the internet and price comparison websites it is hard to keep hold of customers, let alone acquire new ones; whilst maintaining margins.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.