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RSA - Little new news

Equity research team | 3 November 2016 | A A A
RSA - Little new news

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RSA Insurance Group Ltd Ord 100p

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Little new news

RSA shares are broadly flat this morning as RSA delivered a 1% increase in underlying net premiums, boosted at a reported level by weaker sterling and one off movements in Group Re. Profitability is reportedly strong, and growing faster than in the first half.

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 prospective yield for FY17 is 3.7% rising to 4.7% by FY18 on current analyst estimates.

We are impressed with the job Mr Hester has done since he joined in 2014. 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.

Third Quarter Results:

With over two thirds of RSA's operating profit generated in non-sterling currencies, the fall in the pound has provided the group with a significant boost.

Reported group premiums for the year to date (YTD) are up 6%, reflecting a particularly strong performance in Scandinavia and a one off charge of £139m for group reinsurance in the previous year.

Profitability YTD has improved at an underwriting, operating and after-tax level, and is ahead of group expectations. That is driven by continued cost reductions and improvements in the group's attritional loss ratios - although both large losses and weather related costs are ahead of this time last year.

The performance of the investment portfolio remains in line with previous guidance, around £350m of full year income and c. £60m of discount unwind.

Despite negative movements in the pension fund, the group retains £1bn in Solvency II surplus capital, resulting in a ratio of 151%, well within the upper part of the group's target range.

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

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.