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RSA Insurance - Full year dividend rises 52%

Nicholas Hyett | 23 February 2017 | A A A
RSA Insurance - Full year dividend rises 52%

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Group operating profit rose 25% at the full year, with earnings per share of 39.5p up 42%. Dividends for the full year are up 52% after the group announced an 11p per share final dividend.

The shares rose 6.3% following the announcement.

Our View

Hats off to Mr Hester, his turnaround plan seems to have paid serious dividends at RSA. The balance sheet has been painstakingly restored, £290m of cost savings have already been delivered, with a further £110m targeted 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 steady earnings growth out to 2018 and beyond . Historically the dividend has proven about as reliable as an English summer, but now looks more secure, given RSA's much stronger balance sheet position. The prospective yield for 2017 is 3.5% rising to 4.6% by 2018 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 price comparison websites it is hard to keep hold of customers, let alone acquire new ones; whilst maintaining margins.

Full year results:

Written premiums in the group's core operations improved 6% (although fell slightly at constant exchange rates) with underwriting profits rising to £392m (2015: £245m). This reflects a meaningfully improved combined operating ratio, a key measure of underwriting performance for insurers, which falls to 93.8% (2015: 96%).

Income from RSA's investment portfolio fell 8% to £369m, following disposals and low bond yields, although this was partially offset by currency benefits.

The group's Solvency II ratio (a measure of regulatory capital) was 158% at year end, at the upper end of the group's 130-160% target range. The planned disposal of UK Legacy liabilities is expected to add a further 17-20 percentage points, although is also accompanied by a £204m charge this year which has hit reported profits.

Going forwards the group is targeting a return on tangible equity of 13-17% (14.2% at present) and aims to achieve a 'best in class' combined ratio'.

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.