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RSA Insurance - Earnings and dividends up over 30%

Nicholas Hyett | 2 August 2017 | A A A
RSA Insurance - Earnings and dividends up over 30%

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Underlying earnings per share rose 31% in the first half to 23.3p, thanks to continued improvements in underwriting performance. RSA increased its interim dividend by 32% to 6.6p.

Despite the strong performance, results were slightly behind analyst expectations, which saw the shares fall 1.1% following the announcement.

Our View

Stephen Hester's initial turnaround plan for RSA is more or less complete.

The balance sheet has been painstakingly restored, £330m of cost savings have already been delivered, with a further £70m 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 challenging operating environment, and analysts are forecasting steady growth in earnings per share out to at least 2019. Historically the dividend has proven about as reliable as an English summer, but it now looks more secure, given RSA's much stronger balance sheet. The prospective yield for 2017 is 3.3% rising to 4.2% by 2018 on current analyst estimates.

Unfortunately it's now that the real work begins.

The problem RSA faces is that for all its recent progress, it's still in Personal insurance, and that's a tough market in which to deliver knockout performances. Product differentiation is all but impossible except on price and that can end up destroying margins. In today's increasingly transparent world of price comparison websites, that challenge is all the greater.

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. Unfortunately, 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 growth prospects.

First Half Results

Group operating profit was 15% higher than a year earlier at £360m, driven by currency tailwinds, an improved underwriting performance and slight improvement in gross written premiums. Breaking profits out by division, Scandinavia delivered £202m, Canada £71m and the UK & International business £151m.

Net Written Premiums in the half rose 11% to £Â£3.4bn, or 3% at constant currency, with volumes accounting for 1% growth and rate increases a further 2%. Group combined operating ratio, a key measure of underwriting performance, hit a new record in the half, down to 93.2%. Together these supported a 28% increase in group underwriting profit, which reached £222m, driven largely by a strong Scandinavian performance.

The investment portfolio delivered income of £171m, 9% lower than the previous year, reflecting disposals and reinvestment into lower yield securities.

RSA finished the half with a Solvency II Coverage Ratio (a regulatory measure of insurers' capitalisation) of 163%, slight ahead of its 130%-160% target.

The group will continue to target premium growth in the second half, while maintaining underwriting disciple. The target of paying out between 40-50% of earnings as dividends remains unchanged.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.