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RSA Insurance - Caribbean hurricanes dent performance

Nicholas Hyett | 2 November 2017 | A A A
RSA Insurance - Caribbean hurricanes dent performance

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RSA Insurance Group Ltd Ord 100p

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A brief trading update showed an 8% increase in net written premiums so far this year, 3% at constant exchange rates (CER). Earnings per share are ahead of last year, but behind target.

The shares fell 2.3% in early trading.

Our View

CEO 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. With fringe businesses sold off, 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 2019 and beyond.

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 2018 is 4.7%, rising to 5.3% by 2019 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 an increasingly transparent world of price comparison websites, that challenge is all the greater.

We're impressed with the job 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.

Third Quarter Results (CER)

Growth in net written premiums, now at £5.1bn, was driven by a 1% increase in volumes with rate increases adding 2%.

The UK remains the single largest contributor to gross premiums, at £2bn, and saw growth of 4% driven by volume growth of 3% and rate increases of 1%. Volumes were driven by continued take up of the group's telematics offer. With the exception of Ireland, where premiums fell 7% to £232m, premiums held steady or grew across all other regions:

  • Scandinavia - flat at £1.4bn
  • Canada - up 5% at £1.2bn
  • Middle East - up 7% at £158m

Profits have been negatively affected by a £50m provision for the effects of US/Caribbean hurricane, as well as continuing adverse household and large loss experience in the UK. As a result, group underwriting results were weaker than the prior year.

RSA's Solvency II ratio, a key measure of insurer capitalisation, declined slightly to 161% (June 17: 163%).

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.