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RSA Insurance - More premiums and better underwriting

Nicholas Hyett | 22 February 2018 | A A A
RSA Insurance - More premiums and better underwriting

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Steady premium growth and a strong underwriting performance drove a 12% increase in pre-tax profits at RSA, reaching £620m in 2017.

The group also announced a final dividend of 13p, taking total for the full year to 19.6p - a 23% improvement on the year before.

RSA shares rose 3.1% in early trading.

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Our View

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

The balance sheet has been painstakingly restored, £395m of cost savings have already been delivered, with a further £55m targeted by 2019. 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. The prospective yield for 2018 is 4.8%, rising to 5.5% 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 strand of the strategy, cost cutting, can't continue indefinitely without damaging the business, and we still struggle to get excited about RSA's long term growth prospects.

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Full Year Results (Constant Exchange Rates)

Total premiums rose 2% to £6.7bn, with premiums from Scandinavia up 0.3%, Canada 5% and UK & International up 2%.

The group's combined operating ratio (COR - a key measure of underwriting quality) improved to 94% thanks to a strong performance in Scandinavia. This was partially offset by weakness in the UK, following adverse weather events, a few large losses and increased household insurance claims.

Together higher premiums and improved CORs drove a 4% increase in underwriting profits to £394m. Investment income fell 10% to £331m, reflecting disposals and reinvestment at lower yields.

Costs continue to fall, down 6% year-on-year, with headcount now 23% lower than at the beginning of 2014. Savings targets have been raised for the fourth time to £450m by 2019 (of which £395m has been achieved to date).

Balance sheet restructuring saw interest expense half in the year, as the group retired higher interest debt through the issue of new bonds.

RSA's Solvency II position, an important measure of insurers' capitalisation, improved slightly to 163%, with a surplus of £1.1bn. This is slightly above the groups target range of 130-160%.

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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.