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RSA - Q1 consistent with full year targets

Nicholas Hyett | 10 May 2018 | A A A
RSA - Q1 consistent with full year targets

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

RSA Insurance Group Ord 100p

Sell: 426.90 | Buy: 427.00 | Change -3.70 (-0.86%)
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Gross written premiums in the first quarter were 1% ahead of last year at constant exchange rates, with customer numbers improving.

Underlying profit before tax was lower than in 2017, as increased winter weather costs offset premium growth.

The shares rose 2.1% 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. Analysts are forecasting steady growth in earnings per share out to 2020 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 4.5%, rising to 5.7% by 2020 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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First Quarter Trading Update

Gross written premiums hit £2.1bn in the first quarter, with net written premiums up 2% to £1.5bn. This was negatively affected by lower retention rates in certain areas and increased reinsurance costs in UK Motor.

At a regional level, Scandinavia saw 6% premium growth, thanks to growth in Personal Lines, while Canada completed the acquisition of Personal Lines business Deeks and the UK benefitted from its new partnership with Nationwide.

Underwriting profits have been negatively impacted by a poor winter, with weather costs accounting for 5.1% of net earned premiums (1.9 percentage points ahead of the 5 year average). However, RSA delivered improvements in its large loss ratio, attractional loss ratio and controllable loss ratio compared to last year, while investment income was in line with guidance.

The group's Solvency II coverage ratio (a key measure of insurer solvency) was 162%, down from 163% at the year end.

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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 disclosure for more information.