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RSA - March's deep freeze chills results

Nicholas Hyett | 2 August 2018 | A A A
RSA - March's deep freeze chills results

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RSA Insurance Group Ord 100p

Sell: 539.40 | Buy: 539.80 | Change 9.00 (1.69%)
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Underlying profits before tax slipped 11.8% to £291m, as poor weather early in the half dented underwriting performance. Gross written premiums were flat year-on-year.

RSA declared an interim dividend of 7.3p per share, 11% ahead of last year.

The shares were little moved following the announcement.

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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, and a further £55m are pencilled in 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.

Historically the dividend has proven about as reliable as an English summer, but it now looks more secure. The prospective yield for 2018 is 4.2%, rising to 5.5% 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. We still struggle to get excited about RSA's long term growth prospects.

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Half Year Results

Gross written premiums in the half were £4bn, with net written premiums of £3.2bn - down 5% as reinsurance cost increased.

At a regional level Scandinavia saw net premiums grow 1% at constant currency as a strong result from Sweden was offset by weakness in Denmark and Norway. Canada saw net premiums rise 5%, with high levels of retention.

The UK & Ireland saw net premiums shrink 2% on an underlying basis, as pricing remained tough. However, the recent partnership with Nationwide is reportedly doing well.

Underwriting profits fell 23% to £171m, as the combined operating ratio rose 1.5 percentage points to 94.7% after damage caused by the Beast from the East earlier this year. Investment income also shrank, down 8% to £136m, as funds were reinvested at lower rates.

The group's Solvency II coverage ratio (a key measure of insurer solvency) was 169%, up from 163% at the year end.

The group expects market conditions to remain similar going forwards, and is targeting an improved underwriting performance (subject to normal weather conditions). Investment income is expected to be in the region of £145m in the second half.

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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.