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RSA - Managing a tough market well

Nicholas Hyett | 9 May 2019 | A A A
RSA - Managing a tough market well

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RSA Insurance Group Ord 100p

Sell: 676.60 | Buy: 677.00 | Change -0.20 (-0.03%)
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Underlying net written premiums were broadly flat in the first quarter, at £1.6bn, with losses and expenses both improving. As a result, operating profits are ahead of the same period last year.

The shares rose 1.3% 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, £460m of cost savings have been delivered, and final tweaks to the portfolio are being made.

Unfortunately, a series of large losses and a spate of weather related claims upset the boat last year. Most of this is down to the commercial business, particularly in the London Market where RSA writes larger, more specialist insurance contracts.

Volatility is an inherent part of insurance, but RSA has proven more volatile than management had hoped. Hester's response has been to dramatically downsize the London Market business, and up the amount of reinsurance the group does. That might mean giving up some of the premiums RSA earns, but should also make the business less lumpy.

It's too early to say whether those efforts have solved the problem, but the fact that RSA has managed to improve premiums, combined operating ratios and operating profits speaks volumes. Especially given the challenges facing the wider sector.

Nonetheless, a conservative approach to capital means the group decided not to pay a special dividend at the end of last year, despite the insurer's solvency ratio sitting above target. The stock currently offers a prospective yield of 5.4%.

Unfortunately it's now that the real work begins.

For all its progress RSA is 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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First Quarter Results

The general insurance industry remains competitive, although RSA is making progress in re-pricing in some of its more troubled portfolios.

In Scandinavia, RSA saw premiums rise 3%, driven by a combination of volumes and price, with Commercial Lines up 2%. Canada delivered the group's strongest performance, with premiums up 8% as personal insurance saw both volume and price improvements.

However premium income fell 5% In the UK & Ireland, as pricing continued to struggle. This was broadly in line with RSA's expectations, and the company is generally achieving its target rates.

The group's combined operating ratio (COR), a key measure of underwriting performance, is ahead of last year. COR was boosted by lower weather costs, lower large losses and a lower controllable costs. This was partially offset by lower investment income, although this is within RSA's guidance.

RSA finished the period with a Solvency II ratio, a key measure of insurers' capitalisation, of 164% compared to 170% at 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 for more information.