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RSA - Profit boosted by better weather

Nicholas Hyett, Equity Analyst | 27 February 2020 | A A A
RSA - Profit boosted by better weather

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RSA Insurance Group Ord 100p

Sell: 436.60 | Buy: 437.10 | Change 8.20 (1.92%)
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Net written premiums were broadly flat at £6.4bn, as growth in Canada and Scandinavia was offset by declines in UK & International.

Underlying operating profits rose 15.5% to £597m, and excluding discontinued business lines reached £656m. The improvement was primarily the result of stronger underwriting, thanks to favourable comparisons with last year's weather related losses and large losses.

The board announced a 15.6p final dividend, taking the full year payment to 23.1p - up 10% year-on-year. From 2020 the group intends to pay out 50-60% of underlying earnings per share, instead of 40-50%.

The shares were broadly flat in early trading.

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Our view

RSA has bounced back after series of large losses and weather related claims upset the boat in 2018.

The problems stemmed from the commercial business, particularly in the London Market where RSA writes larger, more specialist insurance contracts. The group decided to exit these business lines as a result, which should make profits less lumpy going forward.

Longer term Group CEO, Stephen Hester, has made improving the group's underwriting results and controlling its costs his priority. Although there's still some way to go, 2019 marks another successful year on this front.

RSA operates out of three main divisions: Scandinavia, Canada and UK & International. These are then further split into Personal and Commercial Lines. The Commercial side of the business is the weaker of the two, and is only profitable in the UK - an even then only just. Hester knows these need to improve, and is confident he can get them turning a profit next year.

Unfortunately that means the bulk of RSA's profits come from 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.

RSA trades on a forward PE of 11.3, which is marginally higher than the group's long term average. The shares offer a prospective yield of 5.4%, and the board has raised the dividend policy going forward - although we may get fewer special dividends in the future.

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 don't see a clear plan for attracting new customers. As a result we still struggle to get excited about RSA's long term growth prospects.

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Full Year Results

In 2019 RSA exited several lines of business, primarily specialty lines and London Market portfolios. These results exclude the impact of these exits.

The group generated underwriting profits of £405m, up from £250m last year. The group's investments contributed a further £263m, compared with £275m last year.

RSA paid out 66.3% of premiums in claims, compared with 68.5% last year. Large losses and weather related losses were both significantly lower than last year. The group paid 12.6% of premiums in commissions to brokers and 14.7% in operating expenses. Taking these together, the group's combined ratio improved from 96.2% in 2018 to 93.6% this year.

The UK & International business saw premiums fall from £3.1bn to £2.9bn. The combined ratio improved from 101.4% to 95.0% thanks to significant reductions in weather related losses and large losses. The division made a £144m underwriting profit, compared to a £43m loss last year.

In Scandinavia underlying net written premiums at constant exchange rates were up 1% to £1.7bn, and the combined ratio deteriorated slightly from 86.8% to 87.4%. Denmark and Norway generated underwriting losses while Sweden made a profit. Underwriting profits decreased 2% to £223m.

In Canada net written premiums at constant exchange rates increased 3% to £1.7bn and the combined ratio improved from 98.5% to 94.5%. Again commercial lines were unprofitable, but personal lines improved thanks to lower weather related losses. Underwriting profits increased from £25m to £94m.

The group finished the year with a Solvency II ratio, a key measure of capital for insurers, of 168% (2018: 170%), substantially above the group's 130--160% target range.

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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.