RSA has suspended its dividend, starting with the payment of 15.6p per share due on 14 May. Management doesn't yet know when dividend payments will resume, and there may not be an interim dividend payment as usual.
Given the uncertainty around how long COVID-19 disruption will continue RSA is unable to say what the eventual impact will be.
The group confirmed it had a Solvency II coverage ratio "in excess" of 150% on 31 March and prior to suspending the dividend.
The shares fell 4.0% in early trading.
After prompting from the regulator RSA has suspended dividend payments to preserve capital going into the next few months. We don't think management would have done this otherwise, as the group would still have had a Solvency II ratio of over 150% - which is plenty for normal operations. However, the regulator wants to play things safe, and in fairness the next few months won't be normal.
Investors should remember that the dividend hasn't necessarily gone - if all goes to plan it should just be delayed. There's always the possibility that conditions get substantially worse though, so nothing's guaranteed.
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 marked another successful year on this front. The COVID-19 pandemic will probably put these plans on hold, but when normality returns we think Hester should be able to pick up where he left off.
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.
We're impressed with the job Hester has done since joining 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, even if Hester can pilot the group through the next few months with minimal fuss.
Full Year Results (27/02/20)
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.
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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