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RSA - A resilient first quarter

Sophie Lund-Yates, Equity Analyst | 7 May 2020 | A A A
RSA - A resilient first quarter

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RSA Insurance Group Ord 100p

Sell: 392.00 | Buy: 392.50 | Change 0.00 (0.00%)
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RSA's net written premiums fell 1% to £1.5bn, ignoring the impact of exchange rates. The decline comes as the group shifted its focus to areas of more profitable growth. Operating profit was up by double digit percentages, reflecting an improved combined operating ratio and lower investment income. All three of RSA's regions performed ahead of plans.

Insurance market conditions were largely unchanged in the first quarter because the majority of the disruption happened after the period had already started. The group said it's still too early to quantify the eventual impact of COVID-19.

The shares were up 5.9% in early trading.

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Our view

RSA has bounced back after a series of large losses and weather related claims upset the boat in 2018. Now it's run into coronavirus, but the impact on operations appears to be relatively modest so far.

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, but they're still incurring losses as they run off.

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.

It's important to talk about the balance sheet too. When the market is this volatile the value of the group's investment portfolio can swing wildly, but when the market falls pension and insurance liabilities fall too. We think investors should treat the balance sheet figures with some caution while the market is this volatile, but the net effect so far has been to lift RSA's tangible net asset value per share from 282p on 31 December to 305p on 31 March.

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.

Prior to today's announcement RSA shares changed hands on a forward PE of 8.2, which is well below the group's long term average. While the dividend has been suspended the group is setting aside the money and isn't including it in its capital ratio. This indicates that management intend to pay the dividend when the regulator lets them, but there's always possibility that events will conspire to stop them.

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First quarter results (constant currency)

Premiums in Scandinavia fell 3% to £610m, while the UK & International division saw a decline of 5% to £572m - beating expectations. Premiums grew 8% in Canada thanks to price increases in direct Personal Lines.

Enhanced profitability was driven by improved attritional loss ratios, as relatively lower losses were incurred through this year's underwriting, and better than expected weather related claims. All three of the group's regions performed ahead of expectations, while investment income was in line with expectations. .

On 31 March the group's solvency II coverage ratio stood at 151%, down from 168% at the end of 2019, but in line with the target range of 130-160%. This includes the impact of COVID-19 on the group's financial assets, planned pension contributions and the accrual of the final 2019 dividend. Excluding this accrual the ratio stood at 160%.

The group is preparing itself for a range of possible COVID-19 impacts, including lower premiums and volatile financial markets. Claims have fallen by 20-55% in April, concentrated mainly in motor accidents, although RSA is unsure how much of this is just a delay. Claims may also be more expensive to service, so it is not clear what the ultimate impact will be, but management thinks it will be slightly positive.

In March and April RSA estimates receiving around 25,000 payable COVID-19 related claims, of which around 23,000 are travel claims. The total cost is estimated to be £25m net of reinsurance, but gross claims include £16m for travel, £7m for cancelled weddings and £17m for business interruption. Management expects reinsurance contracts to protect it from large losses associated with COVID-19.

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