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RSA - underlying improvements

Nicholas Hyett, Equity Analyst | 5 November 2020 | A A A
RSA - underlying improvements

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RSA Insurance Group Ltd Ord 100p

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RSA's premiums were down 3% year-to-date at £4.7bn, although management estimates premiums would have been flat if the impact of COVID-19 is excluded. The group's underlying combined ratio, which is the percentage of premiums paid out in claims and costs, was 90%.

The shares rose 1.2% in early trading.

View the latest RSA share price and how to deal

Our view

The impact of coronavirus on RSA appears to be limited so far. Revenue has slowed slightly, but claims have also fallen due to lower economic activity. The group has incurred some business interruption costs, but we don't expect these to be repeated going forward - at least not to the same degree.

Longer term group CEO, Stephen Hester, has made improving the group's underwriting results and controlling costs his priority.

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. Hester's done well to get the Scandinavian commercial business to deliver a profit last half, but there's still work to do in other regions.

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 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 price to earnings ratio of 10.3, which is below the group's long term average. While the dividend has been suspended the group is still setting aside the money and isn't including it in its capital ratio. As things stand management intends to catch up with missed dividends when the regulator lets them, but there's always the possibility that events will conspire to stop them.

RSA key facts

  • 12m forward Price/Earnings ratio: 10.3
  • Ten year average 12m forward Price/Earnings ratio: 11.0
  • Prospective yield: 6.7%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Third Quarter Trading Details

RSA's UK premiums were down 6% to £2.0bn, or 2% excluding the impact of COVID-19. In Scandinavia and Canada premiums fell 1% to £1.4bn and £1.2bn respectively, although management estimates premiums would have risen 4% in Canada without COVID-19. RSA also agreed a distribution deal which it thinks will double the size of its Danish bancassurance business, adding around £100m annually.

Excluding the impact of COVID-19, management says all regions are performing ahead of expectations. In the third quarter non-COVID related claims were down 8-36% depending on the division and region. Since the half year there have been no material cost increases related to COVID-19 except for business interruption related costs. RSA has made a net £62m provision for these claims following the FCA's test court case.

RSA's Solvency II capital ratio was 159% including accruals for this year's dividends and the final payment for 2019. Excluding the accrual for the final 2019 dividend the ratio was 168% - in line with the end of 2019.

Find out more about RSA shares including how to invest

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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.