RSA Insurance Group (RSA) Ordinary 100p
HL comment (26 February 2021)
RSA's full year underlying pre-tax profit rose 15.1% to £718m, which primarily reflects lower claims. The group's combined ratio, which is the percentage of premiums paid out in claims and costs, fell from 93.6% to 91.1%.
The takeover bid by Intact and Tryg was approved by shareholders in January and management expects the deal to close in the second quarter of the new financial year.
RSA isn't paying a final dividend because of its prospective acquisition. Should the deal not go ahead the board intends to pay catch up dividends later.
RSA shares were broadly flat following the announcement.
The potential takeover bid for RSA represents a reasonable offer in our view, and would represent a positive outcome for shareholders if it goes ahead. However, investors should remember nothing is set in stone, and there are plenty of hurdles to clear before any deal is definite. Given that risk, investors should continue to focus on the quality of the business they own.
The impact of coronavirus on RSA has been broadly negative, but fairly limited. Some claims have increased, such as for business interruption, while others have fallen during lockdowns, such as motor claims. The UK was hit particularly hard, in part thanks to an adverse Supreme Court judgement on business interruption insurance.
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 and Canadian commercial business to deliver an underwriting profit last year, but there's still work to do in the UK.
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.
While the dividend has been suspended the group is still setting aside the money. Management intends to catch up with missed dividends when the regulator allows it to, but there's always the possibility events will conspire to stop RSA.
RSA key facts
- 12m forward Price/Earnings ratio: 14.2
- Ten year average 12m forward Price/Earnings ratio: 11.2
- Prospective yield: 4.5%
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.
Full year results (excluding exit portfolios)
RSA generated an overall business operating result of £751m, up from £656m last year. The group defines "business operating result" as profit before tax with some charges relating to non-core functions added back. These include pension costs, investment gains and losses and the loss in value of intangible assets etc.
The Scandinavian business delivered a business operating result of £337m, up 15% year on year. Net written premiums fell 1% to £1.8bn, reflecting a 2% fall in Personal Lines and a flat result from Commercial Lines. The division's combined ratio fell 4.2 percentage points to 83.2%, or 85.0% excluding the impact of the pandemic.
Canada's business operating result was £256m, an increase of 64% on last year. Premiums were up 3% excluding the impact of COVID, but were down 1% overall due to customer relief measures. The division's combined ratio fell to 88.3% from 94.5%, which would have been 91.4% excluding the impact of the pandemic.
Excluding exit portfolios, the UK & International generated a business operating result of £200m (2019: £279m), which was held back by an adverse ruling from the UK Supreme Court on business interruption insurance. The pandemic cost the UK division an estimated £77m overall. The UK business delivered a combined ratio of 99.5% and an underwriting profit of £11m. These figures would have been 95.8% and £88m if the pandemic is excluded. This reflects profitable underwriting in Personal Lines despite falling premiums, but Commercial Lines made an underwriting loss.
RSA made investment profits of £213m, down 19% on last year.
The group's Solvency II capital ratio, a key measure of balance sheet strength, was 189% - well ahead of the 130% to 160% target range. Excluding dividend accruals in respect of 2019 and 2020 the capital ratio would be 170%.
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 disclosure for more information.
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