RSA Insurance Group (RSA) Ordinary 100p
HL comment (1 August 2019)
Excluding the effect of business lines RSA either is exiting or has exited in the last year, net written premiums rose 0.5% in the first half to £3.2bn. An improved underwriting performance underpinned a 1.3% improvement in underlying operating profits to £308m.
The group announced an interim dividend of 7.5p, up 2.7%.
The shares had risen 2.6% by lunchtime.
A series of large losses and a spate of weather related claims upset the boat in 2018. Most of that was down to the commercial business, particularly in the London Market where RSA writes larger, more specialist insurance contracts.
The goal for 2019 is to make sure that doesn't happen again, and reinforce underwriting discipline. The London Market business is midway through a dramatic downsize, and the group's increasing its level of reinsurance. That might mean giving up some of the premiums, but should also make the business less lumpy.
Whether CEO Stephen Hester's most recent changes have solved the problem remains to be seen. But the fact RSA has managed to improve premiums, combined operating ratios and operating profits speaks volumes. Especially given the challenges facing the wider sector.
Nonetheless, a conservative approach to capital means the group decided not to pay a special dividend at the end of last year, despite the insurer's solvency ratio sitting above target. The stock currently offers a prospective yield of 5.3%.
Unfortunately it's now that the real work begins.
For all its progress, RSA is still in 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. We still struggle to get excited about RSA's long term growth prospects.
Half Year Results
Premium growth was driven by growth in Scandinavia, up 2%, and Canada, up 4%, while the UK saw net written premiums fall 2% excluding exit portfolios.
Lower claims and commissions along with broadly flat operating expenses, meant RSA reported an improved combined operating ratio of 94.3% excluding exit portfolios. As a result underwriting profits increased by 5.8% to £181m. While Scandinavia remains the main driver of underwriting profit, Canada also delivered a good result, posting a £19m profit after last year's £4m loss.
Investment profit fell 3.7% to £131m, as the group reinvested at lower yields.
The group's Solvency II ratio, a key measure of an insurer's capitalisation, remains above the 130%-160% target range at 167%.
The outlook for the full year remains unchanged.
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.
Previous RSA Insurance Group updates
The London Stock Exchange does not disclose whether a trade is a buy or a sell so this data is estimated based on the trade price received and the LSE-quoted mid-price at the point the trade is placed. It should only be considered an indication and not a recommendation.
Trades priced above the mid-price at the time the trade is placed are labelled as a buy; those priced below the mid-price are sells; and those priced close to the mid-price or declared late are labelled 'N/A'.