# RSA Insurance Group plc Results represent first down year since 2013

- Link: https://www.directorstalkinterviews.com/rsa-insurance-group-plc-results-represent-first-down-year-since-2013/412768274
- Published: 2019-02-28T07:44:29+00:00
- Author: Charlotte Edwards

**RSA Insurance Group plc** (LON:RSA), today announced 2018 preliminary results

Pre-tax profit £480m, up 7%. Dividends 21p per share, up 7% (final dividend 13.7p)

Underlying results down, driven by higher weather costs and large loss challenges
in Commercial Lines; especially London Market business

Extensive underwriting action underway, including portfolio exits announced in 2018

Underlying EPS 34.1p (2017: 43.5p), but c.42p proforma for portfolio exits and reinsurance
additions1

Underlying return on tangible equity 12.6% (2017: 15.5%) versus 13-17% target range

> **Stephen Hester, RSA Group Chief Executive, commented:**
> “In 2018 RSA increased headline profits and dividends with a still attractive 
> return on capital. At an underlying level however, the results represent RSA’s
> first down year since 2013. We believe strongly that 2019 will show a bounce back
> and are taking decisive action to that end.
> Much went well in 2018, with excellent results in many of RSA’s Personal Lines
> businesses and good progress on expenses and other strategic initiatives. However,
> adverse weather costs and challenging Commercial Lines results exposed us to more
> volatility than expected. This was most intense in the ‘London Market’ business
> which accounted for substantially all our underperformance in the second half.
> We announced significant portfolio exits and initiated major pricing and re-underwriting
> programmes during the year. We have also made management changes and increased
> reinsurance coverage for 2019. Our performance ambitions for RSA are high, and
> unchanged. We recognise the need to demonstrate resumed progress against them.”

**Trading results**

· Pre-tax profits up 7% to £480m (2017: £448m)

· Group operating profit £517m (2017: £663m) down 19% at constant FX: Scandinavia
£306m; Canada £84m; UK & International £105m

· Underwriting profit of £250m (2017: £394m) down 33% at constant FX. Proforma underwriting
profit was £344m1 excluding losses on exit portfolios and adjusting for reinsurance
additions in 2019

· Group combined ratio of 96.2% (2017: 94.0%): Scandinavia 86.8%, Canada 97.6%2 
and UK & International 101.4%. Proforma Group combined ratio 94.6%1, UK & International
97.4%1 and Canada 96.7%1:

– Group attritional loss ratio comparable to 2017

1 Proforma for UK exits and/ or reinsurance, see definition on pages 40 to 41; 2
After allocation of net GVC reinsurance recoveries

– Group weather costs 3.7% (2017: 2.6%) of premiums, £76m1 above 2017; large losses
elevated at 11.6% of premiums (2017: 10.8%)

– Group prior year underwriting profit of £165m (2017: £157m)

· Net written premiums (‘NWP’) of £6,470m up 1%2 underlying (down 3% headline):

− NWP up 2%1 in Scandinavia, with Sweden up 6%1

− NWP up 6%1 in Canada. New distribution partnership with Scotiabank to commence
in Q2 2019

− NWP down 3%1 in UK & International as underwriting and rating actions (including
portfolio exits) take effect

· Group written controllable costs down 2%1 to £1,343m (earned controllable cost
ratio 20.4%, 0.71 points better than 2017)

· Investment income of £322m (2017: £331m) down 3%

· Statutory profit after tax £372m (2017: £322m)

· Headline earnings per share 31.8p up 21% (2017: 26.3p). Underlying EPS 34.1p, 
down 22% (2017: 43.5p) but down 19% at constant FX. Proforma for UK exits and/ or
reinsurance, EPS c.42p3

· Final dividend of 13.7p per ordinary share proposed, bringing total 2018 dividends
to 21p per ordinary share (up 7%) and representing a 62% payout ratio of underlying
earnings and a 50% payout of proforma3 EPS.

**Capital & balance sheet**

· Solvency II coverage ratio of 170% after final dividend (31 December 2017: 163%),
above 130-160% target range

· Tangible equity £2.9bn (31 December 2017: £2.8bn), 279p per share

· Underlying return on tangible equity of 12.6% (2017: 15.5%) just below the 13-
17% target range

· Triennial UK pension review concluded successfully. Stable long-term agreement
in place to an agreed de-risked end point (see page 25)

· IFRS pension surplus £182m (2017: £88m deficit). 2018 capital impact of bond ‘
pull-to-par’ of c.£85m (2019 outlook: c.£60m).

**Strategic update**

· RSA’s entire focus is on the drive for outperformance in our markets. In that 
context, our improvements continue – targeted at customer service, underwriting 
capabilities and costs. In those business areas where profitability is good, we 
are seeing good success with growing customer volumes as a result

· RSA’s 2018 underwriting results (coupled with our London Market losses in H2 2017)
demonstrate too much exposure to market volatility, while accepting that volatility
is an inescapable part of the insurance industry. During the year we initiated determined
actions to improve the position in future:

– Our reinsurance programmes have operated well, capping individual losses, and 
with a Group aggregate cover capping accumulated individual losses over £10 million.
These continue, but we have supplemented them with new aggregate covers for losses
between £1-10m in each of our three regions for 2019. Had these covers been in place
in 2018, they would have reduced losses by c.£30m net, of which £12m would have 
been on continuing portfolios

1 At constant FX; 2 Underlying measure, refer to page 38 for further information

3 Proforma for UK exits and/ or reinsurance, see definition on pages 40 to 41

– Our London Market Specialty & Wholesale business had 2018 premium income of £265m,
but underwriting losses of £109m after net GVC reinsurance recoveries of £13m. This
reflects unusually difficult conditions (including Nat Cat) across the market as
well as our own underwriting shortcomings. We have announced portfolio exits and
changes in underwriting appetite in this business area that reduce our activity 
by c.50% versus 2017 levels and a strategic review is ongoing to identify any further
portfolio exits. While portfolio run-off will continue over 2019, proforma for UK
exits and/ or reinsurance these changes (including two domestic UK scheme exits)
would have improved UK Commercial reported 2018 underwriting profits by £110m1

– In the rest of our Commercial Lines businesses, intense programmes are underway
re-underwriting and re-pricing business where needed and possible, or lapsing if
necessary; c.55% of the pricing and underwriting actions targeted have already been
implemented

– Underwriting capabilities continue to receive intense focus across the Group. 
These include more sophisticated and agile pricing models, underwriter training 
and portfolio discipline and technology driven insights

· A fundamental aspect of competitiveness is cost efficiency and RSA has transformed
its position in this regard. There is work yet to do, especially in areas where 
underwriting actions are reducing business volumes. Group written controllable costs
for 2018 were down 2%2 year-on-year to £1,343m (comprising 4% cost reductions, offset
by 2% inflation). With gross annual savings of £460m since the beginning of 2014,
we have achieved the Group target of > £450m savings a year early and will now move
cost efficiency into ‘business as usual’ mode.

**Market update & outlook**

· Insurance market conditions remain competitive across our territories with significant
price/ volume trade-offs. However, rate hardening and capacity adjustment is now
helping us reprice in Canada and in loss-making international business lines

· Financial market conditions are volatile, driven by political developments and
their knock-on to monetary and economic trends. RSA is relatively well protected,
with conservative investment portfolios and a broad array of internationally derived
profits

· RSA has made strong fundamental progress in recent years. Despite 2018 setbacks,
all of our international businesses have the capability to operate around the ‘best-
in-class’ combined ratio ambitions we have articulated, albeit with Canada having
a particular bounce back targeted in 2019. Our UK business faces the toughest competition
and is taking longer than hoped to achieve its targets. But we firmly believe these
are possible and expect the portfolio changes and other measures outlined to improve
results substantially in 2019 and beyond.

Share on: