# RSA Insurance Group reports strong first quarter 2020 operating results

- Link: https://www.directorstalkinterviews.com/rsa-insurance-group-reports-strong-first-quarter-2020-operating-results/412819444
- Published: 2020-05-07T07:25:37+01:00
- Author: Amilia Stone

**RSA Insurance Group plc** (LON:RSA) has today announced its Q1 2020 Trading Update
^(1).

> **Stephen Hester, RSA Group Chief Executive, commented:**
> “RSA’s first quarter results were strong, continuing the momentum seen in 2019.
> However, focus has now naturally shifted. Our thoughts and deepest sympathies 
> go to those most directly affected by COVID-19. And RSA’s attention is fixed on
> responding to the impacts of COVID-19 on economies, our customers and through 
> that on ourselves. Whilst it is too early to estimate the extent of these, RSA
> is resilient and determined to sustain strong and appropriate support for our 
> customers in these testing times. We are also very conscious of our shareholder
> responsibilities, especially with regards to restarting dividend payments when
> it is prudent to do so.”

**Trading update**

**Market conditions**

Insurance market conditions were largely unchanged in Q1 with little time for a 
COVID-19 effect. The markets were competitive overall, although accommodating underwriting
actions in those portfolios responding to industry losses.

Financial markets were heavily impacted by COVID-19 in March. All asset classes 
saw impacts broadly associated with increasing risk premiums.

**Premiums**

·     Group net written premiums of £1,521m were down 1%^(2) ex. exits vs Q1 2019(
down 2%^(2) inc. exits) and in line with our plans – areas of profitable growth 
were offset by planned underwriting effects in portfolios being remediated, with
this process nearing its conclusion.

·     In Scandinavia premiums of £610m were down 3%^(2) reflecting portfolio actions
in Danish Commercial Lines, partly offset by Personal Lines growth.

·     In Canada premiums increased 8%^(2) to £303m driven by pricing increases and
volume growth in direct Personal Lines, while our broker intermediated businesses
saw volume contraction reflecting underwriting actions.

·     In UK & International premiums were down 5%^(2) to £572m ex. exits (6%^(2)
inc. exits), better than our plan, and reflected the impact of underwriting actions
in 2018 and 2019. Key areas targeted for expansion such as our Regions commercial
business, and UK household saw positive volume growth.

**Profitability**

·     The Group business operating profit for Q1 was up by double digit percentages,
both including and excluding exit portfolios, with an improved combined ratio and
slightly lower investment income (as guided). COVID-19 affected the balance sheet
but not our operating profit materially given the timing of lockdowns late in the
quarter.  Each of our three regions performed on or ahead of our plans. There were
also strong underlying signs of loss ratio improvements in those commercial lines
areas that performed less well in 2019.

·     Underwriting profit components (excluding exits):

–     Group weather costs were 3.7% of net earned premiums (3.7% inc. exits; Q1 
2019: 3.2%), a little better than our expectations for the quarter though worse 
than prior year. Weather costs were better in Canada and worse for the UK & International
division due to February flooding in UK.

–     The large loss ratio was 8.9% (9.5% inc. exits; Q1 2019: 8.5%) with improvements
in Canada offsetting a higher ratio in UK & International.

–     The attritional loss ratio improved overall, and in each region.

–     The written controllable expense ratio increased slightly overall (though 
absolute costs were down 1% in real terms).

–     Prior year development was positive and better than Q1 last year which was
flat.  It included a £12m precautionary reserve for PY inflation effects of COVID-
19.

·     Investment income was within the range guided at our 2019 Full Year Results.

·     Exit portfolios (while now largely run off), generated a loss in the period
principally from a single large claim.

·     The impact of financial market volatility generated £30m of impairments and
mark to market impacts outside the business operating result. Over time, much of
this could reverse should market conditions normalise. £9m of UK restructuring charges
were also booked.

**Balance sheet and capital**

·     Tangible shareholders’ equity at 31 March 2020 was £3.15bn (31 December 2019:
£2.91bn).  The increase was driven by an increased pension surplus, year to date
profits, and FX movements, partly offset by mark-to-market losses.  Tangible net
asset value per share was 305p (31 December 2019: 282p).

·     Balance sheet unrealised gains were £204m at 31 March 2020, down £167m since
year end (c.£100m of the movement related to equities (mainly REITs) with the balance
relating to fixed income). IFRS pension surplus in the UK was £668m (net of tax),
up £413m from 2019 year end.

·     The Group’s estimated Solvency II coverage ratio was 151%^(3) at 31 March 
2020 (31 December 2019: 168%), reflecting COVID-19 driven market impacts and planned
pension contributions, and including the 2019 final dividend accrual. Excluding 
this accrual, the estimated ratio was 160%^(3).  On both bases the coverage ratio
falls well within our target range of 130-160%.

**COVID-19 impacts**

While it is too early to quantify with any precision the impacts of COVID-19 on 
RSA for 2020, we discuss the principal areas affected below with some indicative
data for the period to end April, focused on the six weeks or so impacted by COVID-
19 lockdowns:

·     Our priority is to sustain good service to customers through these testing
times. RSA is working hard to settle claims promptly and fairly and where relevant
to offer interim payment to support customers, as well as sustaining supply chains
through prompt and interim payments. We are also providing a wide range of customer
relief measures across our different territories, ranging from coverage adjustments
and waivers, payment timing relief and discount or price capping of rates. We are
participating fully in a range of industry initiatives including exploring future
pandemic coverage options and voluntary relief funds.

·     The cost of claims will be complex to interpret as patterns are distorted 
by the impact of lockdowns. It is still too early to be confident of trends or to
know the timing and pattern of pandemic impacts, government actions and their economic
effects. Encouragingly some of our territories have begun a gradual normalisation
though it is still too early to know how this will play out.

·     For the month of April claims frequency^(4) was down vs. prior year in a range
20-55% across our three regions, mostly reflecting COVID-19 impacts on activity 
levels. Scandinavia frequency decline was at the lower end of this range reflecting
milder lockdown impacts. In general, motor accident lines were most affected, though
most business lines saw meaningful declines. It is not yet possible to assess how
much of this data reflects delayed timing of claims or what the impact will be on
claims severity of disrupted supply chains and other factors. These elements will
reduce the loss ratio effect. However, it is likely that frequency effects overall
will provide an offset to areas of negative COVID-19 impact on premiums and claims.

·     Specific COVID-19 related claims are arising in travel insurance (which benefit
from substantial reinsurance protection), wedding cancellation insurance (UK impacts)
and for commercial lines business interruption and related policies. The great majority
of business interruption claims are not expected to be eligible under their coverage
terms for COVID-19. However, there are a number of areas where claims are being 
paid, mostly in certain specialist schemes and programmes.

·     For the period since inception of COVID-19 claims in March to end April, RSA
estimates receiving a total of c.25,000 COVID-19 related claims (of which c.23,000
are travel claims) that have coverage and will pay out, at an estimated cost of 
c.£25m net of reinsurance. This includes travel claims with estimated costs of £
16m gross of reinsurance, claims for wedding cancellation with an estimated reserve
of £7m, and claims under certain business interruption and related coverages with
an estimated claims reserve of c.£17m. The great majority of the non-travel claims
relate to our UK&I division.

·     Claims backlogs at month end were within normal tolerances overall and include
COVID-19 related claims that have not yet been validated or where information has
not yet been provided to establish likely claims value.

·     Aside from the reinsurance coverage on travel claims, we expect most other
COVID-19 related claims can be aggregated by week and applied against the Group’s
GVC programme if over £10m, and against the Group’s cat programmes (described in
the Group’s full year results) if reaching higher levels.  This is expected to provide
substantial protection in relation to downside claims scenarios.

·     Our assessment of claims is based on contract terms, detailed analysis of 
specific wordings and relevant legal advice.  As always, it is expected that some
cases will be challenged and may have outcomes the same or different to our expectations.
The rate of receipt of new COVID-19 related claims has slowed materially in the 
most recent weeks.

·     RSA is also expecting a COVID-19 effect on written premium income for 2020,
as some customers reduce their coverage reflecting changed needs, and various rate
adjustment and other programmes impact. There will likely be an increase in bad 
debt from customers, and we are actively working with those in most need on payment
spreading plans. In the period to end April bad debt impacts were not substantial.

·     RSA itself has been able to adjust well to substantially all employees working
from home. While there are limited areas of service slippage, in general business
remains largely as usual. We have prioritised health and welfare of our staff and
we have not implemented job reduction programmes or taken part in government furlough
programmes. 

·     Financial market movements will continue to impact balance sheet, solvency
ratios, pension surplus and investment income. As at end April the Solvency II ratio
had recovered slightly, and was estimated at 153%^(3) (161%^(3) excluding dividend
accrual). The investment income outlook is lower but still within the ranges guided
for 2020.

**Footnotes:**

_^(1  )__This announcement is a trading update only, and doesn’t constitute an interim
report_

_^(2 )__At constant FX_

_^(3  )__The Solvency II capital positions at 31 March 2020 and 30 April 2020 are
estimated_

_^(4)__ Measured as claims counts_

_^(5 )RSA Insurance Group uses Alternative Performance Measures, including certain
adjusted measures, to help explain business performance and financial position. 
These measures have been calculated consistently with those for the year ended 31
December 2019 and reconciliations will be provided with the condensed consolidated
financial statements for the period ended 30 June 2020._

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