RSA Insurance Group Plc – 2019 Interim Results

Solid first half results, underwriting actions 'on track'

·     Current year underwriting profit up 70%

Excluding exit portfolios¹:

·     Group underwriting profit £181m

·     Group combined ratio 94.3%; underlying EPS 21p per share

·     UK & International region underwriting profit £86m; combined ratio 94.0%

Statutory profit before tax £227m, impacted by exits and non-operating charges

Interim dividend 7.5p per share, up 3% vs. H1 2018

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Stephen Hester, RSA Group Chief Executive, commented:

“RSA is reporting a solid first half 2019. Particularly pleasing is the improvement in current year underwriting results, which represent our best first half in the last 10 years¹. Our Personal Lines business continues to drive this performance.

 

While the full earned effect of underwriting, pricing and portfolio changes will show next year, at this stage we are on or ahead of schedule in each region for those planned actions. There are some headwinds from lower bond yields and weaker prior year development and we have more to do in many areas. Nevertheless, we expect to make continued progress overall.”

Trading results

·     Underlying profit before tax £292m (ex. exits). Statutory profit before tax £227m was impacted by exits and non-operating charges (H1 2018: £296m)

·     Group operating profit £308m (ex. exits): Scandinavia £127m; Canada £50m; UK & International £155m (£127m inc. exits). Group total operating profit £280m (H1 2018: £304m)

·     Underwriting profit of £181m (ex. exits). Group total underwriting profit £153m (H1 2018: £171m). Current year underwriting profit up 70% vs. H1 2018

·     Group combined ratio of 94.3% (ex. exits): Scandinavia 89.1%; Canada 97.8%; UK & International 94.0%. Group combined ratio including exits 95.2%; UK & International 96.1%:

–     Group attritional loss ratio² improved 0.6 points vs. H1 2018 and by 1.6² points vs. H2 2018

–     Group weather costs 3.2% (H1 2018: 4.9%) of premiums

–     Large losses 9.6% of premiums excluding exits, total 9.9% (H1 2018: 9.7%)

–     Group prior year underwriting profit of £19m (H1 2018: £92m)

¹ Excluding UK/ London Market exit portfolios, refer to pages 30 to 38 for further information
² At constant FX and ex. changes in reinsurance, refer to pages 30 to 38 for further information

·     Personal Lines (57%¹ of net written premiums) combined ratio was 89.9% (ex. exits), while Commercial Lines was 98.8% (ex. exits)

·     Net written premiums ('NWP') of £3,254m, up 1%² vs. H1 2018 (down 2%³ underlying but up c.0.5%³ex. exits):

–     NWP up 2%³ in Scandinavia

–     NWP up 4%³ in Canada

–     NWP down 8%³ in UK & International as underwriting and rating actions take effect (exits account for c.6 points of the reduction)

·     Group written controllable costs £694m (H1 2018: £697m). Earned controllable cost ratio 21.3%

·     Investment income of £154m (H1 2018: £160m) down 4% as expected

·     Non-operating charges include £17m for completion of the UK Legacy sale contracted in 2017 (capital accretive) and £15m of accounting impact from a reduction in the discount rate on long-term insurance liabilities in Denmark. Losses on UK/ London market exit portfolios were £28m

·     Statutory profit after tax £183m (H1 2018: £245m)

·     Underlying EPS 20.9p excluding exits (inc. exits: H1 2018: 21.0p; H1 2019: 18.6p), headline earnings per share 15.3p

·     Interim dividend of 7.5p per ordinary share proposed, up 3% (H1 2018: 7.3p) and consistent with dividend policy.

Capital & balance sheet

·     Solvency II coverage ratio of 167%⁴ (31 March 2019: 164%), above 130-160% target range

·     Tangible equity £2.92bn up 2% (31 March 2019: £2.88bn), 283p per share

·     Underlying return on tangible equity of 15.0% excluding exits, within the 13-17% target range

·     IFRS pension surplus £164m (31 December 2018: £182m). Fall in bond yields increases estimated full year 2019 capital impact of bond 'pull-to-par' to c.£70m.

Strategic and market update

·     RSA's focus is on building capabilities to outperform in our markets. In that context many initiatives continue – targeted at customer service, underwriting and costs

·     RSA's 2018 underwriting results declined for the first time since 2013. Consequently, our particular focus for 2019 is to progress restorative actions, whilst sustaining momentum in the large parts of our business that continued to perform well:

–     Across our Commercial Lines businesses, programmes are underway re-underwriting and re-pricing business where needed and possible, or lapsing if necessary; much of the pricing and underwriting actions targeted for 2019 have already been implemented. However, results will take more time to show the benefits we expect

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

¹ Split for year ended 31 December 2018; ² At constant FX
³ At constant FX and excluding changes in reinsurance, refer to pages 30 to 38 for further information
⁴ The Solvency II capital position at 30 June 2019 is estimated
 

·     In our 2018 Preliminary Results, we confirmed London Market portfolio exits and other business lapses targeted at reducing unprofitable business and risk exposures by c.£250m vs. 2017 NWP baseline. This will have been substantially accomplished by the end of 2019 and just c.£30m of earned premium remains to run-off in H2 and c.£10m thereafter. We will continue to review market conditions in the remaining portfolios and adjust further if merited.

Market conditions

·     Insurance market conditions remain competitive across our territories with significant price/ volume trade-offs. However, rate hardening and capacity adjustment is helping us re-price 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. However, bond yields have fallen c.50bps in most of our territories in H1 2019. If sustained this will reduce future investment income in addition to its 'pull to par' impact on capital usage. FX movements also have a translation effect on RSA, costing c.2% at underwriting profit level in H1 2019 compared to the prior period. 

 

MANAGEMENT REPORT – KEY FINANCIAL PERFORMANCE DATA

Management basis

 

£m (unless stated)	H1 2019        ex. exits	H1 2019	H1 2018
Profit and loss
Group net written premiums	3,242	3,254	3,219
Underwriting profit ¸	181	153	171
Combined operating ratio ¸	94.3%	95.2%	94.7%
Investment result ¸	131	131	136
Operating result ¸	308	280	304
Profit before tax	255	227	296
Underlying profit before tax ¸	292	264	291
Profit after tax		183	245
Metrics
Earnings per share (pence)		15.3p	21.8p
Underlying earnings per share (pence) ¸	20.9p	18.6p	21.0p
Interim dividend per ordinary share (pence)		7.5p	7.3p
Return on tangible equity (%)		11.0%	16.2%
Underlying return on tangible equity (%) ¸	15.0%	13.4%	15.6%
		30 June 2019	31 Dec 2018
Balance sheet
Net asset value (£m)		3,871	3,786
Tangible net asset value (£m) ¸		2,921	2,867
Net asset value per share (pence) ¸		363p	357p
Tangible net asset value per share (pence) ¸		283p	279p
Capital
Solvency II surplus (£bn)		1.2	1.2
Solvency II coverage ratio		167%	170%

 

 

 

 

CHIEF EXECUTIVE'S STATEMENT

RSA has reported a solid first half performance. Our mission for 2019 is to sustain momentum in the large parts of our business that did well last year, whilst successfully improving the areas that disappointed. Results for the first half show pleasing evidence to support both objectives.

Financial results

Group underwriting profit is £181m (excluding exits) and consistent with our plans. Results from current year underwriting are up strongly versus H1 2018 and our best in the last 10 years. Progress is even more marked versus H2 2018. Within these totals, attritional loss ratios have improved. Weather losses are also lower but offset by weaker prior year development as 2018 actuarial estimates were refined. Cost discipline remained strong. Our Personal Lines results are excellent, while Commercial Lines need more time to see results improve as targeted and were particularly impacted by prior year 'true-ups'.

Underlying EPS (excluding exits) is 21p per share as lower investment income dampens the robust underwriting profit. Underlying return on tangible equity is 15% (excluding exits).

Customer focus & market conditions

RSA's focus is on serving both customers and shareholders well, consistently improving our capabilities in order to do better for both constituencies. In H1 2019 our customer volumes grew, with strong retention and satisfaction indices, in our international Personal Lines businesses where profitability is also strong. In our Commercial Lines businesses, planned exits and underwriting/ pricing action is reducing volumes but targets a stronger, more sustainable business going forward.

Insurance market conditions remain competitive, though business lines facing industrywide profitability challenges are seeing stronger pricing trends. The insurance industry is also exposed to investment returns, particularly bond yields. Sharp falls in yields year to date across most markets therefore represent a future headwind.

Regional progress

A critical task for RSA is to achieve better and more consistent performance from our UK & International region. We are pleased to report that current year underwriting profits more than doubled and that the H1 combined ratio (ex. exits) was 94.0%, with on-target UK results and helped by unusually strong Ireland and Middle East performance. There is much more to do, in particular to finish the year without the level of London Market losses that cost dearly in 2017/ 2018. In that context, our business exits and other underwriting actions are on track. It will still take some years to get the business to our ambitions for it but our new management team in this division have made a strong start. 

RSA's international businesses continue to perform strongly, driven particularly by Personal Lines. In Canada underwriting profits rose substantially (although less than planned due to another tough winter).  Extensive pricing and underwriting actions market-wide are expected to continue the improvement. Commercial Lines remains a challenged area, although we target better H2 results.

RSA's flagship Scandinavian business continues to perform well though not yet in line with our ambitions. Sweden overall and Danish Personal Lines remain the outstanding performers, with Norway much improved from last year. Danish Commercial Lines remains weak, with continuing underwriting action required.

Outlook

Our objectives for the year are unchanged. We will strive to finish 2019 with significant performance gains versus 2018 and evidence carry forward into 2020 of further improvement potential still. Our business will experience challenges from external events not least; we will work hard to meet them with resilience and positive ambition.