Winning for customers and for shareholders
In 2017, RSA delivered growth in premiums, profits and dividends and an improved 15.5% return on tangible equity1 – all compared to an extremely strong 2016 result.
We are pleased to report record underwriting profits. However, the year also had some disappointment relative to our ambitions. Excellent underwriting results in Scandinavia, Canada, Middle East and Ireland were partly offset by poor UK (and related London market) results. It is our task in 2018 to deliver a bounce-back in the latter whilst sustaining underlying progress across the Group as a whole.
RSA Group: 2017 Full Year Results
Strategy and focus
RSA is a focused international insurer. We have complementary leadership positions in the major general insurance markets of the UK, Scandinavia and Canada, together with supporting ‘London market’ and international business. The Group is well balanced between personal and business customers, across our geographies, product lines and distribution channels.
Our business strategy is to sustain a disciplined focus on RSA’s existing areas of market leadership, whilst driving intense operating improvement in pursuit of best-in-class performance levels.
General insurance markets are relatively mature, consolidated and stable, though with some inevitable underwriting volatility. Attractive performance can be achieved through intense operational focus within a disciplined strategic framework.
For the insurance industry, 2017 was a year with some major external underwriting challenges. At a global level, it seems likely to have been one of the worst loss years in recent times due particularly to three major US/ Caribbean hurricanes and Mexico earthquakes. On a lesser scale, UK market losses around the Ogden discount rate change and Household insurance ‘escape of water’ inflation also dented domestic insurance results. Notwithstanding these factors, market capacity remains high, and there are limited signs of price inflation more broadly.
Conversely, financial markets during 2017 were more stable, at least as impacting RSA. Bond yields are off their lows and global central bank action to wean markets off QE gives some optimism that coming years might offer return upside for insurers’ portfolios. However, tight credit spreads continue to hurt, especially on UK pension accounting. RSA makes a majority of profit outside the UK, so FX rates versus sterling are also important. During 2017 impacts were limited despite swings, although the Brexit process continues to have the potential to deliver volatility.
2017 was another year of intense activity at RSA. The great majority of our efforts were focused on operational improvement in pursuit of our best-in-class ambitions. We also delivered the final pieces of RSA’s balance sheet restructuring successfully. We look forward to 2018 as the first clean ‘business as usual’ year since 2012.
Financial strength: RSA’s ‘A’ grade credit ratings are where we want them. The Solvency II capital ratio at 163% (2016: 158%) is in a good place. The £834m disposal in February of our UK Legacy insurance liabilities removed a source of long-tail risk whilst funding a £640m retirement of high cost subordinated debt capital. This was the final piece of balance sheet work on our agenda. While we aspire to grow ‘core tier 1’ capital coverage further, the active phase of balance sheet repair is now complete.
Business improvement: Our goal is to systematically and determinedly hunt down performance improvement opportunities across the business to move RSA’s capabilities and then outcomes towards best-in-class levels. This involves particular focus on improving three areas; service to customers, underlying underwriting results and cost efficiency.
Personal Lines policy count rose at RSA in 2017 for the first time in four years as customers reacted positively to the many improvements we are putting through. The important home partnership with Nationwide commenced business in December. Operational initiatives also contributed, spanning service improvements via digital capabilities in claims and policy servicing, through to capability and proposition uplifts across our business lines. RSA will not chase unprofitable growth. We prize quality of customer relationship over quantity. But nevertheless, serving customers well remains at the heart of all we seek to achieve.
RSA’s most important capability lies in our underwriting judgement. Across the Group multiple improvements continued in areas like portfolio discipline, data and model improvement, machine learning and skills enhancement. Attritional loss ratios improved in every business except the UK. Here our attritional results experienced significant setback, largely through Household ‘escape of water’ claims, which we expect to rectify for 2018/ 2019. The Group attritional loss ratio was slightly better than prior year as a result, not quite as good as hoped for although still substantially better than historically achieved.
Cost efficiency remains a critical performance lever. We have now achieved £395m annual gross savings and are able to raise our savings targets for a fourth time to over £450m by 2019. Digitisation, lean operations, site consolidation, enhanced purchasing, robotics, zero based budgeting — all the tools in modern corporate armouries to boost people productivity — are being deployed effectively across our regions.
Highlights from 2017
If you need a break from the numbers, check out our year in pictures
Financial results 2017
Underlying earnings per share rose 10% to 43.5p. This produced a return on tangible equity2 of 15.5% (2016: 14.2%), versus our target range of 13-17%.
At a statutory level, net profit before tax rose to £448m (2016: £91m) reflecting a lower level (though still significant) of restructuring charges. It remains our ambition that 2017 be the last year of such charges.
Premium income was up 4%, in line with our plan, featuring modest policy count increases together with price and FX benefits.
Underwriting profits posted a new record at £394m, up 4% versus our record year in 2016. The combined ratio of 94.0% was also a new record for RSA. Underlying pre-tax profits rose 12%, benefiting from resilient investment income and lower interest expense.
Excellent underwriting results were achieved in absolute and relative terms across many of our businesses. Scandinavia led the way with a combined ratio of 82.9%. Canada also improved, in a challenging market, to a combined ratio of 93.9%. Middle East had record results (COR 87.7%) and the Irish turnaround delivered its first profits since 2012 (COR 97.0%).
The disappointment was our UK business (including its European branches and London market Commercial Lines business). A COR of 102.0%3 reflected three major loss items; £72m of losses from US/ Caribbean hurricanes and Mexican earthquakes (net of GVC recovery), elevated Household ‘escape of water’ inflation and significant adverse large loss volatility versus long-term averages. Underwriting action is well underway to improve results in 2018.
Reflecting RSA’s overall progress in 2017, a final dividend of 13.0p per share is proposed, making 19.6p per share total for 2017, up 23%. This represents a 45% payout of underlying EPS (higher than 2016 but in line with stated policy). RSA’s focused business strategy is designed to generate attractive levels of free cash flow, after meeting organic growth needs. With rising earnings targeted, no more restructuring costs and as bond pull-to-par impacts recede in coming years, RSA should have the potential for attractive further growth in shareholder distributions.
Our performance target of 13-17% return on tangible equity represents attractive shareholder return both relative to cost of capital and insurance industry norms. To the extent that RSA’s underwriting performance progresses well towards our best-in-class combined ratio ambitions, even better returns are possible. We will try to achieve just that. For 2018, the key tasks are to re-establish respectable performance in our UK business whilst continuing underlying progress in our overseas markets where the majority of the Group trades.
RSA made good progress with customers and for shareholders in 2017, despite significant external challenges. In achieving this, we owe thanks to all stakeholders for their support. But most particularly to my colleagues at RSA, who have embraced our best-in-class ambition so effectively, so my sincere thanks and appreciation.
Group Chief Executive
21 February 2018
1 Underlying measure, please refer to pages 30 to 36 of the full press release (PDF) for further explanation.
2 Underlying measure, please refer to pages 30 to 36 of the full press release (PDF) for further explanation.
3 Proforma for share of aggregate reinsurance recoveries and excludes the impact of the Ogden rate change.
This press release and the associated conference call may contain ‘forward-looking statements’ with respect to certain of the Group’s plans and its current goals and expectations relating to its future financial condition, performance, results, strategic initiatives and objectives. Generally, words such as “may”, “could”, “will”, “expect”, “intend”, “estimate”, “anticipate”, “aim”, “outlook”, “believe”, “plan”, “seek”, “continue” or similar expressions identify forward-looking statements. These forward-looking statements are not guarantees of future performance. By their nature, all forward-looking statements are inherently predictive and speculative and involve risk and uncertainty because they relate to future events and circumstances which are beyond the Group’s control, including amongst other things, UK domestic and global economic business conditions, market-related risks such as fluctuations in interest rates and exchange rates, the policies and actions of regulatory authorities, the impact of competition, inflation, deflation, the timing impact and other uncertainties of future acquisitions or combinations within relevant industries, as well as the impact of tax and other legislation or regulations in the jurisdictions in which the Group and its affiliates operate. As a result, the Group’s actual future financial condition, performance and results may differ materially from the plans, goals and expectations set forth in the Group’s forward-looking statements. Forward-looking statements in this press release are current only as of the date on which such statements are made. The Group undertakes no obligation to update any forward-looking statements, save in respect of any requirement under applicable law or regulation. Nothing in this press release shall be construed as a profit forecast.