"RSA's strategy remains a strong one, best suited for our markets"
In 2018, RSA delivered growth in profits and earnings per share, further dividend growth and underlying return on tangible equity of 12.6%, substantially above our cost of capital.
However, for us 2018 was a disappointing year since RSA posted the first decline in underwriting profits since 2013, driven primarily by higher weather costs and a range of loss challenges in our Commercial Lines businesses, most notably through our London Market results. While we can never be immune from external volatility, we have taken decisive action to address these losses and expect a good recovery in 2019.
Since 2013, a wide range of fundamental improvements have transformed RSA’s competitive position and capabilities. These programmes, aimed towards our ‘best-in-class’ strategic ambitions, continued to deliver across 2018. While there are many positive examples, the strong results from our Personal Lines businesses (57% of the Group) are a fine example – delivering for both customers and shareholders despite weather headwinds.
Strategy and focus
RSA is a focused international insurance group. We have complementary leadership positions in the major general insurance markets of the UK, Scandinavia and Canada together with ‘supporting’ international business. The Group is well balanced between personal (57%) and business customers (43%), across our regions, product lines and distribution channels.
Our business strategy is to sustain a disciplined focus on RSA’s existing areas of market leadership, whilst driving operating improvements in pursuit of ‘best-in-class’ performance levels.
RSA’s strategy remains a strong one, best suited for our markets. However, tough conditions in specialty and wholesale insurance markets in 2017 and 2018 have prompted a reassessment and substantial cutback of our London Market presence (4% of 2018 Group premiums) which forms part of the UK & International commercial business.
General insurance markets are relatively mature, consolidated and stable, though with some intrinsic underwriting volatility. Attractive performance can be achieved through intense operational focus within a disciplined strategic framework.
2018 was a year with some major external underwriting challenges for the insurance industry. In common with 2017, it was an unusually poor loss year for both ‘Nat Cat’ losses and commercial large loss activity. Other weather related losses were also higher than long-term averages. Additionally, selected insurance lines continue to see claims inflation higher than CPI, motor most notably. Despite this backdrop, for many participants overall profitability is robust and hence competitive intensity remains high. Nevertheless, there are now real signs of pricing increases and capacity withdrawals in the worst performing lines which should help portfolio remediation where necessary.
Insurers are exposed to financial markets, and through them to political and macro-economic challenges, despite relatively well-insulated insurance activities themselves. From RSA’s perspective, 2018 was comparatively uneventful in financial market impacts; although there was an adverse FX translation effect (4% of underlying EPS) from sterling strength, and bond yields did not hold the increases initially forecast as political and trade worries impacted markets in H2. Volatility remains a real risk for 2019, not least in the UK via the continuing Brexit debate. RSA earns the large majority of its profits overseas which is at least a comfort.
RSA Group: 2018 Interim Results
2018 was an active year at RSA with our actions falling broadly into two categories—continued operational improvement in pursuit of our ‘best-in-class’ ambitions and specific underwriting actions to address the underperforming areas of our business.
Financial strength: RSA’s ‘A’ grade credit ratings are where we want them. The Solvency II capital ratio strengthened further during 2018 (170% versus 163% in 2017). We also successfully negotiated a longer term funding settlement for our UK pension plan liabilities designed to provide a more stable, lower risk future for the plans themselves and RSA as sponsor.
Business improvement: our pursuit of ‘best in class’ operating metrics and capabilities continues to drive much activity. This is grouped across three areas—customer service, underwriting and cost efficiency—and enabled by data, technology and our own human capital.
Where underlying profitability is good, we have been successful at growing our business and receiving positive customer support. Personal Lines policy counts rose in 2018 in all regions. We also were successful in winning a major bancassurance partnership in Canada with Scotiabank.
Cost efficiency remains a critical element of competitiveness. RSA’s excellent progression continued in 2018 and our cost programmes reached gross annual savings of £460m, meeting our >£450m target a year early. This effort now becomes ‘business as usual’ but has contributed a 4 point improvement to our combined ratio since 2013.
Insurers are the original ‘data scientists’—that is what actuaries do—and capability development through technology and data remains at the heart of our improvement efforts. Hand-in-hand goes the contribution of our people who are increasing productivity every year through technology and better ways of working, and in so doing raising their own skills and value-added contribution.
Underwriting actions: substantial actions were taken in 2018 and are continuing to address areas of underperformance in underwriting:
- In Personal Lines, the primary challenge was weather volatility which is hard to specifically manage. Canada was our worst affected territory. Auto lines claims inflation also remains a market challenge. Extensive rate increases are going through in affected portfolios, together with selected broker cancellation where rate alone is unlikely to have the required result
- In Commercial Lines more extensive action is needed. We announced portfolio exits for c.50% of our London Market business and the two remaining UK generalist MGAs. Across all our remaining Commercial Lines businesses, underwriting action and rate increases are being deployed against underperforming areas. And for 2019 we have added new reinsurance aggregate covers aiming to reduce large loss volatility in each of our regional businesses.
Financial results: at a headline level, pre-tax profits rose 7% to £480m and earnings per share rose 21%. Underlying return on tangible equity was 12.6% (versus 13-17% target range).
Nevertheless, it was a disappointing year financially with the first decline in underlying profits since 2013. Underlying EPS was 34.1p per share (2017: 43.5p), although proforma results were c.42p1.
The fundamentals of our business are solid. Overall premiums rose 1%2 3 on an adjusted basis (down 3% on a reported basis), driven by growth in Personal Lines.
Our Personal Lines businesses (57% of total) showed a combined ratio of 92.4% despite higher weather costs than 2017.
In Commercial Lines we had poor results—a combined ratio of 101.9%. Proforma for portfolio exits and 2019 reinsurance additions, the ratio would have been 97.6%3 with a range of other improvements targeted for 2019.
On a geographic basis, our Scandinavian business continues to be the most important profit contributor. A combined ratio of 86.8% was behind the 2017 record, held back by Commercial Lines large losses, but strong nevertheless. Canada fell back due to adverse weather costs and poor Commercial Lines results. A significant recovery is targeted for 2019.
As in 2017, our UK & International business recorded poor results—a combined ratio of 101.4%. Proforma for business exits, this improves to 97.4%1 and within it were excellent Ireland and Middle East performances.
We have proposed a final dividend of 13.7p per share making 21p per share total for 2018, up 7%. This represents a 62% payout of underlying EPS and a 50% payout of proforma EPS3 and in so doing we are aiming to smooth the impact of underwriting volatility in the light of our belief in improved future results. Our strong capital position and in-year free capital generation support this stance. RSA’s dividend policy is unchanged, targeting 40-50% ‘normal’ payout levels with additional possible where free capital generation so supports.
2018’s challenges have not changed our view of RSA’s attractive performance potential or any of our targeted financial metrics. We recognise the importance of demonstrating resumed progress in 2019 and believe the actions are in place to support that. No business is free of challenge, and the insurance industry will undoubtedly continue to present volatility. We nevertheless are confident that good improvement can be achieved.
RSA benefits enormously from the support of our stakeholders every year. Customers and shareholders represent our key audience. However, the contributions of my colleagues is what makes possible all we accomplish. My sincere thanks to them for their efforts in 2018. The future for RSA is bright if we make it so.
Group Chief Executive
27 February 2019
1 Proforma for UK exits and/ or reinsurance, see definition on pages 40 to 41
2 At constant FX
3 Underlying measure, refer to page 38 for further information