"RSA’s results come in the context of our consistent strategy, to focus on core markets and seek to improve operational capabilities towards ‘best in class’ levels."
2019 was a pleasing year for RSA with total Group profits up on all measures. We report new records in both the current year underwriting result and combined ratio. Underlying earnings per share1 grew to 44.5p and underlying return on tangible equity1 to 16.0%, despite headwinds from low interest rates and FX. Dividends increase 10% to 23.1p/share for 2019.
RSA’s results come in the context of our consistent strategy, to focus on core markets and seek to improve operational capabilities towards ‘best in class’ levels. While we have much yet to do in pursuit of these ambitions, each of our three regions contributed well to 2019 results. In particular the repositioning of our UK & International region showed good progress with underwriting profits1 of £144m. The costs of this repositioning – losses on exit portfolios and cost restructuring charges – impacted results at a statutory level however.
Strategy and focus
RSA is a focused international insurance group. We have complementary leadership positions in the large general insurance markets of the UK, Scandinavia and Canada together with supporting international business in Ireland, Continental Europe and Middle East. The Group is well balanced between personal (57%) and business customers (43%), and across product lines and distribution channels.
Our disciplined strategy has enabled important improvements to customer service, underwriting skills and cost effectiveness in recent years. These improvements are driven by significant development of our capabilities and performance culture, as well as in our technology and data science tools. As a result, RSA has recorded its three best underwriting results this century over the last four years.
The Group’s only ‘down year’ since 2013 came in 2018, driven particularly by marketwide losses and weaknesses in the London market portfolios of our UK & International division. In response, we announced the exit of c.£250m of business (NWP) which has been substantially completed. Extensive changes to leadership and management structure in this division were also made and a new programme is well advanced to bring structural costs down further.
Serving customers well is RSA’s raison d’être. For over 300 years we have built our brands and reputation in this way. Modern times bring heightened demands and expectations from our customers. These range from digital delivery of services, to help with new or changing areas of risk such as cyber and climate change. We are committed to doing all we can to improve and to serve customers well.
Across the Group, where our underwriting is stable and producing the expected results, customer retention and satisfaction levels are generally high and even improving. Conversely, when loss challenges require adjustments to pricing or underwriting conditions, we experience more challenges with service and retention. Many initiatives continue across our business, using technology and data science, to serve customers better. And we are striving to meet rising customer expectations with competitive services that deliver good outcomes.
RSA Group: 2019 Interim Results
General insurance markets are relatively mature, consolidated and stable, though with natural intrinsic volatility. Strong levels of competition mean that profitable growth opportunities are modest, and require a continuous focus on strong underwriting discipline and cost efficiency. Nevertheless, well managed companies do produce returns well above cost of capital and RSA is clearly in that position. Despite competition, in those market segments challenged by negative loss trends, pricing has increased in 2019 which is helpful. Climate change is a key issue for insurers with heightened weather losses seen, notably in North America and certain international business lines.
Insurers are exposed to financial markets, and through them to political and macro-economic challenges, despite insurance services themselves being relatively insensitive to GDP changes. 2019 saw yield declines in most bond markets off already low levels, which produces further income headwinds for insurers. It is striking that investment income made up c.90% of RSA operating profit in 2010 vs well under 50% today. The intense focus on improving underwriting margins has been a very necessary one. Similarly, since c.75% of RSA’s profits come from international business, Sterling’s strength post UK election produces an earnings translation challenge for 2020, though our individual business units are well matched in currency terms.
It was a busy year for RSA. Right across the business, improvement programmes continue in pursuit of “best in class” ambitions. They span customer service, underwriting & claims, cost efficiency, technology and people performance. Superimposed on these programmes were decisive actions to address problem areas from 2018 and correct performance. We are encouraged by the results to date.
Management: An important feature of 2019 was senior management change – to reward success and to bolster areas needing better performance. We recruited Charlotte Jones as Group CFO, Scott Egan moved to CEO UK&I Region and Ken Norgrove moved from CEO Ireland to CEO Scandinavia. In their regional executive committees there was also significant change. Christian Baltzer has joined as CEO Codan Denmark, new CEOs of Ireland, Middle East and Europe were hired as was a new Group HRD and head of UK Personal Lines. It is an important measure of RSA’s progress that we are able both to internally develop leaders and to hire talented people from outside successfully. And beneath these changes, throughout the organisation professional development and performance delivery are advancing as part of our culture.
RSA’s culture is also advancing in other ways. We have met two key diversity & inclusion targets in 2019 – over 33% of the senior management group are now female, as are 40% of my direct reports.
Underwriting & Pricing: At the heart of our business sit the data science driven disciplines of underwriting and claims handling. Every year we seek to move these forward, using modern techniques of analytics and AI, as well as focus on skills and training.
In general our Personal Lines capabilities are in a good place but need continued investment. Exceptions are motor underwriting in the UK where technology driven retooling is underway; and in parts of Canada where claims inflation challenges, especially weather related, are driving further action.
In Commercial Lines we saw the greatest re-underwriting activity in 2019 in addition to substantially completing the UK portfolio exits announced last year. In terms of actions taken, the year went even better than planned. However, while UK & International results improved strongly, Canada and Denmark remained disappointing and further action will need to continue into 2020.
Our additional reinsurance covers for 2019 proved valuable in both Canada and Scandinavia, though a better weather year at Group level meant no recoveries for our GVC layer. The coverage for 2020 is substantially unchanged.
Cost Efficiency & Technology: Data science and technology advancement are at the heart of all we do. We are progressively implementing “backbone” IT platform replacements in all regions whilst pursuing many smaller enhancements. Spend is likely to continue in excess of historic depreciation levels. Technology and better ways of working drive our efficiency efforts, whilst also enabling better underwriting and customer service. Cost efficiency is absolutely vital for any mature, competitive industry. RSA’s record is very good in this regard. However, our top line reductions in the UK necessitate a further targeted programme of >£50m p.a. cost saving by end 2021, which is well advanced.
Financial Results 2019: It was a strong year for RSA with total Group profits up on every measure. The best indicator of ongoing performance levels are our underlying results (ex. exits). These show EPS at 44.5p and return on tangible equity of 16.0% (vs 13-17% target). Statutory profit after tax was up 3% despite the impact of exits and restructuring costs in the UK. Proposed dividends are up 10% to 23.1p/share.
Driving our Group results were strong underwriting profits of £405m and combined ratio (‘COR’) of 93.6% (ex. exits). These were achieved on flat premium income with improvements in each of attritional loss ratio, weather and large loss costs, but a reduction in prior year development.
On a geographic basis, the highlight was a major improvement in our UK & International results, to a combined ratio of 95.0% (ex. exits). Canada improved sharply to 94.5%, Scandinavia was as usual the largest contributor (87.4% COR), though held back by poor Danish Commercial lines results.
The repositioning of RSA’s UK&I region in 2019 has driven some significant costs for exit portfolios and restructuring of expense base. Those actions make us more valuable going forward and have been absorbed by our organic capital generation.
Dividends: We propose total dividends for 2019 of 23.1p/share, up 10%. This represents an 52% payout of underlying EPS (ex. exits), above our 40-50% policy range. Our strong capital position and organic capital generation support this, despite the costs of ‘below the line’ items and bond ‘pull to par’. Reflecting the improvements of recent years in RSA’s performance and resilience, we are also increasing our target dividend payout range to 50-60% of underlying EPS.
RSA’s focused regional strategy is working well. Our ambition to drive towards “best in class” performance levels remains in place and we are optimistic about the ability of our business to improve further to that end. We target progress in each of our three regions in 2020. We have headwinds from lower investment income and adverse FX translation, but believe that EPS growth overall is again in prospect, subject to normal underwriting volatility.
RSA could not perform well for stakeholders, without their heartening and reciprocal support – for which we are very grateful. While customers and shareholders are our primary audience, we are also determined to serve the broader interest of RSA well. All we achieve is driven by the efforts of RSA’s people. I am proud to work with and to lead this group. And my sincere thanks go to them for 2019’s efforts.
Group Chief Executive
27 February 2020
1 Excluding UK&I exit portfolios, refer to pages 32 to 41 in our press release for further information