- The Group is now focused on its strongest businesses, a key to future outperformance. Divestments to achieve this focus have raised £1.2bn.
- RSA's balance sheet is transformed. Credit Ratings are restored, regulatory capital and related capital ratios are at the upper end of our target ranges.
- Performance is transformed. 2016 record underwriting profits of £380m compare to a 2013 profit of £1m1. Underlying return on tangible equity1 of 14.2% in 2016, is now in the upper part of the 12-15% target range we originally set. Dividends are restored and growing.
The quality of the foundations laid during this period, underpinned by the franchise strengths of RSA’s 300 year history, gave us confidence at the start of 2016 to lay out new ambitions for the future.
We now aspire to move RSA’s performance levels towards 'best in class' for our markets, for customers and shareholders. If we succeed we will outperform over the coming years. 2016 performance provides an encouraging down payment on this aspiration, delivering a combined ratio ('COR') of 94.2%, a record1 for RSA.
Strategy & Focus
RSA is a strong and focused international insurer. We have complementary leadership positions in the major general insurance markets of the UK, Scandinavia and Canada. We have valuable franchise strength and balance across these regions, between commercial and personal customers and across product lines.
The history, dynamics and structure of our markets show that focused regional market leaders can both successfully sustain customer appeal (market position) and achieve superior shareholder performance. This is the course we have set out upon.
The general insurance markets we operate in are relatively mature, consolidated and stable. Attractive performance is possible despite slow growth, economic and competitive challenges. It requires intense operational focus within a disciplined strategic framework.
Financial markets are also important for all insurers. Low interest rates hurt. But they force a greater concentration on the core business of underwriting which can yield significant improvements. 2016 is the first year for RSA where underwriting profits have grown to exceed investment income, a trend we expect to continue.
2016 was a year of volatile financial markets, testing both capital resilience and profits. Bond yields at year end were below those of a year ago in our major markets. Credit spreads were narrower (hurting UK pension accounting). But conversely, a significant Brexit induced weakening of Sterling since June helps RSA, as c.70% of our operating profit is earned outside the UK.
RSA’s 3 year 'focus' programme was completed with the sale of our businesses in Latin America and Russia which closed in 2016. Evidence is mounting that the concentration of management focus and resource onto our core businesses will be a key enabler of future performance gains.
Our ‘A’ grade credit ratings are strong and stable. Our Solvency II capital ratio has been improved from 143% (2015) to 158% at the end of 2016 (target range 130-160%), despite retirement of £200m of high cost subordinated debt. Risk reduction in our UK pension scheme assets has also been successfully completed. And 2016 saw testing financial and insurance event volatility which RSA withstood well. Since year end our disposal of UK Legacy liabilities has given us an important boost to capital and the opportunity to improve capital quality still further.
Our goal is to systematically and determinedly hunt down performance improvement opportunities across our business. We have taken RSA's performance from below that of competitors in 2013 and prior, to 'in the pack'. All efforts are now concentrated on moving towards our 'best in class' ambitions. The plan is substantially the same across our businesses. Focus on improving service to customers, on underwriting and on costs.
Across the Group, our many customer initiatives have sustained retention rates and above average satisfaction measures. Core premiums were up in 2016 but on lower policy volumes. We are determined to compete on quality, with competitive but profitable pricing. We will not chase unprofitable growth. However, there are encouraging signs that continuing underwriting and service capability improvements will restore modest volume growth and we hope to deliver good evidence of that in 2017.
RSA’s most important performance lever is our underwriting judgement. Across the Group portfolio disciplines, skills enhancement, data and model improvement and indemnity initiatives are producing strong benefits. Attritional loss ratios for the Core Group improved 1.4 points on 2015 and are 4 points better than those of 2013. We target further improvement still.
Cost efficiency is the other crucial performance ingredient. We have achieved c.£290m of gross annual savings (vs original 2016 target of >£180m). We believe we can raise our savings target for the third time and now expect to deliver over £400m p.a. by 2018. Headcount has reduced 19% since 2013 in our core businesses as our people have become more productive. We expect to enhance their productivity further with continued business re-engineering, enabled by technology and infrastructure renewal programmes covering digitisation, robotics, infrastructure replacement and software upgrades which continue successfully in each region.
Financial results 2016
RSA Group: 2016 Full Year Results
Operating profits - our key ongoing measure - rose 25% to £655m. Underlying earnings per share (EPS) rose 42% to 39.5p. Statutory profit after tax of £20m reflects a particularly ‘noisy’ year in accounting terms. The very strong underlying results were optically offset by planned restructuring costs, debt buy-back costs and non-capital accounting charges. We plan that 2017 should be much cleaner and be the last year of material 'below-the-line' costs.
Core premium income was up 6%, but adjusting for FX and price changes, volumes were modestly down. Premium income was in line with our plan on that basis.
Underwriting profits, the litmus test of performance, rose 73% to a record1 £380m. This represents a combined ratio of 94.2%, also a record1 for RSA. Reserve margins were strengthened to 5.5% (2015: 5%) building some additional cushion against future challenges.
Underlying quality of results was excellent. Current year underwriting profits were a record £271m, up 110%. And volatile weather/large loss items did not help us out, being 0.3 points higher than 2015 at core group level.
Particularly pleasing was the spread of performance. Each region hit or exceeded its operating plan targets. Scandinavia supplied 47% of operating profits with a COR of 86.2%. The UK recorded its first significant underwriting profit in a decade (£123m). And Canada did well (94.9% COR), despite natural catastrophes in the region. The one sub-regional disappointment was Ireland. Despite dramatic improvement to breakeven on current year operating profit, further prior year reserve strengthening was required taking the Irish COR to 116.2%.
Reflecting RSA's strong progress, a final dividend of 11p/share is proposed making 16p/share total for the year, up 52%. This represents a 41% pay out of underlying EPS (in line with stated policy). It remains our belief that RSA will generate attractive free capital, net of organic growth needs and regular dividend pay outs, once restructuring actions complete and bond 'pull to par' impacts reduce, probably in 2018.
Our performance target of 12-15% return on tangible net assets1 is still good by industry standards and represents a creditable achievement level for RSA, implying better ongoing underwriting performance than any year prior to 2016. However, given our progress and the Legacy sale, we are raising the target range to 13-17% ROTE1. Additionally the supplementary ambition we have set of moving towards 'best in class' combined ratio performance in our markets, if achieved, should allow us to exceed even this higher range in time. We will try to do just that.
2016 Full Year Results
RSA is making terrific progress. This is thanks to the efforts of our people and the support of customers, brokers and other stakeholders. Our performance gains are not easy things to achieve, especially with a tough industry backdrop. Sincere thanks and appreciation go to all involved.
RSA has a proud history, despite bumps along the way. We are determined, in performance terms, that the future can be brighter still.
Group Chief Executive
22 February 2017
1 Underlying or alternative performance measure