ANALYSIS: RSA boss forecasts Brexit boost as he reveals record underwriting profit
“For RSA, by far the most important feature [of the Brexit] is the depreciation of sterling which should give us a significant earnings increase measured in sterling terms in the future periods,” chief executive Stephen Hester said during the first-half results presentation to the media.
At current exchange rates it would result in an around 7 percent increase in earnings per share in the future over what they might otherwise have been, he explained. Around 75 percent of RSA’s profits are earned outside the UK, he noted.
Sterling depreciated up to 10 percent against RSA’s core foreign trading territories during the first half of 2016, according to its first-half results presentation.
Nevertheless, RSA’s post tax profit plummeted in the first half to £91million from £215 million in the same period a year ago, a figure which was boosted by disposal gains as part of the insurer’s restructuring.
At the same time, operating profit increased 20 percent year-over-year in the first half of 2016 to £312 million, the majority of which came from the UK (£144 million), followed by Scandinavia (£131 million) and Canada (£69 million).
In the period, RSA made an “all-time record underwriting profit” and “every single one of our three regions is contributing very strongly to those results,” Hester said.
RSA’s underwriting profit was £174 million in the first half, up 72 percent compared with the first half of 2015, driven by a jump in Scandinavia to £96 million from £16 million over the period.
The core group combined ratio was 94.3 percent with Scandinavia at 88.5 percent; Canada at 94.5 percent; and the UK at 94.4 percent.
At the beginning of 2016 RSA set out a three-year plan ending 2018, through which the insurer hopes to achieve a “best in class position” regarding financial performance and capital levels.
For Scandinavia, RSA targets a combined ratio of below 85 percent, for Canada and the UK below 94 percent. In Scandinavia, RSA wants to grow net written premiums and reduce the operating expense ratio as part of the strategy. In Canada it wants to reduce the attritional loss ratio and the operating expense ratio while in the UK net written premium growth and a reduction of the attritional loss ratio are on the agenda.
The turnaround of RSA has been done, the strategy has been fixed, Hester said. “We’re focused on our strongest markets, the balance sheet has been fixed, our credit ratings are secure and we reported today a significant rise in our Solvency II ratio to the top of our target range at 158 percent.”
Investment income, however, dropped to £187 million in the first half compared to £206 million a year ago. For the coming years, RSA expects investment income to remain under pressure, falling to around £300 million for the full year of 2018 compared to about £350 million in 2016.
Brexit is likely to have negative effects for RSA through lower interest rates, resulting in pressure on interest income over the next three years, Hester said. There might also be a negative effect on economic growth, but Hester expects the impact on premiums to be “modest.”
Gross written premiums remained broadly flat in the year-over-year comparison at £3.73 billion in the first half.
