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RSA's turnaround makes progress

RESULTS: RSA is making credible progress with its turnaround strategy, although competitive market conditions - especially in the UK - won't help
August 8, 2014

Unsurprisingly given the under-reserving woes identified in Ireland last year, RSA posted a big slump in half-year profit. Indeed, the Irish unit was hit with a £57m writedown as well as a £64m underwriting loss.

IC TIP: Hold at 423p

More important, however, is progress with chief executive Stephen Hester’s turnaround plan. Much has been achieved. RSA raised £775m though a rights issue, and will receive £591m from selling non-core operations in Poland, the Baltics, China and Canada. That will substantially strengthen the balance sheet. RSA also hopes to restart dividends in the second half. Less impressive is a target of just £180m for annualised cost savings - labelled a "small disappointment" by analysts at Berenberg - but Mr Hester hopes to raise the target.

Competitive conditions, especially in the UK, won’t make progress any easier. UK motor premiums fell 39 per cent as RSA exited unprofitable activities. Weather-related claims and increased reserving in the commercial book haven’t helped, either, and overall the UK delivered a £24m underwriting loss.

Operations in Canada and Scandinavia look healthier, with both profitable at the underwriting level. The Canadian unit saw rates for household cover jump 10 per cent, while Scandinavia is seeing low-single-digit growth in rates across all business lines. Overall, RSA's combined ratio (of claims to premiums) deteriorated by nearly seven percentage points to almost 101 per cent, signalling a modest underwriting loss.

Berenberg expects full-year EPS of 41.2p (from a 46.5p loss in 2013) and net tangible assets (NTA) of 332p.

RSA INSURANCE (RSA)

ORD PRICE:423pMARKET VALUE:£4.3bn
TOUCH:422.8-423.1p12-MONTH HIGH:575pLOW: 347p
DIVIDEND YIELD:nilPE RATIO:na
NET ASSET VALUE:367p*COMBINED RATIO:100.8%

Half-year to 30 JunGross premiums (£bn)Pre-tax profit (£m)Investment income (£m)Dividend per share (p)
20135.12402702.28†
20144.645337nil
% change-10-81+25-100

*Includes intangible assets of £855m, or 84p a share

†Does not reflect 2014's rights issue, share sub-division and subsequent one-for-five consolidation