With an estimated $100bn (£64bn) of losses having hit the global insurance industry last year - the result of earthquakes in Japan and New Zealand, floods in Thailand and Australia, that sort of thing - investors might feel wary of the insurance sector. But RSA largely avoided that. When Lloyd's underwriters were reporting painful losses from those events, RSA remained consistently profitable. Its combined ratio (of claims to premiums) for 2011 came in at a solidly profitably 95 per cent, and broker Numis Securities expects that to improve to 93 per cent in 2012.
- Premium rates are rising
- Modest catastrophe-related losses
- Decent investment results
- Impressive dividend yield
- Little exposure to the most buoyant areas
- UK motor book could struggle
That's because RSA doesn't have much exposure to the business lines that can be exposed to catastrophes. Its earthquake-related loss in 2011 was under £12m, tiny compared with the pain being felt at other UK-listed insurers. For example, Lloyd's underwriter Amlin suffered net losses relating to earthquakes of £377m last year, yet its stock market value is less than half RSA's. In fact, RSA is focused much more on personal and commercial lines of business such as motor, personal liability and property.
True, that means RSA won't benefit much from rising premium rates on catastrophe-exposed business classes. And progress there is expected to be significant as catastrophe-focused underwriters hike premium rates fast in order to rebuild their reserves following those hefty losses. That process is already under way with Hiscox's management, for example, having said last month that rates on its Japanese earthquake cover had doubled. RSA can't match such hefty rate hikes.
Nevertheless, RSA is pushing through solid increases in premium rates. With its first-quarter figures, RSA reported that its Canadian household book had seen rates rise 12 per cent in the year to the end of March, while its Scandinavian commercial liability and commercial motor accounts both boosted rates 5 per cent. Come to that, rates are rising across the board, even though increases on some lines have been modest - such as Canadian liability, where premium rates rose just 1 per cent. Combined, RSA's Canadian and Scandinavian businesses generated 43 per cent of the group's net premiums during the first quarter, while a further 16 per cent came from emerging markets such as Latin America, Asia and the Middle East, where conditions remain healthy.
RSA INSURANCE (RSA) | ||||
|---|---|---|---|---|
| ORD PRICE: | 103p | MARKET VALUE: | £3.66bn | |
| TOUCH: | 102.5-103p | 12-MONTH HIGH: | 141p | LOW: 97p |
| DIVIDEND YIELD: | 9.6% | PE RATIO: | 8 | |
| NET ASSET VALUE: | 108p | COMBINED RATIO: | 95% | |
| Year to 31 Dec | Net premiums (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2008 | 6.46 | 759 | 17.3 | 7.71 |
| 2009 | 6.74 | 554 | 12.2 | 8.25 |
| 2010 | 7.46 | 474 | 9.80 | 8.82 |
| 2011 | 8.14 | 613 | 11.9 | 9.16 |
| 2012* | na | 657 | 13.5 | 9.91 |
| % change | - | +7 | +13 | +8 |
*Numis Securities estimates Normal market size: 20,000 Matched bargain trading Beta: 1.0 | ||||
The UK operation, which generates 32 per cent of net premiums, is also in good shape, with the household account having boosted premium rates by 7 per cent in the year to end-March, while the UK personal motor book saw rates rise 8 per cent. However, after RSA's UK motor rates rose 17 per cent in 2011, the pace is clearly slowing and more pressure looks likely. Not only is this market losing momentum after insurers forced through double-digit rate increases for the past few years, the competition regulators aren't happy, either. Last month, the Office of Fair Trading said it intended to refer the motor market to the Competition Commission after finding that the high cost of providing replacement vehicles to not-at-fault drivers involved in accidents was inflating premium rates.
RSA's investment book looks in good shape, though. Some 89 per cent of the portfolio is invested in cash and safe-looking bonds and, in 2011, it delivered a 3.9 per cent return, not bad among today's ultra-low interest rates. It's also achieving a better return than many of its UK peers - both Hiscox and Amlin made returns on investments of just 0.9 per cent last year. A prospective dividend yield of approaching 10 per cent, based on Numis's forecast payout for 2012, is eye-catching, too. That's easily the fattest yield among the London-listed insurers.
