RSA reports excellent progress YTD 2020, with underwriting profit strongly up

Authored by RSA

Stephen Hester, RSA Group Chief Executive, commented:

“RSA’s run of record underwriting results is continuing. The Group recorded a Q3 discrete combined ratio of 90%, despite providing fully for the UK BI Court ruling in September. While COVID-19 has held back our profit overall, RSA’s inherent strength and the improvements we have made are driving the business forward in a pleasing manner. The outlook for continued underwriting improvements remains positive.”

TRADING UPDATE

Market conditions

Insurance market conditions were largely unchanged in Q3. While competitive overall, they are accommodating pricing and underwriting actions consistent with sustaining loss ratio gains and improving further in those portfolios needing it.

Premiums

Group net written premiums of £4,663m were down 3% YTD 2019 (flat3 excluding the estimated impacts of COVID-19 and in line with our plans).

In Scandinavia premiums of £1,381m were down 1%3 reflecting portfolio actions in Danish Commercial Lines.

In Canada premiums of £1,248m were down 1 (excluding estimated COVID-19 impacts premiums increased 4%).

In UK & International premiums were down 6% to £1,998m or 2% excluding the estimated impact of COVID-19.

On 27 October we were pleased to announce an important new bancassurance distribution alliance between Codan, our Danish business, and Nykredit, SparNord and the association of local savings institutions, providing insurance solutions through Codan’s existing brand Privatsikring. This alliance gives Codan access to roughly 25% of all bank customers in Denmark, and over the next few years we anticipate additional personal lines volumes in Denmark from this deal of over £100m annually, doubling the size of our current bancassurance book.

Profitability

Group business operating profit for the first nine months was up, with a significantly improved combined ratio and lower investment income (as guided). This is despite fully reserving for the UK BI Court case in September. Each of our three regions is performing on or ahead of our plans excluding the impacts of COVID-19.

Underwriting profit components (excluding exits):

Group weather costs were 3.0% of net earned premiums (YTD 2019: 2.6%).

The large loss ratio was 9.0% excluding the estimated COVID-19 impacts of 1.6 points (YTD 2019: 9.6%)

The attritional loss ratio improved strongly overall on all bases, and in each region.

The written controllable expense ratio increased slightly overall (though absolute costs were down 2% in real terms).

Prior year development was positive though slightly below our plan.

Investment income was within the range guided at our 2020 Interim Results.

Exit portfolios (while now largely run off), generated a modest further loss of £6m in the quarter.

Retention ceiling now reached on Group aggregate reinsurance cover, providing protection for individual losses and catastrophe events over £10m in Q4.

The second phase of the UK cost programme began in the third quarter, with £14m of charges booked below the operating result in respect of this.

Balance sheet and capital

Tangible shareholders’ equity at 30 September 2020 was £3.35bn (31 December 2019: £2.91bn). The increase was driven by year to date profits, FX, pension movements and mark-to-market gains.  Tangible net asset value per share was 323p (31 December 2019: 282p).

Balance sheet unrealised gains were £446m (pre-tax) at 30 September 2020, an increase of £18m from half year, driven by positive mark-to-market on bond holdings due to declining yields. IFRS pension surplus in the UK was £416m (net of tax), up a further £61m from half year.

The Group’s estimated Solvency II coverage ratio was 159%4at 30 September 2020 (31 December 2019: 168%), including accruals for current year dividends and the 2019 final dividend. Excluding this latter accrual, the estimated ratio was 168%4.

COVID-19 impacts

While the impacts of COVID-19 on RSA are ongoing, we discuss the principal areas affected below with YTD data:

For the third quarter 2020 non COVID-19 claims frequency was down vs. prior year in a range of 8-36%, mostly reflecting lower economic activity. This provides benefits which have been reflected in premium givebacks and other customer reliefs, as well as partially offsetting COVID-19 related claims costs outlined below.

Since the half year reporting there have been no material increases in COVID-19 related claims reserves outside those relating to business interruption claims in the UK. In September we increased claims reserves (IBNR) by £62m net of reinsurance in respect of the judgment from the FCA Test Case published on the 15 September 2020 and allowing for the latest position on the Group Volatility Cover (GVC). The majority of this has been booked as large losses (c.75%) with the remainder booked within the attritional loss ratio. RSA and the other parties to this case have filed an appeal to the judgment to the Supreme Court under a “leapfrog” appeal process, the results of which are expected later this year. Our estimate of the gross impact of the initial ruling which we published on 15 September has been revised down by c.£20m5 which reduces the likely claims on reinsurers but has little impact on the net cost absorbed by RSA as outlined above. To date there has been no material increase in claims activity related to COVID-19 “second wave” in our various territories.

There is also a COVID-19 effect on premium income for customer reliefs and various other direct economic impacts, which has so far totalled c.£156m YTD.