Describing what was a challenging year for the insurer in 2014, RSA Group Chief Executive Stephen Hester expects better numbers for this year by focusing on operational processes.
“The company made good progress in the face of some tough realities. We can look to the coming years with much sounder strategic and financial foundations,” stated Hester in the company’s 2014 Preliminary Results, released Thursday. “We have created far reaching and detailed plans for operational improvement. Actions are well underway and beginning to benefit both the underlying potential and performance of our businesses.”
For the Canadian component of the company, Mother Nature took her toll – but 2015 does show promise for better results.
“2014 has been a challenging year for RSA in Canada. However, we anticipate the business returning to better performance patterns, subject to volatile items such as weather trends,” stated Hester. “Our focus will be on delivering operational improvement, particularly underwriting and claims improvements, process simplification and modernization of technology and infrastructure. However, the underlying performance of our Canadian business remains supportive of improved future results.”
Net written premiums in Canada were down 3 per cent on a constant exchange rate basis to £1,510 million ($2,904.78 million Cdn) (2013: £1,755 million as reported; £1,553 million at constant exchange) with 5 per cent volume reductions partly offset by 2 per cent rate growth.
Personal premiums were down 2 per cent, with a 6 per cent reduction in Motor partly offset by growth of 5 per cent in Household.
Household premiums included double digit rate increases (on renewal business) as the market responded to the weather events of 2013 and early 2014; volumes were down 3 per cent. In Motor, premium reductions reflected the exit of certain broker relationships, lower new business and rate in Ontario, and competitive conditions in Quebec.
In Commercial, premiums were down 5 per cent driven mainly by the actions we have been taking on the portfolio, particularly where we have been re-underwriting or exiting poorer performing accounts.
Property reductions of 5 per cent are mainly driven by underwriting actions taken in Quebec, and Liability reductions of 10 per cent are due to the exit of unprofitable programs and market leading rating action. (continued.)
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Underwriting profit was £30 million (2013: £13 million loss) with a current year loss of £8 million and a prior year profit of £38 million. The combined ratio was 98 per cent (2013: 100.7 per cent). After including investment returns of £77 million (2013: £93 million), the insurance result was £107 million (2013: £80 million). Ongoing balance sheet work across the Group has included in Canada a more granular segmentation of the portfolio for reserving purposes. This has led to a reallocation of reserves (as reported in August) to better reflect the risk profile of the book, and a £19 million release of margin.
The level of weather losses, although lower than 2013, was higher than trend, impacting profitability.
The weather loss ratio of 5 per cent for the year compares to a five year average for our Canadian business of 4.3 per cent. Personal Household and Motor were both affected by the weather, with Motor experiencing elevated claims frequency as a result of severe driving conditions in the first quarter.
In Commercial, the reallocation of reserves in H1 resulted in an increase in Liability reserves and a release in Motor, impacting their respective results. Property profitability remains under pressure given a highly competitive market, with adverse weather and large loss experience impacting results.
At a total Canadian level, the large loss ratio was 3.6 per cent in 2014 compared to a five year average of 3 per cent and a 2013 ratio of 3.3 per cent. The current year underlying loss ratio was 62.8 per cent (2013: 62.1 per cent).
Overall Group Financial Results
Headline profits at £275 million pre-tax compare to a £244 million pre-tax loss in 2013, yet still represent a fraction of what we seek to achieve as RSA improves performance in coming years.
Net tangible assets have improved by £1.2 billion (74 per cent) to £2.9 billion in 2014 (from 19 per cent to 39 per cent of net written premiums) and now lie within our target range from a capital perspective, though still at the lower end. We are pleased to recommence dividend payments with a final dividend recommendation of 2 pence per share. This is a modest level reflecting the work remaining on profit and capital build. We reiterate a medium term ambition of 40-50 per cent dividend payouts plus further capital distributions if excess capital arises. (continued.)
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Behind the 2014 headline figures are many moving parts, reflecting market movements and the actions we have taken.
Premium income is down 2 per cent on an underlying level at constant exchange (8 per cent headline including completed disposals, Motability changes and the Group ADC). Scandinavia did well (up 3 per cent), U.K. saw most portfolio restructuring (down 6 per cent underlying) with Canada also down a little (down 3 per cent). At reported exchange rates premiums were down 14 per cent.
Current year core business underwriting profit (ex-Ireland) was a record £190 million (2013 £97 million) reflecting a one point improvement in underlying loss ratios, and after a relatively normal weather and large loss charge. The core business current year underlying loss ratio (ex-Ireland) was 56.2 per cent (2013: 57.2 per cent) and has improved in each quarter during 2014.
Total underwriting profit was £90 million (2013 £57 million). The figure was depressed by significant reserve strengthening which impacted prior year profits (prior year underwriting profit ex Ireland £14 million; 2013: £172 million) and an Irish underwriting loss of £107 million. The latter mainly relates to the development of issues from 2013 and prior. Both items have proven more costly than was estimated at the start of the year. We expect them to improve sharply in 2015.
Disposal gains of £342 million were offset by the charges outlined above, albeit much of the latter being non-cash items.
