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RSA raises dividend as first-half profit jumps but not complacent amid Brexit worries

RSA has completed its restructuring but has sounded a cautious outlook given the economic uncertainty in the UK
RSA's interim dividend of 6.6p was below forecasts of 7p.

RSA Insurance Group plc (LON:RSA) hiked its interim dividend by 32% as the company delivered better-than-expected first half profit, though it said it could do “much more” to improve.

The insurer reported a 15% increase in operating profit to £360mln in the six months to 30 June, compared to the same period a year ago, beating the company-supplied consensus forecast of £338mln.

RSA said it would pay an interim dividend of 6.6p, though it was below forecasts of 7p.

READ: RSA shares soar as shake-up nears completion

Underlying return on tangible equity was 16.6%, against a target range of 13-17% and a estimate of 15.3%.

Net premiums edged up 11% to £3.4bn on a reported basis or 3% at constant foreign exchange rates. A weaker pound against currencies in RSA’s other markets provided an 8% benefit to premiums.

Tangible net asset value was £2.8bn, or 273p per share, at the end of June, down from £2.9bn, or 281p per share, at 31 December.

Shares fell 1.51% to 648.50p in afternoon trading. 

RSA completes restructuring 

Investment income fell to £171mln from £187mln, largely as a result of its disposal of its Latin America and UK legacy business.

Earlier this year, RSA announced it had signed contracts to offload £824mln of UK legacy insurance liabilities to Enstar Group.

RSA said this completed the group’s restructuring, helping to reduce risk, boost capital and increase future earnings while allowing it to focus on its more profitable continuing businesses.

At the end of the first half, the Solvency II coverage ratio – a measure of insurers’ capital position – rose to 168% from 158% at 31 December, slightly above the 130-160% target range.

Ogden discount rate cut hurts UK division 

The UK business was hit by the government’s decision to cut the Ogden discount rate – used to assess compensation for serious personal injuries –to 0.75% from 2.5%.

Following an outcry from insurers, the government launched a consultation on how the Ogden rate should be set in future and will publish its response tomorrow.

“Our UK business had the toughest time with Ogden costs, above plan large losses and challenges in household loss ratios,” RSA said.

RSA booked a £42mln net charge relating to the change in the Ogden rate.

RSA cautious on outlook

Chief executive, Stephen Hester, said RSA is also keeping its eye on inflation trends, particularly in the UK where rising prices are putting pressure on consumers’ disposable incomes. A slump in the pound following the Brexit vote last year has pushed inflation higher.

“RSA is pleased to report another half year of outperformance. But we are not relaxing,” Hester said.

“There is much more we aim to improve - for both customers and shareholders.  Competitive markets and our own raised ambitions will demand no less.”

Analysts agreed with Hester that the company still has work to do despite making progress on its turnaround plan. 

Nicholas Hyett, equity analyst at Hargreaves Lansdown, said: "The problem facing RSA is that for all its recent progress, it’s still in personal insurance, and that’s a tough market in which to deliver knockout performances. Product differentiation is all but impossible except on price, and that can end up destroying margins.

"RSA is aware of that danger, with a commitment to maintaining underwriting discipline and a focus on reducing costs. Unfortunately that can only take you so far.”

Shore Capital said disappointing tangible net asset value figures has led it to downgrade its 2017 and 2018 forecasts by 5% for both years. The analyst reiterated a 'sell' rating and a target price of 657p, adding that the stock is "too richly valued". 


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