A tale of two insurers

With the half-year results now in for insurance giants Norwich Union and RSA how do they stack up?

What is clear is that, despite the first six months of the year being free of any significant weather related losses, the UK market continues to be a tough one in which to do business.

NU’s general insurance business reported an operating profit of £326m compared to £284m for the first half of 2007 - when the floods caused the insurer £235m of damage.

Meanwhile, RSA’s UK business produced an operating profit of £230m down slightly from £232m in the previous year.

The challenging conditions can be seen in the individual performances of the various lines of business.

The personal lines market was tough for both companies. Both made efforts to increase rates in home and motor lines, but RSA saw its personal lines underwriting profit fall to £6m in the first half of 2008, from £19m in 2007.

The main contributor to the fall in profitability, was RSA’s private motor which produced an underwriting profit of less than half what it was in 2007 (£6m compared to £15m).

NU on the other hand posted a £53m underwriting loss in its personal lines book. This was an improvement on the 2007 performance, where an underwriting loss of £171m was posted for the first six moths of the year.

But the improvement was down to an improvement in NU’s household book which was hammered by last year’s floods. In contrast, the company’s motor book fared worse, plunging further into loss, while NU’s other personal lines classes fell collectively into the red.

The commercial lines market was also hard work, particularly for NU which saw the underwriting result on its commercial book tumble to a profit of £85m compared to £124 in 2007.

NU’s commercial motor book reported an underwriting profit of £22m, half of what it was in 2007, while the commercial property book fell into the red, producing a £9m loss.

In contrast RSA reported an increase in its commercial lines underwriting profit - £42m compared to £32m in the previous year. This was despite the commercial property book producing a loss of £17m (down from a £9m loss last year) on the back of large losses, and a lower casualty result (an £8m profit from £23m profit in 2007).

Overall NU reported an underwriting profit of £37m in the first six months of the year, compared to a loss of £46m in 2007. RSA produced an underwriting profit of £48m down from £51m the first half of last year.

So what do the results reveal about the underlying performance of the businesses. Given the exceptional flood losses of 2007, a straight comparison with that year’s performance is difficult.

Looking back to 2006 how did the two companies perform? In first six months of that year, NU reported an underwriting result of £222m, while RSA produced an underwriting profit of £95m.

As such, NU’s underwriting profit has fallen by 85% from 2006 to 2008, while RSA’s result has fallen by a half.

RSA blames large losses in the first half of 2007, such as the fire at the Royal Marsden Hospital in London at the beginning of the year, and lower prior year development, which have offset this year’s benign weather conditions. It also points to an overall decline in the profitability of the insurance industry. Adjusting for these factors the performance would be on a par with the 2006 figures, RSA claims.

Banking group Citigroup is positive about the performance. The UK underwriting result was in line with expectations and the rate increases achieved were well ahead of the industry, the bank said.

But NU’s performance does raise some concerns, according to Citigroup. It describes the company’s rebound from the flood-affected 2007 performance as “anaemic” and warns of “significant underlying deterioration”.

In particular Citigroup points to UK pricing weakness and argues that effort to reduce costs would be counteracted by a shrinking premium base and rising commission costs.

NU describes its results as a “solid” performance and says it has been inching up rates to achieve adequate rating levels.

But it is of concern that four lines of business – including NU’s whole personal lines portfolio – are producing underwriting losses.

NU is focusing heavily on its cost base, including taking strong action on the consolidators’ commission levels. How this plays out, along with its efforts to increase rates, will be crucial going into the second half of the year and into 2009.