Why RSA's UK personal motor is a problem child - analysis

Another year, another glut of problems at RSA. The insurer’s share price crashed 9% after a third-quarter profit warning, with London market and marine grabbing the headlines as the troubled areas.

But, arguably, RSA’s biggest challenge is in UK personal motor, a long-running problem child.

During a call immediately after the profit warning, chief executive Stephen Hester (above) admitted to analysts that the “personal operation in motor has got worse”.

Now questions are being asked about how RSA is going to fix a part of the business that has been racking up losses for the best part of a decade.

Hester, however, hopes to be at market leading levels by 2020. In the meantime, RSA will likely cut premiums and raise rates to shore up the book.

RSA has struggled with its strategy and performance here for many years

Ben Cohen, Investec

Despite Hester’s confidence, a perception is taking hold in the market that RSA is trailing behind rivals such as Direct Line, Admiral, Hastings and Aviva. Investec analyst Ben Cohen is forecasting RSA to be deep in underwriting losses this year, well below the market average (see graph).

Summing up the issues facing RSA, Cohen says: “RSA has struggled with its strategy and performance here for many years, as the importance of rapid repricing, claims prevention and handling capabilities have increased with the investments of competitors, including Admiral and Hastings.

“RSA’s premiums will have more than halved over the past 10 years to 2018, as it has pulled back in the mass market and focused on telematics for growth.

“Further restructuring must be a possibility, and, even at less than 10% of UK premiums, the sub-sector could be the cause of more difficulties.”

Rivals pulling clear 

Cohen’s synopsis was echoed by one UK insurance boss, who told Insurance Times: “What you are beginning to see emerge are the winners and losers.

“You have players like Admiral, DLG, Hastings and Aviva – they are all big. They have scale, and that’s so important. It means they can invest in the right pricing, claims, systems and analytics.

“You have to be clear about what you’re doing. If you’re on the aggregators, you need to be low cost. Otherwise, you are going to need a fantastic brand. RSA don’t have any of that right now.

“They’ve also been in a cycle of cutting back. Once you start that, it can quickly become a vicious circle, and very difficult to get out of. To turn it around, they are going to need to have something special.”

Hester predicts RSA will be fit to expand in motor within two years. 

He said: “I would say 2020 would be the first year that I would expect us to feel confident about expanding the motor book. Now that depends, of course, on market conditions, whether we then want to expand or not.”

Dividend pressure 

A profit warning is not unfamiliar territory for RSA, having shocked the market in 2013 when a major problem in Ireland emerged. The discovery of a financial hole in the Irish business led to chief executive Simon Lee leaving and Hester taking over. A £773m rights issue, £200m capital injection into Ireland and sale of non-core business helped fix the problem. RSA also axed the dividend in 2013, a sacred cow for investors who annually pin their hopes on solid returns.

Barring a major catastrophe event, RSA will almost certainly pay out a dividend. However, the 110% combined operating ratio and £70m loss for UK and London market means a rise in the dividend pay-out ratio is under pressure.

UBS said the profit warning was “unhelpful given RSA’s elevated valuation and expectations the pay-out ratio can rise”.

It added: “The buy case on RSA would be that it has cut costs, improved underwriting margins, controlled large loss volatility, and it can now move towards gradually growing the book at improved margins, while increasing the pay-out ratio.

“This profit warning is clearly a blow, and suggests that RSA has further work to do to improve underwriting standards and control large loss volatility, particularly in the London market business.”