RSA could get ‘significant’ motor rate hike from big client - analyst

RSA could be in for a “significant” rate increase in its fleet motor business as a major contract renews, according to Panmure Gordon analyst Barrie Cornes.

The insurer is renegotiating its three-year contract with car lease company Motability, which has the UK’s largest motor fleet.

Cornes wrote in a research note: “Claims experience in the past few years has been poor largely as a result of rates being set prior to the large influx of personal injury claims. We anticipate that the negotiations taking place ahead of the renewal of the contract later this year will see some significant rate increases.”

However, he added that the benefits would not show up in RSA’s underwriting results “for some time” because the higher premiums will take time to be earned.  

RSA has cut is exposure to UK motor business in 2012. Shore Capital analyst Eamonn Flanagan wrote in his review of the UK non-life industry at the beginning of the year that RSA had lowered its UK motor premiums by 20% in the first none months of 2012.

Cornes expects the RSA group to narrowly beat its 95% combined operating ratio (COR) target for 2012 by posting a ratio of 94.9%.

He expects RSA to post an operating profit of £708m in 2012, down 3% on 2011’s £727m. However, he expects the insurance group’s fortunes to improve in 2013, where he estimates an operating profit of £780m.

Cornes said that RSA is a “well-run business” that is “doing all the right things”. However, he has kept his recommendation for RSA’s stock at ‘hold’ because he believes there is little scope for the share price to grow much further.

He said the company’s shares trade at a “relatively high” price to net tangible asset value ratio of 2.1 times and a price/earnings ratio of 10.8 times, based on estimated earnings for 2013.

Cornes added: “These multiples are likely to restrict upside in our view whilst the 7.1% dividend yield will conversely restrict any downside.”