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RSA expects UK business to bounce back after 'disappointing' 2017

RSA Insurance Group Plc expects its U.K. business to "bounce back" in 2018 after natural catastrophes and household insurance claims inflation pushed the division to an underwriting loss in 2017.

The result for the domestic business, which made up 40.3% of the U.K.-based group's £6.68 billion net written premium for 2017, was a black mark on an otherwise good year for RSA. It reported an 11% jump in annual underlying profit after tax attributable to ordinary shareholders to £444 million, boosted its full-year dividend by 23% to 19.6 pence per share and raised its cost-cutting target to £450 million of annual gross savings by 2019.

The group combined ratio, which measures underwriting profitability by showing claims and costs as a percentage of premiums, was 94%, which RSA said was a record low and down to the underwriting performance in Scandinavia and Canada.

The isolated U.K. combined ratio jumped to a loss-making 104.3% in 2017 from 95.4% in 2016. The deterioration had three main causes: a £72 million claims bill, net of reinsurance, from 2017's natural catastrophes in the U.S., Caribbean and Mexico, which fell on the U.K. division; an increase in large non-catastrophe claims; and a rise in escape-of-water claims in the U.K. household business. The result also included a £23 million charge for the change in the U.K. personal injury discount rate.

'Disappointing result' with underlying positives

U.K. and international CFO Matt Hotson described the U.K. performance in 2017 as "a disappointing result at headline level" during a Feb. 22 conference call with journalists, while U.K. and international CEO Steve Lewis added: "It is no question the 2017 result is not the one we were anticipating."

Yet Lewis added: "I am confident we will see the U.K.'s results bounce back in 2018 and continue the improvement trajectory established over recent years."

RSA's mid-term ambition is to achieve a U.K. combined ratio of below 94%. "Over the next two to three years, that it's an eminently doable ambition," Lewis said.

RSA said in its earnings statement that its performance ambition for the U.K remained unchanged "although its achievement may take longer than originally hoped." According to Lewis, the statement referred mainly to the increase in household escape-of-water claims, which RSA aims to tackle by changing pricing and claims processes.

"Pricing takes time to earn through the book," he said. "While we would anticipate recovering some of the household position in 2018, we won't fully earn the benefits of the pricing actions we are taking until 2019. That brings in somewhat of a drag as we continue to reposition the overall sustainable profitability of the organization."

Hotson said that while the 2017 result was disappointing, "it does mask a lot of very positive and good things that are going on in this business." These include growth in RSA's U.K. telematics business and a new five-year home insurance partnership with Nationwide Building Society, which started in 2017 and which Hotson said "looks set to take us to a leading position in household in the U.K. by the time that [business] has annualized through by the end of this year."

Shore capital analyst Eamonn Flanagan described RSA's 2017 underwriting results from Canada and Scandinavia as "excellent" and the 82.9% Scandinavia combined ratio as a "'blow-out' performance." But he added that the U.K. performance was "weak" and highlighted a "disappointing" 5% fall in RSA's net tangible asset value.

RSA's shareholders seemed impressed with the results, pushing the company's stock up 3.2% on the day. That made it the fourth-biggest riser in the benchmark FTSE 100, which lost 0.4%.