Overview
RSA Insurance Group PLC (RSA) is a British general insurer, offering insurance to individuals and businesses ranging from small businesses to large corporations. The original company, Sun Insurance, was formed by Charles Povey in 1706 and The Sun Fire Office was established in 1710. Over the next 300 years, the corporation grew into an internationally recognised insurer and is headquartered in London, the United Kingdom. The company in its present form was established after the merger of Sun Alliance Group merges with Royal Insurance Holdings in 1996. In 2008, the changed its name to RSA Insurance Group and today is a part of the FTSE 100 index. The company is one of the world's longest standing general insurers, serving nine million customers in over 100 countries. It has established leadership positions in three core regions: Scandinavia, Canada, and the UK & International and employs 13,500 people worldwide. The group's operations are balanced between personal and business customers. It offers various personal insurance products like home, car, pet and travel insurance directly to its customers, as well as through brokers and agents. It also provides services for businesses of any size, covering risks like property, vehicle and fleet, professional liability and indemnity and travel.

Management
Martin Scicluna is the current Chairman of the Board. He also chairs the nomination and governance committee. He has substantial expertise and grasp of the financial services sector and, prior to joining RSA Insurance Group, had held various positions in other companies. The Group chief executive is Stephen Hester; he was appointed in February 2014. He has 30 years of experience in FTSE 100 companies. Scott Egan is the current Group chief financial officer.

Geographical Segments
The primary operating segments are differentiated based on geography and comprise of Scandinavia, Canada, UK & International and Central Functions. The Central Functions include the Group's internal reinsurance function and Group Corporate Centre. According to the first half of FY 2018, UK & International (which includes Ireland and the Middle East) was the largest segment and reported Net written premiums worth £1,532 million. It was closely followed by Scandinavia.

Key Statistics

 
Recent Developments
On 5th February 2019, the company had announced that Scott Egan, who held the position of Chief Financial Officer since October 2015, would be appointed as Chief Executive of RSA's UK & International division with effect from 5th February 2019. Subsequently, on 26th February 2019, the company announced the appointment of Charlotte Jones as Chief Financial Officer, replacing Scott Egan. He is expected to take the position by summer.
 
Key Financial Metrics (FY 2018, in £m)
 

(Source: Company Filings)
 
Key Financial Highlights (FY 2018, in £m)
The net written premiums of £6,470 million fell 1 per cent at constant FX but increased 1 per cent on an underlying basis, affected by a reduction in the retention levels for certain reinsurance programmes. The Group's combined operating ratio was 96.2%, against 94.0% in FY 2017. The group's operating profit was reported at £517 million in FY 2018, down from £663 million In FY 2017, reflecting a decrease of 19 per cent at the constant exchange rate. The regional operating profit was reported as Scandinavia £306 million; Canada £84 million; UK & International £105 million. The pre-tax profits rose by 7 per cent to £480 million, from £448 million in the financial year 2017.  However, the underwriting results reported by the company were down. This was mainly because of adverse weather conditions, and losses in commercial lines. The underwriting profit was £250 million, against £394 million in FY 2017, reflecting a fall of 33 per cent at the constant exchange rate. The investment income in FY 2018 dipped by 3 per cent to £322 million. The statutory profit after tax rose to £372 million. The headline EPS was up by 21 per cent to 31.8p, while underlying EPS was 34.1p per share, falling for the first time since 2013. Underlying return on tangible equity was reported at 12.6 per cent versus 13-17 per cent target range. Due to profit after tax of £450m, the tangible net assets increased by 4 per cent to £2.9 billion on 31 December 2018. The group reports a strong capital position with solvency II coverage of 170%, against 163% in 2017. The company fulfilled its target of cost savings and reached the target of > £450 million a year early.

Financial Ratios

(Source: Thomson Reuters)
 
Ratios Commentary
The company in the first half of 2018 reported a significantly lower expense ratio than its peers, reflecting the cost-cutting efforts undertaken by the group. A lower investment ratio signifies that the company is earning less income from investment in proportion to premiums than its competitors. The profitability margins of the group are higher than its peers and increased significantly in the first half of 2018. The company is considerably less leveraged than its peers. A higher proportion of assets are funded by the equity and even the debt in proportion to equity is less than the industry median.
 
Valuation Methodology

Method 1: Price/Earnings Multiple Approach (NTM)


Method 2: Price/Cash Flow Multiple Approach (NTM) (Book Value Per Share (FY19E) approximately)


To compare RSA with its peers, Price/Book value multiple has been used. The peers are Aviva PLC(NTM P/B was 0.97), Swiss Re AG (NTM P/B was 1.02),Hannover Rueck SE(NTM P/B was 1.67) and Direct Line Insurance Group PLC(NTM P/B was 1.82). The mean of Price/Book (NTM) of the company’s peers was 1.37x.
 
*All forecasted figures and peers have been taken from Thomson Reuters.
 
Share Price Commentary

Daily Chart as at Mar-11-19, before the market close. (Source: Thomson Reuters)
 
On 11^th March 2019, at the time of writing (before market close), RSA shares were trading at GBX 512.8, up by 0.5 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBX 683.40/GBX 490.40. At the time of writing, the share was trading 24.96 per cent lower than its 52w High and 4.56 per cent higher than its 52w low. Stock’s average traded volume for 5 days was 5,035,101.20; 30 days - 3,573,648.30 and 90 days - 3,122,546.90. The average traded volume for 5 days was up by 40.9 per cent as compared to 30 days average traded volume. On the valuation front, the stock was trading at a trailing twelve months PE multiple of 14.1x as compared to the industry median of 13.9x. The company’s stock beta was 0.95 reflecting the same directional movement of stock with the index. The outstanding market capitalisation was around £5.25 billion and a dividend yield of 4.12 per cent.
 
Risks Assessment and Growth Prospects
In FY 2018, the company reported negative growth at an underlying level for the first time since 2013. Despite that, the company is expected to strongly bounce back in 2019, with good progress on expenses and other strategic initiatives planned in the year. The company has announced substantial portfolio exits, initiated significant pricing and re-underwriting programmes, and increased reinsurance coverage for 2019 to combat the rising risks to insurance from adverse weather conditions, especially exposure from European windstorms and Canadian earthquakes, and considering that the catastrophic event weather insured losses have increased fourfold over the past 30 years. The macroeconomic variables including widening credit spreads, declining bond yields or currency fluctuations possess a significant risk to the company's insurance funds and returns. Though the impact of Brexit on company's operations are not expected to be substantial, the group has transferred its European branches into a newly created Luxembourg entity, which will be the headquarters of the company's existing European Union (EU).
 
Conclusion
The company's strong capital position with a dedicated cost reduction programme has meant that the company's financials remain strong despite the harsh business environment. Its reinsurance programme has been consistent with the increased uncertainty, and the company seeks to take on more risks according to its appetite only. Based on strong fundamentals supported by healthy increase in demand for insurance and the valuation done using the above two methods, we have given a BUY recommendation at the closing price of GBX 509.8 (as on 8th March 2019) with double-digit upside potential based on 12.7x NTM Price/Earnings on FY19E earnings per share and 1.37x NTM Price/Book Value on FY19E Book value per share.

*The buy recommendation is valid for the current price as per the report as on (11th March 2019).

Note- GBp or GBX are interchangeably used for Pence Sterling. 

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