The U.K.’s Royal & Sun Alliance may be on the way to proving that smaller is better. After a radical restructuring, which included the disposal of most of its U.S. business, and a £960 million ($1.6 billion) infusion of new capital through a rights issue, the group’s financial picture is improving.
Nine month results, reported yesterday, show a £146 million [$248 million) pre-tax loss for the period, £10 million ($17 million) less than in the same period of 2002. Although the figures were in the lower range of analysts' forecasts, they were accompanied by the welcome news that R&SA will spend less on claims provisions in the U.S. than it had originally planned. When the rights issue was presented the company indicated it would use over half of it, around £800 million, ($1.36 billion) as reserves for U.S. claims, but it has now reduced that figure.
Group Chief Executive Andy Haste indicated that an ongoing review of the claims provisions had established that an additional £500 million ($850 million) was a more realistic amount. "We're taking account of the balance of £300m [$510 million] as a contingent liability for adverse claims development that may arise in the future,” he said in a written statement. “This £300m is in excess of local best estimates and is not attributable to any specific operation. Net of attributable tax, this has been deducted in determining our risk based capital position.”
Haste, who’s headed the company since April, noted: “The underlying performance of our ongoing operations, with a combined ratio of 96.2%, has been good. We have taken steps to address the legacy issues of the past, but we recognise that there is still a lot of work to do to ensure that we achieve our target of an average combined ratio of 100% across the insurance cycle.”
He listed the following as “successful actions” in the [third] quarter:
– Launching our rights issue, which was completed on 16 October and, together with our pre existing capital surplus, gives us the capital base to implement the strategy we laid out in September
– Making progress on sorting out the future of our US operations and appointing a new management team to take things forward
– Continuing progress on our cost savings – by the end of the quarter we’d delivered £127m on an annualised basis
– Announcing the disposal of a number of operations and pulling out of more non profitable lines of business and business relationships
– Continuing to achieve premium rate increases across the board – although the rate of increase in some lines is slowing
– Our ongoing operations keeping their eye on the ball and producing another quarter of sub 100 combined ratio
Concerning R&SA’s U.S. operations, Haste indicated: “The Travelers deal only began to take effect in October. Around 25 percent of the book has already transferred or lapsed. Progress continues on shaping the future for those parts of the US operation that were not included in the Travelers deal. We’ve put in place a transitional plan to manage the restructuring of our US operation, including appointing a new management team who will be responsible for overseeing its implementation.
“We’ve instituted a number of control mechanisms to ensure that we make orderly progress on our restructuring, including creating a new risk management role within the senior team. We’ve negotiated other renewal rights arrangements, all of which will have come into effect before the end of the year, reducing our ongoing premiums in the US by a further $200m. We’ve moved forward but still have work to do. 2004 will be a transitional year as the effects of the actions we’re taking work through the remaining US book.”
He added that R&SA also hopes to reduce its quota share arrangement with Munich Re. “Our intention in 2004 is to reduce the level of premiums that we cede to them to around £350m [$595 million], about half of the level this year,” said Haste.
In another bit of good news for the company Codan the Danish insurer that is 71.5 percent owned by R&SA, reported a nine-month pretax profit of DKr. 838 million ($135 million) compared to a DKr. 386 million ($61.8 million) loss for the same period of 2002.