The verdict is in on major insurer RSA – with Jeffries International Limited giving it a “HOLD” rating.
The firm outlined the insurer’s “gruelling journey” from “self-help” to “best in class” and determined that while the latter is not beyond its reach, there is “little margin for error”.
In particular, it pointed to its UK business slipping away from best in class margins. While its efforts in Ireland were met with profits, the UK saw a reversal at 104.3% due to one-offs like last year’s natural catastrophes and the Ogden rate leading to a deterioration in household losses and a “surge in commercial large losses.” It noted that management acted quickly to reprice, but that hasn’t stopped the “blue sky scenario” from looking a touch bleaker.
Over in Canada, RSA attained its best in class target during 2017 at sub 94% and beat out market leader Intact – but the industry backdrop in general remains unfavourable, particularly with Ontario motor rates edging higher. Therefore, according to Jeffries, though RSA is performing well in Canada, industry pressures may ultimately take their toll. Similarly, over in Scandinavia, where the company’s performance has been outstanding at 82.9% there is fear that it could be “over earning”.
All of this has led Jeffries to determine that while all of the company’s targets are achievable, earning them all simultaneously is likely to prove elusive – particularly due to performance in the UK and Ireland. As such it determines that “at >12x 2018F P/E, we believe RSA's valuation already reflects ‘best in class’ margins but may not reflect underlying pressures.”
