Royal Sun Alliance (RSA) Insurance Group - Steady and assured

Whilst insurance giant Royal & Sun Alliance Insurance Gr (LSE: RSA) may not be embroiled in rally fever, the group’s numbers for 2009’s opening quarter illustrate robust financial and operational performance in challenging trading and economic conditions. Management have bolstered the group’s net written premiums by 8 percent to £1.9 billion, which is more or less flat on Q1 2008 on a constant exchange rate basis.  

And although net written premiums (NWP) have been stable on the whole, the UK market has been outperformed by the group’s other divisions. Indeed £652 million in NWP represents healthy market share to say the least yet it still represents a 1 percent drop from 2008. RSA’s resolute start to the year owes much to its International and Emerging Markets divisions which posted 12 percent and 20 percent climbs in NWP respectively.  
 
With NWP of over £1 billion (a 1 percent jump on 2008 on constant exchange rates), the group’s International division continues to carry the can. The group’s cash cow posted yet another outstanding set of results thanks to the effects of acquisitions as well as organic growth, aggressive rate measures and foreign exchange.  
 
And whilst the Western world watches in envy at the robust economic recovery being made in much of developing world, it is little wonder that the group’s Emerging Markets division is the centre of much attention. Indeed, the 20 percent jump in NWP to £195 million (a 1 percent jump on 2008 on constant exchange rates) we believe will be improved upon in the months and years ahead as RSA secured a foothold in a greater number of territories.  
 
India remains on track for 6+ percent GDP growth this year and has been central to the group’s success. Indeed, RSA’s interests Eastern Europe and India posted growth of 27 percent (19 percent at constant exchange). If the number of Indians swapping their motorcycles for the Tata Nano is anything to go by, then it will not be long before this performance is outdone. RSA’s Asia and the Middle East division was in the main a resounding success while Latin America coped admirably in light of several headwinds.  
 
As at the end of March, the group’s investment portfolio totalled £14.2 billion and the current deflationary environment augurs well for its fixed income weighting. We take great comfort from the fact that 90 percent of the total investment portfolio is invested in high quality fixed income and cash assets.  
 
Furthermore, the group has maintained its IGD surplus to £1.7 billion from the year end and we are comfortable with the group’s coverage over the IGD requirement remaining at 2.4 times. And whilst capital adequacy is not an issue, the group continues to expect a combined operating ratio (COR) of 95 percent for 2009.  

A combination of cost cutting and a broader offering should see RSA safely through 2009 and its growing global profile ensures a bright future. The group have successfully managed to bolster rates without compromising on retention and continue to set manage their portfolio with caution. The group’s net asset value may have dropped to 106p from the 112p from December however it still suggest today’s share price is off the mark.  Fundamentally, we believe RSA trades on a highly undemanding prospective price earnings multiple of around 9 times whilst the stock is ably supported by a healthy dividend yield of around 6 percent.