Overhaul will lead to volume reductions and ‘aggressive’ cost cutting, says Berenberg’s Sami Taipalus

RSA’s “relatively weak” UK business looks set to for a “major restructuring” , according to Berenberg analyst Sami Taipalus.

However, Taipalus warned in a research note this morning that the UK restructuring would be difficult to pull off because of the commercial bias of RSA’s UK book.

RSA’s UK unit made an underwriting profit of £36m in 2013, up 71% on the £21m it made in 2012. However, the insurer’s UK combined operating ratio (COR) deteriorated by 0.4 percentage points to 99.2% because of losses in its personal motor and commercial liability businesses.

These two divisions reported 2013 CORs of 140% and 111.7% respectively.

Also, Taipalus said RSA includes ancillary revenues and instalment income from UK motor insurance in underwriting profit. He estimates that stripping this out woudl increase RSA’s UK motor COR to around 121% from the reported 111.7%.

In the research note, Taipalus said that the UK restructuring  would likely lead to “volume reductions and aggressive cost cutting”.

He also warned that the work would be difficult. He wrote: “Due to the commercial lines bias of this operation, it may not be straightforward to improve profitability.

“For example, the RSA UK cost base consists mainly of commissions and other sales expenses, which are difficult to reduce without also losing volume in profitable areas. We note, also, material pressure from weak UK non-life pricing trends.”

Despite his comments on the UK business, Taipalus said that RSA’s new group chief executive Stephen Hester “has made a promising start”, and that the group’s plans for structural simplification by selling businesses “makes sense to us”.