Commercial lines drag RSA to break-even

LV=’s John O’Roarke may have hailed an improvement in UK commercial lines last week, but it is clearly not taking effect yet.

Take RSA. Its UK personal lines business held up reasonably well in the face of June flood claims of £40m: it reported a combined ratio of 99.3% and an underwriting profit of £14m in the first half of 2012.

Granted, the floods have almost halved the underwriting profit, but a profit at all in the face of the flooding claims is not to be sniffed at.

RSA’s problem in the UK, one it shares with many of its peers, is commercial lines. Underwriting losses in its commercial business doubled to £14m from £7m, completely cancelling out the personal lines profit and rendering RSA’s UK business as a whole in break-even territory. Not bad, but not good either.

Big losses

The biggest culprits here are RSA’s stubbornly high commercial motor combined ratio – 108.3% at the first half – caused by continuing losses from a single account, and a big turn for the worse in commercial liability, where the combined ratio jumped to 102% from 92.5%.

RSA has commented on the troublesome motor account before, but will have questions to answer about the sharp liability deterioration.

The one saving grace for RSA’s UK commercial book was property, which is now firmly back in profitable territory with a combined ratio of 93.4%.

Rate rises

So was O’Roarke wrong to talk about commercial improvements?

It’s a little early to say, but his argument holds some water, judging by evidence in the RSA results. RSA achieved some reasonable commercial price rises in the year to June: 9% in motor, 6% in liability and 3% in property. This averages at 6% across the commercial book, which is short of O’Roarke’s 8%-10% prediction for the market. But there is still half a year to go, and RSA may not need the same level of rate increases as the average insurer.

Also, companies are clearly starting to feel the pain of UK commercial losses, which could spur them into action. At RSA, the commercial slip turned what could have been a creditable UK first-half performance into a mediocre one, which is not something that either RSA UK chief Adrian Brown or group chief Simon Lee will be happy to tolerate for any length of time.

Willis showing promise

Elsewhere, Willis management and shareholders must be pleased with the company’s start to the year after its torrid 2011. Profit after tax almost tripled to $333m (£214m) from $119m.

The bulk of the lift is thanks to non-recurrence on one-off costs that hit in 2011, rather than any fundamental improvement at the company, but absence of these items, which include restructuring costs and the payment of last year’s FSA fine, are cause for celebration and remove any distractions.

Less encouraging, perhaps, is the continued low organic growth in fees and commissions, which was 2% in the first half of 2012 - in line with the level achieved for the full 2011 year. This compares with 4% at the half-year stage for Aon and 4.2%, excluding contingent and supplemental commissions, for Arthur J Gallagher.

Willis is improving, but still has some way to go.