After plummeting results and a share price to match, Royal & SunAlliance (R&SA) needed to impress with its first quarter results.

And the figures for the UK's second biggest general insurance group figures were generally welcomed. But, as Jason Woolfe reports, the improvement was patchy

Intermediated business stood out as the fly in the ointment of Royal & SunAlliance's (R&SA) first quarter results.

The group beat analysts' expectations by posting an operating result of £175m, up from £160m last year. Their consensus had been £158m. It achieved a combined ratio of 99%, down from 104.2% last year, beating its own target of 102%.

General business net premiums totalled £1,945m against £2,023m last time. This included the impact of a quota share deal with Munich Re, which increased to 15% from 10% last year.

The group's greatest bugbear recently has been a shortage of capital. The successful sale of its Australasian business, Promina, earlier this month helped redress this.

It supplied an extra £545m of risk-based capital, leaving the group £2.8bn to support general business underwriting to its projected level of £7bn net written premiums by the end of the year.

But even chief executive Andy Haste admitted the improvement was too patchy.

Describing the UK personal lines result as "unacceptable", he picked out intermediated business as needing an overhaul.

He said: "We need to eliminate unprofitable segments of personal intermediated business and are currently renegotiating corporate partner contracts.

"We must also reduce the expense base of More Th>n. Across the UK, disposals, outsourcing and redundancies already actioned will reduce headcount by 3,800 and we have reduced premises by 17 sites."

The UK personal lines business achieved a combined ratio of 106.7% and an underwriting loss of £30m. The poor performance dragged down the general business result, after the commercial segment returned a combined ratio of 94.4% and an underwriting profit of £20m.

Analysts gave a broad welcome to the results, but also sounded a note of caution.

David Wharrier, of Fitch Ratings, picks out the UK personal lines performance as evidence that R&SA had yet to fully put its troubles behind it. "We do welcome the improvement in the combined ratio to 99%, but remain a bit concerned that some operating units continue to produce unacceptable results, such as the UK personal lines and Canada, too."

He says the Promina sale "gets them back to an adequate footing, but not the £800m surplus they are looking for".

Haste is understood to have hinted to analysts that more sales and further cutbacks could be in the pipeline.

Having officially projected net written premiums of £7bn by the end of 2003, Haste reportedly suggested that the group could shrink that figure to £5.5bn. Of the £1.5bn reduction, 80% would come from sales and 20% would come from downsizing.

But the bottom line for Fitch is that it is not yet ready to change its BBB+ rating, or the negative outlook that goes with it.

Wharrier concludes: "It's a good promising start, but it's only one quarter."

His counterpart at Standard & Poor's, Mark Button, also has concerns over the group's capital position. S&P rates R&SA at A- and the group has stated its objective to regain an A rating.

"The key negative factors restraining the rating are capital adequacy and financial flexibility," Button says.

He wants to see further underwriting risk reduction as well as the disposal of the US surplus lines business to release capital.

Others are more bullish. Chris Rathbone, of Williams de Broë, points out that the £175m operating result compares to a consensus forecast among analysts of £158m.

"If you take into account the fact that they set aside £30m of profit for weather claims, you are actually talking about an operating result of £205m against £160m last time," he says.

He currently forecasts a full year operating result of £550m and regards the group as a recovery story unfolding - with much of the credit due to previous chief executive, Bob Mendelsohn.

He concludes: "Is it a recovery story? I think it is. And it would be fair to say that a lot of the remedial action was taken by Mendelsohn."

Investments
R&SA had already sold significant shareholdings, but continued its disposal strategy in the first three months of the year. By the end of the quarter it held stocks worth about £1.15bn, but also bought derivatives protecting it against deteriorating values on another £140m of stock.

Its fixed interest holdings are mainly in high quality short dated bonds that gave an average yield of 3.7% in the first quarter.