2019 Interim Results

2019 INTERIM RESULTS

RSA Insurance Group plc 1 August 2019

Solid first half results, underwriting actions 'on track'

·; Current year underwriting profit up 70%

Excluding exit portfolios1:

·; Group underwriting profit £181m

·; Group combined ratio 94.3%; underlying EPS 21p per share

·; UK & International region underwriting profit £86m; combined ratio 94.0%

Statutory profit before tax £227m, impacted by exits and non-operating charges

Interim dividend 7.5p per share, up 3% vs. H1 2018

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Stephen Hester, RSA Group Chief Executive, commented:

"RSA is reporting a solid first half 2019. Particularly pleasing is the improvement in current year underwriting results, which represent our best first half in the last 10 years1. Our Personal Lines business continues to drive this performance.

While the full earned effect of underwriting, pricing and portfolio changes will show next year, at this stage we are on or ahead of schedule in each region for those planned actions. There are some headwinds from lower bond yields and weaker prior year development and we have more to do in many areas. Nevertheless, we expect to make continued progress overall."

Trading results

·; Underlying profit before tax £292m (ex. exits). Statutory profit before tax £227m was impacted by exits and non-operating charges (H1 2018: £296m)

·; Group operating profit £308m (ex. exits): Scandinavia £127m; Canada £50m; UK & International £155m (£127m inc. exits). Group total operating profit £280m (H1 2018: £304m)

·; Underwriting profit of £181m (ex. exits). Group total underwriting profit £153m (H1 2018: £171m). Current year underwriting profit up 70% vs. H1 2018

·; Group combined ratio of 94.3% (ex. exits): Scandinavia 89.1%; Canada 97.8%; UK & International 94.0%. Group combined ratio including exits 95.2%; UK & International 96.1%:

- Group attritional loss ratio2 improved 0.6 points vs. H1 2018 and by 1.62 points vs. H2 2018

- Group weather costs 3.2% (H1 2018: 4.9%) of premiums

- Large losses 9.6% of premiums excluding exits, total 9.9% (H1 2018: 9.7%)

- Group prior year underwriting profit of £19m (H1 2018: £92m)

1 Excluding UK/ London Market exit portfolios, refer to pages 30 to 38 for further information2 At constant FX and ex. changes in reinsurance, refer to pages 30 to 38 for further information

·; Personal Lines (57%1 of net written premiums) combined ratio was 89.9% (ex. exits), while Commercial Lines was 98.8% (ex. exits)

·; Net written premiums ('NWP') of £3,254m, up 1%2 vs. H1 2018 (down 2%3 underlying but up c.0.5%3 ex. exits):

- NWP up 2%3 in Scandinavia

- NWP up 4%3 in Canada

- NWP down 8%3 in UK & International as underwriting and rating actions take effect (exits account for c.6 points of the reduction)

·; Group written controllable costs £694m (H1 2018: £697m). Earned controllable cost ratio 21.3%

·; Investment income of £154m (H1 2018: £160m) down 4% as expected

·; Non-operating charges include £17m for completion of the UK Legacy sale contracted in 2017 (capital accretive) and £15m of accounting impact from a reduction in the discount rate on long-term insurance liabilities in Denmark. Losses on UK/ London market exit portfolios were £28m

·; Statutory profit after tax £183m (H1 2018: £245m)

·; Underlying EPS 20.9p excluding exits (inc. exits: H1 2018: 21.0p; H1 2019: 18.6p), headline earnings per share 15.3p

·; Interim dividend of 7.5p per ordinary share proposed, up 3% (H1 2018: 7.3p) and consistent with dividend policy.

Capital & balance sheet

·; Solvency II coverage ratio of 167%4 (31 March 2019: 164%), above 130-160% target range

·; Tangible equity £2.92bn up 2% (31 March 2019: £2.88bn), 283p per share

·; Underlying return on tangible equity of 15.0% excluding exits, within the 13-17% target range

·; IFRS pension surplus £164m (31 December 2018: £182m). Fall in bond yields increases estimated full year 2019 capital impact of bond 'pull-to-par' to c.£70m.

Strategic and market update

·; RSA's focus is on building capabilities to outperform in our markets. In that context many initiatives continue - targeted at customer service, underwriting and costs

·; RSA's 2018 underwriting results declined for the first time since 2013. Consequently, our particular focus for 2019 is to progress restorative actions, whilst sustaining momentum in the large parts of our business that continued to perform well:

- Across our Commercial Lines businesses, programmes are underway re-underwriting and re-pricing business where needed and possible, or lapsing if necessary; much of the pricing and underwriting actions targeted for 2019 have already been implemented. However, results will take more time to show the benefits we expect

- Underwriting capabilities more broadly continue to receive intensive focus across the Group. These include more sophisticated and agile pricing models, underwriter training and portfolio discipline and technology driven insights

1 Split for year ended 31 December 2018; 2 At constant FX3 At constant FX and excluding changes in reinsurance, refer to pages 30 to 38 for further information4 The Solvency II capital position at 30 June 2019 is estimated 

·; In our 2018 Preliminary Results, we confirmed London Market portfolio exits and other business lapses targeted at reducing unprofitable business and risk exposures by c.£250m vs. 2017 NWP baseline. This will have been substantially accomplished by the end of 2019 and just c.£30m of earned premium remains to run-off in H2 and c.£10m thereafter. We will continue to review market conditions in the remaining portfolios and adjust further if merited.

Market conditions

·; Insurance market conditions remain competitive across our territories with significant price/ volume trade-offs. However, rate hardening and capacity adjustment is helping us re-price in Canada and in loss-making international business lines

·; Financial market conditions are volatile, driven by political developments and their knock-on to monetary and economic trends. RSA is relatively well protected with conservative investment portfolios and a broad array of internationally derived profits. However, bond yields have fallen c.50bps in most of our territories in H1 2019. If sustained this will reduce future investment income in addition to its 'pull to par' impact on capital usage. FX movements also have a translation effect on RSA, costing c.2% at underwriting profit level in H1 2019 compared to the prior period. 

MANAGEMENT REPORT - KEY FINANCIAL PERFORMANCE DATA

Management basis

CHIEF EXECUTIVE'S STATEMENT

RSA has reported a solid first half performance. Our mission for 2019 is to sustain momentum in the large parts of our business that did well last year, whilst successfully improving the areas that disappointed. Results for the first half show pleasing evidence to support both objectives.

Financial results

Group underwriting profit is £181m (excluding exits) and consistent with our plans. Results from current year underwriting are up strongly versus H1 2018 and our best in the last 10 years. Progress is even more marked versus H2 2018. Within these totals, attritional loss ratios have improved. Weather losses are also lower but offset by weaker prior year development as 2018 actuarial estimates were refined. Cost discipline remained strong. Our Personal Lines results are excellent, while Commercial Lines need more time to see results improve as targeted and were particularly impacted by prior year 'true-ups'.

Underlying EPS (excluding exits) is 21p per share as lower investment income dampens the robust underwriting profit. Underlying return on tangible equity is 15% (excluding exits).

Customer focus & market conditions

RSA's focus is on serving both customers and shareholders well, consistently improving our capabilities in order to do better for both constituencies. In H1 2019 our customer volumes grew, with strong retention and satisfaction indices, in our international Personal Lines businesses where profitability is also strong. In our Commercial Lines businesses, planned exits and underwriting/ pricing action is reducing volumes but targets a stronger, more sustainable business going forward.

Insurance market conditions remain competitive, though business lines facing industrywide profitability challenges are seeing stronger pricing trends. The insurance industry is also exposed to investment returns, particularly bond yields. Sharp falls in yields year to date across most markets therefore represent a future headwind.

Regional progress

A critical task for RSA is to achieve better and more consistent performance from our UK & International region. We are pleased to report that current year underwriting profits more than doubled and that the H1 combined ratio (ex. exits) was 94.0%, with on-target UK results and helped by unusually strong Ireland and Middle East performance. There is much more to do, in particular to finish the year without the level of London Market losses that cost dearly in 2017/ 2018. In that context, our business exits and other underwriting actions are on track. It will still take some years to get the business to our ambitions for it but our new management team in this division have made a strong start.

RSA's international businesses continue to perform strongly, driven particularly by Personal Lines. In Canada underwriting profits rose substantially (although less than planned due to another tough winter). Extensive pricing and underwriting actions market-wide are expected to continue the improvement. Commercial Lines remains a challenged area, although we target better H2 results.

RSA's flagship Scandinavian business continues to perform well though not yet in line with our ambitions. Sweden overall and Danish Personal Lines remain the outstanding performers, with Norway much improved from last year. Danish Commercial Lines remains weak, with continuing underwriting action required.

Outlook

Our objectives for the year are unchanged. We will strive to finish 2019 with significant performance gains versus 2018 and evidence carry forward into 2020 of further improvement potential still. Our business will experience challenges from external events not least; we will work hard to meet them with resilience and positive ambition.

Stephen Hester

Group Chief Executive

31 July 2019

MANAGEMENT REPORT

SEGMENTAL INCOME STATEMENT

Management basis - 6 months ended 30 June 2019

Notes:

UK & International comprises the UK (and European branches), Ireland and Middle East. Refer to page 26 for comparatives.

1 Exit portfolios in UK & International which will substantially run-off over the course of 20192 Preference dividends of £5m and coupons of £7m paid on Restricted Tier 1 securities 3 On an earned basis 

Premiums

Net written premiums ('NWP') of £3,254m were up 1% in the period at constant FX. Underlying premiums were down 2%1 when adjusted for reinsurance changes but grew c.0.5%1 2 excluding the exit portfolios.

Group retention increased to 80.7% in the period (H1 2018: 80.3%). In Personal Lines, we are pleased to report improvements in Scandinavia, the UK and Johnson, our direct business in Canada. In Commercial Lines, retention was up in Scandinavia but down in the UK and Canada, where we are taking the most rating and underwriting action.

Regional trends for H1 2019 include:

·; Scandinavian premiums were up 1% or up 2% excluding changes in reinsurance, both at constant FX. Personal Lines premiums grew 3%1 3 and this was driven by Sweden and Denmark, our most attractive markets. Both rate and retention contributed and policies-in-force ('PIFs') grew. Premiums were up 3%1 in Commercial Lines. Rate was ahead of plan and the same period last year but was dampened by a reduction in volumes as higher retention was more than offset by lower new business

·; Premiums grew 3% in Canada and 4% excluding changes in reinsurance, both at constant FX. This was driven by an 8%1 increase in Personal Lines. We achieved high single-digit rate and hard market conditions meant that retention remained strong at 90% for Johnson. Overall, PIFs were up 1% and Johnson continued to grow organically. Premiums in Commercial Lines decreased by 5%1 where a reduction in volumes was partly offset by strong rate. Lower volumes were driven by targeted lapses and were in line with our plans

·; Premiums were down 9% in the UK & International region and 8% excluding changes in reinsurance, both at constant FX. Exits accounted for c.6 points of the reduction. UK Personal Lines premiums were down 12% in the period, with exits driving c.2 points of the reduction; Household was down 13% with the sale of Oak Home accounting for c.5 points of the reduction. Importantly, we have continued to achieve good rate increase through our Household book. Motor and Pet premiums also decreased. Commercial Lines premiums were down 8%1 excluding reinsurance changes, but up c.2%1 2 excluding exits. Rate was positive in all major lines of business, although retention and new business were both impacted. Premiums in Ireland increased by 7%1 helped by strong new business in Personal Motor. In the Middle East, premiums were down 6%1 largely due to lower volumes in Commercial Lines and rating pressure in Personal Lines

·; Net written premiums in the UK/ London Market exit portfolios were £12m. Net earned premiums were higher at £57m reflecting the ongoing run-off of exposures. A further c.£30m of premiums are expected to be earned out in H2, with this reducing significantly to c.£10m in 2020.

More detail is provided in the regional reviews on pages 14 to 19.

1 At constant FX and excluding changes in reinsurance, refer to pages 30 to 38 for further information2 Excluding UK/ London Market exit portfolios, refer to pages 30 to 38 for further information3 Excluding a one-off adjustment in Swedish Personal Accident in Q1 2018 

Underwriting result 

Total Group underwriting result:

·; The Group attritional loss ratio of 54.9% was 0.61 points better than H1 2018 and a pleasing 1.61 points better than H2. The ratio increased by 0.41 points in Scandinavia, mainly in Commercial Motor and Commercial Property. Action plans are in place to address this for both lines of business. In Canada, the attritional loss ratio improved by 2.0 points and was better across all major lines. Pleasingly, Personal Auto was 1.5 points better as rate and claims initiatives started to impact. The UK & International attritional loss ratio improved by 11 point compared to H1 last year. In the UK, improvements in Household and Pet were partly offset by an increase in Motor. In particular, Household improved by 5 points reflecting the actions taken to address the 'escape of water' claims inflation issue which presented in H2 2017

·; Weather losses amounted to £103m or 3.2% of net earned premiums (H1 2018: 4.9%; five year average: 3.1%2). While weather was only marginally higher than our plans at a Group level, Canada experienced another period of heavy losses. Insured damage for catastrophic weather events across Canada was $0.6bn3 for the industry. Spring floods in Quebec, Ontario and New Brunswick followed a severe winter and cost more than $0.2bn3

·; Large losses were £316m or 9.9% of net earned premiums (H1 2018: 9.7%; five year average: 9.6%2). This was 9.6% excluding UK exit portfolios. Scandinavia increased by 0.5 points mainly due to a Danish Commercial Property fire which added 1.2 points. Large losses increased by 2 points in Canada, mainly in Household and Commercial Property. The UK & International was 0.7 points better in H1

·; Reinsurance: The retentions were not reached on the Group Volatility Cover ('GVC') or the new regional aggregate covers in H1 2019. The percentage retention reached for each of our covers was as follows: GVC 17%; Scandinavia 78%; Canada large 51%; Canada catastrophe 79%; UK 22%. Please see page 25 for further details of the relevant covers.

Group prior year profit of £19m provided a 0.9 point benefit excluding exits (0.7% inc. exits; H1 2018: 3.0 points) to the combined ratio. Q1 was flat, while Q2 was broadly in line with our planning assumptions. The first half included positive development from each region, excluding the exit portfolios in the UK & International region which incurred negative development of £7m. The principal 'swing item' was negative prior year development in Commercial Lines on the 2018 accident year as actuarial estimates were refined.

Our assessment of the margin in reserves for the Group (the difference between our actuarial indication and the booked reserves in the financial statements) remains at its target level at c.5% of best estimate claims reserves.

1 Excluding changes in reinsurance, refer to pages 30 to 38 for further information2 2014 to 2018; 3 Source: Catastrophe Indices & Quantification Inc. 

Underwriting operating expenses

The Group underwriting expense ratio of 15.0% increased as expected, despite flat costs. This was due to UK business exits and meant that the ratio was 0.4 points higher than H1 2018. Scandinavia improved by 0.2 points and Canada improved by 0.8 points, although the latter was helped by certain timing differences. The expense ratio in UK & International increased by 1.4 points, or 1.0 points excluding exit portfolios. This was in line with expectations and reflected the contraction in premiums. We expect to commence a further UK focused cost programme in H2 to address this.

Commissions

The Group commission ratio of 12.9% decreased by 0.3 points (H1 2018: 13.2%), mainly due to a lower proportion of Commercial Lines in the business mix.

Investment result

The investment result was £131m (H1 2018: £136m) with investment income of £154m (H1 2018: £160m), investment expenses of £7m (H1 2018: £7m) and the liability discount unwind of £16m (H1 2018: £17m).

Investment income was down 4% on prior year, primarily reflecting the impact of reinvestment at lower yields which was partially offset by increased income from actions taken on the portfolios to increase exposure to less liquid credit investments. The average book yield across our major bond portfolios was 2.2% (H1 2018: 2.3%).

Based on current forward bond yields and FX rates, for H2 2019 we project investment income of c.£130-140m and the capital element of the bond pull-to-par of c.£40m (post tax).

Controllable costs

Group written controllable costs were £694m (H1 2018: £697m). This comprised 2% cost reductions, offset by 2% inflation. Scandinavia delivered cost reductions of 4%, Canada delivered 4% and UK & International delivered 1%, all gross of inflation and at constant FX.

Group FTE2 was 2% lower than H1 2018, despite additional resources required to support the new Scotiabank partnership in Canada. FTE is down 24% (excluding disposals) since the beginning of 2014 to 12,554 at 30 June 2019.

The earned controllable expense ratio of 21.3% was up slightly versus H1 2018 (21.2%) due to UK business exits. The ratio is down over 31 points since H1 2013 and our ambition of an earned controllable expense ratio of less than 20% is unchanged.

Non-operating items

Interest costs:

·; Interest costs were £16m (£23m including the Tier 1 issuance), up from £13m in H1 2018. The increase reflects changes to lease accounting (IFRS 16), mainly on properties

1 At constant FX and ex. disposals (where relevant)2 Full time equivalent employees 

·; Coupon costs of £7m (H1 2018: £7m) for the 2017 Tier 1 issuance are presented at the bottom of the management P&L as 'other equity costs'. Under IFRS, these are recognised in the statement of changes in equity.

Other non-operating charges:

·; Net losses of £18m in H1 2019 included a £15m contribution to Enstar Group Limited following the sanction of the Part VII transfer by the High Court of Justice of England and Wales of the UK Legacy liabilities on 13 June 2019. The completion of this transaction provided a net benefit to capital

·; Changes in economic assumptions represents £15m for the accounting impact of a reduction in the discount rate on long-term insurance liabilities in Denmark.

Tax

The Group reported a tax charge of £44m for H1 2019, giving an effective tax rate ('ETR') of 20% (H1 2018: 17%). The tax charge largely comprises tax payable on overseas profits. The Group underlying tax rate for H1 2019 was 18%. This is lower than forecast for 2019 due to better UK & International results (H1 2018: 19%).

The carrying value of the Group's deferred tax assets at 30 June 2019 was £231m (31 December 2018: £234m), of which £189m (31 December 2018: £189m) are in the UK. At expected tax rates, a further c.£241m (31 December 2018: c.£261m) of deferred tax assets remain available for use but not recognised on balance sheet; these are predominantly in the UK and Ireland.

The carrying value of the Group's deferred tax liabilities at 30 June 2019 was £103m (31 December 2018: £79m), the majority of which are in Sweden and Denmark. The increase in H1 2019 is mainly due to an increase in available for sale ('AFS') investment gains in Sweden.

For 2019 as a whole, we expect the Group's ETR and underlying tax rate to be in the region of 21% and 19% respectively, subject to profit mix. In the medium term, we continue to expect the ETR and underlying rate to be in the region of 20%, given the scale of still unrecognised UK and Irish tax assets.

Dividend

We are pleased to declare an interim dividend of 7.5p per ordinary share, up 3% (H1 2018: 7.3p). Our medium-term policy of ordinary dividend payouts of between 40-50% of earnings is unchanged, with additional distributions where justified.

BALANCE SHEET

Movement in Net Assets

Tangible net assets increased by 2% to £2.9bn at 30 June 2019.

The increase was driven by profit after tax of £214m3 and fair value mark-to-market movements of £156m, mainly reflecting tightening credit spreads and falling bond yields. Tangible net assets were reduced by payment of the 2018 final dividend (£141m), together with investment of £63m in intangible assets which were primarily IT related (net investment of £19m after amortisation of £44m shown as part of profit).

The pension schemes generated a loss of £109m in net asset terms and this was primarily as a result of tighter 'AA' corporate bond spreads, by which liabilities are discounted. The IAS 19 surplus at 30 June 2019 was £164m, please see page 24 for more details.

TNAV per share increased by 1% to 283p.

1 Ordinary shareholders' funds including preference share capital of £125m

2 Includes preference dividends of £5m and coupons of £7m paid on 2017 issued restricted tier 1 securities

3 Adjusted for items relating to goodwill and intangible assets

CAPITAL POSITION

The Solvency II coverage ratio1 decreased to 167% during the period:

Please refer to appendix (page 23) for further Solvency II details (including sensitivities).

1 The Solvency II capital position at 30 June 2019 is estimated2 Represents 6 months' accrual of a 'notional' dividend amount for the year 

REGIONAL REVIEW - SCANDINAVIA

Management basis

SCANDINAVIA

Scandinavia delivered operating profit of £127m, down 11%1. The combined ratio of 89.1% was 1.5 points higher than the first half last year. Personal Lines remained excellent with a combined ratio of 79% despite higher weather losses and lower (but still favourable) prior year development. Commercial Lines increased by 3.4 points to a combined ratio of 103.8%. Higher weather, large and attritional losses all contributed and Property was the most impacted.

Net written premiums of £1,039m increased by 1% at constant FX or 2%2 on an underlying basis. Personal Lines premiums were up 1%2 or 3%2 3 excluding a one-off adjustment in H1 last year. Swedish Personal Lines premiums grew 3%2 3 and Household, Motor and Personal Accident were all up. This was driven by mid-single digit rate and higher retention (up 0.4 points to 85.8%) which translated to an increase in policies-in-force ('PIFs'). Danish Personal Lines premiums increased by 4%2 and both rate and retention contributed. PIFs grew in all lines of business.

Net written premiums increased by 3%2 in Commercial Lines. Rate was ahead of plan and H1 last year in all lines of business but was dampened by a 3% reduction in volumes. Higher retention was more than offset by lower new business where action to improve performance in Motor and Property began to impact premiums.

Customer metrics continue to improve. An 'effortless' measure determines and tracks how seamless customer interactions are against defined targets. Swedish Personal Lines reported a score of 68%, close to target and up 6 points since Q2 last year. Danish Claims reported a score of 80% (up 10 points) and an NPS4 of +57. Best-in-class metrics have been helped by strong call centre availability (92%) and an increase in digital claims notifications to 23% (up 10 points). Overall, retention improved to 85% (H1 2018: 82%) and was better in all countries.

Large losses of 8.5% were above the five year average of 6.1% (H1 2018: 8.0%) and driven by Denmark. While we saw some increase in frequency, our independent reviews to date indicate that the risks were appropriately underwritten. One Danish Commercial Property fire, which was first insured more than 10 years ago, added 1.2 points to the large loss ratio. The attritional loss ratio of 63.8% increased by 0.8 points or 0.4 points excluding the impact of 2019 reinsurance changes. This was driven by Danish Commercial Lines, primarily the Motor and Property books. Action plans are in place for both and include re-pricing, re-underwriting and reducing capacity.

Written controllable expenses were down 2%1 in H1 2019, with 4% cost reductions offset by 2% inflation. The earned controllable cost ratio of 22.0% improved by 0.3 points, helped by a 2%1 reduction in staff related costs. Written premium per FTE increased by 8% in Q2 2019 compared to the same period last year. We are investing in important areas such as pricing sophistication, data analytics, the IT hub in Malmö and a talent acquisition hub.

Geographically, Sweden generated an underwriting profit of £115m (H1 2018: £108m1) and a combined ratio of 77.3% (H1 2018: 77.9%). Lower large losses, more favourable prior year development and lower expenses were partly offset by higher weather losses. Denmark reported an underwriting loss of £12m (H1 2018: £14m1 profit) and a combined ratio of 104% (H1 2018: 95.7%). There was adverse prior year development in Personal Lines but the result was driven by our unusually poor Danish Commercial Lines performance with higher attritional and large losses, notably in Motor (attritional only) and Property. The underwriting loss in Norway of £7m more than halved, driven by improvement in the loss ratio of nearly 11 points.

1 At constant FX2 At constant FX and excluding changes in reinsurance, refer to pages 30 to 38 for further information 3 Excluding a one-off adjustment in Swedish Personal Accident in Q1 20184 Net Promoter Score 

REGIONAL REVIEW - CANADA 

Management basis

CANADA

Canada delivered operating profit of £50m for H1 2019, almost twice that of H1 last year. The combined ratio improved by 2.7 points to 97.8%. Personal Lines improved by over 8 points to 94.5%, despite another heavy period for weather losses. The combined ratio in Commercial Lines was disappointing and increased by almost 10 points due to higher weather and large losses and significantly lower (but still favourable) prior year development.

Net written premiums of £768m increased by 3% at constant FX or 4%1 on an underlying basis. This was driven by growth of 8%1 in Personal Lines in H1. We applied rate of just over 7% in Personal Auto, notwithstanding the rate cap of 5% in Alberta, while we applied nearly 10% in Household. This helped to combat ongoing and significant claims inflation and build an allowance for heavier weather losses expected as a result of climate change. Hard market conditions meant that retention remained strong at 90% for Johnson, our direct business. Personal broker reported a 4 point decrease to 85%; this was in line with our plans and reflected targeted actions to improve profitability. Overall, policies-in-force were up 1% and Johnson continued to grow organically (9%). We commenced writing new business for Scotiabank in April and renewals followed in July. Premiums in Commercial Lines decreased by 5%1 where a 15% reduction in volumes was partly offset by rate of almost 10%. Lower volumes were in line with our plans and mainly driven by targeted lapses. We expect to continue to prioritise profitability over volume in the second half.

Our customer metrics continue to report well, although rating action impacted in H1. Johnson sales and service NPS was +42 in Q2, with first contact resolution for inbound calls at 94%. The Q2 'voice of the broker' survey scored the ease of doing business with us at 75%. User adoption rates for 'RSA Pro' (our online quote and bind tool for SMEs) continue to increase and feedback has been positive.

While the weather loss ratio reduced by 2.8 points to 7.2%, it was again elevated relative to the five year average of 4.7%. At an industry level, insured damage for catastrophic losses was around $0.6bn2 in H1. Spring floods in Quebec, Ontario and New Brunswick followed a severe Q1 and cost more than $208m2. Household and Commercial Property were our most impacted books and one loss added 2.3 points to the Commercial Lines combined ratio. The large loss ratio of 8.9% was 2 points above the five year average and the increase was mainly in Household and Commercial Property.

The attritional loss ratio of 56.2% improved by 2 points in H1 2019 and was better across all major lines of business. Pleasingly, Personal Auto improved by 1.5 points as rate and claims initiatives started to take effect. We expect to continue to apply rate in H2, subject to regulatory approval.

H1 was a busy period from a technology perspective. Guidewire Claims is now full deployed across the business and our new Claims Portal is live for Personal Broker, with Johnson expected to follow in Q3. Radar Live is fully deployed in all major lines and is improving the speed and efficacy of our non-regulatory rate filings.

Written controllable expenses of £147m were 2%3 lower than H1 last year, with 4% cost reductions absorbing 2% inflation. Savings in staff costs were partly offset by higher software amortisation charges and IT costs reflecting capability investments. The earned controllable expense ratio of 17.6% was 1.4 points lower than H1 last year and was better than our plans. This ratio is likely to increase in H2 as certain timing differences unwind. Productivity improved with a 10% increase in written premiums per FTE in June 2019 compared to June 2018.

1 At constant FX and excluding changes in reinsurance, refer to pages 30 to 38 for further information2 Source: Catastrophe Indices and Quantification Inc.; 3 At constant FX 

REGIONAL REVIEW - UK & INTERNATIONAL

Management basis

UK & INTERNATIONAL

The UK & International region delivered an operating profit of £155m for the period (£127m including exits) and combined ratio was 94.0% (96.1% including exits).

UK

The UK reported an underwriting profit of £42m in the period and a combined ratio of 96.5%, excluding exit portfolios. This was driven by better than plan current year results offset by lower prior year development. Including exits, COR was 98.9%.

Net written premiums of £1,148m were down 10% as reported. Exits accounted for c.6 points of the reduction. Personal Lines premiums decreased by 12% in the period; Household was down 13% with the sale of Oak Home accounting for c.4 points of the reduction. Importantly, we have continued to achieve good rate increase through our Household book. Motor and Pet premiums also decreased. While retention improved, new business was down as we held our discipline on rate. Commercial Lines premiums were down 8%1 excluding reinsurance changes, but up c.2%1 excluding exits. Rate was positive in all major lines of business; for example, Commercial Property achieved rate of 6% and Marine achieved nearly 10%. Pricing and underwriting action taken in the period impacted retention and new business.

Weather was relatively benign in the period. The large loss ratio of 12.3% was a little better than last year and our plans. The attritional loss ratio of 47.2% was 1.31 points better than last year. Improvements in Household and Pet were partly offset by increases in Marine and Motor. In particular, Household was 5 points better than H1 last year as strong rate earned through. Prior year development cost £29m or 1.4% on the combined ratio (H1 2018: 3.0% benefit) as strengthening was required on the 2018 accident year. The expense ratio increased by just over 1 point as expected, savings of 1% gross of inflation were offset by the impact of contracting premiums.

Ireland and the Middle East

Ireland reported another excellent performance, generating an underwriting profit of £26m (H1 2018: £19m) on a combined ratio of 83.3% (H1 2018: 87.3%). Net written premiums increased by 7%2 helped by strong new business in Personal Motor. Benign weather helped to reduce the combined ratio, compared to a poor weather experience in H1 last year.

The Middle East delivered an underwriting profit of £18m (H1 2018: £14m) and another record combined ratio of 81.7% (H1 2018: 84.9%). Net written premiums decreased by 6%2 largely as a result of lower volumes in Commercial Lines and rating pressure in Personal Lines. More benign weather and a lower attritional loss ratio (down 1.6 points) helped deliver the result.

Exit portfolios

In 2018, we announced portfolio exits and changes in underwriting appetite for our London Market business. Additional exits included two UK generalist MGA schemes and certain European branch business. This was in response to challenging market conditions as well as our own strategic reassessment. The total net written premium we targeted for exit was c.£250m against a 2017 baseline, of which substantially all has been implemented.

The underwriting loss from these portfolios was £28m for the period. Net written premiums were £12m. Net earned premiums were higher at £57m reflecting the ongoing run-off of exposures. A further c.£30m of exited premiums are expected to be earned out in H2, with this reducing significantly to c.£10m in 2020.

1 Excluding changes in reinsurance, refer to pages 30 to 38 for further information 2 At constant FX

INVESTMENT PERFORMANCE

Management basis

INVESTMENT PERFORMANCE

Investment income of £154m (H1 2018: £160m) was offset by investment expenses of £7m (H1 2018: £7m) and the liability discount unwind of £16m (H1 2018: £17m). Investment income was down on the same period last year reflecting the impact of reinvestment at lower yields which was partially offset by enhanced income from actions taken on the portfolios to increase exposure to less liquid credit investments.

The average book yield for H1 2019 on the total portfolio was 2.4% (H1 2018: 2.5%), with an average yield on the bond portfolios of 2.2% (H1 2018: 2.3%). Reinvestment rates in the Group's major bond portfolios were approximately 1.3% (H1 2018: 1.5%).

At 30 June 2019, the average duration of the Group's bond portfolios of 3.9 years was slightly higher than at year-end (31 December 2018: 3.8 years).

The investment portfolio increased by 1% during the period to £12.7bn.

At 30 June 2019, high quality widely diversified fixed income securities represented 83% of the portfolio (31 December 2018: 83%). Equities (largely REITs1) represented 2% (31 December 2018: 2%) and cash was 6% of the total portfolio (31 December 2018: 6%).

The quality of the bond portfolio remains very high with 98% investment grade and 71% rated AA or above. We remain well diversified by sector and geography.

Based on current forward bond yields and foreign exchange rates, it is estimated that investment income will be lower than our previous guidance at c.£285-295m for 2019, c.£255-275m for 2020 and c.£240-260m for 2021. The discount unwind is expected to be in the region of c.£30-35m per annum and investment expenses are expected to be c.£13m per annum.

Unrealised bond gains and pull-to-par

At 30 June 2019, balance sheet unrealised gains of £431m (pre-tax) had increased by £181m, principally driven by positive mark-to-market on bond holdings due to declining government bond yields and tightening credit spreads.

This higher opening balance, together with flattening yield curves, has meant that the predicted period of time for the AFS gain to unwind has increased since year-end. If yield curves were to stay as they are, it is now estimated that the gains would take around 7 to 8 years to fully unwind, with around 50% within the next 3 years (AFS unwind is estimated to be c.£40m post tax for H2 2019 and c.£70m for 2020, impacting capital generation by those amounts).

1 Real Estate Investment Trusts 

APPENDIX I

Further information

CAPITAL

Solvency II sensitivities

The above sensitivities have been considered in isolation. The impact of a combination of sensitivities may be different to the individual outcomes stated above. Where an IFRS valuation of a pension scheme surplus is restricted under Solvency II, downside pension sensitivities may be dampened relative to those shown.

Reconciliation of IFRS total capital to Eligible Own Funds

1 The impact of pensions depends significantly on the opening position of the schemes and market conditions. As such, the sensitivities shown are point-in-time estimates that will vary and should not be extrapolated

2 The interest rate sensitivity assumes a non-parallel shift in the yield curve to reflect that the long end of the yield curve is typically more stable than the short end

3 The asymmetry in credit spread sensitivities reflects the fact that upside pension sensitivities are restricted to the surplus cap.

PENSIONS

The table below provides a reconciliation of the movement in the Group's pension fund position under IAS 19 (net of tax) from 1 January 2019 to 30 June 2019:

At an aggregate level, the pension fund surplus under IAS 19 fell slightly during H1 2019 from a £182m surplus at 1 January to a surplus of £164m at 30 June (net of tax).

Overall, strong asset returns and deficit funding contributions were broadly offset by tightened credit spreads. Asset values increased over the period due to strong equity returns and higher bond prices; however, this was offset by an increase in liabilities driven by lower discount rates. In particular, the schemes remain exposed to movements in AA credit spreads (as these drive the discount rate under IAS 19), which narrowed considerably over the half year.

1 Actuarial gains/ (losses) are gross of tax and include pension investment expenses, variance against expected returns, change in actuarial assumptions and experience losses

2 Other movements are gross of tax and include regular contributions, service/ administration costs, expected returns, interest costs and settlement gains/ (losses)

REINSURANCE

On 1 January 2019, the Group Volatility Cover (GVC) entered the second year of the three year agreement that commenced on 1 January 2018.

The key terms of the GVC are as follows:

·; Cover protects all our short tail business including Property, Marine and Construction & Engineering

·; Events or individual net losses of £10m or greater are added together across our financial year. When a loss exceeds £10m it is included in full

·; Cover attaches when the total of these retained losses is greater than £170m

·; Limit of cover is £150m per year, with £300m maximum over the 3 year period

·; Counterparties are high credit quality reinsurers (50% AA- or better, 41% A- or better, 9% collateralised).

Alongside the GVC and our significant underwriting actions, we purchased some new reinsurance covers in 2019 to provide additional protection for our short tail lines of business.

Firstly, we reduced several of our retentions, details below:

·; Our maximum Property risk retention was reduced to £20m from a 2018 maximum of £50m

·; Our non-core Catastrophe retentions were reduced to a maximum of £25m from a 2018 maximum of £50m. This reduced maximum retention applies for all territories, excluding Europe and Canada

·; We recover from the new protection if we do not recover the same loss from the GVC.

Secondly, we purchased new aggregate covers for the UK, Scandinavia and Canada for losses below £10m. These covers provide protection for our short tail lines of business including Property, Marine and Construction & Engineering. Further details below:

·; UK: Aggregate cover protects large losses between £3m and £10m. Cover attaches when the total of the losses in this band exceeds £58m. Limit of cover is £30m

·; Scandinavia: Aggregate cover protects large losses between DKK 20m and DKK 100m and Catastrophe losses between DKK 50m and DKK 100m. Cover attaches when the total of the losses in these bands exceeds DKK 130m. Limit of cover is DKK 180m

·; Canada: Aggregate cover protects large losses between C$2m and C$10m and catastrophe losses between C$5m and C$17.5m. Large loss and Catastrophe sections operate independently; cover attaches when large losses exceed C$50m or Catastrophe losses exceed C$25m. Limit of cover is C$65m which is shared across the two sections of cover.

There were no other material changes to our reinsurance retentions. Our main Catastrophe retentions remain at £75m for the UK and Europe combined, £50m for Europe excluding the UK and $75m for Canada. Our UK and Ireland Motor retentions remain at the 2018 level of £1m and €1m respectively.

MANAGEMENT REPORT

SEGMENTAL INCOME STATEMENT

Management basis - 6 months ended 30 June 2018

Notes:

UK & International comprises the UK (and European branches), Ireland and Middle East.

1 Preference dividends of £5m and coupons of £7m paid on Restricted Tier 1 securities 2 On an earned basis 

COMBINED RATIO DETAIL 

Group