RSA Insurance 2020 Interim Results

2020 INTERIM RESULTS

RSA Insurance Group plc 30 July 2020

· Group business operating result up 13% vs H1 2019

· Group underwriting profit £240m1 up 33%

· Group combined ratio 92.2%1; underlying EPS 23.5p1 per share

· Statutory profit before tax £211m down 7% due to COVID-19 market related impacts

Stephen Hester, RSA Group Chief Executive, commented:

"RSA is reporting good growth in underwriting profits for the first half from continued business improvement actions. COVID-19 impacts on operating profits were broadly neutral in H1, though related financial market charges reduced our statutory results.

Each region of RSA contributed in line or better than our plans, driven by improved attritional loss ratios. We are pleased with progress towards our "best in class" ambitions, and the underwriting performance which is a first half record for RSA.

COVID-19 has dominated recent months. Uncertain times put a special premium on sustaining customer service whilst operating safely and securely for our people and other stakeholders. This has been our focus and will remain so over the rest of the year. The recovery path from the pandemic itself is not yet certain, as well as its human and economic consequences. Nevertheless, we see good prospects for RSA remaining resilient and emerging strongly from this period."

Trading results

· Underlying profit before tax £332m1 up 14%. Statutory profit before tax £211m down 7% impacted by COVID-19 financial market impacts

· Group business operating result of £349m1 up 13%: Scandinavia £164m; Canada £88m; UK & International £148m1. Group total business operating result of £316m (H1 2019: £280m). In aggregate, the net impact of COVID-19 from premiums, claims and investment income effects is neutral

· Group underwriting profit of £240m1 up 33%. Group total underwriting profit £207m (H1 2019: £153m)

· Group combined ratio of 92.2%1: Scandinavia 83.2%; Canada 93.2%; UK & International 93.6%1. Group total combined ratio 93.3%; UK & International (including exits) 96.0%:

- Group attritional loss ratio1 improved 4 points vs. H1 2019 of which 2.5 points are COVID-19 related

- Group weather costs 3.4%1 of premiums (H1 20191: 3.0%)

- Large losses 9.9%1 of which 0.9 points COVID-19 related (H1 20191: 9.6%)

- Group prior year underwriting profit of £18m1 after £6m of COVID-19 related provisions (H1 20191: £26m)

1 Excluding UK/ London Market exit portfolios, refer to pages 33 to 42 for further information

· Personal Lines (55% of net written premiums) combined ratio 86.0%1, Commercial Lines 96.8%1

· Net written premiums ('NWP') of £3,136m1, down 3%2 vs. H1 2019. We estimate that COVID-19 reduced NWP by c.£110m (3%), consisting of price reductions, refunds, coverage changes and specific business line volume impacts. Group NWP was on plan ex COVID-19 impacts. In total:

- NWP down 1%2 in Scandinavia

- NWP up 3%2 in Canada

- NWP down 8%1,2 in UK & International

· Group written controllable costs down to £680m (H1 2019: £694m). Earned controllable cost ratio 21.9%

· Investment income of £134m down 13% after £6m COVID-19 impacts

· Other charges include £54m of mark to market losses/impairments/discount rate change relating to COVID-19 market volatility and £18m for UK cost base restructuring as guided.

· Losses on UK/ London market exit portfolios were £33m reflecting one large "bau" claim, certain COVID-19 international construction claims and increased prior year reserves

· Statutory profit after tax £164m (H1 2019: £183m)

· Underlying EPS 23.5p1 is up 12%, statutory earnings per share 13.5p down 12%

· Consistent with the 2019 final dividend suspension in April, an interim dividend for 2020 is not presently being announced. RSA expects to resume dividends as soon as judged prudent, which absent unforeseen events should be by the time of full year results 2020. We also aim to catch up on missed dividend payments over time consistent with prudent capital management.

Capital & balance sheet

· Solvency II coverage ratio of 172%3 as stated, 158%3 including proforma dividend accruals for full year 2019 and H1 2020 (31 December 2019: 168%), versus our 130-160% target range

· Tangible equity £3.17bn up 9% (31 December 2019: £2.91bn), 307p per share

· Underlying return on tangible equity of 16.7%1, within the 13-17% target range

· IFRS pension surplus £328m (31 December 2019: £211m). Fall in bond yields increases estimated full year 2020 capital impact of bond 'pull-to-par' to c.£80m.

Strategic and market update

· RSA continues to benefit from a settled and consistent strategy. The focus is on building capabilities to outperform in our selected markets. In that context many initiatives continue, targeted at improving customer service, underwriting and costs

· From the base of strong 2019 results, the tasks for 2020 were around sustaining momentum in the large parts of our business that perform very well whilst focusing on driving remedial action in weaker performing areas. This latter principally involves completing the portfolio exits announced in 2018, building our UK performance track record (including reducing its cost base) and improving Danish and Canadian commercial lines results:

1 Excluding UK/ London Market exit portfolios, refer to pages 33 to 42 for further information

2At constant FX, refer to pages 33 to 42 for further information 

3The Solvency II capital position at 30 June 2020 is estimated

- In our UK domestic business, normalising for weather which hit results in H1, there has been sustained improvement into 2020 though with more to do. The exit portfolios are substantially run off (though with some tail exposures left) and the business is refocused and operating with greater clarity and intensity. Business simplification and cost improvements are vital and the programme which started in H2 last year will be expanded further this year, not least to offset top line threats from a weak economy. In both Canada and Denmark, good progress continues in commercial lines pricing and underwriting with strong attritional gains and large loss improvements starting to come through also.

Market conditions

· Insurance market conditions remain competitive across our territories. However, COVID-19 disruptions make it hard to accurately discern underlying prospects. On the one hand rate hardening and capacity adjustment is generally helping us re-price in loss-making business lines. But recessionary conditions normally bring lower business volumes which in turn can encourage greater competition for business and rate softening. It will take some time for the balance of these effects to become clear.

· Financial market conditions are volatile, and while they have recovered somewhat since March, the risk of further sharp movements cannot be excluded. RSA is relatively well protected with conservative investment portfolios and a broad array of internationally derived profits. However, risk free yields have fallen significantly in H1 2020 in addition to heightened risks around property and some other asset classes. Wider credit spreads offer partial offsets but the risk remains of mark to market volatility impacting investment income and capital ratios.

COVID-19 impacts

· While the impacts of COVID-19 on RSA are ongoing, we discuss the principal areas affected below with data for H1:

- Financial market movements will continue to affect balance sheet, solvency ratios, pension surplus and investment income. Data as at end June is presented above.

- Our priority is to sustain good service to customers. RSA is working hard to settle claims promptly and fairly and where relevant to offer interim payment to support customers, as well as sustaining supply chains similarly. We are also providing a range of customer relief measures across our different territories, ranging from coverage adjustments and waivers, payment timing relief and discount or price capping of rates. We are participating fully in industry initiatives including exploring future pandemic coverage options and voluntary relief funds.

- Claims impacts are complex to interpret as claims patterns are distorted by the impact of lockdowns. It is still too early to have settled trends or to know the full timing and pattern of pandemic impacts, government actions and their economic effects. Encouragingly all of our territories have begun a steady normalisation though we do not yet know how this will play out.

- For the second quarter 2020 non COVID-19 claims frequency was down vs prior year in a range 15-60%, mostly reflecting lower economic activity levels. Frequencies increased in June as lockdown easings began. It is not yet possible to fully assess the impact on claims severity of disrupted supply chains or on timing of claims notifications. However, we can see that frequency effects overall will provide a material offset to areas of negative COVID-19 impact on premiums, costs and claims. The first half claims reserving calculations show frequency benefits broadly matched with COVID-19 claims costs and premium reductions resulting in a neutral overall impact to the business operating result at Group level after building some cautionary reserves for the uncertainties described above.

- Most business interruption coverages are not expected to be eligible under their terms for COVID-19 claims. However, there are a number of areas where claims are being paid. In addition, RSA is one of 8 participants in the FCA "test case" on business interruption coverage wordings in the UK, the result of which may also have wider implications for the industry in this sector. We are not able to comment on this process at present, beyond confirming that RSA's position on its BI wordings is supported by external legal advice.

- In H1 2020 RSA booked c.39,000 travel claims with estimated costs of £26m but £1m net of reinsurance and 2,700 claims for wedding cancellation, with an estimated cost of £9m. In addition, we have received claims under Business Interruption coverages with case reserves and actuarial IBNR of £47m (of which £7m relates to delayed construction projects). The development since our reporting on 7th May, represents the receipt of some additional claims but primarily the completion of reserve reviews which has led to revisions to ultimate estimates and IBNR to the up to date values provided here.

- The great majority of the non-travel claims relate to our UK&I division. Claims backlogs at period end were within normal tolerances overall.

- Away from the reinsurance coverage on travel claims, we expect most other COVID-19 related claims can be aggregated by week and applied against the Group's GVC programme if over £10m, and against the Group's Cat programmes if reaching higher levels. This is expected to provide substantial protection in relation to downside claims scenarios. So far, these coverages have not been applied. Please see page 28 for further details of the GVC and Group Cat programmes.

- There is also a COVID-19 effect on premium income for 2020, which has so far totalled c £110m in H1. This results from a range of customer driven coverage changes, volume impacts and specific premium relief schemes across our different territories. We continue to monitor any increase in credit risks arising from customers experiencing financial difficulties as a result of weaker economic conditions and are actively working with those in most need on payment deferral plans. In H1 the bad debt charge did not increase materially, however.

- RSA itself was able to adjust well to substantially all employees working from home and is only cautiously beginning to return to office working in certain territories so far. While there are areas of service slippage, in general business as usual remains the norm. We have prioritised health and welfare of our staff and have not taken part in government furlough programmes.

MANAGEMENT REPORT - KEY FINANCIAL PERFORMANCE DATA

Management basis

CHIEF EXECUTIVE'S FIRST HALF 2020 REVIEW

RSA has reported a strong first half 2020 performance. We have been able to operate throughout the period with limited COVID-19 related impacts on our service to customers and in so doing continue to support and protect, per our policy promises. We expect to pay out c.£2bn in claims costs for H1. This is our raison d'etre. At the same time we have safeguarded our staff and continued to make contributions to our communities more broadly. While this has been our focus in a time of great external challenges, our mission to improve RSA's business thereby serving shareholders and others well has not been neglected. A record first half underwriting performance, and a healthy increase in underlying earnings per share are important proof points.

We are in uncertain times and as a financial institution must keep resilience and prudent financial management central to our decision making. In that regard we were sorry to suspend our 2019 final dividend payment and not presently to have announced a 2020 interim payment either. These decisions reflect regulatory guidance and a consideration for wider reputational arguments. We expect to resume dividend payments as soon as prudent to do so, and aim to catch up on missed dividends over time on the same basis.

Financial results

Our underwriting profits rose 33%1. In turn this drove a 13%1 increase in the business operating result. Earnings per share rose to 23.5p1 on an underlying basis, producing a return on tangible equity of 16.7%1. Statutory earnings were down 7% impacted by a variety of COVID-19 related charges.

These results are driven by business improvement actions taken over recent years and focussed on underwriting quality, whilst pushing hard on cost efficiency. Even excluding COVID-19 impacts, attritional loss ratios have improved again, as have large losses. Weather costs were above prior year though switching in severity from Canada to UK on this occasion.

Customer focus & market conditions

RSA's mission is to serve customers well. In that regard our change efforts continue across the business focused on digital enablement, improving service and sustaining strong and effective claims support. We remain equally dedicated to good and productive partnerships with our brokers and affinity clients. The mutual support and focus on our end customer is much appreciated.

COVID-19 has brought many particular challenges - from an unprecedented shift to "working from home", to supply chain interruptions and then a range of new claims in those policy areas responding to COVID-19. While never perfect, I am proud of our teams' response to these challenges. RSA has operated near normally throughout the crisis, supporting our customers and responding to the new challenges. There have inevitably been questions around some policy coverage wordings, since few customers, brokers or underwriters had concentrated on a COVID-19 scenario when establishing covers. But we remain determined to pay claims promptly and in accordance with our policies whilst protecting all stakeholders against unaffordable widening of covers. We support the UK legal test case on business interruption wording in that regard as an important contribution to clarity of cover.1 Excluding UK/ London Market exit portfolios, refer to pages 33 to 42 for further information

Insurance markets inevitably reflect the broader economic conditions around them. As such there are uncertainties and the prospect of a reduction of business volumes as a direct result of COVID-19 and as a result of the economic weakness it gives rise to. We will weather these impacts but will work hard to keep costs in line with any reduced income. Financial markets are also important to insurers. The fall in risk free interest rates hurts investment income and the volatility of credit and other asset classes impacts capital too. We will continue to prioritise resilience and a conservative risk profile in navigating these challenges.

Business improvement

Across RSA we are pushing determinedly towards our "best in class" performance ambitions. At its heart we seek to sustain and improve those business areas already achieving excellent performance, whilst taking strong action to improve where lagging. The report card for H1 2020 is good.

RSA's international businesses, which constitute c.87% of H1 profits, are all performing very well. Scandinavian H1 combined ratio is good and consistent with our ambition at 83%, and the particular work needed to improve Danish commercial lines results is showing good progress though with more to do here and on cost in H2.

In Canada a COR of 93% is also at very attractive levels, flattered a bit by better weather conditions but strong anyway. And similarly our businesses in Ireland and Middle East have had excellent first halves.

In the UK our results were down on H1 last year due to February's flooding, but improved if normalising for weather. We are making encouraging progress in re-establishing good performance standards here but with much left to do. Improved cost competitiveness is most needed in the UK. The cost programme we announced in 2019 has gone well and will be increased further this year to address economic challenges and faster bring the business to where we need to be.

Outlook

Given the particular challenges of 2020, our goals for the year are first and foremost to provide customer service, to safeguard our people's health and to sustain financial strength and resilience. However, we are also determined that RSA should enter 2021 in good shape and with strong "business as usual" results for this year, whatever the other challenges that superimpose on this. Half one is encouraging in this regard.

Stephen Hester

Group Chief Executive

29 July 2020

MANAGEMENT REPORT

SEGMENTAL INCOME STATEMENT

Management basis - 6 months ended 30 June 2020

Notes:

UK & International comprises the UK (and European branches), Ireland and Middle East. Refer to page 29 for comparatives.

1 Exit portfolios in UK & International which was substantially ran off in 2019, with residual premium still to earn out in 20202 Preference dividends of £5m and coupons of £7m paid on Restricted Tier 1 securities 3 On an earned basis 

Premiums1

Net written premiums ('NWP') of £3,136m were down 3% vs. H1 2019 at constant FX. We estimate that COVID-19 impacts on NWP were c.£110m (3%), consisting of price reductions, refunds, coverage changes and specific business line volume impacts. Outside of COVID-19 impacts, areas of profitable growth were balanced by planned underwriting effects in portfolios being remediated, with the process nearing its conclusion.

Group retention declined slightly to 79.6% in the period (H1 2019: 80.7%) with retention ahead of our plans in Swedish Personal Lines and the UK. In Commercial Lines, retention was up in the UK and Canada, but down in Scandinavia (principally Danish Commercial) where we are taking the most rating and underwriting action.

Regional trends for H1 2020 include:

· Scandinavian premiums were down 1% at constant FX. Personal Lines premiums grew 1%2 and included growth in Swedish Household and Personal Accident, our most attractive markets. Premiums were down 4%2 in Commercial Lines reflecting portfolio actions in Danish Commercial Lines where volumes were down 13%.

· Premiums grew 3% in Canada at constant FX, this included an estimated £22m of COVID-19 related customer relief measures impacting written premiums in the second quarter. Personal Lines premiums grew 4%2 driven by strong growth in Johnson which increased 12% (of which 5% was organic growth). We achieved high single-digit rate and hard market conditions meant that retention remained strong at 89% for Johnson, while PIFs were also up 4%. Premiums in Commercial Lines increased by 1%2 where double digit rate more than offset lower volumes.

· Premiums were down 8% in the UK & International region at constant FX, this included an estimated £81m impact from COVID-19. UK Personal Lines premiums were down 9% as reported (4% excluding COVID-19 impacts). Household premiums were broadly flat and despite pushing good rate, stronger retention helped to offset lower new business volumes. Motor and Pet premiums decreased as we continue to prioritise margin improvements. UK Commercial Lines premiums were down 5% (2% growth excluding COVID-19 impacts). We achieved rate ahead of our plans across all major lines of business and both retention and new business were better than prior year. Premiums in Ireland decreased by 11%2 (1% excluding COVID-19 impacts) due to lower Personal Motor new business. In the Middle East, premiums were down 17%2 (9% excluding COVID-19 impacts) largely due to lower volumes in Commercial Lines and rating pressure in Personal Lines.

· Although there was no net written premium in the UK/ London Market exit portfolios, there was £11m of premium earned in H1 2020. The remainder of any unearned premium will earn through in the second half of the year.

More detail is provided in the regional reviews on pages 16 to 22.

1 Excluding UK/ London Market exit portfolios, refer to pages 33 to 42 for further information 2 At constant FX

Underwriting result1

Total Group underwriting result:

· The impacts of COVID-19 provided a small underwriting benefit overall. COVID-19 related frequency benefits were offset by lower premiums, direct COVID-19 related claims, claims provisions and projected claims inflation impacting both the prior year and current year.

· The Group attritional loss ratio of 50.9% was 4 points better than H1 2019. Excluding the impacts of COVID-19 the attritional loss ratio was 53.4%, a 1.5 points improvement. The ratio improved by 2.0 points in Scandinavia (of which COVID-19 provided a 1.6 point benefit). In Canada, the attritional loss ratio improved by 5.7 points (of which COVID-19 provided a 1.7 point benefit). The UK & International attritional loss ratio improved by 5.9 points (of which COVID-19 provided a 5.5 point benefit).

· Weather losses amounted to £104m or 3.4% of net earned premiums (H1 2019: 3.0%; five year average: 2.9%2) a little worse than prior year. Weather costs were adverse in the UK & International due to February flooding in the UK, while Canada was better overall though not in the second quarter.

· Large losses were £303m or 9.9% of net earned premiums (Inc. exits: 10.4%; H1 2019: 9.6%; five year average: 10.0%2). Excluding the impacts of COVID-19 the large loss ratio was 9.0%, a 0.6 points improvement versus H1 2019. Scandinavia improved by 1.1 points. Large losses were 1.5 points better in Canada. The UK & International was flat excluding COVID-19 and 1.9 points worse than H1 2019 altogether.

· Reinsurance: Excluding any COVID-19 related loss, the percentage retention reached for each of our covers was as follows: GVC 54%; Scandinavia 68%; Canada large 37%; Canada catastrophe 80%; UK 17%. Please see page 28 for further details of the relevant covers.

Group prior year profit provided 0.6% of benefit to the combined ratio or £18m, this included a COVID-19 reserve of £6m (H1 2019: 0.9 points benefit to the combined ratio).

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 over its target level at c.5% of best estimate claims reserves. We added to this margin by £25m in H1 with a precautionary COVID-19 general reserve.

1 Excluding UK/ London Market exit portfolios, refer to pages 33 to 42 for further information2 2015 to 2019 

Underwriting operating expenses

The Group underwriting expense ratio of 15.9% increased as expected due to lower premiums from COVID-19 impacts. Scandinavia improved by 0.3 points while Canada and the UK & International increased by 2.2 points and 0.8 points respectively. The Canadian expense ratio also reflected increased amortisation (as guided) but was impacted by lower premiums driven by COVID-19. The UK cost programme has continued and is expected to be further increased in the second half of the year.

Commissions

The Group commission ratio of 12.7% was flat versus prior year (H1 2019: 12.7%)

Investment result

The investment result was £112m (H1 2019: £131m) with investment income of £134m (H1 2019: £154m), investment expenses of £7m (H1 2019: £7m) and the liability discount unwind of £15m (H1 2019: £16m).

Investment income was down 13% on prior year, primarily reflecting the impact of reinvestment at lower yields. The average book yield across our major bond portfolios was 1.9% (H1 2019: 2.2%). Approximately £6m of the reduction in investment income was a result of COVID-19 market impacts.

Based on current forward bond yields and FX rates, for H2 2020 we project investment income of c.£120-135m and the capital element of the bond pull-to-par of c.£40m (post tax).

Controllable costs

Group written controllable costs were £680m (H1 2019: £694m). This comprised 3% cost reductions, offset by 2% inflation. Scandinavia delivered cost reductions of 1% and UK & International delivered 11% savings, all gross of inflation and at constant FX.

Group FTE2 was flat versus H1 2019, despite additional resources required to support the new Scotiabank partnership in Canada.

The earned controllable expense ratio of 21.8% (ex. exits) was up slightly versus H1 2019 (21.3%) due to a lower premium base driven by both portfolio actions and COVID-19. The ratio is down over 2.51 points since H1 2013 and our ambition of an earned controllable expense ratio of less than 20% is unchanged.

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

Other charges

Interest costs:

· Interest costs were £17m (£24m including the Tier 1 issuance), up from £16m in H1 2019.

· Coupon costs of £7m (H1 2019: £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 charges:

· Net losses of £57m were incurred, of which £46m related to COVID-19 market volatility. This was split between unrealised losses of £26m on inflation linked derivatives and property as well as impairments of £20m, primarily driven by REITs1.

· £18m of restructuring charges were incurred relating to the UK cost reduction programme that commenced in H2 2019 in the business. £45m of costs have been incurred since the start of the programme.

· Changes in economic assumptions represents £8m for the accounting impact of a reduction in the discount rate on long-term insurance liabilities in Denmark driven by COVID-19 impacts on interest rates, while there was also a £5m goodwill write-down relating to our Norwegian business

Tax

The Group reported a tax charge of £47m for H1 2020, giving an effective tax rate ('ETR') of 22% (H1 2019: 20%). The tax charge largely comprises tax payable on overseas profits. The Group underlying tax rate for H1 2020 was 20% (ex. exits) and 21% (inc. exits) in line with our plans (H1 2019: 18% inc. and ex. exits).

The carrying value of the Group's deferred tax assets at 30 June 2020 was £202m (31 December 2019: £209m), of which £180m (31 December 2019: £180m) are in the UK. At expected tax rates, a further c.£310m (31 December 2019: £254m) of deferred tax assets remain available for use but not recognised on balance sheet; these are predominantly in the UK and Ireland. The majority of the movement in H1 2020 relates to the change in the UK tax rate from 17% to 19% effective 1 April 2020.

The carrying value of the Group's deferred tax liabilities at 30 June 2020 was £102m (31 December 2019: £84m), the majority of which are in Sweden and Denmark.

For 2020 as a whole, we expect the Group's ETR and underlying tax rate to be comparable to the rates for H1 2020, 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 unrecognised UK and Irish tax assets.

1 Real Estate Investment Trusts

Dividend

· Consistent with the 2019 final dividend suspension in April, an interim dividend for 2020 is not presently being announced. RSA expects to resume dividends as soon as judged prudent, which absent unforeseen events should be by the time of full year results 2020. We also aim to catch up on missed dividend payments over time consistent with prudent capital management.

BALANCE SHEET

Movement in Net Assets

Tangible net assets increased by 9% to £3.17bn at 30 June 2020.

The increase was driven by profit after tax of £199m3 and fair value exchange gains and mark-to-market movements of £102m, mainly reflecting translational gains from weaker sterling and lower bond yields respectively. Tangible net assets were reduced by investment of £53m in intangible assets which were primarily IT related (net investment of £13m after amortisation of £40m shown as part of profit).

The pension schemes generated a profit of £14m in net asset terms with market movements and experience slightly positive in aggregate. The IAS 19 surplus at 30 June 2020 was £328m, please see page 27 for more details.

TNAV per share increased by 9% to 307p.

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 158% during the period:

Please refer to appendix (page 26) for further Solvency II details (including sensitivities).

Note: IFRS pension surplus increased £117m, providing a 5 point additional unrecognised buffer to the Solvency II ratio This brings the total unrecognised pension buffer to c.8 points.

1 The Solvency II capital position at 30 June 2020 is estimated and is shown post dividend accrual2 Represents 6 months' accrual of a 'notional' dividend amount for the year 2020 

REGIONAL REVIEW - SCANDINAVIA

Management basis

SCANDINAVIA

Scandinavia delivered a business operating result of £164m for H1 2020, up 30%. The combined ratio of 83.2% was 5.9 points better than the first half last year. Excluding impacts of COVID-19 the combined ratio was 84.7%. Personal Lines performance remained excellent with a combined ratio of 78.4%. Commercial Lines improved significantly by 13 points to 90.5% with the Danish Commercial Lines generating a £10m profit in the first half (H1 2019: £25m loss).

Net written premiums of £1,012 decreased by 1% at constant FX. Personal Lines premiums were up 1%1 driven by Swedish Personal Lines which grew 2%1 with both Household and Personal Accident up. This was driven by strong new business trends, particularly in Personal Accident, whilst retention was ahead of our Plans across all classes. Danish Personal Lines premiums were flat with rate offsetting slightly lower retention. PIFs grew in all lines of business.

Net written premiums decreased by 4%1 in Commercial Lines. Rate was ahead of plan and H1 last year across the majority of lines of business but was impacted by significant portfolio action taken in Danish Commercial where volumes were down 13% (as planned). Swedish Commercial was up 1%1 driven by strong new business levels.

During the second quarter the majority of our employees in Scandinavia have been successfully working from home. Despite changes to the work environment, customer satisfaction measures have remained strong during the period for both sales and service and claims. Digital sales in both Personal Lines and Commercial Lines have increased year on year in each of our geographies with online traffic also up between 25-55% in the period.

Large losses of 7.4% improved (H1 2019: 8.5%). The attritional loss ratio of 61.8% included 1.6 points of COVID-19 related frequency benefits. Excluding COVID-19 the attritional loss ratio of 63.4% was 0.4 points better than H1 2019.

Written controllable expenses were flat in H1 2020, with 1% cost reductions offset by 1% inflation. The earned controllable cost ratio of 22.3% increased by 0.3 points, driven by lower earned premiums.

Geographically, Sweden generated an underwriting profit of £116m (H1 2019: £113m1) and a combined ratio of 77.0% (H1 2019: 77.3%). Lower large losses, better weather experience and lower expenses were partly offset by adverse prior year development. Denmark reported an underwriting profit of £29m (H1 2019: £13m1 loss) and a combined ratio of 89.6% (H1 2019: 104.0%). This was supported by a strong turnaround in Danish Commercial Lines performance. The underwriting loss in Norway of £4m was lower (H1 2019: £6m1 loss) driven by modest improvements in the attritional loss ratio and expenses.

1 At constant FX 

REGIONAL REVIEW - CANADA 

Management basis

 CANADA

Canada delivered a business operating result of £88m for H1 2020, up 76% versus H1 last year. The combined ratio improved by 4.6 points to 93.2%. Excluding the impacts of COVID-19 the combined ratio was 94.3%. Personal Lines continued to perform well and the combined ratio improved by over 7 points to 87.2%. Pleasingly, Personal Broker performance showed continued improvement and is now operating at target profitability levels. In the Personal Motor segments, rate reductions and premium adjustments offset COVID-19 related frequency benefits. The combined ratio in Commercial Lines remained disappointing at 109.0% (H1 2019: 105.6%) with improved attritional and large loss improvements offset by higher weather costs and adverse prior year development. The Commercial Lines current year combined ratio improved by c.4 points to 103.4%.

Net written premiums of £795m increased by 3% at constant FX. This was driven by growth of 4%1 in Personal Lines in H1, despite COVID-19 related customer relief measures made in the second quarter. These relief measures, which totalled an estimated $75m CAD included premium rebates, coverage changes as well as changes to rate filings. We applied rate of c.9% in Personal Auto, while we applied double digit rate 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. Retention remained strong at 89% for Johnson, our direct business. Personal Broker reported a 3 point decrease to 81%; this was in line with our plans and reflected targeted actions to improve profitably. Johnson continued to grow organically (5%). We commenced writing new business for Scotiabank in April last year and renewals followed in July and the portfolio has performed well to date. Premiums in Commercial Lines increased by 1%1 where a 7% reduction in volumes was more than offset by rate achieved. Lower volumes were in line with our plans and mainly driven by targeted lapses. We expect to continue to prioritise profitability over volume.

Lockdown measures in Canada have meant that 95% of employees quickly transitioned to work from home at the beginning of the pandemic in Canada. Despite this, business operations and performance kept on track. Johnson service levels exceeded plan with brand and agent net promoter scores at a twelve month high. Meanwhile, digital transactions were up 11% and site visits up 46% for Johnson since the onset of COVID-19.

While the weather loss ratio reduced by 1.8 points to 5.4%, it remained above the five year average of 4.7%2. This included the June Alberta Hailstorm which was the fourth-most-expensive insured natural disaster in Canadian history at $1.2bn3. The large loss charge of 7.4% was 1.5 points better than H1 2019. The attritional loss ratio of 50.5% improved by nearly 6 points in H1 2020. Excluding COVID-19 the attritional loss ratio was 52.2%.

Written controllable expenses of £170m were 15%1 higher than H1 last year driven primarily by an increase in both planned software amortisation charges as well as higher staff costs (also planned) relating to the Scotiabank partnership and some one-off items. The earned controllable expense ratio of 20.1% is expected to trend back below 20% for 2020.

1 At constant FX2 2015-20193 Source: Catastrophe Indices and Quantification Inc. 

REGIONAL REVIEW - UK & INTERNATIONAL

1 Europe, previously reported within UK Commercial, is now reported separately.2 Excluding UK/ London Market exit portfolios, refer to pages 33 to 42 for further information3Adjusted for changes in UK&I business mix resulting from exits.

UK & INTERNATIONAL

The UK & International region delivered a business operating result of £148m1 for the period (£115m including exits), slightly down on prior year due to lower investment income. The business delivered a combined ratio of 93.6%1 (96.0% including exits). Excluding the impacts of COVID-19 the combined ratio was 94.7%1 with the attritional loss ratios improved by c.0.5 points while the large loss ratio stayed below the adjusted five year average, with weather being adverse.

UK

The UK reported an underwriting profit of £40m1 in the period and a combined ratio of 96.1%1. This was £6m below prior year though would have been £19m better if equalising for weather.

Net written premiums of £927m were down 7%1 as reported, reflecting COVID-19 impacts plus the underwriting and pricing action taken in 2018 and 2019. Rates were strong and ahead of plan in Commercial Lines while we saw an improvement in retention in both Personal and Commercial Lines, albeit partly helped by lower churn in some of the business lines due to the UK lockdown.

Personal Lines premiums decreased by 9% in the period of which 5% relates to COVID-19, mainly driven by lower sales in our telematics business and through some of our branch-based partners. Household premiums were down 1% with retention being better than both plan and prior year. MORE TH>N Home premiums exceeded our expectations and delivered positive new business growth. Overall, new business volumes were down as we continued to hold our discipline on rate.

Commercial Lines premiums were down 5%2 excluding exits with the majority of this driven by the impacts of COVID-19. Rates were ahead of our plans as we achieved double digit rate increases in London Market and mid-single digit in our Regions business. Positive momentum continued in our Regions business as we grew premiums by 14% on prior year, supported by strong new business, retention and rates all of which were ahead of our plans.

Throughout COVID-19 we were able to maintain service to our customers, transitioning our customer contact centres almost exclusively to remote working. Customer migration to digital channels of communication has been sustained, with More Than digital renewals increasing 18% in the month of June, versus a year ago. In Commercial Lines, we implemented a new Claims Commitment, accelerating our standard response times for customers.

The weather ratio of 4.6%1 was 2.5 points worse than prior year and was driven by the February floods which cost c.£35m. The large loss ratio of 12.3%1 was 1.8 points worse than last year, but was stable versus prior year excluding COVID-19 impacts. The attritional loss ratio of 41.6%1 was 5.9 points better than H1 2019 driven substantially by frequency benefits associated with COVID-19 and improved by 0.3 points excluding COVID-19. Prior year underwriting result was an £11m loss1 or 1.1%1 on the combined ratio (H1 2019: 0.3% benefit). The expense ratio increased slightly due to premium shortfalls but controllable expenses fell in absolute terms. As a result, the 2019 cost programme will be expanded in the second half.

1 Excluding UK/ London Market exit portfolios, refer to pages 33 to 42 for further information 2 At constant FX

Europe, Ireland and the Middle East

Europe1, which is now reported separately within UK & International, delivered an underwriting profit of £5m and a combined ratio of 95.2%. The combined ratio was nearly 10 points better than the same period last year, with attritional loss ratios significantly improved and large loss ratio better than prior year and plan (excluding COVID-19). Premiums were lower versus prior year as we cautiously rebuild the portfolio, although market hardening has allowed us to achieve double digit rate increases but we remain mindful of possible volatility in this portfolio.

Ireland reported another excellent performance, generating an underwriting profit of £28m (H1 2019: £26m) on a combined ratio of 81.9% (H1 2019: 83.3%). Net written premiums fell by 11%2 driven by the COVID-19 impact on new business levels in Personal Motor. Improved attritionals and large loss ratio helped to improve the combined ratio versus H1 last year.

The Middle East delivered an underwriting profit of £16m (H1 2019: £18m) on a combined ratio of 83.0% (H1 2019: 81.7%). Net written premiums decreased by 17%2 with COVID-19 impact on business activity a key driver. An improved attritional loss ratio was more than offset by increased expenses and commissions as a result of lower premium contribution.

Exit portfolios

The underwriting loss from these portfolios was £33m for the period. Net written premiums were negligible, while net earned premiums were £11m reflecting the ongoing run-off of exposures. The portfolios are expected to be materially run-off by the end of 2020.

1 Excluding UK/ London Market exit portfolios, refer to pages 33 to 42 for further information 2 At constant FX 

INVESTMENT PERFORMANCE

Management basis

INVESTMENT PERFORMANCE

Investment income of £134m (H1 2019: £154m) was offset by investment expenses of £7m (H1 2019: £7m) and the liability discount unwind of £15m (H1 2019: £16m). Investment income was down on the same period last year primarily reflecting the impact of reinvestment at lower yields but also negatively impacted by lower cash rates and reduced dividend income from the REIT1 portfolio.

The average book yield for H1 2020 on the total portfolio was 2.1% (H1 2019: 2.4%), with an average yield on the bond portfolios of 1.9% (H1 2019: 2.2%). Reinvestment rates in the Group's major bond portfolios were approximately 0.7% (H1 2019: 1.3%).

At 30 June 2020, the average duration of the Group's bond portfolios of 4.2 years was slightly higher than at year-end (31 December 2019: 3.9 years).

The investment portfolio increased by 2% during the period to £12.9bn.

At 30 June 2020, high quality widely diversified fixed income securities represented 83% of the portfolio (31 December 2019: 82%). Equities (largely REITs1) represented 1% (31 December 2019: 2%) and cash was 7% of the total portfolio (31 December 2019: 7%).

The quality of the bond portfolio remains very high with 99% investment grade and 69% rated AA or above. The bond portfolio remains well diversified by sector and geography.

Based on current forward bond yields and foreign exchange rates, we have left our investment income guidance unchanged at c.£255-270m for 2020, c.£240-255m for 2021 and c.£235-250m for 2022. The discount unwind is expected to be in the region of c.£30m per annum and investment expenses are expected to be c.£14m per annum.

Unrealised bond gains and pull-to-par

At 30 June 2020, balance sheet unrealised gains of £428m (pre-tax) had increased by £57m, principally driven by positive mark-to-market on bond holdings due to declining yields, partially offset by negative movements in our REIT1 and preference share holdings.

If yield curves were to stay as they are, it is now estimated that the bond 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 2020 and c.£80m for 2021, 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. In Q1 2020, RSA were granted approval to apply the volatility adjustment, which reduces our exposure to spread movements and is reflected in the sensitivities above.

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 and interest rate sensitivities reflects the fact that upside pension sensitivities are restricted to the surplus cap.

4 Sensitivities assume that credit spreads of different ratings all move by the same amount and hence reflect an assumed offset between the impact on assets held and the IFRS value of pension scheme obligations which could differ

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 2020 to 30 June 2020:

At an aggregate level, the pension fund surplus under IAS 19 improved during H1 2020 from a £211m surplus at 1 January to a surplus of £328m at 30 June (net of tax). This was driven primarily by deficit funding contributions paid in January (£75m pre-tax) with the impact of market movements and experience also slightly positive in aggregate.

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 2020, the Group Volatility Cover (GVC) entered the final 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, 50% A- or better)

Alongside the GVC, we continue to purchase additional 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. For 2020, we placed 100% of the Canada and Scandinavia aggregate covers and chose to place 75% of the UK aggregate cover in order to balance the cost versus benefit of this protection. 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 £50m. Limit of cover is £35m

· Scandinavia: Aggregate cover protects large losses between DKK 20m and DKK 100m. Cover attaches when the total of the losses in these bands exceeds DKK 120m. Limit of cover is DKK 150m

· Canada: Aggregate cover protects large losses between C$2.5m and C$10m and catastrophe losses between C$7.5m and C$17.5m. Large loss and Catastrophe sections operate independently; cover attaches when large losses exceed C$55m 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 for 2020. 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 2019 level of £1m and €1m respectively.

MANAGEMENT REPORT

SEGMENTAL INCOME STATEMENT

Management basis - 6 months ended 30 June 2019