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BAML BANKING & INSURANCE CONFERENCE
Stephen HesterGroup Chief Executive
27 September 2016
RSA INSURANCE GROUP:
PURSUIT OF OUTPERFORMANCE
This presentation may contain ‘forward-looking statements’ with respect to certain of the Group’s plans and itscurrent goals and expectations relating to its future financial condition, performance, results, strategic initiativesand objectives. Generally, words such as “may”, “could”, “will”, “expect”, “intend”, “estimate”, “anticipate”, “aim”,“outlook”, “believe”, “plan”, “seek”, “continue” or similar expressions identify forward-looking statements. Theseforward-looking statements are not guarantees of future performance. By their nature, all forward-lookingstatements involve risk and uncertainty because they relate to future events and circumstances which arebeyond the Group’s control, including amongst other things, UK domestic and global economic businessconditions, market-related risks such as fluctuations in interest rates and exchange rates, the policies and actionsof regulatory authorities (including changes related to capital and solvency requirements), the impact ofcompetition, inflation, deflation, the timing impact and other uncertainties of future acquisitions or combinationswithin relevant industries, as well as the impact of tax and other legislation or regulations in the jurisdictions inwhich the Group and its affiliates operate. As a result, the Group’s actual future financial condition, performanceand results may differ materially from the plans, goals and expectations set forth in the Group’s forward-lookingstatements. Forward-looking statements in this presentation are current only as of the date on which suchstatements are made. The Group undertakes no obligation to update any forward-looking statements, save inrespect of any requirement under applicable law or regulation. Nothing in this presentation should be construedas a profit forecast.
NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION IN WHOLE OR IN PART IN, INTO OR FROM ANYJURISDICTION WHERE TO DO SO WOULD CONSTITUTE A VIOLATION OF THE RELEVANT LAWS OR REGULATIONSOF THAT JURISDICTION
CONFERENCE THEME: “PRICED FOR UNCERTAINTY. LOOKING FOR ANSWERS”
RSA Insurance:
A ‘self help’ story
Resilient in challenging economic and financial market conditions
‘Focused mid-cap’, a proven value strategy in P&C Insurance
Unusually attractive EPS & dividend increases – delivered and in prospect1
Momentum ahead of ‘street’ expectations; good value entry point if progresscontinues
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2
3
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5
3
Introduction
1 Based on consensus and Company targets
RSA has successfully
completed its turnaround
phase
Now focused on move towards
‘best in class’ performance
1 2
4
Today’s presentation updates on
what we are doing to
achieve that goal
3
Introduction
PURSUIT OF OUTPERFORMANCE
To win in P&C insurance you need:
THESIS
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Strong customer franchise(s)
Disciplined strategy that focuses on strengths and avoids mistakes
A balance sheet that protects customers and the company
Intense and accomplished operational delivery - across customers, underwriting and costs
Introduction
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2
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RSA’S STRATEGY & FRANCHISE
FOCUSED; STRONGER; BETTER
What is RSA?
A leading international general insurer, focused on Northern developed markets
Aiming to compete only where we can win. And to win where we compete
Well capitalised, achieving sustainable attractive returns
Strong operational delivery; transparent and easy to understand
Enduring customer appeal
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2
3
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In short, winning for customers and for shareholders
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Strategy & Franchise
LEADERS IN OUR MARKETS, WITH ATTRACTIVE BUSINESS BALANCE
1 Includes Ireland, Specialty businesses in the Eurozone, and Middle EastNote: Split based on 2015 core Group NWP, except indicative profitability - based on target combined Underwriting and Investment result
By Customer…
ByProduct…
By distribution
channel…
Indicative target
profitability mix
Commercial
Personal
Affinity
Direct
Broker
Household
Motor
Other
Marine & other
CommercialMotor
Liability
Property
Scandinavia UK1
Canada
8
Strategy & Franchise
Aim to deliver superior performance and justify a superior P/E
Regional leadership positions
Intense performance focus
Operational and financial excellence
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‘FOCUSED MID-CAP’ PROPOSITION
+++
9
Strategy & Franchise
ACTION PLAN
ACTION PLAN
Action Plan
Strategy implemented– Focus on strongest businesses– 19 disposals completed
Customer actions– Digital platforms for customer convenience, flexibility and speed– Improve service standards– Increase customer satisfaction and retention– Sharpen customer acquisition tools
2014 2015 2016 2017
11
Balance sheet fixed– £1.2bn disposal proceeds– £750m Rights Issue– Solvency II delivered– Debt restructuring actions
Performance restored– 2013: 99.6% COR; £244m pre-tax loss– 2015: 96.9% COR; £323m pre-tax profit;
ROTE > cost of equity
Foundations laid to power next phase
2018
Turnaround done Pursuit of outperformance
Underwriting actions– Elevate underwriting disciplines– Ongoing ‘BAU’ portfolio re-underwriting– Invest in tools and technology– Optimise reinsurance
Cost actions– Lean/robotics/process redesign– Procurement – Spans and layers– Simplify offerings– IT change
People, management and culture
PURSUIT OF OUTPERFORMANCE
Management Approach Improvement Actions
What is ‘best in class’ performance in our markets and how do we get there?
For each business:
• Compare to ‘best in class’ customer capabilities, underwriting excellence, costs and technology
• Identify capability gaps and roadmap to improve
• Validate and sequence change initiatives
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2
3
Performance improvement actions in 5 areas:
• Customer capabilities
• Underwriting improvements
• Cost efficiency
• Technology enabling
• People and culture
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2
3
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Performance
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SERVING CUSTOMERS BETTER
Customer Actions
Sales Actions
1
2
Customer
Multi-channeldistribution Enhance direct/broker/affinity choice for clients.
Speed, convenience & flexibility Digital trends at the forefront of customer evolution.
Proposition Drive to sharpen targeted customer propositions.
Service Differentiate on service standards and delivery.
Satisfaction Target strong positive NPS and effective brand promise.
Salesforce effectiveness Multiple disciplines to improve delivery to customers.
Trading capabilities Greater market responsiveness in pricing and policymake up.
Pricing expertise Richer risk segmentation.
E-trading Drive ‘industrialisation’ of B2B delivery for pricecompetitiveness and growth.
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SERVING CUSTOMERS BETTER
Customer
38
3132
-3
-10
-26
1H132012 1H151H14 2H15
21
2H13 1H16
Example: UK Commercial NPS
Codan CSAT ranked 2nd
in SME in DenmarkCodan CSAT ranked 1st
overall in Norway
Customer Agent NPS +60, significantly ahead of benchmark
RSA 2nd most recommended in Canadian broker survey
RSA ranked 1st or 2nd in GSL European offices
1
2
Promoters spend more…
…And are more likely to convert
Average premium 1.4x higher
Total spend 2.6x higher
1.9x
Quote conversion almost double for promoters
+64
UNDERWRITING BETTER
Core Group attritional loss ratio progressionCY attritional loss ratio development, H1 2015 – H1 2016 (%)
Scandinavia
Canada
UK
Underwriting
Core Group-3.1
1H15-1H16
54.8
57.9-4.1
1H15 - 1H16
57.1
61.2
-2.0
1H15 - 1H16
64.5
66.5
-2.2
1H15 - 1H16
46.5
48.7
Key underwriting improvement actions
a
b
c
Portfolio re-underwriting
Tightening underwriting discipline
Investing in tools and technology
• Actions now largely complete• Exited UK Broker Motor• Exited certain municipality business in Sweden• Germany Commercial lines exited• Pruning of facilities business in Canada, plus revision of
Property appetite more broadly
• Improved rigor and intensity of portfolio management –disciplined decile analysis of renewal business to improve profitability and risk mix within portfolios
• Optimisation of final price to technical pricing
• Re-built technical pricing models across the Group’s Personal Lines businesses:–Increased sources, number and detail of rating factors–Greater granularity in customer segmentation
• Upgraded external rating engines utilising Radar Live & Earnix:–Enables use of more complex algorithms in rating–Significantly increases speed in bringing prices to
market• Building initiatives in data analytics
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1H16 benefits c.1pt from benign indirect weather
LOWER COSTS – TARGET >£350m SAVINGS BY 2018
Costs
Simplify processes, IT changeCost reduction themes and progress
1 Simplify end-to-end processes– Lean operational excellence being deployed across
all regions– Digitisation and robotics initiatives in all regions
2 Optimise procurement– Procurement savings in-flight across the Group,
e.g. IT infrastructure, BPO transition
3 Streamline spans and layers– Wave one process achieved up-to 17%
improvement in spans of control by region– Further benefits anticipated
5
4 Simplify products– As we deliver technology and process
improvements, we will target the rationalisation of non-continuing product variants within our businesses.
5 IT change– Transition to new WIPRO IT infrastructure
arrangements in UK and Scandinavia completed in H1.
– Introduction of Guidewire in Canada, new policy system (Duck Creek) in the UK and TIA in Scandinavia.
Example
1
Opportunity: Potential to increase scale and efficiency of transformation through investment in robotic automation and digital self-service.
UK Personal Lines pilot results
Approach: Robotic automation offers benefits through process simplification and digital self-service. Ambition to utilise robotics to deliver and accelerate transformation programme benefits.
Initial pilot programmes have been run in UK PL and elsewhere with positive early results.
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8 511
User inputs
>50
User input Screens
28
Applications used
As-is To-be
Simplified IT architecture
Simplified call centre agent
navigation
Simplified process
Below is ‘before and after’ for a customer agent in a UK Home renewal enquiry:
MANAGEMENT RENEWAL
Management
17
30%
70%
28%
36%
36%
Group Executive Management Team
All of our Group Executive and 64% of our Senior Leaders have been newly appointed since January 2014
New to RSA New to Role Unchanged
Group Senior Leaders
FINANCIAL AMBITION: DRIVEN BY CLOSING GAPS TO BEST IN CLASS COMBINED RATIO PERFORMANCE
Ambition
181 UK includes Ireland, Specialty businesses in the Eurozone, and Middle East2 Annualised, based on current FX rates
Scandinavia
< 85%Net written premium (£bn)(CFX)
Attritional loss ratio2 (%) Operating expense ratio 1 (%)
1.61.6
2014 20152013
1.5
Ambition
+2-4%
20142013
64.867.5
-2-3pts
Ambition2015
64.5 17.0 16.9 16.4
Ambition
-2-3pts
201520142013
63.7 pre Impact of discount adj2.
Canada
< 94%Net written premium (£bn)(CFX)
Attritional loss ratio (%) Operating expense ratio 1 (%)
2013
1.4
+0-3%
Ambition2015
1.4
2014
1.4
2014
62.8
2013
62.1
-1.5-2.5pts
Ambition2015
60.315.1 15.9 16.8
Ambition201520142013
-1-2pts
UK1
< 94%Net written premium (£bn)(CFX) +2-4%
Ambition2015
2.6
2014
2.6
2013
3.0
2015
48.1
2014
49.0
2013
50.2
-2-3pts
Ambition
15.2 14.1 13.7
2013
-0.5-1pts
Ambition20152014
Attritional loss ratio (%) Operating expense ratio 1 (%)
Investment incomeConservative, high quality fixed income portfolio
FX translationc.75% profits are non-Sterling. Recent weakening worth 3p2 EPS
Cost reduction>£350m by 2018
Interest costsFurther debt actions = lower interest costs
Reorganisation costs Materially taken by end of 2017
TaxUnderlying tax rate falling to low 20s (%)
Major ‘jumps’ in EPS
Sustainable high quality cash flows
Capacity for attractive ‘total’ dividend payouts
‘Best in class’ underwriting Operational & financial optimisation Attractive investment case
Current consensus dividend yield in line with FTSE 100 in 2017 and ahead in 2018
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REASONS TO BELIEVE
Scandinavia
Canada
UK
99.9
RSAAmbition
< 94.0
Best-in-class H1 2016
89.5
RSA H1 2016
94.4
Market median H1 2016
95.9
RSA 2013
Combined ratio performance
Benchmarking
Source: As reported in published H1 2016 financial statements. Peer group consists of: UK: Aviva, DLG, AXA, Allianz, Zurich, and Ageas. Scandinavia: Top, Tryg, If, LF, Folksam, Gjensidige and Alm Brand Canada: Intact, Aviva, Cooperators, Desjardins, TD, Wawanesa, and Economical. Note that there are some differences in accounting treatment for reported COR between local peers and RSA.
RSAAmbition
< 85.0
Best-in-class H1 2016
83.3
RSA H1 2016
88.5
Market median H1 2016
84.9
RSA 2013
89.7
RSAAmbition
< 94.0
Best-in-class H1 2016
94.5
RSA H1 2016
94.5
Market median H1 2016
101.2
RSA 2013
100.0
1 RSA figures presented on a ‘like-for-like’ basis.
FINANCIAL MOMENTUM
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Financials
1 Presented on a ‘like-for-like’ basis.
-4.5
H1 2016
54.7
2013
59.2
-3.7
H1 2016
64.5
2013
68.2
-4.3
46.5
2013
50.8
H1 2016 2013
-5.2
62.3
H1 2016
57.1
84.2
65.3
2013
-18.9
H1 2016
100.1
2013 H1 2016
94.7
-5.4 -1.2
2013 H1 2016
88.5
89.7 99.9
H1 2016
94.4
2013
-5.5
100.0
2013
-5.5
H1 2016
94.5
-65.1
100.7
2013 H1 2016
165.8
Scandinavia UK Canada IrelandGroup
Attritionalloss ratio (%)
Combined ratio1 (%)
200180
120
>350
2018target
FY 2016guidance
c.250
HY2016
FY2014
FY2015
Cumulative gross cost
savings (£m)
SUMMARY
Summary
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Winning for customers and for shareholders
Strategic refocus now completed & balance sheet fixed
Excellent performance progress, ahead of our plans
Record half year 2016 underwriting profits
1
Underlying ROTE in our target range of 12-15% a year early
– good prospects of further upside
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Q&A
APPENDIX
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WHAT MAKES RSA ATTRACTIVE
Leading market positions in stable
markets
Well balanced business by geography, customer,
channel and product
Capital efficiency from diversification
Cash generative business model
Group synergies of expertise, cost and
revenues
Disciplined and focused execution
Strong brands and market reputation
Appendix
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Appendix
GENERAL INSURANCE MARKETS
Scale important, but principally at a market level,
not globally
Large, enduring and stable markets
Competitive and challenging markets, consolidated
structure, no patents, so most players doing similar things
1 2 3
Proactive mainstream players holding their own vs specialists / disruptors
4
Important evolutions in customer expectations,
regulation and technology, as in other industries
5
Few existential threats or transformative
opportunities
Business models need to cope with market cycles and
underwriting volatility
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7
MARKET CHARACTERISTICS INFORMING RSA’S STRATEGY
CAPITAL
Targeting single ‘A’ category ratings, and 130% – 160% operating range under Solvency II
Metric Appetite
Credit rating •Target single A category ratings (S&P, Moody’s)
Solvency II coverage
ratio•Target coverage 130% - 160%•Coverage at 30 June 2016: 158%
Pillar II •Full economic capital position consistent with other measures
TNAV:NWP •Reasonableness test against other metrics
• A measured approach to capital risk appetite, targeting a minimum buffer above the SCR in addition to capital resilience based on a range of sensitivities
• RSA is a diversified, multi-channel, multi-product general insurer and is not normally exposed to significant volatility from the business mix
• Pension scheme provides a degree of IAS 19 volatility under Solvency II, though not in cash terms
Solvency II Appetite
26
Appendix
CAPITAL GENERATION
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• Gross capital generation annually closely equivalent to net earnings. No obstacles to cash dividends to Group centre from subsidiaries.
• SCR increase from targeted growth expected to be marginal due to benefit of increased profitability and diversification of insurance risks.
• Pension contributions neutral to capital unless schemes are in surplus greater than the SCR allocation to pension risk.
• In steady state, great majority of earnings available for shareholder distributions subject to any inorganic capital needs and any bond pull-to-par.
• Dividend policy of 40-50% regular dividend payout; additional surpluses considered for share buybacks or special dividends once steady state capital and operating earnings achieved.
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Appendix