Allied World acquisition of RSA’s Asian business marks changing of guard for corporate customers

The deal marks a further step in Allied World's strategy to become a meaningful player in the international large corporate insurance sector, evidenced by its appointment of Julian James as president of Allied World Europe in late 2012 and the creation of a platform for multinational business. The RSA business that Allied World is to acquire includes a niche group of specialty lines, including casualty, construction and engineering, marine and property. Allied World said that RSA has a long history in the region, with connections that go back over 40 years in Hong Kong and over 180 years in Singapore. In 2013, the businesses had total gross premiums written of approximately US$250m.hide"This is a truly unique opportunity to acquire leading specialty businesses in key Asian markets. This transaction will significantly deepen and broaden our presence in Asia," said Scott Carmilani, President and Chief Executive Officer of the Switzerland-based company. "The business brings regional market leadership, complementary product offerings, extensive distribution and an experienced and talented management team to Allied World, strengthening our global insurance franchise," he added. Under the terms of the transaction, Allied World will acquire the in-force portfolio and related assets and liabilities of both branches. The deal is expected to be completed during the first half of 2015. Stephen Hester, RSA Group chief executive, said that the deal represents a further 'tightening' of the group's strategic focus. "This transaction builds further on the momentum of our recently announced disposals in the Baltics, Poland, Canada (Noraxis) and China, and represents continued progress against our aim of tightening the strategic focus of the group. Further disposals are targeted over the next 12-18 months to complete this process," he said. This effectively appears to underline the fact that Allied World is now a credible option for the large corporate insurance buyer and that RSA no longer plays in this market in a serious way. RSA has decided to 'tighten' its business as part of an effort to overcome recent financial problems in its Irish operation and a host of worrying profit warnings last year. Mr Hester, who joined as CEO in February of this year from RBS, introduced a serious restructuring in order to get the business back on its feet. As he announced first half results, Mr Hester revealed progress has been made in the rehabilitation of the group. He said that RSA has made 'pleasing progress' during the first half of 2014 to address the challenges that had accumulated over 'some years' and culminated in the group's Irish write-downs. "We remain confident that the action plan laid out in February can be successfully accomplished; indeed progress is ahead of our expectations so far. As so often in restructuring situations, the 'clean-up' costs are proving higher than initially expected, but these are outweighed by gains on disposals which are well ahead of plan. We are grateful to our customers, business partners and especially our shareholders for their support at the start of this year," said Mr Hester. The CEO said that RSA's action plan is comprised of three parts that he believes will make the insurer 'focused, stronger, better'. He gave shareholders and customers progress on the plan, stating that it is built upon three core areas-a strategic 'reset' to focus on core historic markets and disposals, restoration of the health of the balance sheet and a fundamental improvement in operating performance. First, Mr Hester said that RSA's strategy 'reset' is ahead of schedule. This means that the business will now be focused mainly on its businesses in Scandinavia, Canada, UK & Ireland and Latin America. Disposals of businesses in the Baltics, Poland, Noraxis in Canada and China had all been agreed by the start of last month. "The businesses are going to good new owners and at attractive values for our shareholders. Further disposals are targeted over the next 12-18 months to complete the process," stated Mr Hester. Secondly, Mr Hester said that the group capital and balance sheet health has been 'decisively restored' and new management disciplines have been introduced to sustain the position. The recently carried out rights issue and disposal gains are 'substantially rebuilding' tangible equity. RSA’s credit rating, which was reduced following the Irish news, has been restored to A 'stable' by Standard & Poor's. "The business is now trading more normally after an uncertain start to the year," said Mr Hester. The balance sheet restoration job is, however, ongoing, stressed Mr Hester. "We have some continuing balance sheet clean-up work to do to ensure the quality of what we present. The largest items were booked as at end 2013 and announced in February. We said then that there might be more to come. In this half-year we have booked Irish goodwill and intangible write-downs and taken a range of other reserve actions against prior year emergence. We target completing this process during the remainder of 2014 which should also see some healthy gains realised as disposals complete," he explained. Mr Hester added that the group's target of building net tangible assets to 35-45% of premium income remains and that he expects to reach a 'healthy level' within that range over the next 18-30 months. This will be achieved through disposals, retained earnings, net of any further clean-up costs, restructuring charges to fund cost savings and after reinstating dividend payments, said Mr Hester. "We see this as being an appropriate position relative to other internationally operating peers, with proper buffers in excess of a range of regulatory and rating agency indicators. This judgement will be updated once the new Solvency II capital regime is more settled," he added. Mr Hester said that the bulk of his management team's efforts are focused on the improvement and then sustainability of business performance. He described 2014 as a 'foundation year'. "We put a three-year plan in place in February which we are working to. However, we are also engaged in a more detailed and ambitious strategic challenge of the business in our largest markets which we hope will result in further actions to underpin the quality and ambition of this plan," said Mr Hester. The RSA CEO said that this plan starts with two priorities, costs and revenues. He said that the group is targeting in excess of £180m gross annualised cost reductions over the next three years (excluding disposals) and the goal is to raise these targets over time dependent on progress. "There will be restructuring charges to effect these changes. At the same time we are developing many initiatives to invest in our business to improve customer service and efficiency. Our technology needs to move forward as does the sophisticated use of data to make the best underwriting decisions," he said. The group is also engaged in 'determined action' to improve the sustainability of its insurance portfolio and expected loss ratios. "In the current year this means re-pricing or trimming business we cannot make sense of. Overall premium income is reduced as a result. From this new sounder base we expect to grow again but with better underlying loss ratios. Pleasingly, our business retention levels remain stable and healthy in the areas we target, a testimony to the enduring competitive strength of our business," explained Mr Hester. "So there is much to do. There will be setbacks and the performance standards we aspire to will take some years to achieve. But a good start has been made. We are determined to deliver an RSA admired amongst international general insurers for both customer appeal and shareholder delivery. And to do this with transparent and conservative risk and financial management," concluded Mr Hester.

Allied World acquisition of RSA’s Asian business marks changing of guard for corporate customers

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