Royal & SunAlliance pledges profitability for 2003

By Daniela Cambone | April 20 2003 04:30PM

Royal & SunAlliance has witnessed catastrophic underwriting results over the past couple of years. However, the company is determined to return to profitability in 2003 says its President and CEO Larry Simmons.

French reinsurer SCOR recently published its annual report that lists the financial results of the general insurance companies in Canada. In it, Royal & SunAlliance (R&SA) posted devastating underwriting losses of $210.0 million in 2002, and $106.1 million in 2001. In addition, its expense ratio increased from 29.1% in 2001 to 30.7% in 2002 and its loss ratio increased from 79.3% in 2001 to 85.9% in 2002. These results caused it to have an overall net after tax loss of $68.4 million in 2002 compared with its profit of $56.5 million in 2001.

However, Mr. Simmons says that the principle disappointment was the combined ratio, which increased from 108.4% in 2001 to 116.6% in 2002. This means that for every dollar it took in, it spent almost $1.17.

The March edition of The Insurance Journal reported that brokers were concerned about R&SA’s commitment to the Canadian marketplace given its financial results and its recent exits from certain lines. Further, we said R&SA would announce its Canadian business strategy at the end of April.

R&SA later clarified, however, that its strategy and commitment to Canada are continuously ongoing, and that it simply did not want to comment publicly before the release of its 2002 results.

The Insurance Journal met with Mr. Simmons in Toronto to set the record straight. Mr. Simmons reassures the industry that R&SA is committed to Canada and is proactive and confident it will return to profitability.

“Brokers will be pleased to hear that we will remain in Canada. I think they respect and understand the need for a company to make profit,” he says. Mr. Simmons adds that the Canadian market makes up 6% of the insurer’s global business activity, and says that the percentage will likely increase.

Plans for profit

What can the insurer do to correct the situation? “Part of the plan involves filing for rate increases, improving underwriting, trying to improve efficiencies and committing capital to where we can make money,” explains Mr. Simmons.

The insurer is in the process of defining its strengths on which it will concentrate, says Mr. Simmons. One segment he cites is commercial property insurance. This includes business and personal services (printers, office service supplies), manufacturing and wholesale, warehousing and certain products in construction. The insurer has experienced significant success with property insurance and it expects more growth as well.

R&SA recently became one of the largest travel insurance underwriters in Canada. It signed an agreement with Expert Travel Financial Security (ETFS), making R&SA the leading provider of travel insurance products for the ETFS portfolio. The existing ETFS travel portfolio totals more than $50 million (CDN) in premiums.

Decrease exposure

In addition, R&SA will reduce “exposure in those areas where we are not profitable and we where think that we will not become profitable,” he says.

One of those areas is automobile insurance. Mr. Simmons highlights that the Canadian automotive industry, with the exception of Quebec, has not been veryprofitable.

“We are reducing exposure in automobile, we are avoiding exposures where we are losing, and are not committing growth in those markets,” he explains.

The insurer is already in the process of reducing exposure in automobile insurance by decreasing broker representation, terminating contracts, and tightening underwriting and selection procedures, says Mr. Simmons. He adds that the insurer is not pulling out altogether but diminishing exposure in all the provinces.

As well, Mr. Simmons states that the company is working hard in urging parliament for reforms to the auto insurance industry and to address the issues. “There is evidence that the driving cost in the system is bodily injuries, in some provinces more so than others,” he states.

Despite the changes, Mr. Simmons does not expect the insurer’s overall direct premiums to increase and he anticipates flat or very little growth in the next year. However, he says the insurer’s goal is to reach a gross return on equity of 15% by 2004 and to sustain that level once it gets there. “The shareholders are asking for it and are entitled to it,” he says, but adds, “it will be a huge challenge, particularly with the investment markets we face.”

In past months, R&SA sold the renewal rights of its personal insurance business in Quebec to CGU Insurance Company of Canada. “The Quebec market is very concentrated, it is much more concentrated than the rest of the Canadian market. The loss ratio was good but our expense ratio was going up,” explains Mr. Simmons about the departure. The insurer also recently dropped its long-haul trucking business across Canada.