The Week Ahead – SunAlliance dramatic fall

Major UK insurer Royal & SunAlliance will reveal a dramatic fall in profits in its annual results when they are published today, despite a #200m profit boost from the new insurance industry accounting standard.

But the sharp fall in profit will come as no surprise to the City as the disappointing results were trailed by the insurer’s board in their third-quarter results. The company blamed a year of worldwide natural disasters for the fall.

In the eye of the financial hurricane is Royal & Sun Alliance group finance director Julian Hance. With a long track record in the insurance industry, Hance joined the company in 1986. After training with Deloitte & Touche, he specialised in insurance sector audits.

Analysts expect the company’s operating profits for 1998 to reach #731m, down from #988m the previous year, despite the boost from new accounting rules from the Association of British Insurers.

The new SORP ruling requires companies to include long-term investment returns in p&l accounts to show investment gains as well as income. Last week, Royal & SunAlliance’s rival CGU also enjoyed a #200m fillip to its annual earnings from the same source.

Stephen Dias, a managing director at Goldman Sachs, blamed the plummeting profits on ‘worldwide catastrophes’ such as hurricane George in the Caribbean, which triggered #20m insurance payouts.

‘They’ve had a bad year in 1998, with catastrophes worldwide,’ said Dias.

‘There have been ice storms, hurricanes and gas explosions in Australia.’

Dias was unimpressed by the potentially short-term gain offered by the SORP. ‘The new accounting regulations will be of minimal help,’ he said.

Since the merger between Royal and Sun Alliance in 1996, the company had struggled to achieve its aim of #120m in cost savings because of additional millennium bug and euro compliance costs, said Dias.

Nevertheless, despite reservations in the City, the company remains the UK’s third-biggest insurer. It grew faster last year than larger rivals CGU and Guardian Royal Exchange.

With today’s figures widely trailed, all eyes will be on the company’s long-term strategy – particularly any cost-cutting programme – which it also plans to reveal later as part of its annual results.

Related reading