Asbestos-related charge takes shine off Royal & Sun profits

Royal & Sun Alliance's first set of profits figures since last year's merger were marred by a pounds 167m charge for asbestos and environmental claims in the US. The announcement yesterday took the shine off its plans to buy back pounds 350m worth of shares.

The insurance group also incurred a higher-than-expected cost of pounds 201m for integrating the previous Royal Life and Sun Alliance businesses. Analysts had expected a figure closer to pounds 175m, the sum the management of Royal & Sun eventually expects to achieve in cost savings each year once the integration is completed. Royal & Sun also took a pounds 32m charge to compensate for the recent strength of sterling.

Overall, Royal & Sun reported pre-tax profits before exceptional items of pounds 706m, down from pounds 915m in 1995. The 1996 figure includes the cost of the asbestos and currency provisions but excludes the cost of integrating businesses. Pre-tax profit fell to pounds 648m from pounds 1.03bn.

However, the group is paying a total dividend of 19p per share, in line with its forecasts when it announced its merger late year.

"We are well on target to achieve the objectives we set ourselves for the integration period up to the end of 1997," said Roger Taylor, deputy chairman.

Part of its plan was to appoint a new non-executive chairman from outside the group and yesterday it announced that Patrick Gillam, chairman of Standard Chartered Bank, would take on the role. "I have every confidence in Mr Gillam, who has extensive international experience in covering a range of businesses, particularly in relation to financial services," Sir Christopher Benson, chairman of Royal Sun Alliance, said.

Royal & Sun has laid off 1,500 of the 5,000 staff it said would lose their jobs as a result of the merger. The insurance group said most of the remaining staff now knew their fate and many of those lined up for redundancy were in management positions who still had roles to play during the integration phases.

"The integration is progressing very well indeed, especially on the staffing front. The staff know now where they stand and the important thing is that we're continuing to retain business," said Richard Gamble, chief executive of Royal & Sun.

Its decision to take a pounds 167m charge as a result of changes in reserving practices for US asbestos and environmental liabilities follows a similar move by Eagle Star, a unit of BAT, to take a pounds 160m provision to cover the likely cost of old pollution claims.

Royal & Sun said it was taking the charge because the methodology of calculating these asbestos and environment liabilities had improved. Of the pounds 167m charge, pounds 117m is related to the old Royal Insurance subsidiary in the US.

Overall, improved profits in its Canadian and Scandinavian businesses were offset by a reduction in profits in other areas.

In the UK, profits in its general business fell to pounds 326m from pounds 453m, as a result of an increase in the frequency and average cost of personal lines claims and the continuing intensity of competition, Mr Gamble said.