Three years after the merger between insurance groups Royal and Sun Alliance, forming Royal & Sun Alliance, the City at last seems to have found a little to cheer about.

The company has been battered by a series of bad weather claims, fierce competition in the motor insurance market and a failure to benefit from reorganisation through the merger.

But analysts now seem pleased with the six-month results to June, buoyed as they were by the absence of great natural disasters and the improvement in general insurance.

Pre-tax profits fell from £429 million to £16 million. Losses per share were 4.4p (11.9p earnings). But the interim dividend was up five per cent to 8.8p.

Unlike a lot of businesses, though, it is operating profits the analysts look at.

Worldwide, the life pension business was 20 per cent up at £1.6 billion and there was a 17 per cent increase to £4.3 billion in general business net premiums.

Operating profits in the first half of the year rose from £315 million to £320 million, which was at the upper end of expectations.

Of this, general insurance produced operating profits of £218 million (£168 million), a 30 per cent increase which reflected rate increases and the benefits of the acquisitions of Orion of the U.S. and Trygg-Hansa in Scandinavia.

With a concentration on higher underwriting rates and better claims management, R&SA was satisfied the company would meet its performance objectives.

R&SA chief executive Bob Mendelsohn said: "These results underpin the confidence we have that we will not only hit our targets but sustain them."

By this he means the company will meet its operating ratio of 103 per cent by the end of this year.

This is the critical criterion of underwriting profitability used by insurance groups.

It measures claims and expenses paid as a proportion of premiums.

In the second quarter this year it fell to 107.5 per cent from 108 per cent in the first quarter.

Like other insurance groups, R&SA has a large war chest. The buoyant stock markets of the past few years have meant their investment portfolios have done well.

In the past year some £750 million has been returned to shareholders through a special dividend and a share buy-back, and there have been the acquisitions.

But although the City was pleased with the results and R&SA shares moved up 14p to 430p, the company is still selling at a discount to net assets of 460p.

This is not a comfortable position for an insurance group and R&SA could be a target itself.

dalbygray@cs.com