RSA Insurance (RSA) has been seen as a solid underwriter that manages to deliver consistent growth in premium rates in its various personal lines business. So it was all the more surprising that the company disappointed investors earlier this month with a stream of grim news. It started with a mixed trading update and was quickly followed by revelations that three senior executives at the Irish operation had been suspended after the discovery of "issues in the Irish claims and finance functions". RSA's share price has slumped nearly 20 per cent since, but the shares still trade at a multiple of tangible net assets (NTA) that's demanding for its sector - leaving them still looking vulnerable.
- Modest premium rate progress
- Takeover rumours
- Irish unit under investigation
- Fears for the dividend
- Worries that reserves are too low
- Shares expensive compared with rivals
The precise nature of the problem in Ireland remains unclear. But management has already injected extra capital into the Irish unit and warned shareholders that 2013's operating result will be about £70m lower than City expectations. RSA has also appointed accountants PwC to investigate the Irish issues, but the report may not appear until the year-end. In the meantime, fears are growing that PwC could conclude that the Irish unit needs still more capital and that may hit RSA's dividend, which was already hacked back by a third in the latest two payouts anyway. "With full-year 2013 dividend cover having fallen to only marginally above 1.0 times, the final dividend is now vulnerable to any further setbacks," believes analyst Nick Johnson of broker Numis Securities. Reports that the Irish police are watching events won't help sentiment, either.
Some analysts also wonder whether RSA's problems in Ireland cast doubt on the adequacy of reserving levels elsewhere - implying that capital may need to be injected into other operations, too. For example, analysts at Berenberg are surprised that RSA had been operating with a reserves to net written premiums ratio of "only" 94 per cent in Ireland - the figure at Irish rival FBD Holdings, for instance, was 184 per cent at year-end 2012. "Our concern is that RSA could be operating similar, thin balance sheets in other geographies," said the broker.
RSA INSURANCE (RSA) | ||||
|---|---|---|---|---|
| ORD PRICE: | 103.9p | MARKET VALUE: | £3.80bn | |
| TOUCH: | 103.9-104.1p | 12-MONTH HIGH: | 137p | LOW: 101p |
| FWD DIVIDEND YIELD: | 6.2% | FWD PE RATIO: | 16 | |
| NET ASSET VALUE: | 99p | COMBINED RATIO: | 94.2% | |
| Year to 31 Dec | Gross premiums (£bn) | Pre-tax profit (£m) | Adj. earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2009 | 7.74 | 554 | 12.1 | 8.25 |
| 2010 | 8.45 | 474 | 9.7 | 8.82 |
| 2011 | 9.13 | 613 | 11.8 | 9.16 |
| 2012 | 9.40 | 448 | 8.7 | 7.31 |
| 2013* | 9.88 | 353 | 6.7 | 6.41 |
| % change | +5 | -21 | -23 | -12 |
*Numis Securities estimates Normal market size: 20,000 Matched bargain trading Beta: 1.0 | ||||
Meanwhile, other - unrelated - problems in Ireland have marred trading. Specifically, management highlighted deteriorating trends in claims for bodily injury in its Irish motor book and reserves for that are being reviewed. There have also been fairly heavy claims relating to bad weather - a £45m-£65m loss from the windstorms that hit the UK, the Baltics and Scandinavia last month on top of an £83m hit at the half-year stage from flooding in Canada.
However, progress on premium rates looks broadly positive. True, UK rates for personal motor insurance fell 2 per cent in the year to end-September and were flat in the household book, but modest gains were achieved elsewhere, and decent rates of premium growth were achieved for all business lines in Scandinavia and Canada. For example, Canadian motor rates jumped 7 per cent. Numis is also forecasting a decently-profitable combined ratio (of claims to premiums) of 96 per cent for the full year.
