RSA makes modest progress

RSA Insurance reported reasonable enough progress with its third-quarter trading update last month. Even though the insurer suffered a £30m loss relating to February's Chilean earthquake - as well as losses due to European bad weather claims that were £80m higher than expected - management still expects to report a modestly profitable 95 per cent combined ratio (of claims to premiums) for 2010.

What's more, the group reported that premium rates on its UK book had risen across the board. The personal motor account saw rates rise by a healthy 9 per cent in the first quarter, while the household book delivered a 3 per cent rate hike. On the commercial side, RSA's UK property rates rose 5 per cent in the three-month period and commercial motor rates were up 4 per cent. The group's Canadian operations continued to report premium growth, too - although premiums were flat in Scandinavia and fell 23 per cent in Asia and the Middle East.

RSA's investment portfolio has retained its conservative focus - 87 per cent of the book is invested in safe-looking cash and bonds. Management expects the portfolio to deliver investment income of about £540m for 2010, a performance that's in line with 2009's outcome.

Numis Securities says…

Hold. While the return to growth in UK commercial lines represents an encouraging development, the sustainability of any upturn remains uncertain. As such, we continue to believe that the shares are currently close to fair value, trading at 1.57 times 2009's net tangible assets (NTA), given the prospect of a declining return on net tangible assets (RONTA) in the near term. However, downside risks are mitigated by a prospective yield of over 7 per cent and potential upside to RONTA in the event of a return to higher interest rates. Expect pre-tax profits of £592m for 2010, EPS of 12.6p and NTA of 93.3p.

Collins Stewart says…

Buy. With investment returns low, industry pricing needs to rise further to improve profitability - RSA's earnings should be driven by similar trends. We see some risk to 2010's earnings if interest rates stay so low, but a well-covered dividend yield and a defensive investment portfolio means that the shares are an attractive trade in volatile markets. What's more, RSA looks more attractive relative to it peers on a price-earnings basis, rather than a price-to-book basis - reflecting a higher forecast return on equity. Our price target, on a sum-of-the-parts basis, stands at 140p.