RSA Insurance (RSA) has certainly faced its share of challenges. A painful capital shortage emerged in late 2013 following news that profits at the Irish operation had been overstated. The dividend was quickly cut and former RBS (RBS) boss Stephen Hester - no stranger to tackling capital shortfalls - was parachuted into the chief executive's chair to turn the struggling insurer around. But while RSA now looks more robust, a restructuring programme well under way and after raising nearly £750m net of expenses with last February's rights issue, the operating performance remains lacklustre. That leaves the shares, which are demandingly rated by sector standards, looking unsustainably pricey.
- Capital concerns addressed
- Making progress with restructuring
- Barely making underwriting profits
- Investment return under pressure
- Dividend hacked back
- Shares demandingly rated for the sector
Indeed, RSA's combined ratio (of claims to premiums) slipped into loss-making territory at the half-year stage, exceeding the 100 per cent level. A dramatic near-term improvement isn't likely, either. Broker Numis Securities expects the combined ratio to reach a barely profitable 99 per cent for end-2014 and anticipates only marginal improvement for 2016 - to a 96 per cent ratio. Significantly, that's a rather weaker underwriting performance than most other listed insurers are reporting. A glance at the Lloyd's players, for instance, reveals combined ratios that are typically in the mid-to-upper 80 per cent range.
Pricing for RSA's personal lines-focused cover looks fairly subdued, too. At the third-quarter stage premium rates rose just 2 per cent overall and management said that market conditions had "remained competitive across our territories". The core UK business - responsible for about 40 per cent of premiums - looks notably depressed: at the third-quarter stage, personal household rates were flat year-on-year and most other business lines saw low-single digit increases. That said, the Scandinavian operation is in better shape and the Canadian business is seeing sharp rate rises for personal household cover. RSA's isn't seeing the sharp rate falls being experienced at Lloyd's for catastrophe-focused business, but its pricing is hardly firm either.
RSA INSURANCE (RSA) | ||||
|---|---|---|---|---|
| ORD PRICE: | 466.8p | MARKET VALUE: | £4.74bn | |
| TOUCH: | 466.7-466.8p | 12-MONTH HIGH: | 501p | LOW: 410p |
| FORWARD DIVIDEND YIELD: | 2.7% | FORWARD PE RATIO: | 13 | |
| NET ASSET VALUE: | 383p | COMBINED RATIO: | 100.8% | |
| Year to 31 Dec | Net premiums (£bn) | Pre-tax profit (£m) | Earnings per share (p)* | Dividend per share (p)* |
|---|---|---|---|---|
| 2011 | 8.14 | 613 | 52.8 | 40.7 |
| 2012 | 8.35 | 448 | 53.4 | 32.5 |
| 2013 | 8.66 | -244 | 14.0 | 10.2 |
| 2014* | 7.81 | 543 | 38.5 | 8.8 |
| 2015* | 7.85 | 422 | 36.5 | 12.5 |
| % change | +1 | -22 | -5 | +42 |
*Numis Securities forecasts, adjusted EPS figures, EPS and dividend adjusted for rights issue and share consolidation. Normal market size:4,000 Matched bargain trading Beta:1.00 | ||||
In today's ultra-low interest rate environment, RSA's investment performance is suffering, too. At the half-year stage, the average book yield across the portfolio fell from 3.6 per cent to 3.2 per cent, and things are getting worse. With the third-quarter figures, management flagged up that "interest rates have trended lower across our major markets, further impacting the reinvestment rate on our bond portfolio". Currency headwinds are another factor - the strong pound helped drive reported half-year premiums down 16 per cent.
That, however, shouldn't detract from Mr Hester's progress. The rights issue, and a £400m subordinated bond issue in October, have quashed any capital worries. While the disposal of non-core businesses is also leaving the group looking far better focused on its core UK, Canadian and Scandinavian markets. Specifically, RSA has made disposals in Singapore, Hong Kong, China, Italy, Poland, Lithuania and Estonia.
