RSA back on track

RSA Group's turnaround was evident in these half-year results, with the insurer returning to profit. But the investment case is not quite so clear cut, and some hard-to-please investors see better opportunities elsewhere.

Indeed, Panmure Gordon admitted the numbers were "very complicated" and that there is still a lot of work to do. "We had feared that RSA would 'bring out the dead' with this set of figures and so it seems to have been done," the broker said. "Reserve strengthening should have finished but we have heard that before from RSA and we remain sceptical."

Surplus capital (known as the Insurance Group Directive surplus) at 30 June was around £1.7 billion, 2.2 times the capital requirement and up £1.1 billion since the start of the year, due in part to the £747 million rights issue. As RSA took a more disciplined underwriting approach, net written premiums fell 9% to £3.9 billion. A strong pound had reported premiums down 16%.

Pre-tax profit reached £69 million compared with a £494 million loss in the second half of 2013, and a combination of agreed disposals worth £591 million and rights issue money helped rebuild tangible equity. After scrapping its dividend in February, RSA said it plans to restart the payments with the release of its full-year 2014 results and reiterated a medium-term return on tangible equity target of 12-15%

But while this was certainly a mixed bag of results, it has convinced new boy Stephen Hester - drafted in after three profit warnings amid poor weather and accounting problems at the Irish business - that his "Action Plan" is on track.

"Since announcing it five months ago, we have made strong progress improving strategic focus and capital health," said the former Royal Bank of Scotland boss. "Good work is also underway on cost, portfolio actions and the management line-up to drive future performance. While first half profits are modest, they reflect further balance sheet and reserve clean-up as well as above normal weather costs. Underlying business trends, together with the actions outlined, are supportive of achieving the medium-term customer, capital and shareholder targets we have set.

"It will take a while to see if the new strategic plan is working but £180 million of cost savings have been identified which should. This is very much a work in progress set of results and whilst messy we believe should suggest second half 2014 will produce a relatively clean set of figures."

Panmure Gordon has kept its 'hold' recommendation on the stock and 485p target price. Currently at 436p, RSA shares trade on 8.4 times earnings forecasts for 2014 of 51.7p, and 1.6 times Panmure’s year-end forecast for net tangible asset value of 265p.

While the insurer isn't out of the woods yet and has a lot further to go until shareholders are content after a tumultuous year, Hester's action plan does at least appear to be steering RSA in the right direction.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.