Interactive Investor

Why RSA's 32% dividend hike fell short

2nd August 2017 14:25

Graeme Evans from interactive investor

Stephen Hester won't be resting on his laurels now that RSA Insurance is done with restructuring and has just posted another half-year of outperformance.

"We are not relaxing", the former Royal Bank of Scotland boss insisted after operating profit rose 15% on the back of a record underwriting result. As if to prove his point, RSA shares fell more than 2% Wednesday, despite the better-than-expected figures.

The main source of discontent for shareholders and analysts was the interim dividend of 6.6p a share, which at 32% higher than a year earlier was still weaker than the 7p forecast in some quarters.

There's also a whiff of profit taking after the group, which was created out of Royal & Sun Alliance in 2008, traded at record highs in recent weeks.

Hester is now focused on making RSA "best-in-class", with a particular focus on improving customer service and underwriting skills.

He will also need to see an improvement in trading in the UK, with the business put in the shade by operations in Scandinavia contributing a majority of group underwriting profits. There was also much better trading in Canada.

In the UK, where the group is better known as More Than, results were impacted by a £42 million net charge relating to the change in Ogden discount rate in motor insurance. Weather and large losses taken together were also 1.6 points worse than last year.

Panmure Gordon insurance analyst Barrie Cornes said shares in RSA, the subject of an abandoned bid approach from Zurich Insurance in 2015, have been on a "remarkable run", but he is not convinced there is more to come.

He pointed to a 2.4x price-to-net tangible asset value and 2017 and 2018 price earnings multiples of 14.1 and 12.5 respectively.

Cornes said: "In addition to the current valuation we believe that it is highly unlikely that the company will be acquired even if the acquirer were to receive attractive capital diversification benefits."

While maintaining a 'hold' recommendation, Cornes did raise his target price from 600p to 640p to reflect an improved motor insurance trading environment.

RSA's restructuring efforts were completed in February with the £834 million sale of UK legacy liabilities to Enstar. The clean-up transaction added 17-20 points to its Solvency II position.

This Solvency II coverage ratio — a key measure of an insurer's capital position — rose to 163% today, slightly above the 130-160% target range.

A combined ratio of 93.2% was RSA's best on record after better than planned weather costs were offset by higher than usual large losses.

Net written premiums grew 11% in the period, with higher retention and new business adding to pricing and FX gains.

While RSA said top-line growth is not its highest priority, brokers at UBS quoted this as one of the reasons why it joined Panmure Gordon in sounding a note of caution over the share price outlook.

They said in a note: "Key to the medium-term re-rating of the stock is returning top line momentum to the business which is still nascent in 2Q17 results."

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.