RSA Insurance Group (RSA)


Should I buy shares in RSA Insurance?

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Shares in RSA Insurance (RSA) plunged 13% on Wednesday as it cut its final dividend by a third to 3.9p per share, and rebased 2013 by a similar amount.

The cut was driven by the impact of lower bond yields, which have lowered earnings by c. £200 million. According to the insurer, with the pay-out ratio approaching 95%, this gave little scope to grow the business even if earnings recovered.

"Given that 12 months ago RSA flagged that the rate of dividend growth was to reduce from c. 6% to c. 2-2.5%, we view the cut as very disappointing given that nothing has materially changed over the last 12 months," voiced Barrie Cornes, analyst at Panmure Gordon, downgrading his recommendation on the stock to a "sell".

The announcement came as the company published a solid set of 2012 results, despite challenging trading conditions.

The operating result reduced to £684 million, compared to consensus expectations of between £620 million and £750 million. Net written premium increased 5% to £8.353 billion versus consensus expectation of £8.415 billion. The combined operating ratio (COR) was in line with expectations at 95.4%.

Looking ahead, guidance for 2013 was for the COR to come in better than 95% and investment income of c. £470 million, slightly lower than the 2012 investment income of £515 million. While the return on equity fell from 11.5% to 9.1%, the announcement suggested that 2013 should see a return of equity of between 10% and 12%.

Analyst view

Marc Kimsey, senior trader at Accendo Markets, was of the view that the share price reaction was overdone: "Had the dividend cut been accompanied by a weak trading statement, the fall of 14% might be justified. However, the trading floor believes the sell-off is harsh and applaud the board's swift reaction to low-yielding bond incomes.

"At 6.25p for 2013, RSA's dividend is still among the best in the sector, and ironically, with the share price at this level, a 5.3% yield doesn't look so bad after all."

He added: "The company still has emerging economy opportunities in the crosshairs - expansion is not the sign of a struggling outfit."

Nic Clarke, analyst at Charles Stanley, pointed out that following the rebased dividend, RSA intended to pursue a progressive dividend policy in line with the anticipated underlying earnings growth.

"The group was becoming constrained by its dividend which was starting to hamper growth options," he added. "Although RSA is not planning to spend the additional capital available on a big acquisition it appears there are plenty of bolt on acquisitions in emerging markets that should add shareholder value."

Cornes disagreed, stating the dividend yield of 7.1% acted as the "key support for the share price". Now, with the dividend cut, the yield falls to 4.5%, which he said would shift investors' attention back onto the valuation.

According to Cornes, the shares were "relatively very highly rated" on a price to net tangible asset value of about 2.3 times and a 2013 price/earnings ratio of about 11 times.

Kevin Ryan, analyst at Investec, stated the company had bigger things to worry about: "Economic torpor in much of the world and competitive insurance rates globally mean that RSA will struggle to grow its top line.

"RSA is a well-run business, but growth will prove elusive, so we retain our 'sell' recommendation."

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.