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The Surprising Buy Case For RSA Insurance Group plc

Today I am looking at an eye-opening reason why the likelihood of further M&A activity looks set to push shares in RSA Insurance Group (LSE: RSA) (NASDAQOTH: RSANY.US) higher.

An excellent performer on the acquisition stage

RSA Insurance Group has been extremely successful over the past year in selecting bountiful acquisition candidates, and its purchases in South America in particular are integrating well with the rest of the group. The company decided earlier this year to rebase the dividend as part of its growth strategy, and has affirmed its commitment to achieve expansion “both organically and through selective bolt-on acquisitions”.

Indeed, the success of the insurance giant’s M&A activity conducted last year should provide investors with encouragement over RSA’s aptitude in selecting red-hot takeover targets and successfully absorbing them into the group. And I am convinced this should lead to fresh acquisition action sooner rather than later, in turn bolstering the firm’s already-appetising earnings prospects.

In 2012 the company acquired L’Union Canadienne of Canada, and followed this up with the purchase of El Comercio and Aseguradora de Créditos y Garantías of Argentina. These purchases helped drive business significantly higher during the first six months of 2013, a theme which should obviously continue to head higher as value from the buyouts filter through.

In Canada, net written premiums rose 17% from January-June 2013, to £866m. And the acquisitions in emerging regions also helped drive net written premiums 17% higher in the first half to £686m.

RSA Insurance Group has emerged as an excellent cash generator, and saw free cash flow rise to £624m in 2012, up 19% from the previous year. The company’s weighty cash pile should help to facilitate fresh M&A business in the near future, and I expect its capital power to head still higher as earnings look set to take off. The company saw surging business across all its major regions push post-tax earnings 24% higher in January-June to £190m.

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Despite this year's dividend rebasement decision, RSA Insurance Group remains a popular pick with income investors owing to the chunky yields on offer. Indeed, for 2013 and 2014 the company currently carries yields of 5.1% and 5.2% respectively, well above the forward average of 3.2% for the FTSE 100. And I expect steady earnings growth, bolstered by further M&A activity, to keep shareholder payouts headed higher.

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> Royston does not own shares in RSA Insurance Group.