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The Stock Picker’s Guide to RSA Insurance Group plc

Successful investors use a disciplined approach to picking stocks, and checklists can be a great way to make sure you’ve covered all the bases.

In this series I’m subjecting companies to scrutiny under five headings: prospects, performance, management, safety and valuation.  How does RSA Insurance (LSE: RSA) (NASDAQOTH: RSANY.US) measure up?

Prospects

RSA is engaged in general insurance with motor, home and commercial insurance lines the most important. The UK personal market is overcrowded and motor insurers consistently make a loss at the underwriting level.

However, RSA is internationally diversified, picking foreign markets where it can be a top-rank competitor. 

Western Europe (UK plus minor positions in Italy and Ireland) makes 30% of profits and is in recovery mode; Canada and Scandinavia make 60% of profits and offer growth; emerging markets offer growth and operational leverage, with revenue increases dropping straight through to bottom-line profits.

Performance

RSA’s operating profit and EPS have been volatile since at least 2005, but dividends rose consistently through that period, so last summer’s surprise dividend cut was always on the cards, if badly handled.

Dividend cover that had shrunk to around 1.5 times is now back up to 2 times, with increased capital available for international expansion.

Management

The company was turned around successfully between 2003 and 2011 under former CEO Andy Haste. His deputy, Simon Lee, grew the highly successful international division and is now CEO.

Safety

RSA has an IGD capital surplus of £0.9bn, 1.7 times coverage of its regulatory minimum. Though adequate, that’s a smaller coverage ratio than sector peer Direct Line Group.

A pension deficit of £400m arises from a gross pension liability equal to RSA’s £5bn market cap, even after the company has outsourced 55% of the liability.

On the plus side, RSA is not involved in catastrophe insurance so is less vulnerable to big hits, and its rebased dividend is now covered by cash flow.

Valuation

RSA’s prospective PE of 10.1 is somewhat above Direct Line’s 8.8 but cheaper than Admirals‘ 13.0. RSA’s shares are currently trading at a 25% premium to net asset value compared to just 12% for Direct Line.

The yield is 5.1%. Dividends are planned to grow in line with underlying earnings. Because of the group’s international diversification, a policy related to UK inflation would make little sense.

Conclusion

General insurers pay high dividends, but the earnings are volatile and the payout is vulnerable. RSA’s astute selection of profitable developed markets and emerging markets means it offers more growth prospects than most of the sector.

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Tony does not own any shares mentioned in this article.