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Why Shares In RSA Insurance Group plc Plummeted

Although we don’t believe in timing the market or panicking over every stock fluctuation, understanding how a business is performing, competing and changing is vital to sensible investment.

What: Shares in RSA Insurance (LSE: RSA) (NASDAQOTH: RSANY.US) plunged by over 16% in early trade this morning, following the resignation of group chief executive Simon Lee.

So what: The company discovered alleged accounting irregularities in RSA Insurance Ireland last month, and suspended its head Philip Smith, who later resigned. The findings of the subsequent review have now been issued, with the group revealing that a £130m strengthening of reserves is needed, on top of the £70m previously announced on 8 November relating to claims and finance issues.

Now what: RSA is appointing Martin Scicluna as executive chairman, and one of his first tasks will be to help co-ordinate the search for a new group CEO.

The company has also taken immediate action in order to maintain the solvency ratio of its Irish unit above 200%, by injecting £135m worth of capital into RSA Insurance Ireland immediately.

What’s more, the storms that dominated headlines and caused untold damage across the UK and Scandinavia in December led to net claims of £25m for RSA, and as a result will lead to a further reduction in anticipated 2013 earnings. Management stated:

“We now expect mid-single digit Group return on equity in 2013. The impact of events in the last quarter will need to be taken into consideration when the Board determines the 2013 final dividend recommendation in February 2014.”

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> Sam does not own shares in RSA Insurance.