The insurance sector has recovered strongly in 2013, and a number of its constituents look set to continue their show of strength into 2014 and beyond. Today I’m taking a look at the prospects for RSA Insurance (LSE: RSA) (NASDAQOTH: RSANY.US)
Here’s RSA’s recent performance record, with current forecasts for the next two years:
| Dec | Pre-tax | EPS | Change | Dividend | Change | Yield | Cover |
|---|---|---|---|---|---|---|---|
| 2008 | £759m | 17.3p | -10% | 7.71p | 4.4% | 2.2x | |
| 2009 | £554m | 12.2p | -30% | 8.25p | +7% | 4.6% | 1.5x |
| 2010 | £474m | 9.8p | -20% | 8.82p | +7% | 5.2% | 1.1x |
| 2011 | £613m | 11.9p | +21% | 9.16p | +4% | 4.8% | 1.3x |
| 2012 | £479m | 9.5p | -20% | 7.31p | +8% | 5.5% | 1.3x |
| 2013(f) | £181m | 4.9p | -48% | 4.4p | -40% | 4.8% | 1.1x |
| 2014(f) | £428m | 11.6p | +136% | 4.6p | +5% | 5.1% | 2.5x |
That’s a similar story to Aviva, which I looked at recently. We see falling earnings during the recession, but the company doggedly sticking to its policy of growing dividends. That’s generally fine in a cyclical industry where fat years can pay the cash needed for dividends during lean times, but only up to a point.
Like Aviva, RSA just had to slash its dividend and restart a progressive increase policy from a new rebased level.
Irregularities!
Since the dividend was cut, RSA has found itself embroiled in a bit of controversy.
In November, allegations of accounting irregularities at RSA Insurance Ireland arose during a routine internal audit, leading to the suspension of Irish CEO Philip Smith and two others. Mr Smith later resigned, with group chief executive Simon Lee following him out the door in December.
At the time, the firm estimated that its operating result would be £70m lower than previously expected, and subsequently said it needed to strengthen its reserves by a further £130m.
With costs from damages claims from storms that hit the UK and Scandinavia coming on top of the problem, RSA has also told us it expects only a mid-single-digit return on equity for the year to December 2013. It appears pretty certain that the full-year dividend will be affected too — the forecasts above partly accommodate the latest news, but they could still turn out to be too high.
Price crash
What happened to the share price? Well, it slumped. It quickly crashed from around the 120p level to as low as 87p by mid-December, though today it has recovered a little from that to just above 100p.
At current levels, the shares are on a P/E based on December 2013 expectations of around 20, which might seem high. But that’s based on a one-off hit from the accounting issues, with the company now saying it is confident the irregularities were confined to Ireland. And we also heard on 7 January that the earlier figures have been refined to £72m and £128m respectively.
Too cheap now
For 2014 forecasts, we’re looking at a forward P/E of just over 8. And even if dividends are cut further for 2013 results, it doesn’t look like there should be any further fallout to negatively impact the 5.1% yield forecast for 2014.
All of that makes me think the shares are cheap and in for a good year.
Verdict: Leaving the crisis behind in 2014!
