RSA Insurance Group plc (LSE: RSA) (NASDAQOTH: RSAIF.US) just cannot seem to get things right. After surviving near bankruptcy back during 2003, a decade later the company is once again teetering on the brink of disaster thanks to dodgy accounting.
In particular, RSA has found evidence of misleading accounting at its Irish division, which included the misreporting of claims, costs and premiums as a result of collaboration between some executives. All in all, RSA’s management found a £200 million hole in its accounts and was forced to issue two profit warnings in the space of a month as a result.
Downgraded
Unfortunately, there could be bigger troubles ahead for RSA. You see, about half of RSA’s business comes from customers who require the company to have a credit rating ‘A’, at least. With RSA’s recent troubles, the company has been downgraded by Standard & Poor’s credit rating agency to ‘A-‘, the next level is ‘BBB+’ — below the ‘A’ threshold many customers require.
Moreover, RSA has been put on watch for further rating action within 90 days, which could imply the company is in line to be downgraded to BBB+. If this is the case, it is likely that RSA would lose half of its business overnight.
Strapped for cash
With RSA teetering on the brink of another rating action, City analysts have estimated that the company requires an additional £500 million to continue operating and avoid further scrutiny by credit rating agencies. Sadly, this implies that a rights issue could be on the cards and a dividend cut is also likely. However, analysts believe that RSA is unlikely to sell off some of its international business as this would hit profits, putting the company’s dividend under further pressure.
Takeover or break up?
As RSA teeters on the brink there is speculation that the company will become the prey of a larger rival. Indeed, City analysts now believe that RSA could be worth more if it was taken over and broken up. In particular, it is estimated that RSA’s break-up value could be in the region of 129p per share.
Actually, it has been widely speculated that Finnish insurance group Sampo, could make a swoop and then sell-off anything it does not want. With assets within Scandinavia and the Baltic’s, RSA could be a great fit for Sampo.
Foolish summary
So overall, with a rights issue and dividend cut likely in the near future, I feel that investors cannot trust RSA again just yet.
One of RSA’s most attractive qualities is its dividend yield, which currently sits at 6.2%. However, with this payout set to come under pressure as the company struggles for cash, it could be time to reevaluate RSA’s position in your portfolio.
