Right now I’m looking at some of the most popular companies in the FTSE 100 to try and establish whether or not they have the potential to push profits up to levels not seen in the last few years.
Today I’m looking at RSA Insurance Group (LSE: RSA) (NASDAQOTH: RSANY.US) to ascertain if it can make £1bn in profit.
Have we been here before?
A great place to start assessing whether or not RSA can make £1bn in profit is to look at the company’s historic performance. Unfortunately, it would appear as if RSA has never been able to make £1bn in profit and it would appear that the company is unlikely to reach this target in the near future.
Indeed, even back during 1999, widely considered RSA’s hay-day when the insurer’s net asset value per share was in excess of 400p, profits remained stubbornly below £1bn. The closest RSA has ever come to hitting this profit target was back during 2007, just before the financial crisis set in when the company reported a profit before interest and tax of £867m.
But what about the future?
Sadly, it seems that right now RSA is on the ropes, struggling to survive let alone turn a profit of £1bn.
Still, after years of lacklustre performance from the insurer, RSA’s turnaround plan — composed of a £775m rights issue and £300m worth of asset disposals — may finally put the insurer on a stable footing. What’s more, RSA’s management is also planning to wind down or restructure ‘low-return’ insurance operations in several key markets. These operations write around £400m in premiums per year for RSA.
Actually, after years of overspending on bolt-on acquisitions, ill-thought-out software programs and unsustainable dividend payouts, this complete restructure could be exactly what RSA needs to return to health. However, with all these disposals, RSA’s profit and revenue is likely to take a hit as a result. Unfortunately, this implies that RSA is unlikely to hit my profit target of £1bn unless it has several exceptional years of performance.
Nevertheless, it would appear that RSA’s turnaround plan has some wealthy backers as Warren Buffett’s Berkshire Hathaway has provided the company with an emergency £500m reinsurance policy. This provision, in exchange for a small fee, will cover RSA’s losses stemming from insurance contracts the company has already written. Essentially, this is a backstop helping RSA to avoid any excessive insurance losses while the company gets its house in order.
Foolish summary
All in all, based on the fact that the company is currently struggling to survive, I feel that RSA cannot make £1bn profit.
