Today I am looking at why I believe savvy investors should give RSA Insurance Group (LSE: RSA) (NASDAQOTH: RSANY.US) an extremely wide berth.
A drawn-out recovery on the horizon
RSA Insurance shocked the market last November by revealing that improprieties at its Irish division had created a massive black hole on its balance sheet. The company had to strengthen reserves across the Irish Sea to the tune of £200m as a result, and led to a string of executive resignations including that of long-standing chief Simon Lee.
Under the guidance of new chief executive Stephen Hester, the company is aiming to get back on track and just today RSA Insurance released details of its upcoming £773m rights issue. RSA Insurance says “will enable the Group to restore its capital position and keep ahead of anticipated industry capital trends.“
But the move represents the first steps in a long and very-likely painful recovery. Should conditions in the ultra-competitive insurance sector become more difficult — net written premiums edged just 3% higher during 2013 to £8.7bn — the company could be set for further drastic action.
Divestments to weigh on growth
In addition to the rights issue, RSA Insurance has also launched ambitious restructuring plan which it hopes will substantially shore-up its capital position further. The group plans to complete strategic disposals to the tune of £300m this year alone, with rounds of further asset slashing tipped beyond 2014.
RSA Insurance said that its operations in the UK and Ireland, Scandinavia, Canada and Latin America will form the core of the group looking ahead. This means that the company will be waving goodbye to its hugely promising operations in Central and Eastern Europe and the Middle East, and Asia — net written premiums in these divisions surged 14% and 24% correspondingly during 2013.
The decision to jettison these high-growth areas could severely impact future revenue expansion, with potentially huge ramifications for earnings and dividend growth over the long term.
A murky dividend outlook
RSA Insurance’s battered finances meant that the company withheld on churning out a final dividend for 2013, leaving a full-year payout of just 2.28p per share achieved via the interim dividend. This compares markedly with 2012’s total payout of 7.31p, and represented the second successive yearly cut for the company.
The insurer said that a “medium term goal of paying out 40-50% of earnings in dividends seems sensible,” but that any payouts will be linked to the success of its recovery strategy. Added to the fact that RSA Insurance also warned that this year’s interim dividend “is likely to be modest” due to the rights issue, I believe that income investors seeking safer payout prospects should look elsewhere.
