Why RSA Insurance Group plc’s Divestment Plans Will Crush Growth

Royston Wild evaluates what RSA Insurance Group plc’s (LON: RSA) past troubles are likely to mean for future earnings.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Today I am looking at why I believe RSA Insurance Group‘s (LSE: RSA) (NASDAQOTH: RSANY.US) divestment drive will hammer growth in future years.

Disposals set to pressure growth prospects

To describe 2013 as an ‘annus horribilis’ for RSA Insurance Group would be a gross understatement. Shares tumbled 28% during the course of the year, worsened by news of operating irregularities at its Irish division in November. These issues resulted in a £200m hole in the company’s reserves there, and led to a spate of high-level boardroom resignations.

These travails caused group underwriting profit to tumble to just £57m in 2013 from £358m the year before. The company has highlighted the RSAneed “to grasp the nettles of both underperformance and undercapitalisation” in order to get back on track, a scenario which has included the launch of £773m rights issue to fill holes in the balance sheet.

The firm has also announced a self-healing programme to slash costs and streamline the business, a strategy which includes reducing the footprint of the group to just the UK and Ireland, Canada, Scandinavia and Latin America. Given the state of the company’s bombed-out balance sheet, the board’s hardline stance to repair its battered finances are undoubtedly a necessity.

However, the scale of the company’s divestment strategy has raised fears over potential growth rates, particularly as RSA Insurance’s operations in emerging markets — where income levels are rising and the insurance market remains vastly underexploited — are on the chopping block.

The business has already started the ball rolling on an estimated £300m worth of disposals this year alone, with further asset sales likely to continue next year and beyond. This situation is likely to significantly crimp earnings growth over the long haul.

Risks outweigh potential rewards

Despite last year’s financial problems, which resulted in a 10% earnings dip, City analysts expect RSA Insurance to print a 13% earnings bounceback this year. Growth is anticipated to slow in 2015, however, with a slight 3% advance pencilled in.

These projections leave the company changing hands on P/E multiples of 11.8 and 11.5 for 2014 and 2015 correspondingly, comfortably below a forward average of 12.7 for the complete non-life insurance sector.

But given the early stage of RSA Insurance’s turnaround strategy, not to mention backdrop of increased competition and rising insurance claims costs, I believe that the potential risks still massively undermine the firm’s investment case, even at current price levels.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston does not own shares in RSA Insurance Group.

More on Investing Articles

Person holding magnifying glass over important document, reading the small print
Investing Articles

3 UK stocks I reckon could benefit from the upcoming general election

As the general election hurtles towards us, this Fool wonders which UK stocks could benefit, and focuses on three picks…

Read more »

BUY AND HOLD spelled in letters on top of a pile of books. Alongside is a piggy bank in glasses. Buy and hold is a popular long term stock and shares strategy.
Investing Articles

At 11%, this dividend share pays the biggest yield in the FTSE 100

When a dividend share offers a big yield, we need to be cautious of the risks. But I reckon this…

Read more »

British Isles on nautical map
Investing Articles

I reckon Hiscox shares could be one of the best bargains on the FTSE

I've been investing in FTSE companies for years, but after a major decline I've not seen a company with as…

Read more »

Grey Number 4 Stencil on Yellow Concrete Wall
Investing Articles

4 reasons I’d still buy National Grid shares in a heartbeat despite the recent wobble!

As National Grid shares plunged on the news of a right issue, I’m not flinching, and reckon it's a top…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

After gaining 45% in 12 months, is the Amazon share price now overvalued?

Our author thinks the Amazon share price might be too high. While the long-term future of the business looks bright,…

Read more »

Investing Articles

2 hot dividend stocks I’d buy and hold for 10 years

Our writer reckons these two dividend stocks could help her bag juicy dividends for years to come and explains why.

Read more »

British Pennies on a Pound Note
Investing Articles

2 dividend-paying penny shares I’d happily own

These two penny shares have caught our writer's eye for a combination of income prospects now and business growth potential…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

This FTSE 250 share looks like a bargain to me!

This FTSE 250 share has seen its price tumble due to chaotic local economic conditions in a key market. But…

Read more »