Is FTSE 100 faller RSA Insurance a top buy after 9% plunge?

Do big falls turn RSA Insurance Group plc (LON: RSA) and Dialight plc (LON: DIA) shares into unmissable bargains?

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Shares in RSA Insurance Group (LSE: RSA) fell by 9.9% in morning trading Friday, as the FTSE 100 insurance giant revealed a disappointing third quarter.

Heavier-than-expected UK losses have led to an underwriting loss for the quarter, leading chief executive Stephen Hester to tell us that “actions to improve in the UK are well under way,” while the company reported a strong period in its international business.

Problems in the UK stem partly from bad weather losses, but RSA’s motor and marine insurance sectors have been suffering too. But on the upside, UK household and commercial property insurance saw improvements.

Although reported pre-tax profit should be ahead of last year, on an underlying basis it’s expected to come in below 2017’s result — and that was put down “primarily to elevated weather costs.”

Buy or sell?

What does all this say about RSA as an investment, and has it hit Mr Hester’s “best-in-class ambitions” for the company?

Well, the first thought that strikes me is that insurance companies are in the business of shouldering risk for their clients, so when things go bad it’s the company that takes the hit and not the person with a wind-blown tree crushing their car, or whatever calamity it is.

So investors should expect to see quarters like this, which are pretty much inevitable for any insurance company. And as an investor who likes the insurance business myself (I hold Aviva shares, but I’ve owned RSA in the past), I’d be looking to top up on share price drops like this.

On the whole, I still see RSA as a solid long-term investment.

Another big drop

Industrial LED maker Dialight (LSE: DIA) was another of the FTSE’s major casualties on Friday, with its share price crashing by more than 20% as the market opened, before regaining a good deal of that to stand around 7% down by midday.

Dialight’s bad news came on Thursday after the markets closed, as the firm announced the termination of its agreement with its current manufacturing partner. The partner’s performance, which Dialight had described as “disappointing but stable,” has apparently deteriorated.

And with production of key products already shifting back to its own facilities, a line has been drawn under this unfortunate episode.

The company now expects to record full-year operating profit of around £8m to £10m, which allows for £6m to £7m additional costs associated with its manufacturing partner problems.

Valuation dented?

Dialight shares had been on an attractive growth valuation with a P/E multiple of 17 for the current year, expected to drop to under 12.5 by 2019, and with PEG ratios of only 0.3 for each year (with anything under 0.7 usually seen as attractive).

That valuation is not looking so tempting now, but I think a successful full transfer of manufacturing could see growth resume fairly quickly. I’ll be watching for the firm’s next update scheduled for early December.

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.

Alan Oscroft owns shares of Aviva. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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