Is RSA Insurance Group plc A Contrarian Buy?

We at the Fool have often said that the big insurers are a buy. We have already seen both Prudential and Aviva rocket outwards in value in recent months. Whilst Prudential was a successful play on emerging market growth, Aviva was a value play which is now paying dividends.

By comparison, RSA Insurance Group plc (LSE: RSA) (NASDAQOTH: RSANY.US) has been a bit of a laggard. Since the Credit Crunch it has been pretty much range bound. Recently the share price has been recovering steadily.

The share price has taken a tumble

But storms and adverse weather in the UK and in Canada have affected the company’s profits this year. And then there was the news about accounting irregularities in Ireland. Not surprisingly, RSA’s share price has taken a tumble.

After its share price fall, is RSA now a contrarian buy? When a share price falls like this, the first thing I check are the fundamentals — from this I work out whether the share price will fall and fall, or whether it will bounce and then recover. So, let’s analyse the numbers.

The forward P/E ratio is now 16. By this measure, the company is no longer cheap. But dig a little deeper, and we find that profits are expected to return to normal levels the following year, and the P/E ratio is likely to fall below 10.

Yet the fundamentals are good

It is also worth noting that the company is selling at close to book value. And there is a dividend yield of 6%. All these indicators suggest that the company is cheap.

What’s more, this is a strong, stable company with significant scale and which has a range of profitable, growing businesses around the world. This is no fly-by-night outfit. The controversy in Ireland is worrying, but I wouldn’t overplay its impact.

My view is that RSA’s share price fall is a reaction to the storm losses and accounting irregularities rather than a symptom of long-term troubles. Premiums have actually increased substantially, with emerging markets rocketing outwards.

So this is a share which I think contrarians should be thinking seriously of buying into. It is certainly on my watch list, and I am waiting patiently for this falling knife to hit the floor before buying in. Once the share price bottoms, RSA is a definite contrarian buy.

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> Prabhat doesn't own shares in any of the companies mentioned in this article.