The Pros And Cons Of Investing In RSA Insurance Group plc

Stock market selections are never black-and-white decisions, and investors often have to plough through a mountain of conflicting arguments before coming to a sound conclusion.

Today I am looking at RSA Insurance Group (LSE: RSA) (NASDAQOTH: RSANY.US) and assessing whether the positives surrounding the firm’s investment case outweigh the negatives.

Boardroom in turmoil

RSA Insurance hit the headlines again this month when chief executive Simon Lee fell on his sword following allegations of impropriety at the firm’s Irish division. Lee had been head of the group for more than a decade, casting immediate questions over the insurer’s future direction.

The company suspended RSA Insurance Ireland’s chief executive Philip Smith, as well as its chief financial officer and claims director in November, due to what it called “issues in the Irish claims and finance functions.” PricewaterhouseCoopers has been drafted in to carry out a full investigation into the case and will announce its findings in January.

Earnings rebound forecast for 2014

RSA Insurance has experienced vast, double digit earnings declines in four of the past five years, and City brokers expect further heavy weakness to transpire this year — consensus currently points to a hefty 26% drop, to 7p per share.

But the number crunchers expect the company to bounce back from next year, with a 72% earnings improvement forecast for 2014 alone, to 12.1p per share. This projection leaves RSA Insurance changing hands on a P/E rating of 7.7, comfortably beating a 12.5 forward average for its sector peers.

… but financial woes could prompt downgrades

Still, December’s update revealed the extent of the financial black hole at its beleaguered Ireland division. The insurer has to reinforce reserves here by £130m, mainly to cover bodily injury claims in motor and liability, and follows November’s £70m injection for the recent claims and finance scandal. The company also has to plough £135m into its operations across the Irish Sea to maintain a solvency ratio above 200%.

RSA Insurance noted that near-term earnings forecasts have been reduced due to its problems in Ireland, as well as the heavy cost of recent storm claims. With chairman Martin Scicluna also announcing that a review into “improving the capital strength of the Group, optimising the Group’s business portfolio and delivering a sustainable dividend into the future” is underway, earnings projections further out could also take a whack.

Investor payouts predicted to surge

RSA Insurance’s progressive dividend policy has experienced heavy pressure in recent years, with the firm’s decision to rebase forcing the full-year payout down to 7.31p per share last year, from 9.16p in 2011. And forecasters expect the firm to cut the dividend further, to 6.17p in 2013, although a recovery to 6.47p is predicted for 2014.

Despite this year’s additional expected cutback, however, the insurer still carries a monster 6.7% yield based on current projections, while next year’s increase creates a reading of 7%. This smashes a forward average of 4.5% for the complete non-life insurance out of the water.

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Still, the size of future dividends could come under serious threat in the new year — the business warned this month that “the impact of events in the last quarter will need to be taken into consideration when the Board determines the 2013 final dividend recommendation in February 2014.” In my opinion RSA Insurance represents a massive gamble at the current time.

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Royston does not own shares in RSA Insurance Group.