Is RSA Insurance Group plc Set For Electrifying Earnings Growth In 2014?

Today I am looking at the earnings prospects for beleaguered insurance giant RSA Insurance Group (LSE: RSA) (NASDAQOTH: RSANY.US) for 2014.

Irish problems envelop earnings outlook

The share price collapse at RSA Insurance Group has been one of the stock market’s biggest horror stories of 2013. The price started its descent following a profit warning in November’s interims, and was hammered further following the boardroom turmoil and financial buffering required at the firm’s Irish unit. Its share price has now dropped 30% in less than two months.

But far from whetting the appetite of bargain hunters, I believe that the beleaguered insurance giant remains a hugely risky proposition that should be avoided. The departure of chief executive Simon Lee in December brings back worrying reminders of the boardroom tussles back in 2002, when the then group head Bob Mendelsohn was jettisoned after failing to meet a raft of performance targets.

Lee’s fall from grace has been triggered by travails at RSA Insurance Ireland, whose head Philip Smith was suspended, along with two other executives, during the autumn after “issues in the Irish claims and finance functionswere identified. The company has had to plough more than £200m into this division in order to cover these issues, as well as build reserves for bodily injury claims.

PricewaterhouseCoopers have been drafted in to run the rule over the state of the division, the results of which investigation is due on 9 January. While Lee earlier advised that “whilst these issues are serious, they do not have a material, long term impact on the group,” I for one will not be holding my breath until PwC come back with their conclusion.

RSA Insurance has been consistently inconsistent in being able to post any sort of earnings recovery in recent years, and has suffered heavy dips in four of the past five periods. City analysts expect the firm to follow this up with more earnings weakness this year, with a 48% drop to 4.9p per share pencilled in.

Still, the consensus for 2014 points to a remarkable 136% bounceback to 11.6p per share. This projection leaves the insurer dealing on a P/E rating of 7.9, comfortably below the value watermark of 10 and smashing a forward average of 13.3 for the entire non-life insurance sector.

But RSA Insurance is dealing on such a low multiple for a reason. Although new business inflows continue to rise, so do the cost of claims the firm is having to shell out for, particularly in the UK and Canada. And who knows what other anomalies could come to the surface following the Irish scandal, issues which could eat into long-term earnings and potentially force a fire-sale of its cherished emerging market assets. I’ll be sitting on my hands rather than eyeing a bargain buy.

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> Royston does not own shares in RSA Insurance Group.