The Hidden Nasty In RSA Insurance Group plc’s Latest Results


Yesterday’s news that RSA Insurance Group (LSE: RSA) (NASDAQOTH: RSNAY.US) has appointed ex-Royal Bank of Scotland Group boss Stephen Hester to be its new chief executive, has pushed the firm’s share price up 8% in 24 hours.

Although I believe Mr Hester is likely to sort out RSA’s problems, I fear that his first job could be to deliver more bad news, when RSA reports its 2013 results on 27 February.

Digging for dirt

Having taken a closer look at RSA’s latest results, I think there are three areas where Mr Hester may be forced to report further problems:

1. The weather

Extreme weather in Canada and northern Europe has pushed RSA’s expected weather losses up to 3.7% of its premiums, significantly above its planning assumption of 2.2%. As a result, return on equity is expected to fall below 10% in 2013, missing its target range of 10%-12%.

More to come? It’s probably safe to assume that the flooding and gales experienced in the UK in December will add to RSA’s weather-related losses, so the firm may report a larger loss than expected.

2. Capital shortfall

News of a £200m black hole in the accounts of RSA’s Irish division prompted suggestions that RSA would need to raise new capital, or sell off some of its key assets.

I’m inclined to agree. RSA’s IGD surplus — a key regulatory measure of surplus capital — has fallen from £1.2bn at the end of 2012 to £0.9bn at the end of the third quarter of 2013. The firm’s capital requirements are now covered just 1.5 times, down from 1.9 times at the end of 2012.

More to come? Since the end of the third quarter, RSA has injected £200m into its Irish business, which will presumably have reduced its surplus capital still further.

3. Asset values

RSA reported a tangible net asset value of just 51p per share at the end of the third quarter, down from 65p at the end of 2012, and 70p at the end of 2011 — that’s a 27% fall in less than two years.

Tangible assets now account for just 51% of RSA’s book value, down from 65% at the end of 2011.

More to come?

The majority of RSA’s assets are bonds, which are held in multiple currencies. The combination of fluctuating exchange rates and bond prices makes any change in value hard to predict.

Dividend pain

RSA is almost certain to cut its final dividend again this year, and could even cancel its payout.

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> Roland does not own shares in any of the companies mentioned in this article.