RSA has long-term troubles. Its share price is down 25% over the last five years, when the FTSE 100 rebounded a whopping 80%. The big blow came last November, when RSA was forced to issue a profits warning after a £200 million fraud in its Irish business. That instantly knocked 14% off its share price. And then came the floods. Two more profit warnings followed within the next six…
RSA Insurance Group (LSE: RSA)(NASDAQOTH:RSANY.US) hasn’t made anybody rich over the past five years, except short sellers. Here are five ways it could make you rich in future.
RSA has long-term troubles. Its share price is down 25% over the last five years, when the FTSE 100 rebounded a whopping 80%. The big blow came last November, when RSA was forced to issue a profits warning after a £200 million fraud in its Irish business. That instantly knocked 14% off its share price. And then came the floods. Two more profit warnings followed within the next six weeks, washing away chief executive Simon Lee, who was cut loose in December. RSA is up to its neck, and any recovery will take time.
Recent dismal performance could make RSA a tempting buying opportunity, but you must understand the risks. The insurer faces long-term challenges, including a bad case of whiplash. The UK is the whiplash capital of the world, with insurers paying out millions in personal injury claims following car accidents. Government attempts to clampdown on the claims culture have done little to slow the rush of questionable claims. Whiplash will remain a pain in the neck for anybody investing in RSA.
3) By fighting back
After four-and-a-half years battling to detoxify Royal Bank of Scotland, newly-appointed RSA chief executive Stephen Hester knows all about poisoned chalices. RSA has problems, but at least it ain’t RBS. Like any wise new boss, Hester has got the bad news out of the way quickly, before he can be blamed for it. RSA has just cancelled its 2013 dividend, and is said to be planning a rumoured £800 million rights issue, in a bid to bolster its parlous capital position. That’s twice as big as expected. I’m happy to see Hester making full use of his ‘new broom’ status while it lasts. The stock is up nearly 6% since his appointment.
4) By growing
RSA’s problems predated both fraud and flood. Its share price struggles were reflected in its crazy yield, which hit nearly 9% a year or two ago. At the time, I wrote that this was by far the most exciting thing about the company. Today, you get zilch, which puts the onus on growth. Earnings per share have suffered double-digit drops in five of the last six years, including a whopping 56% in 2013. The market forecasts a 175% rebound this year, followed by another 10% in 2015. Trading at 10.7 times earnings today, you aren’t overpaying for these prospects either.
5) By being bold
The RSA share price is at its lowest level for nearly nine years. If they’re right about global warming, we can expect ever stormier weather. Whiplash claims are out of whack. The UK general insurance market is a dogfight. RSA has to meet stringent EU-imposed capital requirements. Attempts to raise cash by selling off its overseas divisions are hampered by the uncertainty hanging over emerging markets. For many investors, this marks RSA as a sell. If you’re feeling bold, and happy to commit to this stock and sector for the longer term, you might be tempted to buy.
> Harvey doesn't own any shares mentioned in this article.