RSA Insurance Group Plc’s Greatest Strengths

RSAWhen I think of general insurer RSA Insurance Group (LSE: RSA) (NASDAQOTH: RSAIF.US), two factors jump out at me as the firm’s greatest strengths and top the list of what makes the company  attractive as an investment proposition.

1) Turnaround potential

When I last wrote about RSA Insurance back in January, I wondered if the firm’s enduring problems would threaten the dividend and lead to a fund-raising event.

With the release of the full-year results in February, the incoming CEO, Stephen Hester, confirmed that the firm’s dire 2013 financial performance means the final dividend will not go ahead, and there will also be a rights issue aimed at raising £775 m.

He didn’t stop there. In something of a kitchen-sink statement, he also said the business would be refocused to make the UK & Ireland, Canada, Scandinavia and Latin America form the core of the Group, and that a disposal programme will target £300m in proceeds.  He’s also taken capital actions to reduce equity and property exposure and to execute new reinsurance structures.

The firm’s well-reported difficulties in its Irish arm are really just the tip of an iceberg of troubles that have been building for some time. Extreme weather events have been costing the firm dearly in claims, which hasn’t helped either, but the wider trading record reveals a steady decline over several years:

Year to December 2008 2009 2010 2011 2012 2013
Revenue (£m) 7,273 7,744 8,448 9,131 9,397 9,822
Net cash from operations (£m) 527 301 296 303 303 456
Adjusted earnings per share 17.3p 12.2p 9.8p 11.9p 9.5p 7.9p
Dividend per share 7.71p 8.25p 8.82p 9.16p 7.31p 2.28p

Cash flow flat-lined some time ago and dividend cover from earnings has been weakening.

RSA Insurance seems to have everything in place to set itself up as a turnaround proposition within the overall cyclicality of its industry sector.

2) New top management

The firm seems to have scored a blinder by securing the services of Stephen Hester to lead its turnaround. Investors will probably know him best as the recent CEO of Royal Bank of Scotland where he led the UK’s largest-ever corporate restructuring and recovery programme. However, he’d been around the block before that and sports an impressive CV showcasing some 30 years’ experience in financial services and FTSE 100 companies, including as CEO of  The British Land Company, COO and FD of Abbey National, and  senior roles at Credit Suisse First Boston in the UK and US.

Mr. Hester is certainly not green behind the ears when it comes to turning big business around and I think his appointment bodes well for the prospects of RSA Insurance going forward.

What now?

RSA has struggled with profitability and cash flow in recent years. Current events have brought matters to a head and now the firm looks attractive for its turnaround potential.

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Kevin does not own shares in RSA Insurance Group.