Why RSA Insurance Group plc’s Divestment Plans Will Crush Growth

Today I am looking at why I believe RSA Insurance Group‘s (LSE: RSA) (NASDAQOTH: RSANY.US) divestment drive will hammer growth in future years.

Disposals set to pressure growth prospects

To describe 2013 as an ‘annus horribilis’ for RSA Insurance Group would be a gross understatement. Shares tumbled 28% during the course of the year, worsened by news of operating irregularities at its Irish division in November. These issues resulted in a £200m hole in the company’s reserves there, and led to a spate of high-level boardroom resignations.

These travails caused group underwriting profit to tumble to just £57m in 2013 from £358m the year before. The company has highlighted the RSAneed “to grasp the nettles of both underperformance and undercapitalisation” in order to get back on track, a scenario which has included the launch of £773m rights issue to fill holes in the balance sheet.

The firm has also announced a self-healing programme to slash costs and streamline the business, a strategy which includes reducing the footprint of the group to just the UK and Ireland, Canada, Scandinavia and Latin America. Given the state of the company’s bombed-out balance sheet, the board’s hardline stance to repair its battered finances are undoubtedly a necessity.

However, the scale of the company’s divestment strategy has raised fears over potential growth rates, particularly as RSA Insurance’s operations in emerging markets — where income levels are rising and the insurance market remains vastly underexploited — are on the chopping block.

The business has already started the ball rolling on an estimated £300m worth of disposals this year alone, with further asset sales likely to continue next year and beyond. This situation is likely to significantly crimp earnings growth over the long haul.

Risks outweigh potential rewards

Despite last year’s financial problems, which resulted in a 10% earnings dip, City analysts expect RSA Insurance to print a 13% earnings bounceback this year. Growth is anticipated to slow in 2015, however, with a slight 3% advance pencilled in.

These projections leave the company changing hands on P/E multiples of 11.8 and 11.5 for 2014 and 2015 correspondingly, comfortably below a forward average of 12.7 for the complete non-life insurance sector.

But given the early stage of RSA Insurance’s turnaround strategy, not to mention backdrop of increased competition and rising insurance claims costs, I believe that the potential risks still massively undermine the firm’s investment case, even at current price levels.

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Royston does not own shares in RSA Insurance Group.