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The Turnaround Prospects For RSA Insurance Group plc

RSA

2013 was a nightmare of a year for RSA (LSE: RSA) (NASDAQOTH: RSANY.US), with a series of profit warnings and £200m of losses within its Irish operations. This contributed to then chief executive, Simon Lee, quitting in December. Lee had headed the group for more than a decade.

The appointment of former RBS man Stephen Hester, whose arrival led to a 6% boost to its share price, answers some questions about the immediate future of the company. The hope is that Mr Hester’s track record of transforming business along with a new company agenda will deliver value for shareholders once more.

Turnaround specialist

During Mr Hester’s five years at RBS, he was credited with helping turn around the bank. He took over in 2008 — with the bank nearly bankrupt — at the height of the financial crisis. He cut costs while simplifying the business: 39,000 jobs were shed and the group moved away from complex overseas operations.

The immediate task for Hester is finding a way to shore up RSA’s finances. Extreme weather claims cost the group dearly last year, pushing its expected weather losses up to nearly 4% of its premiums, above expectations. Along with the £200m scandal in Ireland this adds up to a shortfall in capital.

It was thought in December, around the time of Simon Lee quitting as chief executive and another profit warning, that RSA could become a bid target. Since then, however, the share price has recovered from its 90p slump, so a bid seems like wishful thinking.

Dividend cut likely

In order to plug the hole in the balance sheet, the insurer could raise more than £500m by offering new shares. Analysts suggest that Mr Hester will make it easier to raise equity; his credibility should mean that shares are issued at a better price, with lower underwriting fees.

A real worry is that the final dividend this year will be scrapped. If you’re looking for a reliable income stock, it may be best to look elsewhere, as the 33% cut in last year’s payout was revealed even before we knew of the £200m losses. The dividend has become overstretched in recent years, with barely any cover.

You might instead find RSA is attractive for its turnaround potential — certainly they’ve got someone at the helm with the right kind of experience. It’s also worth taking into account its attractive businesses in Canada, Scandanavia and emerging markets. If you like the fundamentals, that’s most important.

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> Mark doesn't own shares in any company mentioned.