Why Shares In RSA Insurance Group plc Tumbled

Although we don’t believe in timing the market or panicking over every stock fluctuation, understanding how a business is performing, competing and changing is vital to sensible investment.

What: The share price of RSA (LSE: RSA) (NASDAQOTH: RSANY.US) fell by 10% to 85p during early trade this morning after the troubled insurer launched its £773m cash call to repair its finances. A total of 1.4bn shares were listed, nil paid, on the main market.

RSARSA is offering three new shares for every eight held at a price of 56p per share.

So what: Last month RSA unveiled a £244m loss in its final results owing to the £200m black hole discovered in the firm’s Irish business. As such, a rights issue was considered the best option to ensure the group has enough capital to be proceeding with. Additionally, RSA is disposing of selected businesses to raise a target of £300m.

The chief executive, Stephen Hester, commented:

“We thank shareholders for their ongoing support. We remain focussed on delivering the transformation programme we outlined at our preliminary results presentation in February and look forward to sharing more details on our plans in the coming months.”

Now what: RSA scrapped its final 2013 dividend and any interim dividend in 2014 — so soon after the rights issue — is likely to be modest. In the medium term RSA’s goal is to pay out  40-50% of earnings in dividends.

How quickly this happens is down to the speed of the company’s recovery. Stephen Hester, the new chief executive, is credited with helping turn around RBS during his five years at the bank. Whether he can match his previous success remains to be seen.

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Mark does not own shares in any company mentioned.