Right now I’m analysing some of the most popular companies in the FTSE 100 to establish if they are attractive long-term buy and forget investments.
Today I’m looking at RSA Insurance (LSE: RSA) (NASDAQOTH: RSANY.US)
What is the sustainable competitive advantage?
RSA is a multi-line insurance provider, with over 300 years of history and subsidiaries around the world in both emerging and developed markets.
Indeed, this multi-line internationally diversified structure has allowed RSA to grow the total value of its premiums written by 30% over the past five years, despite the turbulence in Europe and general economic slowdown in the western world.
Moreover, in several countries, RSA’s operations are in a market-leading position, so the firm is able to set rates and insure risks that peers cannot.
Still, insurance is a risky business and RSA is completely dependent upon its combined operating ratio, a measure of premiums received versus claims paid out, to stay below 100%, indicating that the company is taking in more than it is paying out.
That said, RSA is more likely to achieve this goal than most as the company’s international diversification and multi-line insurance offerings mean that the company is not overly exposed to anyone market.
Company’s long-term outlook?
The biggest threat to RSA’s outlook is volatility in the financial markets. You see, like its peers, RSA re-invests its profits into a bond and stock portfolio in order to smooth out returns and boost its bottom line.
For example, during 2011 and 2012 RSA made a net loss as company expenses and claims payouts far exceeded income from insurance premiums written. However, after including returns from the company’s investment portfolio, the company made a profit.
RSA is also facing stiff competition in its home market here in the UK where, cheaper providers and comparison sites are hurting the company’s non-commercial sales of insurance products, which fell 1% during the first half of the year.
That said, the company’s UK commercial insurance operations remain strong, with sales expanding 6% during the first half of the year.
Nonetheless, over the longer term, RSA should see a sustained demand for its insurance products. Indeed, the number of premiums written in emerging economies is expected to grow by around 10% for the next few years. Demand for insurance products within developed markets is expected to expand 1-3% over the same period.
All in all, RSA’s history, exposure to emerging markets and growth over the past five years, reassures me that the company is an investment that is suitable for the long term. Despite the company’s exposure to financial markets, RSA has a long history of producing returns for investors and I believe this is set to continue.
So overall, I rate RSA Insurance as a good share to buy and forget.
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In the meantime, please stay tuned for my next FTSE 100 verdict
> Rupert does not own any share mentioned in this article.