US Edition RSA Insurance
92.5p-7.2
Questor says BUY
The investment case of RSA Insurance Group is a special situation. The shares have crashed after a one off event. With such uncertainty around the company that pricing the shares becomes difficult.
The insurance group formerly known as Royal and Sun Alliance, has discovered a black hole in its accounts.
Specifically ,it is people claiming for injuries such as whiplash in car accidents that is costing the group millions. RSA said that it now has to almost double its reserves in the Irish unit to pay out for personal injury claims to £130m, from £70m previously.
If an insurance group is setting aside more cash to pay out for claims then it is making less profit and it has less cash to return shareholders. The dividend has already fallen a third in the past two years. RSA now say the dividend payments may fall further.
Buying these shares sounds like madness, but some people are. The shares fell more than 20pc after the announcement, but then rose sharply into the close of the day’s trading.
That is because the shares are trading at an 11pc discount to the net asset value of 103p. That is the value that shareholders could get if it was broken up and sold.
The Irish business is only a small part of the overall group. RSA has very attractive business in Scandinavia, Canada and the emerging markets.
In the half year ended August 1, net written insurance premiums were up 7pc to £4.7bn and pre-tax profits increased by 14pc to £250m. Even if the dividend were to be cut a further 20pc to 5p it would still offer more than a 5pc forecast yield.
This is a very high risk option but RSA could ride this out or get bought. Buy.