Questor share tip: Sell RSA as turnaround labours

RSA Insurance
430½p-13.4p
Questor says SELL

RSA Insurance’s [LON:RSA] first set of results, following some major balance sheet surgery under Stephen Hester, was an opportunity to show shareholders the promise of a brighter future.

However, the insurer fluffed its lines and Questor is now bailing out.

RSA, formerly known as Royal and Sun Alliance, first hit problems in November last year. A black hole was discovered in the Irish division’s accounts, which required a near-doubling of reserves from £70m to £130m. The gap in the Irish arm’s insurance loss reserves was compounded by a £220m fraud.

The damage to the insurer’s reputation and balance sheet meant chief executive Simon Lee resigned, the dividend was axed and the shares slumped by more than 30pc. Investors who had been attracted by a steady income from the insurer were left shocked.

Mr Hester, the man behind the Royal Bank of Scotland turnaround, arrived in February to try to put the company back on an even keel.

RSA launched a £748m discounted rights issue in March, the Baltic and Polish divisions were sold in April to raise a further £300m, and the share price was consolidated five-for-one in May.

Questor thinks that on the evidence provided in yesterday’s results the future looks far from promising, despite all these efforts.

The company revealed restructuring costs of £117m in the six months ended June 30. The Irish division suffered a further write-down of £57m, and the company pumped an additional £22m into reserves after claims from people suffering whiplash in car accidents exceeded the reserves built up from premiums.

The problems on the Emerald Isle aside, the rest of the business isn’t looking too rosy either. The UK & western Europe business slumped to a loss during the first half as bad weather hit Britain. The emerging markets division also recorded a loss, as operations in Latin America suffered from earthquakes in Chile.

This offset a strong performance in Scandinavia.

Looking at the company as a whole, the amount of insurance it is writing is falling, with net written premiums down 9pc to £3.9bn. And the core insurance business is only just breaking even, with a profit from underwriting of £2m, down from £188m in the same period last year.

The insurance sector has been a tough place to be for the past five years, with falling premiums and rising costs. Most insurers largely generate their profits from investment returns on the reserves they hold.

The problem for RSA is that with record low bond yields, investment returns are also falling, down from £192m to £166m. Once you add in head office, interest and restructuring costs, the company reported first-half, pre-tax profits of £69m, down from £250m at the same stage last year.

Questor picked RSA as a very high risk buy last year (92½p, December 16) on the basis that the core business would attract buyers and it would resolve its problems.

With a net asset value of 356p per share, the stock may still appeal to investors. However, the core business isn’t looking good enough to warrant waiting for signs of a recovery. The shares, trading at about 88½p in old money (438p adjusted for the one-for-five consolidation), are up roughly 10pc on the theoretical ex-rights price of about 78p. The shares are trading on 11 times forecast earnings, rising to 12 times next year, and offer a prospective yield of 2.5pc.

Questor thinks this is as good a time as any to bail out of this speculative tip, and downgrades to a sell.