During 2013, I’ve looked at most shares in the FTSE 100 and graded them against these five quality and value indicators:
- Dividend cover
- Borrowings
- Growth
- Price to earnings
- Outlook
Some companies scored highly against the “business quality” indicators of level of borrowings, earnings growth record, and outlook. Others scored highly against the “value” indicators of dividend cover and price-to-earnings ratio (P/E).
Quality and value in harmony
However, the most promising investment opportunities scored well on both business-quality and value indicators.
In this mini-series, I’m revisiting some of the highest-scoring shares to look at events since the original article and to assess the quality of the investment opportunity now. Some of these high-scoring firms could be investment winners for 2014 and beyond so, today, I’m revisiting general insurance company RSA Insurance Group (LSE: RSA) (NASDAQOTH: RSANY.US), which scored 18 out of 25 in October.
Trouble in Ireland
It’s not every day that a company swings a broadsword under the head of one of its subsidiaries, but that’s exactly what’s happened at RSA Insurance Ireland, where the Chief Executive Officer, Chief Financial Officer and Claims Director have all been suspended pending the results of an independent investigation – the market doesn’t like it one bit and the shares are down over 14% since October.
On 10th November, Simon Lee, Group Chief Executive of RSA, had this to say about the issue:
“We are extremely disappointed with the issues which have been identified and their financial impact on the Group. Whilst the investigation is ongoing, I am confident that these issues are isolated to the Irish business.”
Let’s hope he’s right, because RSA seems to be having a few difficulties lately and could do without further aggravation. For example, also in Ireland, RSA has noticed that personal injury claims are going up, requiring strengthening of its Irish bodily injury reserves, which will adversely affect 2013 performance.
Extreme weather dents profits
Elsewhere, the firm recently revealed that it expects continuing severe weather events around the world to drive full-year weather losses higher than previously thought. Returns on equity will likely fall below the 10% figure achieved at the half-year stage.
Meanwhile, insurance premium sales have grown 7% in the first three quarters of the firm’s trading year, led by double-digit growth in Canada and emerging markets. So, sales are on track, but I can’t help feeling ambivalent about that, given the risks attached to each insurance policy carried by the firm.
The company’s investment operation, which seems to be centred mainly on holding bonds, is expected to deliver income of around £470m for the full year, which represents an almost 11% decline from that achieved last year.
RSA’s total-return potential now
Generally, profits and cash flows are feeling a squeeze that resulted in a 33% dividend cut at the time of the interim results, so 2013 isn’t shaping up to be the best of years for RSA Insurance Group, but let’s see how it scores against my business-quality and value indicators now.
City forecasters predict forward earnings to cover the rebased forward dividend about 1.9 times, scoring 3/5 as before; net debt is running around the level of net profit scoring an unchanged 3/5; historical earnings remain volatile so I’m maintaining a neutral 3/5 score; a forward P/E rating of about 8.4 sits well against expectations of rebounding earnings and a 6.3% dividend yield for 2014, scoring 5/5, up from four last time; and recent trading and a cautiously positive outlook incline me to drop my outlook-rating to 3/5 from five last time.
Overall, I score RSA Insurance Group 17/25, today.
What now?
So, RSA is a troubled firm scoring high on my value indicators and rather lower on my business-quality indicators. Is this a contrarian buying opportunity or will RSA’s problems endure? It’s hard to know, of course, but my guide here is the industry itself – I’m not too keen on it as an investment opportunity because it’s hard to see inside.