The appointment of heavyweight turnaround specialist Stephen Hester as chief executive of RSA Insurance Group (LSE: RSA) (NASDAQOTH: RSANY.US) was met with enthusiasm by investors.
When the firm published its annual results in February, Mr Hester promised to sort out the insurer’s balance sheet, with a £773m rights issue. Details of the rights issue were released to the market this morning. Although the new shares are being sold at a hefty 40% discount to last night’s closing price, the City seems happy and RSA’s share price is up by nearly 2% at the time of writing.
Will the rights issue make RSA a safer place for its long-suffering shareholders? I’ve taken a closer look at the firm’s finances to find out.
1. Operating profit/interest
What we’re looking for here is a ratio of at least 1.5, preferably more than 2, to show that RSA’s operating earnings cover its interest payments with room to spare:
Operating result / interest costs
£286m / £117m = 2.4 times cover
RSA reported a loss last year, so I’ve used the firm’s adjusted figures to get an idea of how its underlying profits relate to its operational finance costs.
The result is adequate, but only just — RSA’s adjusted operating profits covered its interest payments 2.4 times last year, down from 5.8 times in 2012. It’s no wonder RSA said that a final dividend couldn’t be justified last year.
2. Debt/equity ratio & cash generation
Commonly referred to as gearing, this is simply the ratio of debt to shareholder equity, or book value (total assets – total liabilities).
RSA reported net debt of just £448m and equity of £3,014m in 2013, giving it a very comfortable net gearing ratio of 15%.
3. IGD capital surplus
The Insurance Groups Directive (IGD) capital surplus sounds a bit of a mouthful but is actually a very simple — and important — figure.
Insurance firms have to hold a certain amount of surplus capital to ensure they can cope with unexpected events and financial problems. RSA’s requirement is around £1.6bn, but before today’s rights issue, its IGD surplus coverage ratio was unacceptably low, at just 1.1 times (in comparison, Aviva’s coverage ratio is 1.7 times).
The main purpose of RSA’s rights issue was to correct this problem, and following today’s rights issue, RSA expects to have an IGD surplus of £1.3bn, giving a solid coverage ratio of 1.8 times.