Is this a new start for Royal & SunAlliance? The insurer successfully concluded its much-maligned rights issue last week, raising pounds 960m to boost its balance sheet after rising asbestosclaims and three years of declining stock markets eroded reserves.
It’s been a difficult time for insurance companies, but under the leadership of Andy Haste, who started as chief executive in April, RSA is heading in a new direction. First, it is focusing on its operations in the UK, Scandinavia and Canada, while the American business will be restructured. To this end, it has sold operations in Australia, US and Puerto Rico, raising pounds 650m in the process.
Second, it aims to improve its underwriting discipline, claims handling and cost control, saving pounds 270m per year. And third, it had to restore its financial position. Hence the rights issue.
Even after a significant cash injection, investors are still worried about potential asbestos liabilities – to the extent that there are fears about the US business having a negative value. Robin Savage of WestLB Panmure said: “I think the US business is worth very little, but I can’t see it having a negative value.”
The core businesses have strong positions in their markets, and profits have gone up as premiums have increased. The port-folio could be tidied up if RSA sells its 37 per cent stake in the South African insurer Mutual & Federal, and this could raise a further pounds 100m. And with a balance sheet that is far healthier than it was a month ago, things seem to be looking up.
While financial concerns have been alleviated in the short term, another factor that was depressing the share price has been lifted. Before investors could subscribe for the new shares, hedge funds were shorting the stock (selling shares that they don’t own at today’s price in the hope of buying them lower at a later date) in an attempt to drive the price down below the rights issue price of 70p. From the day the issue was announced, the shares collapsed by 35 per cent from 124.38p to 80.75p. With the fund- raising now out of the way, the technical overhang is no longer an issue.
But getting to grips with the company’s numbers is a nightmare. Mr Savage continues: “There are an awful lot of uncertainties about the basics, which makes forecasting difficult. As soon as we see some real numbers that investors can have confidence in, you could have a value of around 150p.”
From the current level of 94p, the downside looks pretty limited.
