ii view: why RSA shares just surged by 45%

Covid has hindered, but a possible bid for the insurer has put a rocket under the share price.

Nine-month trading update to end September

• Possible bid for the company worth 685p per share plus the 8p dividend
• Group net written premiums down 3% to £4.66 billion
• Underwriting profit strongly up

Chief executive Stephen Hester said:

“While Covid-19 has held back our profit overall, RSA's inherent strength and the improvements we have made are driving the business forward in a pleasing manner. The outlook for continued underwriting improvements remains positive."

ii round-up:

UK, Scandinavia and Canada focused insurance company RSA (LSE:RSA) has received a bid approach from Intact Financial Corporation and Tryg A/S, which may or may not lead to an offer being made for RSA.

The proposal is made up of 685p per share in cash, plus the announced interim dividend of 8p per share. In April, RSA shares fell to a low of 321p, and were trading at around 452p today, just before the market got wind of the approach a few minutes before the end of the trading day.

A statement from RSA read: “The board of RSA has indicated to the consortium that it would be minded to recommend the proposal, subject to satisfactory resolution of the other terms of the possible offer, including a period of due diligence. Accordingly, RSA is engaged in discussions with the consortium in relation to the possible offer.”

Earlier on Thursday, the firm reported strong growth in underwriting profit in this latest quarterly update. 

The statement, which was light on numbers, flagged performances ahead of plan for each of its three regions excluding the impacts of Covid-19. 

RSA shares were down by just over 2% in afternoon trading, having risen by more than a third since late March induced pandemic lows. Shares of Admiral Group (LSE:ADM) are up over 40% over the same period, while Direct Line Insurance Group (LSE:DLG) shares are up by around a fifth. 

RSA, whose brands include MORE TH>N in the UK and Trygg-Hansa in Sweden, has been busy removing itself from unfavourable lines at its London-based international commercial underwriting business. Intense competition in the underwriting arena had previously resulted in falling prices with many insurers scaling back operations. 

The insurer recently agreed a new bancassurance distribution alliance between Codan, its Danish business, and Nykredit, SparNord and the association of local savings institutions, to provide insurance solutions through Codan's existing brand Privatsikring. The alliance gives Codan access to roughly 25% of all bank customers in Denmark. 

In late July, RSA reported a 7% fall in statutory profit before tax to £211 million, hit by pandemic financial market impacts. Virus-related claims under business closures have also fed into the mix. In line with its Covid cancelled 2019 final payment, no interim payment was previously declared, although the company hoped to return to payments and then catch-up on missed payments over time. 

ii view:

A history dating back over 300 years, property and casualty insurance company RSA employs over 13,000 people, serving nine million customers in over 100 countries. The former Royal Sun Alliance company is led by Stephen Hester, the previous chief executive at Royal Bank of Scotland, now renamed NatWest (LSE:NWG). 

For investors, and prior to the news of a bid approach for the company, there would have been concern about renewed lockdowns which might potentially raise business closure claims. The hit from lower returns for invested premiums  is also an ongoing battle. But a reshaped underwriting business is now back performing and an estimated forward one-year dividend yield of over 5% is not to be overlooked in the current low interest-rate environment. 

Now, with the share price having surged on news of the bid, investors would only buys at these inflated levels if they think a rival bid will appear. That looks unlikely just now given management is minded to recommend this bid if it is made official.

Positives: 

• Product and geographical diversity
• Management action to improve performance

Negatives:

• Uncertain Covid outlook
• Dividend payment previously suspended

The average rating of stock market analysts:

Strong buy