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LONDON -- Shares in RSA Insurance Group (LSE: RSA ) took a battering in February, collapsing from a 19-month high above 136 pence following the release of shocking results for last year, and are currently trading around 116 pence.
Profit slide continued last year
RSA announced last month that its combined operating ratio last year came in at 95.4%, up from 94.9% in 2011 and pushing operating profit 6% lower to 684 million pounds. The company has now posted heavy double-digit profit declines in four of the past five years.
And I expect the insurer to experience more pain moving forwards, squeezed by a backdrop of increased insurance rate competitiveness and continued difficulties in the global economic recovery.
Rising operational and claim costs look set to pressure RSA, and Investec expects claims costs from the U.K. -- responsible for 35% of total premiums -- to rise around 19% in 2013. This is partly due to the recent Simmons v Castle case, which is set to add 10% to general damage costs from 1 April onwards.
Dividend takes a pasting
RSA's poor performance in recent years saw it slash its full-year dividend in 2012, from 9.2 pence per share in 2011 to 7.3 pence. A final dividend of 3.9 pence was down from 5.8 pence in the previous year, and the insurer expects to cut its interim payment by a similar percentage this year.
The company has elected to rebase the dividend to invest in growth opportunities and maintain a progressive policy further out. And analysts expect further cutbacks ahead, with 2013's full-year dividend expected to fall 14% to 6.3 pence, before rising a modest 3% to 6.5 pence next year.
Despite recent dividend scalebacks, forecast yields are still expected to remain north of the 3.5% FTSE 100 average -- the yield for this year is expected to come in at 5.4% before rising to 5.6% in 2014. As well, these also come attached with decent coverage of 1.9 times and 2 times for this year and next.
Earnings expected to bounce following 2012 collapse
Following the colossal 20% drop in earnings per share (EPS) last year, to 9.5 pence, City forecasters expect growth to snap 26% higher to 12 pence in 2013. EPS is then predicted to crawl 1% higher to 13.1 pence.
RSA currently trades on a P/E ratio of 9.6 and 8.9 for 2013 and 2014 respectively, providing a discount to a forward earnings multiple of 10.4 for the broader non-life insurance sector.
However, I think that the potential for further heavy dividend cuts should prompt investors to seek more secure payout opportunities elsewhere, particularly as RSA is likely to experience escalating earnings turmoil in the medium term at least.
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