Is RSA Insurance an Exciting Emerging-Market Play?

LONDON -- While crippling austerity in Europe has put the brakes on growth rates in Europe, a backdrop of accommodative central-bank action, elevated commodity prices, and rising personal-affluence levels has created an exceptional investing opportunity in developing countries.

The divergence between traditional and emerging markets is borne out by the latest International Monetary Fund projections, which puts U.S. growth at 1.9% in 2013, while eurozone GDP is set to dip 0.3%. Conversely, emerging markets are anticipated to expand 5.3% this year.

Bubbly activity in developing geographies can create large opportunities for many London-listed firms. Today, I am looking at RSA Insurance Group (LSE: RSA  ) and assessing whether its operations in these regions are likely to underpin solid earnings growth.

Interims confirm rising emerging-market activity
In May's interims, RSA announced premium growth of 7% to 2.4 billion pounds, marking a spritely start to the new year. Net written premiums rose 5% to 2.3 billion pounds, and while growth from the U.K. and Western Europe edged just 1% higher and Scandinavian business remained flat, premiums from emerging markets leapt an impressive 16% year on year. Surging Canadian trade, up 18%, also underpinned growth.

In particular, premiums in China leapt a chunky 24% to 41 million pounds due to solid retail activity, while Latin American premiums increased 15% to 187 million pounds. Premiums in Central and Eastern Europe and the Middle East rose 14% to 97 million pounds.

Net written premiums from developing regions came in at 325 million pounds in the three-month period. This now represents almost 14% of the group total and is up about one basis point from the same point last year, even though Q1's 16% activity rise in these regions illustrates a slowdown from the 20% increase seen in the corresponding 2012 period.

The company has undertaken merger and acquisition activity over the past year to supplement organic expansion, purchasing Argentina's El Comercio and Aseguradora de Créditos y Garantías to double its market share there and position itself as the country's fifth-largest general insurer. That is not to say that RSA has witnessed plain sailing in these new markets, however: It was forced to knock its Czech operations on the head last summer due to concerns over capital returns. It also sold its businesses in the Dutch Caribbean.

While emerging markets generally provide an avenue of light for the company, the beleaguered regions of Britain, Scandinavia and Western Europe still account for more than two thirds of the group's total premiums. Consequently, further economic headwinds in these areas could heap heavy pressure on the firm's earnings prospects.

So is RSA Insurance Group a buy?
City brokers expect earnings per share to bounce back in 2013 following last year's 20% decline, with expansion of 32% this year to 12.5 pence expected to be followed by a 2% advance in 2014 to 12.8 pence.

The insurer currently deals on a P/E rating of 8.9 for 2013 and 8.7 for 2014, which tallies up favorably to a prospective earnings multiple of 10.2 for the entire non-life insurance sector.

Although earnings are expected to rebound strongly at RSA, thanks to some extent to surging-emerging market activity, I believe the insurance group is an unattractive pick at present due to a patchy dividend policy. The company cut last year's total dividend more than 20% to about 7.3 pence, choosing to rebase the dividend and instead invest in growth opportunities to get dividends rolling again in coming years.

Forecasters expect last year's payout to fall again in 2013 to 7.1 pence before slipping again to 6.9 pence next year. Although these payments carry respective yields of 6.2% and 6.1%, well ahead of a forward reading of 4.8% for its U.K.-listed peers, the emergence of fresh earnings pressure could drive shareholder returns still lower, in my opinion.

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