LONDON -- When an FTSE 100 (INDEX: ^FTSE) company is yielding around 9%, it should be ringing a few alarm bells. Something isn't right. On the other hand, a 9% yield may be a great reason to buy the shares, which could gradually re-rate to a more appropriate level if the income is perceived to be sustainable. Such is the question investors must weigh for themselves over RSA Insurance (LSE: RSA.L).
Big insurers are complex beasts. But I can't see any great reason to be unduly concerned about RSA following Thursday's interim management statement. The overall picture is of a company in a strong and conservatively managed financial position, with healthy global diversification and plans to diversify even further.
RSA has a low-risk investment strategy, with 89% of its 14.4 billion pound portfolio invested in high-quality fixed income and cash. Its exposure to peripheral European government debt represents just 1% of the portfolio.
In the first quarter, its net written premiums were up by 5%, with all regions delivering good growth, whilst its net asset value per share is 107 pence. RSA also expects to show solid premium growth, with a combined operating ratio of better than 95% for 2012.
Moving away from the U.K.
The insurer's aim is to generate 70% of its business outside the U.K. by 2014, up from roughly two-thirds now. The U.K. remains RSA's single-largest market, but Canada, Scandinavia, Western Europe, and emerging markets are catching up. RSA has been particularly acquisitive in Canada, which now represents close to 20% of premiums.
So any repeat of the potentially transformational 5 billion pound approach for the general insurance business of Aviva (NYSE: AV) looks less likely now, as RSA has followed a path of many smaller buys overseas, mainly in Canada.
Overall, the brokers expect to see a slight increase in the dividend for 2013 to more than 9.7 pence, with earnings greater than 14.1 pence. So the anticipated yield is more than 9% at the little-changed price of 105.4 pence, with a forward price-to-earnings ratio of 7.4. There is a high degree of consensus around the forecasts. This isn't a huge amount of dividend cover, but the conservative way in which RSA invests, along with the determination the company will have not to cut the dividend, is reason enough for confidence for me.
The share price, meanwhile, continues to suggest that RSA will -- or may -- cut the dividend. Clearly, that's a possibility, but I'm betting the market is wrong.
RSA isn't an exciting share by any means, but its yield most certainly is.
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