RSA earnings overshadowed by CEO's money-raising plans

Reuters
A sign of RSA insurance company is pictured outside its office in London
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A sign of RSA insurance company is pictured outside its office in London December 13, 2013. REUTERS/Toby …

By Chris Vellacott

LONDON (Reuters) - British insurer RSA publishes 2013 earnings on Thursday, but investors are set to mostly ignore last year's numbers and focus on the bigger question - how management plans to plug a gaping hole in its balance sheet.

RSA's results will mark the first outing for newly appointed Chief Executive Stephen Hester, the former head of Royal Bank of Scotland who joined early in February with the insurer in the midst of a strategic review.

His most pressing task will be to raise new capital - possibly as much as 1 billion pounds according to some analysts - following an accounting scandal at RSA's Irish arm and substantial costs from claims linked to bad weather in Europe.

The company has said all options are being considered and has highlighted a dividend cut, asset sales and rights issue as possible courses of action.

The Irish accounting issues were uncovered last year and contributed to a series of profit warnings, leading to the departure of several senior executives including Hester's predecessor Simon Lee.

At stake is the firm's credit rating, already lowered in December to A- by Standard & Poor's.

Further downgrades could lead to brokers refusing to sell RSA products. A cut to BBB+ would be "potentially disastrous," Panmure Gordon said on Monday.

With large areas of southern England - including affluent, expensively insured London suburbs - hit by floods since the year end, the need to raise capital is becoming ever more pressing.

GOODWILL

RSA shares traded nearly 3 percent lower on Monday morning, after the insurer confirmed late on Sunday a rights issue was possible but that it had not made a final decision.

Investors say that the appointment of Hester, who built a reputation since the 2008 financial crisis as a trouble-shooter having salvaged RBS by slashing assets and costs, is a game changer, making them more inclined to put up the money themselves.

"There's quite a lot of goodwill towards Hester. I suppose that's why he's there. He can probably spin a story to get some new equity, whatever route it is," said one of RSA's institutional shareholders.

Panmure Gordon analysts say RSA needs to raise around 500 million pounds to stave off a credit downgrade, with up to 400 million to be gathered by issuing new shares to investors and the rest covered by dividend cuts and sales of non-core assets.

The broker also said it expects a 43 percent drop in RSA's operating result to 377 million pounds, driven by the losses in Ireland and weather-related claims.

Bernstein Research analysts see a more aggressive move - up to 1 billion pounds raised "to err on the safe side", of which half would come from a rights issue, around 180 million pounds from cutting the dividend and the rest through "management actions".

While the goodwill towards Hester from shareholders bodes well for a successful rights issue to raise the bulk of the required new capital, he could opt for a small placing and avoid holding the process up with a shareholder vote.

But to avoid a vote, the shareholder said, the placing would need to be for less than 10 percent of the company - or about 350 million pounds, which may not be enough.

"My suspicion would be if you did that, you'd end up not raising enough. The key thing is, you don't want to come to the market and have to do it again," the shareholder said.

(Reporting by Chris Vellacott; Editing by John Stonestreet)

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