‘RSA does not have enough equity to support the business it’s writing’ chief exec admits

RSA group chief executive Stephen Hester revealed plans to raise £775m from a rights issue and £300m from disposals next year as he announced results he admitted were “poor”.

The insurer made a pre-tax loss of £244m in 2013 after accounting irregularities in Ireland, reserve strengthening and adverse weather at the end of the year.

Without those events, RSA would have made a £427m pre-tax profit. In 2012 it reported a £448m pre-tax profit.

On £8.7bn net written premiums, RSA reported a combined operating ratio of 99.6% (2012: 95.6%) with an underwriting profit of £57m. But that would be a ratio of 96.8% and a £309m underwriting profit without the issues in Ireland, bad weather and reserve strengthening.

RSA Ireland posted a £220m underwriting loss. This meant the UK and Western Europe was RSA’s worst performing region. It made a £226m underwriting loss and a combined operating ratio, including investment income, of 106.6%

RSA also booked a £331m write down of goodwill and software intangible assets.

“It’s important to note that the loss is created through a substantial amount of balance sheet clean-up items,” Hester said.

“One issue people have had with RSA and many insurance companies is the acknowledgement that insurance accounting can be complex and when an insurance company delivers disappointments there are inevitably questions about disclosure and the quality of balance sheet assumptions.

“Part of putting this company on the right foot for the future is to clear that up and to ensure the quality of the balance sheet is strong, just as we need to strengthen quantity of capital in the balance sheet.”

Hester said RSA would now focus on four core areas of UK & Ireland, Canada, Scandinavia and Latin America. It is targeting £300m in disposals from outside those locations in 2014 and talks are already under way.

He told journalists this morning: “Put simply, RSA does not have enough tangible equity to properly support the business it is writing. That’s partly a result of 2013 losses but also partly an erosion of tangible equity over the past three to four years.

“We need to reset that with the rights issue we’re announcing today together with a series of self-help measures.”

“RSA’s 2013 results are poor and we need to grasp the nettles of both underperformance and undercapitalisation,” he added.

“As part of this we intend to launch a rights issue to help ensure we have the appropriate level of capital behind the group.”

The rights issue, which represents about 20% of RSA’s market value, will be formally launched next month when the prospectus has been approved by the UK Listings Authority, and RSA expects to have the money in the bank by Easter.

RSA also confirmed that it will not pay shareholders a dividend this year.

Asked if job cuts were on the agenda, Hester said: “Sadly jobs will be part of that [reducing RSA’s expenses] but there’s no immediate and substantial announcement to make on it.”

Hester, who joined RSA three weeks ago, said he had found a “huge alignment” between what he thought RSA needed to do and what his colleagues were already planning.