Company in the news: RSA Insurance Group

RSA has had no end of problems this year. Is it worth hanging on to the shares, and are there any better bets in the insurance sector? Phil Oakley reports.

Insurance company RSA is in a mess. It has issued two profit warnings this year and admitted that there are some accounting irregularities in its Irish business. After cutting its dividend by a third earlier this year, many analysts now think it will cut it again.

It's no surprise, therefore, that the share price has tanked. With dividends expected to be barely covered by profits, I think a dividend cut is likely.

Investors have bought insurance shares because of the big dividends that they pay. But, as RSA demonstrates, this sector has lots of risks. Competition is fierce, while firms are also under pressure to have stronger finances. Analysts are currently expecting a dividend of 6.25p per share from RSA.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free
https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

At 110p per share, that gives a yield of 5.7% before any cut. We've been more positive on the company's irredeemable cumulative preference shares (LSE: RSAB) for a while now as they pay a fixed dividend before ordinary shareholders get a penny, making them less risky.

At 110p (coincidentally) they pay 7.375p per share to give a fixed yield of 6.7% and look a better bet for income.

We continue to prefer specialist insurers such as Amlin (LSE: AML) and Lancashire Holdings (LSE: LRE) for their potential dividend income.

Verdict: avoid

Phil spent 13 years as an investment analyst for both stockbroking and fund management companies.

 

After graduating with a MSc in International Banking, Economics & Finance from Liverpool Business School in 1996, Phil went to work for BWD Rensburg, a Liverpool based investment manager. In 2001, he joined ABN AMRO as a transport analyst. After a brief spell as a food retail analyst, he spent five years with ABN's very successful UK Smaller Companies team where he covered engineering, transport and support services stocks.

 

In 2007, Phil joined Halbis Capital Management as a European equities analyst. He began writing for MoneyWeek in 2010.