independent

Thursday 17 April 2014

RSA faces sale or downgrade to junk status, analysts warn

CATASTROPHIC losses at RSA's Irish division may prompt a takeover of the insurance giant or lead the company bonds to be rated as junk, which would drive away business, analysts warned, after the venerable insurer lost its chief executive and revealed another black hole in the accounts here.

Investors and brokers made the warnings after the British insurer admitted that it had been forced to pour another £135m (€160m) into its Irish operation. Investors are so worried that £1.8bn has been knocked off the share price in a month. Auditor PriceWaterhouseCoopers has launched an investigation into the matter, while the Central Bank said it may take sanctions against the insurer.

"If the PWC investigation uncovers more problems then we are looking at a different ballgame altogether -- there may not even be any buyers," said Karl Morris, senior vice president at KBW's insurance unit.

He said it was unlikely that RSA's problems are confined to Ireland.

"The managing director has said this was an isolated incident, but that's what they said back when it was thought £70m would be enough to shore up reserves," said Mr Morris.

Former Irish chief executive Philip O'Sullivan's claims that he had been made a 'scapegoat', said Mr Morris, also suggests there is more to the story than we realise.

Yesterday's announcement was the latest in a series that have shocked the markets and prompted the resignation of both Irish chief executive Philip O'Sullivan and, yesterday, of group chief executive Simon Lee (pictured right).

The insurer has now been forced to sink more than €237m into its Irish unit thanks to "accounting irregularities", including a failure to set aside enough capital for large claims and bodily injury claims in the motor insurance sector.

That means almost two thirds of RSA's total reserves have been poured into Ireland in a matter of weeks.

In a statement to the stock exchange, RSA said the impact of the further cash injection into its Irish operation would reduce its 2013 profits. This was the third profit warning the insurer has had to issue in the past two months.

Analysts told the Irish Independent that the developments could even prompt a further ratings downgrade of RSA, with disastrous consequences. The first indication of trouble in its Irish business, announced on November 8, prompted international ratings agency S&P to downgrade its credit rating from "A+" to "A."

If it falls below an "A-", Panmure analyst Barrie Cornes said, then it risks losing the massive chunk of its business provided by insurance brokers. "It is absolutely paramount that RSA keeps its A rating," he said.

The company, he added, will now be scrambling to raise money and prevent a downgrade. "It's capital position was tight even before all of this started," said Mr Corrie.

It could issue new shares, but this would further anger shareholders who have already seen the value of their investment sink by a third in recent weeks.

More likely, analysts said, is a sale of some -- or all -- of RSA.

"We think RSA is vulnerable to an approach for the whole of the business in the next few weeks," said Mr Corrie.

Zurich has been tipped as a potential buyer.

Irish Independent

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