Everything, including the kitchen sink…

We read RSA’s recent 2013 year end announcement and presentation with considerable interest, because it proved to be what we consider a classic example of “kitchen-sinking”.

Firstly, we should state that we believe that the appointment of Mr. Hester was a masterstroke, given his previous experience at RBS and British Land; and his access to government, regulators and the City. Plus, he is a Yorkshireman, with a deep love of trees!

That said, so far as RSA is concerned, what happened in 2013 was clearly a bit more than a “little local Irish difficulty”, given the size of the Rights Issue (GBP 775MM) and the elimination of the dividend.

If one looks at the key factors for 2013, apart from the well-publicized issues in Ireland, not much went right for the group- underwriting results, the Combined Ratio and investment income all deteriorated overall, with 2012’s PBT of GBP 448MM being transmuted into a loss of (GBP 244MM) –i.e., a swing of almost GBP 700MM on NWP of GBP 8.7BN, after unusual items and provisions.

That said, premium levels held up well; and the Group clearly has some solid businesses outside the UK, particularly in Scandinavia and Canada. However, one should note that GBP 356MM  of Reorganization Costs were slipped in, including GBP 110MM of goodwill impairment in Argentina and Poland, and a somewhat surprising GBP 221MM of “software impairments” in the UK business. So, it would appear that the opportunity has been taken to get as much bad news and negative adjustments taken care of at the start of Mr. Hester’s appointment; which, as we said above, looks very much like a classic corporate “kitchen-sinking”, such that Mr. Hester is not impeded by misfortunes from the past and can manage RSA’s turnaround as he sees fit.

Of course, the other classic usage in the announcement is that of showing what outcomes should have been in “normal circumstances”; which, naturally, demonstrate that things are not really so bad! While we can understand that, when one is about to tap the City for a reasonable amount of cash in order to restructure, nevertheless, we hope that those taking up the rights will look closely at what was published and make an informed judgement as to whether the assumptions made are reasonable.

Quite clearly, the PRA and other regulators, will be watching closely whether the Rights Issue is a “success”; and must hope that there are no more “negative surprises” that have yet to come to light. We are sure that there have been numerous “full and frank discussions” between the parties concerned; and that a person of Mr. Hester’s calibre and experience will have insisted on full “warts and all” disclosure before agreeing to take on his new role. We wish him and his team success, because it is always unfortunate to observe a venerable and respected market participant in distress.

From Awbury’s point of view, RSA’s recent experiences simply demonstrate that one should never assume that the first news is the worst news; and that institutional survival usually depends upon a combination of factors, including franchise, open relationships with regulators, the willingness of a Board to take prompt action, and the ability quickly to identify causation and realistic remedial action.

There will be other “RSAs”. There always are.

-The Awbury Team

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