RSA Insurance Group, the UK’s biggest non-life insurer by market value, cut its dividend by 33 per cent after investment income fell for the fourth straight year.
Its shares dropped the most in almost nine years. The company reduced its 2012 second-half payout to 3.9 pence a share from 5.82 pence a year earlier. The stock declined as much as 15 per cent and was down 13 per cent to 118.8 pence at 8.42am in London trading, marking the biggest fall since March 2004.
The “surprise dividend cut leaves little support” for RSA’s valuation, Joy Ferneyhough, a London-based analyst at Espirito Santo Investment Bank with a sell rating on the stock, wrote in a note to clients. “Underlying earnings are likely to come under increasing pressure from investment-income headwinds and potentially dwindling reserve releases.”
RSA, which insures cars, homes and ships in the UK, Scandinavia and emerging markets, said the decision to reduce its dividend followed a “prolonged low bond yield environment” that had cost it £200 million in pretax earnings since 2008. The company’s underwriting profit in 2012 was eroded by claims related to wet weather in the UK that cost £60 million more than usual and earthquakes in Italy that cost £30 million. RSA had the seventh-highest dividend yield in the FTSE 100 Index before yesterday’s announcement.
“Had we carried on with the current dividend policy, the payout ratio would have been close to 100 per cent in 2012,” chief executive Simon Lee (left) said. “We felt that was an imbalanced approach and it would be more prudent to keep more of the capital within the business.”
RSA’s net income for 2012 dropped 18 per cent to £351 million. Investment returns dropped to £515 million in 2012 from £579 million in the previous year, RSA said in the statement. The dividend cut will save £100 million in 2013, providing an opportunity to grow the business, Lee said. - (Bloomberg)
