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Insurer RSA faces tough choices to protect credit rating

A sign of RSA insurance company is pictured outside its office in London December 13, 2013. REUTERS/Toby Melville
A sign of RSA insurance company is pictured outside its office in London December 13, 2013. REUTERS/Toby Melville

By Chris Vellacott

LONDON (Reuters) - Troubled insurer RSA may have to sell its best assets, leaving it concentrated in slow-growing markets such as its British home patch, to raise up to 1 billion pounds ($1.6 billion) and safeguard its credit ratings.

RSA said on Friday it needed to boost capital and may have to cut its dividend following three profit warnings and a move to strengthen reserves at its Irish business, where it suspects accounting irregularities.

Some analysts estimate Britain's biggest non-life insurer, which owns the More Than brand, may need to raise as much as 1 billion pounds.

RSA Chairman Martin Scicluna is under pressure to outline a recovery plan to avoid downgrades to the company's credit ratings, a move that could deter insurance brokers from recommending its products such as car and home insurance.

Ratings agency Fitch put RSA's Insurer Financial Strength (IFS) rating of 'A' on Rating Watch Negative on Monday, indicating it is considering a downgrade.

Standard & Poor's lowered its credit ratings on the insurer and its core businesses to 'A-' from 'A' and revised its ratings to Credit Watch Developing from Negative.

RSA's Chief Financial Officer Richard Houghton said S&P's decision would have no material impact on the insurer's operations, its customers or its ability to trade.

Selling trophy assets in overseas markets, where RSA makes two thirds of its revenue, could be its least worst option.

Investors who have seen their shares fall 28 percent since the start of this year look unlikely to back a rights issue and analysts say the company is worth less than the sum of its constituent businesses, making the prospect of a full takeover remote.

"The key thing is that if there is a capital shortfall, shareholders will be unwilling to plug it with a rights issue," said one institutional RSA shareholder on Monday.

BREAK-UP VALUE

RSA shares have fallen by close to 12 percent since Thursday, the day before its latest profit warning.

Scicluna, who has been running the insurer since chief executive Simon Lee quit on Friday, told Reuters any part of the business could be sold, but declined to say which were the most likely.

If RSA were forced to divest trophy assets such as businesses in Scandinavia, Canada or emerging markets in Asia or Latin America, this would amount to 'selling the family silver," according to Shore Capital Stockbrokers.

RSA would be left with a rump of slow-growth western European assets such as its Irish business, where consultant PwC is due to report on suspected accounting problems in January, and Britain, where market conditions for insurance are tough.

Broker Canaccord Genuity estimated RSA would have an equity value on disposal of up to 130 pence per share, assuming the individual businesses are valued at between eight times forward earnings for the British arm, and 15 times for the Canadian unit.

That compares with Canaccord's target price for the whole group of 85 pence, implying it is worth more broken up than as a whole. RSA shares were trading at around 90 pence on Monday.

No bidder has yet come forward, an RSA source said on Monday. The source said the firm is being advised by its corporate brokers JP Morgan and Bank of America Merrill Lynch.

Scicluna and his team are scheduled for a routine meeting this week with ratings agency analysts, the source said.

RSA has an implied rating of 'BBB', according to Thomson Reuters data, compared with an average of 'BB+' for its peer group of UK insurers that includes 'A' rated Aviva .

($1 = 0.6143 British pounds)

(Reporting by Chris Vellacott; additional reporting by Richa Naidu; editing by Erica Billingham and Tom Pfeiffer)

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