Royal & Sun Alliance needs to raise capital (breakingviews)
British insurer Royal & Sun Alliance sees a chance for growth, at last. Premiums are up by as much as 50% after the US terrorist attacks. Meanwhile, other firms are fast-abandoning general insurance - at least in the UK. CGNU and Prudential have turned to life insurance; Independent Insurance has failed. RSA should be in pole position to mop-up. The trouble is, the British group lacks sufficient capital to take advantage of the upswing. The decision to return £750m to shareholders in 1999, at the bottom of the cycle, looks foolish now. All of which explains why chief executive Bob Mendelsohn is mulling a £2bn rights issue, and has canvassed major shareholders about the idea.
Mendelsohn should think again. For one, it is not clear why shareholders should stump up now given RSA's underperformance over the past five years. What is more, since Sept. 11 other insurance firms have announced plans to raise some $9bn of new equity, according to HSBC estimates. RSA is now at the back of the line. Not that Mendelsohn hasn't thought of other approaches. One is to increase the group's leverage. Yet RSA is already the most highly geared UK insurer. The other is to redeploy capital from slower growing businesses. But now is a poor time to try and sell its asset management operation. And its life assurance business, which it put up for sale this year for around £1.5bn, is bedeviled by guaranteed annuity rate policies - which did for Equitable Life, and so - no surprise - has scared off potential buyers.
That leaves RSA looking like a child in a sweet shop with no money to spend. Still, it is not completely stuck. One option is to securitise future profits from its life business - a good idea on paper, although it would take time to clear with the regulators. The other is to cut its dividend. At 7%, RSA's dividend yield is almost twice as much as its UK peers, and has long been ripe for the chop. Investors would probably forgive the company if it fell back in line with the sector. Cutting the dividend in half would also free up about £170m a year - not great, but a good start. It would also save the rights issue for when Mendelsohn really needs it, such as participating in the consolidation of Europe's general insurance markets.