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INSIDE THE CITY

Hang on to Hester’s rescue job at RSA

The Sunday Times

Stephen Hester is a seasoned turnaround merchant. After dragging Royal Bank of Scotland from the wreckage of the financial crisis — the UK’s biggest-ever corporate restructuring at the time — he moved on to RSA in February 2014.

The FTSE 100 insurer was in a bad state after a string of profit warnings and an accounting scandal involving a £200m capital shortfall in its Irish business.

Hester, 59, slashed costs and pulled out of Latin America and other markets to focus on the UK, Canada and Scandinavia, with the latter considered the crown jewels of the business.

Rival insurer Zurich made a £5.6bn takeover bid in 2015, although it was abandoned after the Swiss giant warned about losses in its own business.

With the RSA turnaround completed, questions are swirling over Hester’s future and his next rescue project. “I’d be surprised if he’s there in 12 months, because he’s done the job,” said Barrie Cornes, insurance analyst at Panmure Gordon.

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Shares in RSA, which dates back more than 300 years, have dropped from about 520p in early March — before the coronavirus took hold — to 418.4p. “My only real concern over the past few years was valuation, which I thought was stretched, but with Covid-19 knocking down the share price I’ve switched to a buy rating,” said Cornes.

The insurer posted record underwriting profits of £314m last year, up by £229m from 2018. Pre-tax profit rose by 3% to £492m.

Still, RSA has come under fire for refusing to pay out to some policyholders with business interruption cover that feel they have a valid claim because of Covid-19. It is one of eight companies facing a test case at the High Court, brought by the Financial Conduct Authority (FCA), to decide whether insurers should pay out.

Hester said last month that it was still too early to quantify the impact of Covid-19. Last year’s final dividend was ditched to shore up capital reserves, with a pledge to restart payments “when prudent to do so”.

Some analysts reckon RSA could be a takeover target, given its rude health and cheaper valuation. Analysts have questioned whether the business should be broken up to unlock greater value — a debate that has rumbled on at rival Aviva. RSA recently resolved its pension deficit, which Cornes said would make an acquisition easier.

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With dividends suspended and the outcome of the FCA case up in the air, pending a hearing expected next month, investors may want to sit tight — despite the likelihood of Hester’s exit in the medium term. Hold.

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