A few weeks ago, I wrote about RSA Insurance Group plc (LSE:RSA) (NASDAQOTH:RSAIF) and concluded that after a catalogue of disasters, stretching back as far as 1999, investors cannot rely on the company to pull itself out of its most recent accounting debacle.
However, now that Stephen Hester has taken the helm, I have had a slight change of thought on the company. Indeed, it would appear that the market is also pleased with the appointment, as after the news came out RSA’s shares rallied by around 10%.
The right man for the job
Hester comes to RSA highly acclaimed, after spending several years successfully cleaning up RBS, which involved what was arguably one of the largest and most complex corporate restructurings in British history. Nevertheless, even with his experience at RBS behind him, Hester’s appointment has been criticized by some people because of his lack of experience within the insurance sector.
However, according to people with knowledge of the matter, as RSA is a non-specialist insurer, with its average insurance contract lasting for a year or two, an in-depth knowledge of the industry is not essential. If RSA were a specialist insurer, writing risks that lasted for five or more years — like Catlin — Hester’s appointment might well be inappropriate.
Getting to work right away
Still, Hester has no time to rest in his new role. No, RSA’s newest executive has got his work cut out if he plans to meet his own self-imposed deadline of putting a recovery plan together by the time the company reports its full-year 2013 results in a few weeks’ time. This is not going to be an easy job.
To nurse RSA back to health, Hester will need to boost RSA’s credit rating by finding cash to fill a hole in the insurer’s balance sheet. City analysts believe that Hester will need to find an additional £500m to £1bn in order to satisfy rating agencies — no small figure.
Convincing the rating agencies that RSA has enough cash to remain in business is perhaps Hester’s most important job. Many of RSA’s clients require the company to have an investment grade credit rating in order to do business with it. At present, RSA’s credit rating is only just above the investment grade benchmark, so a cut could result in the company losing a significant portion of its business.
With such a large amount of cash needed to stabilize RSA, it is widely believed that the company will slash its dividend payout, saving the company around £120 million a year. But this won’t be enough, so investors should not rule out the use of other extreme measures to raise the cash, including a rights issue or the sale of overseas businesses.
Foolish takeaway
So, with Stephen Hester in the driving seat at RSA, the company’s outlook is a lot brighter than it was before. That being said, returning RSA to full health will not be easy and Hester has his work cut out, although I doubt there is a better man for the job.
