RSA: clouding over

It is the quintessential British experience. You awake to bright sunshine, but by the time you leave the house the sky has clouded over and rain threatens. When Stephen Hester was appointed chief executive of insurer RSA in February last year the shares rose 8 per cent in a week. But since then the clouds of low interest rates have obscured the sunny start and more than reversed that gain.

This is a shame. Mr Hester has made the right moves to improve what was a troubled business. A £775m rights issue last year fixed the balance sheet. The capital position is comfortable (but not excessively so). He has also been selling non-core units, cutting costs and sharpening underwriting. With a following wind, RSA should be able to put itself back on track.

But the wind is not following. Low interest rates hurt in many ways. First they cut the income that RSA generates from its investment book. It expects £380m of such income this year, against £439m last year. Low rates also push yield-hungry investors to seek new homes for their capital, and insurance is one such home. The resulting capital influx pushes down premiums. So RSA did well to increase premiums slightly in the first quarter, reported on Thursday (although exchange rates pushed reported premiums down 6 per cent.) But add all the pressure together, and analysts expect RSA to report EPS of 32p for 2016. When Mr Hester was appointed, the estimate for 2016 was 56p.

And weaker earnings mean less capital, which in turn means a longer delay before RSA can resume the sort of dividends that shareholders used to enjoy. The shares yielded more than 6 per cent between 2010 and 2014; the yield for 2016 is 3.5 per cent.

Thursday was a decent day for RSA. The shares edged ahead on the back of the first quarter numbers, while the jump in European government bond yields could also be helpful. But these are gaps in the clouds, rather than signs that the sun is returning.

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