Barclays gains confidence in RSA Insurance's growth and yield ambitions

Barclays said it sees 15% upside at RSA Insurance after an encouraging meeting with some of the company's management, reiterating its 'overweight' rating.

RSA's chief financial officer Scott Egan repeated the recent mantra that, while it is early days on the roadmap to its 2018 targets, the company is on track and is "focused intently on executing".

Management's ambition is to achieve a combined ratio (COR) of less than 94% in UK, akin to Aviva UK at 93.5%, less than 94% in Canada and less than 85% in Scandinavia, which equates to group combined ratio of circa 91%.

"The plan was not predicated on any changes in the company’s underlying markets, but purely on self help levers within their control. If they do not achieve the targets, management will be held accountable," Barclays relayed.

The bank upgraded RSA last month on the thesis that even if the insurer is able to partially achieve its 2018 ambitions, the stock offered significant upside to potentially become one of the highest yielder within FTSE 100 beyond 2018.

"The CFO suggested that all the markets they operate in could see a growth in line with local GDP at the most.

"As such, RSA achieving its 2018 ambitions will be a self help story, which is not driven by top line growth but supported by RSA’s ongoing efforts to improve underlying performance."

Barclays current price target is 545p, versus RSA's share price overnight of 474.2p.

If the company can hit all the ambitions by 2018, EPS would be 57p, and Barclays sees a price target of 661p, which forms the basis of its upside valuation.