RSA 'largely unaffected' by recent underwriting volatility, says Jefferies

With the shares having de-rated 6.5% as a result of last week's market volatility, the broker used a dividend discount model to find that RSA's implied cost of equity was now greater than 11.35%, while expected growth was just 4.26%.

Given the FTSE 100 company's capital strength, with a Solvency II ratio of 172%, and fact that 2019 earnings are largely unaffected by recent underwriting volatility, "we believe that the market overstates the risks to special dividends in 2019," said Jefferies analysts Philip Kett and Mark Cathcart.

"Although we agree that risks around special dividends warrant a higher risk premium of 50bps, we consider 135bps to be excessive, especially as RSA is already 12% above the 130%-160% solvency II target range."

Discussing RSA's underwriting woes, the broker said that by increasing prices at renewal and lapsing unprofitable business, the firm can tackle the underlying issues that led to "large losses and attritional loss ratio creep".

Jefferies also noted that none of RSA's recent issues had caused it to materially question its 2019 forecasts and stated the positive steps towards cutting unprofitable units in the group's most recent statement had further solidified its stance.

In addition to raising RSA from 'hold' to 'buy', Jefferies also nudged its target price on the FTSE 100 constituent from 603p to 606p.