After less than a month on the job, RSA Insurance Group Plc Chief Executive Officer Stephen Hester announced a stock sale and tapped Warren Buffett for reinsurance to help strengthen the insurer after its scandal in Ireland.
Hester announced the £775 million ($1.3 billion) share sale and also scrapped the dividend today as he seeks to satisfy bond-rating firms, which could imperil the London-based insurer’s ability to retain clients with a downgrade. RSA also bought a £550 million [$920.4 million] reinsurance policy from Buffett’s Berkshire Hathaway Inc.
It’s now “very hard for them to downgrade us,” Hester said on a conference call today.
Hester succeeded Simon Lee, who quit in the wake of three profit warnings in the fourth quarter and a £200 million [$332.75 million] capital injection into its Irish unit after an accounting probe. The insurer also had claims relating to a barrage of windstorms and floods across Europe, the U.K. and Canada, which further depleted its capital to £200 million at the end of 2013.
Buffett, 83, and his reinsurance chief Ajit Jain have assumed obligations from other insurers including CNA Financial Corp. and American International Group Inc. seeking to cut risk or narrow their focus. The contracts give Berkshire more funds to invest and make acquisitions. Jain didn’t immediately return a call seeking comment.
Berkshire provided the reinsurance policy after it was selected in a tender process involving a number of insurers, an RSA spokesman said. The details were not disclosed.
Berkshire has a AA credit rating at Standard & Poor’s, making the Omaha, Nebraska-based company an attractive partner for risk-transfer deals. S&P cut RSA to A- in December and said there may be further cuts. Lower credit grades can make it too risky for insurance brokers to recommend an insurer’s products.
RSA shares dropped 4 percent to 98.10 pence [$1.64] at the close in London trading, the biggest selloff since Dec. 13 when Lee resigned. More than 1 billion pounds were wiped off the company’s market value in 2013.
“RSA is pulling almost all levers available to it to strengthen capital, and as a result, we expect its actions to be much more dilutive than the market had anticipated,” Goldman Sachs Group Inc. analysts Ravi Tanna and Elizabeth Rogers wrote in a note to clients.
The stock sale, which accounts for about 20 percent of RSA’s market value, is expected to start at the end of next month, Hester said on a conference call.
RSA also sold most of its equities held as investments to bolster the balance sheet. The company expects to have £1.3 billion [$2.1633 billion] of excess capital after the rights offering. It’s also looking to raise £300 million [$502 billion] in 2014 from asset sales outside its “core markets” of the U.K., Ireland, Canada, Scandinavia and Latin America.
“I thought from the beginning that we needed an amount of equity that would require a rights issue,” Hester, the 53-year- old former CEO of Royal Bank of Scotland Group Plc, said in a phone interview from London. The Board’s “challenge was that unless they had a credible CEO, it was going to be hard to do.”
He said he spoke to the insurer’s top five shareholders yesterday, which include BlackRock Inc. and Threadneedle Asset Management, according to data compiled by Bloomberg.
“We slipped on a rather ugly banana skin in Ireland, and we didn’t have the resilience to ride that without the consequences we have all seen,” Hester said. “I haven’t detected anything in the culture that is wrong. You could argue there were some misjudgments at the top level. Every company would prefer to avoid fraud.”
RSA plans to sell its central and eastern European units including Link4 in Poland and Balta in Latvia, three people with knowledge of the plan said last month. Hester said today two disposals were already underway and that there would be more in 2014 and 2015.
Though there “should be no moment when we are not prepared to consider alternatives to our base plan,” it’s “improbable” that the company will sell assets in its core markets, Hester told reporters.
RSA also posted a pretax loss of £244 million [$408 million] for 2013 compared with a profit of £448 million [$749.83 million] a year earlier. The net cost of bad weather claims in 2013 was £293 million [$490.35 million]. The recent European floods and Europe and winter storms in Canada are estimated to have cost the insurer another £75 million [$125.5 million] to £100 million [$167.35 million] this year.
As a result, any interim dividend in 2014 after the rights offering “is likely to be modest,” the company said.
–With assistance from Zachary Tracer and Noah Buhayar in New York. Editors: Keith Campbell, Dan Kraut