RSA Insurance Group Plc, the U.K.’s biggest non-life insurer, tumbled after suspending its Irish unit’s management, probing losses and warning it will miss targets for the second time in a week.
The stock fell 10 percent and earlier slumped as much as 16 percent, the steepest intraday drop since March 2004. RSA told analysts on a conference call today that it was investigating “large” losses booked in its Irish claims business and the timing of when premiums were reported over at least the previous two years.
RSA said after trading closed last week that full-year operating profit will be 70 million pounds ($112 million), lower than analysts’ estimates, after the London-based company had to inject additional capital into the Irish unit. The three suspended managers include Philip Smith, who had been the chief executive officer of the Irish division since 2007.
“It clearly raises concerns over the control framework at the company and the risk of other control weaknesses,” said Andy Broadfield, a London-based analyst at Barclays Plc with an underweight rating on the stock. “This issue should have been picked up earlier.”
The stock closed at 108.1 pence in London, wiping about 450 million pounds off the value of the shares. The stock has fallen 14 percent this year, the worst performer in the 19-member FTSE 350 Insurance Index.
A woman who answered the door at Smith’s home in Cabinteely, a suburb in south Dublin, said he didn’t have a comment. She declined to give her name.
At least seven analysts revised their earnings estimates today and the insurer is now likely to report full-year pretax profit of 472 million pounds, according to the median estimate of 19 analysts surveyed by Bloomberg. RSA had told investors on Nov. 5 that it will miss its 10 percent target for return on equity following last month’s storms in Europe.
Simon Lee, who became CEO two years ago, told analysts today that RSA’s capital position remained “robust” and that the dividend policy for the year was unchanged, though with a “tighter” ability to cover the payments.
The insurer will probably pay a final dividend of 4.02 pence a share, according to data compiled by Bloomberg. In May, the company was criticized by Standard Life Plc, one of its largest shareholders, for cutting its dividend by 33 percent and failing to communicate clearly with investors.
“We think that the dividend is under threat as a result of these profit warnings and a possible further one by year-end,” said Barrie Cornes, an analyst at Panmure Gordon & Co. in London with a sell recommendation on the shares.
Lee, 52, said the company’s Irish unit first uncovered the irregularities in mid-October, before the insurer reported its third-quarter earnings the following month.
RSA chose not to disclose the probe in the Nov. 5 results announcement because executives didn’t initially expect it would have a material impact on earnings. It was not until the second half of last week that the financial implications from the investigation became “serious,” Lee said.
The insurer made the announcement on Nov. 8 after RSA injected an additional 100 million euros ($134 million) of capital into the unit to keep its solvency ratio, a measure of its capacity to absorb losses, above 200 percent.
The company has also hired PricewaterhouseCoopers LLP to report on oversight and controls at the unit by the year-end.
“These are very serious and disappointing events,” Lee said on the conference call. “We are very confident that these issues are isolated to the Irish business, and do not believe that they are indicative of any problems in our group’s wider processes. 2013 is proving to be a very difficult year.”
RSA Insurance Ireland is the biggest non-life insurer in the country. The division, which sells products through a network of brokers and the 123.ie website, reported profit of 25 million pounds in 2012.
RSA named Smith, 45, a director of the Irish unit in September 2006 and made him CEO the following year, records with the Irish companies office and the firm’s website show. He helped the insurer boost its share of the Irish market in terms of premium income to 15 percent in 2011, up from 10 percent two years earlier, according to the most recent central bank data. He bought 123.ie for 65 million euros in 2010.
RSA has also suspended Rory O’Connor, RSA Ireland’s chief financial officer, and the unit’s claims director, Peter Burke. The company said in its statement that it hasn’t made findings against any individuals.
No one answered at O’Connor’s apartment in the Dublin suburb of Dundrum. A spokesman for RSA to declined to elaborate on the reasons for the suspensions or provide contact information for the executives, citing the investigation. None of the three responded to e-mails sent through their LinkedIn Corp. pages.