RSA Irish investigation goes back at least two years

By Sam Cage and Chris Vellacott

DUBLIN/LONDON (Reuters) - Britain's largest general insurer RSA is probing claims irregularities and accounting issues at its Irish unit going back at least two years after an internal audit of the business triggered the group's second profit warning in a week.

Shares in the insurer tumbled 17 percent on Monday as investors had their first opportunity to react to RSA's disclosure late on Friday that it had uncovered "issues" at its Irish operations and had suspended three top executives there.

Group Chief Financial Officer Richard Houghton said on Monday the company was examining "the booking of large losses within claims and the timing of the recognition of earned premiums."

He added the issue dates back at least two years.

Chief Executive Simon Lee sought to reassure investors that the company's dividend, which was cut earlier this year, was secure, but said RSA would be more cautious about bolt-on acquisitions.

"Clearly the hit we've taken means while our capital positions remain strong, they are not as flexible as they were pre-hit and we will be judicious in our approach to mergers and acquisitions going forward," Lee told a conference call with analysts.

The profit warning and Irish probe put Lee under pressure. The CEO's handling of a dividend cut in February had already upset some investors.

"It's really difficult for (the CEO) because he took over at a time when the shares were riding high and since then there have been a series of disappointments," said Euan Stirling, investment director at Standard Life Investments, which holds 4 percent of RSA making it the group's fifth-largest shareholder, speaking on the BBC's Radio 5 Live.

Another institutional shareholder who asked not to be named said RSA's run of mishaps have made it vulnerable to a takeover attempt by rivals.

"To have one profit warning could be seen as unfortunate. To have two in a week begins to look like carelessness... some potential predators might dust down their files with RSA very much on the back foot," the investor said.

SUSPENSIONS

RSA has appointed auditor PricewaterhouseCoopers to review the Irish operation's financial and regulatory processes and controls and group oversight of the division. It has injected 100 million euros of fresh capital into it.

Lee said the investigation focused on claims irregularities and accounting issues specific to the Irish business.

RSA has suspended the Irish unit's chief executive Philip Smith, chief financial officer Rory O'Connor and claims director Peter Burke pending the outcome of the review.

"No findings have been made against any individuals at this time," RSA said last week.

Reuters has not been able to reach the three executives for comment.

The Prudential Regulatory Authority, which regulates the RSA Group, is in close contact with the Irish authorities and the firm and is gathering information on how widespread the problems are, a UK regulatory source familiar with the situation said.

A separate source familiar with developments said the central bank in Ireland monitored RSA more closely than some of its peers because the insurer was growing so fast after a spree of acquisitions including online broker 123.ie.

EXTREMELY DAMAGING

The problems at the Irish unit mean that RSA's 2013 operating result will be 70 million pounds ($112 million) lower than current market expectations.

This amounted to RSA's second profit warning within one week. Three days earlier, the company said full year returns would suffer after severe weather in Europe and Canada were "materially above assumptions".

"(This) is obviously proving to be a very difficult year for the group," Lee said, adding he expects 2014 to be better.

Ireland accounts for a relatively small part of RSA, making up just 4 percent of group premiums last year.

The insurer's shares plunged at the open on Monday to hit their lowest since June 2012 and were nearly 9 percent lower at 109.9 pence by 1305 GMT.

"The words 'reserving issues' and 'claims issues' strike fear into the hearts of management, investors and regulators of insurance companies - and not without good reason," said Eamonn Flanagan of Shore Capital Stockbrokers.

"Mercifully, although extremely damaging for the group's reputation and credibility in Ireland, these issues are unlikely to topple the group."

(Editing by Carmel Crimmins and David Evans)