As the market began the first full trading week of the year on a downbeat note, troubled RSA Insurance has bucked the trend on hopes its Irish woes may be an isolated incident, with some analysts speculating the insurer could still be a bid target. RSA is due to unveil the results of a PwC review of its Irish operations, following the discovery of accounting irregularities in the business, on Thursday. Last month the company said it may have to cut its dividend to help boost its capital after three profit warnings. Some of its better assets could also be on the block as it tries to revive its fortunes. But a report over the weekend suggested PwC believed the insurer may avoid any further write downs, which has lifted its shares 6.25p or nearly 7% to 98.4p. Analyst Eamonn Flanagan at Shore Capital said: The Sunday Telegraph suggested that the PwC report has concluded that the issues in Ireland were an 'isolated incident' requiring no further write-downs etc. If this is so, this should be positive for the stock, provided the chairman convinces the market on Thursday that the issues are genuinely one-off and provides an explanation as to how the group will ensure there is no repeat, especially in one of the larger territories for the group…such as Canada or Scandinavia. Of course, Thursday is only likely to be about Ireland , with the wider strategic review of capital still not expected until the end of February 2014 . It is the outcome of that review that will dictate the stock performance going forward. For now, we reiterate our hold recommendation but do suspect that group's prospects and self-help options are healthier than the doomsters in the market may believe. RSA has also been helped by UBS lifting its price target from 100p to 113p with a buy rating, partly on takeover prospects. The bank's James Shuck said the Irish problems could be a catalyst for change at the insurer: For too long RSA has operated with a tight capital position and one eye on strong capital generation. Ireland has changed that and we believe management must now act quickly to avoid a potentially crippling further rating downgrade. With a new chief executive on the way, there is also real opportunity to address reserving question marks more directly and reassure over earnings power. While there are significant uncertainties, we think that the balance of risks is to the upside. On Thursday the group will provide details on the PwC review of Ireland and adequacy of group controls. We also expect an update on the appropriateness of certain accounting practices and comment on an internal audit review of large claims. This stops short of a full independent reserve review but would be a major step forward if successfully negotiated without evidence of contagion. We believe that the full year dividend will be suspended and £0.5bn of capital raised. We don't believe that franchise damaging disposals, a partial IPO or a full rights issue are needed. Our analysis suggests several options including the securitisation of low volatility portfolios, a "cashbox" placing and reduced investment exposure. These have the benefit of being flexible solutions while capital rebuilds organically. We think that any combination of these temporarily lowers earnings by 10%-15%. We continue to believe that a takeover and break-up of RSA remains a possibility. We think that this hinges on Sampo as the orchestrator. Our break up valuation implies a fair value of at least 129p per share. The mood in the rest of the market was less upbeat, with the FTSE 100 down 7.55 points at 6723.12, not helped by a worse than expected UK service sector survey. With Chinese services data also below forecasts, mining shares are among the main losers. Fresnillo has fallen 20.5p to 751p while Randgold Resources is down 88p at £38.36, while Rio Tinto has lost 65p to £33.05. Marks & Spencer has also come under pressure, down 10.7p at 433.3p on concerns about poor Christmas trading. Citigroup has also cut its price target from 575p to 510p albeit maintaining its buy rating.
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