RSA Confirms Offer to Buy Aviva’s P/C Operations for $7.83 Billion

UK insurer RSA has confirmed that it has “put forward a proposal to Aviva to acquire its UK, Canadian and Irish general insurance businesses, excluding RAC and Health (the Target Businesses), for £5 billion [$7.83 billion] in cash.

RSA’s Board made the announcement after Aviva had issued a bulletin confirming talks with RSA on July 28 and ongoing “press speculation.” So far it has rejected the offer.

The “Target Businesses” have apparently been on RSA’s collective mind for some time. The company said that combining its own operations with their Aviva counterparts “would make strong strategic sense.

“The proposed transaction represents in-market consolidation in geographies and lines of business that RSA knows well and in RSA’s view, would give rise to significant cost synergies estimated at £300 million [$470 million] per annum pre-tax. RSA also believes that the resulting two strongly capitalized businesses, focused on life and general insurance respectively, would be in the interests of both sets of shareholders.”

According to RSA’s estimates the “Target Businesses had net income of around £510 million [app. $800 million] in 2009 and net assets of £3.219 billion [app. $5 billion].” The bulletin described the proposal as offering “a fair value for the Target Businesses and represents a PE ratio of around 9.8 times and a multiple to net assets of 1.6 times. The transaction would be funded by a fully underwritten rights issue.”

However, as RSA noted, its offer has been rejected without further discussion. Specifically Aviva’s bulletin stated: “The Board of Aviva considered the proposal carefully in conjunction with its advisers and is convinced that the highest value to shareholders will be delivered by retaining these businesses within the group.”

RSA has rebounded sharply in value, following its decision to exit the U.S. market and a management buyout in 2007 [See IJ web site – ].

The Company has been profitable and has “delivered 26 consecutive quarters of combined operating ratios in the mid-90 per cents.” According to RSA, its recent results – “between 2006 and 2009, RSA’s operating profits remained stable” – contrasts with Aviva’s results, where, RSA noted – “general insurance operating profits fell by 43 per cent, as disclosed in its annual reports.”

RSA’s observation reflects the fact that Aviva (formerly CGNU, or CGU and Norwich Union) has been actively expanding in the life and pension sector, following the Group’s formation.

RSA, which has pursued the P/C side of the business, said it “believes its focused business is the optimal model for writing general insurance.” It made the following points:
— No other major primary UK insurer continues to pursue the composite model
— Aviva’s returns on equity have been behind those of certain other UK insurers in the last three years and are reflected in its low PE multiples
— Under Solvency I, there is no capital advantage for writing general and life insurance together. Under Solvency II, it is too early to determine the net benefits which regulators may allow for composite insurers; however, the direction of the regulatory capital changes over the last three years has been to eliminate double-counting of capital.

RSA said it “considers that its proposal represents fair value for the Target Businesses and would be in the interests of both sets of shareholders.” It also “remains open to discussions with Aviva.”

Source: RSA and Aviva