RSA bids to create major new force via Aviva bid

But RSA’s £5bn bid was rejected by Aviva that said that it believes shareholders would be better served by a continuation of its composite model and independence. Analysts have said that RSA would have to raise its bid by hundreds of millions of pounds to attract a more positive response from Aviva. RSA confirmed Monday that it had tabled the £5bn cash bid for the Aviva U.K., Canadian and Irish non-life business, excluding health and the non-life business in the Netherlands, France, Italy, Poland, Turkey and Singapore that would be funded by a rights issue. Aviva said on Tuesday that it had carefully considered the bid on behalf of shareholders and decided it was not in their best interests. In its announcement RSA said that it has ‘for some time’ believed that the combination of RSA and the Aviva non-life business would make ‘strong strategic sense.’hideIt said that the proposed transaction represented ‘in-market consolidation’ in geographies and lines of business that RSA knows well and, in its view, would give rise to ‘significant’ cost synergies estimated at £300m a year pre-tax. RSA also said it believes that the resulting two strongly capitalised businesses, focused on life and general insurance respectively, would be in the interests of both sets of shareholders. RSA estimates that the target businesses produced net profit of around £510m in 2009 and have net assets of £3.219bn. It said that it considered its proposal to be a ‘fair value’ for the businesses and represents a PE ratio of around 9.8 times and a multiple to net assets of 1.6 times. Despite this, Aviva rejected this proposal ‘without any discussions taking place,’ said RSA. RSA said that it has a strong track record of driving sustainable profitable performance and has delivered 26 consecutive quarters of combined operating ratios in the mid-90 per cents. During the period between 2006 and 2009, RSA’s operating profits remained stable while Aviva’s general insurance operating profits fell by 43%, pointed out the group. RSA also said that it believes its approach focused on non-life business and not the composite approach is the optimal model for non-life insurance. The group pointed out that no other major primary U.K. insurer continues to pursue the composite model other than Aviva. It added that Aviva’s returns on equity have lagged behind those of other U.K. insurers in the last three years and are reflected in its low PE multiples. RSA also pointed out that under Solvency I, there is no capital advantage for the composite approach. “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,” it added. RSA also pointed out that Aviva has suggested that its non-life business is important for generating cash to support the dividend and other businesses in its franchise. But RSA has estimated that the target businesses contributed only £0.5bn of capital generated out of the total capital generated of £2.5bn. The Board of Aviva said that it had considered the proposal carefully and is convinced that the highest value to shareholders would be delivered by retaining the businesses within the group. It said that, as part of its normal planning process, the Board, supported by external advisers, recently completed a strategic review and concluded that having both life and non-life businesses delivers ‘significant capital and earnings benefits’, and that there are further synergies to be realised over the short to medium term. It added that Aviva is the leading general insurance business in the U.K. and Ireland, and the number two player in Canada, and should be ‘valued accordingly.’ The Aviva board also pointed out that the non-life insurance market is currently at a cyclical low point and that the current business performance does not reflect its full earnings potential. For example, Aviva's non-life insurance businesses in aggregate made operating profits of £1bn in 2009 compared to £1.7bn in 2006. It also said that, despite RSA’s contention about the benefit of a focused model, there are ‘significant’ synergies for Aviva derived from the composite model in terms of a single global brand, cross-selling opportunities and shared back office services. “The combination of the life and non-life businesses allows Aviva to operate with substantially less capital than the two businesses would do on a stand-alone basis, which is likely to be further reinforced under the Solvency II proposals. The GI (non-life) business is highly cash generative which supports growth in the franchise alongside a healthy and increasing dividend for shareholders,” stated Aviva. Lord Sharman, chairman of Aviva, said: "The Aviva Board considered RSA's proposal carefully with a clear focus on maximising value for Aviva shareholders. Given the compelling strategic and financial benefits to Aviva shareholders of retaining the GI business, its upside potential and the terms offered by RSA, the Board was unanimous in rejecting this proposal." Andrew Moss, group chief executive of Aviva, added: "The progress we're making in reshaping and transforming Aviva was evident in the 21% increase to £1.27 billion of operating profits at our interim results and we firmly believe this strategy will continue to deliver superior value for our shareholders."

RSA bids to create major new force via Aviva bid

Want to read this article?

Read Next

Strebel to replace Gonzalez as head of Swiss Re China

Risk managers want software providers to integrate more AI tools

Court says German government must tighten up climate protection

Premium increases continue to slow down in US commercial P&C market

Berkshire Hathaway discloses minority $6.72bn stake in Chubb

Strebel to replace Gonzalez as head of Swiss Re China

Risk managers want software providers to integrate more AI tools

Court says German government must tighten up climate protection

Premium increases continue to slow down in US commercial P&C market

Berkshire Hathaway discloses minority $6.72bn stake in Chubb

Want to read this article?

Read Next

Strebel to replace Gonzalez as head of Swiss Re China

Risk managers want software providers to integrate more AI tools

Court says German government must tighten up climate protection

Premium increases continue to slow down in US commercial P&C market

Berkshire Hathaway discloses minority $6.72bn stake in Chubb

Related Articles