28th Jul 2015 13:09
LONDON (Alliance News) - RSA Insurance Group PLC on Tuesday said it has not held talks or received any offer from Switzerland's Zurich Insurance Group, after shares in the company surged higher on the back of Zurich's earlier confirmation that it was running the rule over the business.
Early Tuesday, Zurich said it is evaluating a potential bid for RSA. In a short statement, the Swiss insurer confirmed it is evaluating a potential offer for the FTSE 100-listed company. It added that the announcement does not represent a firm offer to buy RSA and said there is no assurance that any offer will be made.
Later in the day, RSA said it has not held any talks or received any proposal from Zurich and said shareholders are advised to take no action.
RSA shares were trading sharply higher on the news of Zurich's interest, up 14% to 499.90 pence in afternoon trade and comfortably the best performer in the FTSE 100.
In a note published earlier this month, Shore Capital analyst Eamonn Flanagan had suggested RSA may be a takeover target, amid suggestions that M&A activity in the insurance sector was set to heat up, following Swiss-based Ace Ltd's USD28.3 billion acquisition of property and casualty insurer Chubb Corp and the USD18 billion merger of Willis Group and Towers Watson.
Those deals came in the wake of the takeover of FTSE 250-listed insurer Brit PLC by Canada's Fairfax Financial Holdings Ltd, which completed in May, and the GBP2.79 billion takeover of specialist insurer Catlin Group Ltd by the US's XL Group PLC in April.
Flanagan had said RSA is a potential bid candidate thanks to its Scandinavian and Canadian businesses, but he cautioned the group's pension scheme may prove a deterrent to would-be suitors.
In a note on Tuesday, Flanagan said Shore has not been keen on the notion of a break-up bid for RSA due to its concerns about the pension deficit, but said that a bid for the whole group is "much more likely" and said Zurich's statement is the first indication that an offer is on the cards.
Flanagan added that despite the RSA's recent problems it has some "terrific assets" which would be attractive to potential buyers. In addition, following the rights issue and disposals, the group is pretty well capitalised, he added, while also noting that a deal would offer some material cost savings for the combined group.
Panmure Gordon analyst Barrie Cornes agreed that the main attraction of RSA is its UK and Ireland, Canada and Scandinavian assets. "Whilst this does not mean that an offer will materialise, we believe that it probably will. We think that there could be a number of other interested parties including the likes of AXA and a number of US-based insurers that might enter the fray," Cornes added.
The news of Zurich's interest comes follows a period of retrenchment for RSA, which was hit at the end of 2013 by the revelation of a GBP200 million black hole in its books caused by accounting problems in its Irish unit. Earlier this month, the Financial Reporting Council, the UK's accounting watchdog, said it had opened a formal investigation into individuals involved in the auditing of RSA's Irish accounts, expanding out its existing probe into Deloitte, RSA's former auditor.
But in 2014, RSA swung to a profit, having posted a GBP203 million loss a year earlier, as a result of gains made on asset sales under the restructuring programme being led by Stephen Hester, RSA's chief executive and the former boss of The Royal Bank of Scotland Group PLC, who took over at the bank following its bailout by the UK government.
"A Zurich takeover of RSA really would see Hester shoring up risk - giving a cash buffer for new capital rules and help ease a pension deficit. A sale of the RSA group as a whole with a premium rather than a break-up would be a turnaround job well done for Stephen Hester whose credentials remain intact after his Sisyphus-like work at RBS," said Neil Shah, director of research for Edison Investment Research.
Earlier this year, reports suggested RSA was nearing a deal to sell its Latin American unit, which would mark the largest disposal so far made under Hester's asset sale plans. The Latin American business is estimated to be worth around GBP500 million and its sale, along with offloading its Middle East operations, would leave RSA focused on its UK and Ireland, Canada and Scandinavian arms.
At the time of the reports about the Latin American unit in March, Berenberg said the sale of that business could be a game-changer for RSA and would serve to push its capital metrics beyond regulatory certainty, therefore allowing it to reach a competitive dividend payout ratio quicker than the bank had expected it would.
In its trading statement for the first quarter, RSA said its net profit was again slightly ahead of plans thanks to asset sales in Hong Kong and Singapore, but cautioned that lower interest rates and adverse currency fluctuations in key business areas were having an unwelcome effect on its business.
"Lower interest rates and currency moves in our key territories continue to have adverse impacts, whilst insurance markets remain competitive. The path to high quality outperformance will not be smooth or easy, but our focus on that goal is clear," Hester said in the first-quarter statement.
By Sam Unsted; [email protected]; @SamUAtAlliance
Copyright 2015 Alliance News Limited. All Rights Reserved.
Related Shares:
RBS.LRSA.L