A purchase has theoretical merit, but would represent a management U-turn

Buying troubled rival RSA could be a shot in the arm for Aviva and help the insurer deliver its “cash flow plus growth” strategy, according to Berenberg analyst Matthew Preston.

RSA is in turmoil after reserving problems at its Irish operations have led to profit warnings and the resignation of chief executive Simon Lee.

In a research note published this morning, Preston said that while an acquisition of RSA would be a “significant change of tack” for Aviva’s management, such a move has theoretical merit.

Preston said that because two-thirds of RSA’s premiums come from regions that complement Aviva’s own, combining the two would establish market leadership position.

He said: “Even assuming conservative synergies, we estimate that a deal could be earnings-per-share accretive, but, more importantly, has the potential to boost cash flows.”

Preston added that the move could reduce Aviva’s level of internal debt relative to the capital employed within the combined general insurance operations.

He said: “Should internal leverage then be viewed as sustainable, management could unlock the cash flow for shareholders.

“In addition, with emerging markets forming around 16% of RSA’s premiums, Aviva’s proportion of growth businesses would be enhanced.”

Furthermore, such a move would leave Aviva’s external borrowing largely unchanged, Preston estimated.

Despite the potential positives of such an acquisition, Preston said: “Our analysis of the merits of an RSA acquisition does not mean it will happen, as it would require something of a leap of faith from investors, in our view.

“In the absence of radical action, we believe that the leverage issues at Aviva will remain a key overhang, limiting dividend prospects.”

Berenberg maintains a ‘sell’ recommendation on Aviva’s shares, and a price target of 415p.