Market at bottom of insurance cycle and does not reflect earnings potential, says Aviva

Aviva has confirmed that on Wednesday 28 July it received a conditional proposal from RSA to buy its general insurance businesses in the UK, Ireland and Canada - excluding RAC and Health - for £5bn, funded from a rights issue.

The proposal would have left the pension liabilities of the GI Business with Aviva as well as the general insurance businesses in the Netherlands, France, Italy, Poland, Turkey and Singapore, Aviva said.

Aviva’s board unanimously rejected the bid and told RSA on Friday 6 August.

Aviva said:

  • 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.
  • Aviva is the leading general insurance business in the UK and Ireland, and the number two player in Canada, and should be valued accordingly.
  • The general insurance market is presently at a cyclical low. Accordingly, the current business performance does not reflect its full earnings potential. For example, Aviva's general insurance businesses in aggregate made operating profits of £1.0bn in 2009 compared to £1.7bn in 2006.
  • The group's recent 2010 first half results demonstrated the significant momentum delivered by management's actions, with a material improvement in current year profitability, ahead of the market recovery occurring.
  • 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 Business is highly cash generative, which supports growth in the franchise alongside a healthy and increasing dividend for shareholders.

Maximising shareholder value

Lord Sharman, chairman, 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 said: "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."