RSA says offer is "fair value" and makes "strong strategic sense"

RSA says it remains open to discussions with Aviva about buying its general insurance arm, and says its £5bn cash offer represents fair value and would be in the interests of both sets of shareholders.

Aviva rejected RSAs offer, believing it undervalued its general insurance arm and that its composite business model, which combines life insurance, general insurance and asset management, was the right strategy.

However, in a statement issued today, RSA appeared to be trying to undermine Aviva’s arguments for not selling.

The suitor pointed out that no other primary insurer continues to operate a composite model and that Aviva’s returns on equity have been below those of certain other UK general insurers, which was reflected in low price-to-earnings multiples.

RSA added that there is no advantage to writing life and general insurance together under the current Solvency I regime, and that while it is too early to determine the net benefits regulators may allow for composite insurers under Solvency II, the direction of regulatory capital changes over the last three years has been to eliminate double-counting of capital.

“Aviva has suggested that its general insurance business is important for generating cash to support the dividend and other businesses in its franchise,” RSA said in the statement.

“However, RSA has estimated that the target businesses contributed only £0.5bn of capital generated out of the total capital generated of £2.5bn.”

RSA estimates that Aviva’s general insurance business had net income of around £510min 2009 and net assets of £3.2bn. It added that it considers its £5bn offer to be a fair value for the business, representing a price/earnings ratio of 9.8 times and a multiple to net assets of 1.6 times.

RSA said it has considered for some time that a deal with Aviva "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 £300m per annum pre-tax."

RSA confirmed that it would fund the transaction with a fully-underwritten rights issue.