FTSE 100’s Oldest Insurer RSA Receives A £7 Billion Takeover Bid

Summary

• The Company received a £7 billion takeover proposal from Intact and Tryg
• The operating landscape of insurers remain highly volatile with the continuing uncertainty of the Covid-19 pandemic
• RSA shares have risen over 50 per cent in a week’s time

The owner of More Than insurance brand, RSA Insurance Group (LON: RSA) has reportedly received an offer of a £7 billion deal from a consortium of overseas insurers regarding a potential takeover. This deal could potentially lead to the break-up of one of the oldest insurers in the FTSE 100 index. The shares of RSA soared by more than 45 per cent on Thursday following the announcement made by the RSA Insurance Group regarding a potential deal. The shares of RSA Insurance Group zoomed past the GBX 650 mark on the London Stock Exchange.

The offer came from a consortium of two potential buyers, namely Canada based Intact Financial Corporation and Danish insurer Tryg A/S. The offer seems to be tempting as the shareholders might receive £83 million in dividends and the RSA shall receive close to £7 billion in exchange of its shares. This proposal comprises 685 pence in cash per RSA share and interim dividend per share of 8 pence (which may or may not lead to an offer being made for RSA). The potential buyers can either make an offer or withdraw until 5 PM on 3 December under the takeover deal.

As per the details of the company, if the deal materialises, Danish Insurer Tryg could take over the reins of RSA’ business in Norway and Sweden. Canadian Insurer Intact Financial Corp could takeover its international operations along with UK and Canadian markets. Notably, profits from RSA’s Denmark business could be shared as both the new owners co-own the Denmark market.

Also read: Covid-19 Impact: Lloyd's Of London Expects £5 Billion In Insurance Pay-Out for The Year

RSA Background

Sun Alliance and Royal Insurance joined forces in 1996 to create RSA Insurance Group. One of FTSE 100’s oldest insurer, RSA offers a broad range of personal and commercial insurance products. The pandemic seems to have weighed down heavily on the RSA’s business.

During the third quarter of 2020, the insurer did not witness any material increase in coronavirus pandemic related claims. However, the business interruption claims seem to have impacted the health of the company. In the wake of the FCA Test Case published on the 15 September 2020 which allowed the businesses to claim for the Group Volatility Cover (GVC), the insurer had increased its claims reserves (IBNR) by £62 million net of reinsurance in respect of the judgment by the appellate authority. Nearly 75 per cent of these reserves have been booked as big losses, and the remaining part of the reserves have been quantified as an attritional loss.

Also read: An Insurance Stock Continuously Building Resilience for the Future Growth

UK based insurers along with RSA Group, under a "leapfrog" appeal process, have filed an appeal to the judgment to the Supreme Court and expects the results by the end of 2020. Even though the insurer has revised down its gross impact of the initial ruling, which was published on 15 September by circa £20 million, but it would have a negligible impact on the net cost incurred by the insurer. The second wave of the pandemic did not lead to any rise in claims activities across markets.

RSA recorded growth in its operating profits for the first nine months of 2020 compared to the previous year, according to its recent trading update published on 5 November 2020. Notably, the Group’s net written premiums were down by 3 per cent to £4,663 million against 2019 YTD (year-to-date), with a decrease in Scandinavia premiums of 1 per cent, Canada premiums of 1 per cent and UK & International premiums 6 per cent. The insurer recorded a slump in its UK & International markets as the premiums were down by 6 per cent to £1,998 million.

During the third quarter of 2020, the Company delivered decent progress, with a significantly improved combined ratio and lower investment income. The Group operating profit increased against the previous year for the first nine months of 2020.

In the penultimate quarter of 2020, the second phase of the UK cost programme began, with £14 million of charges booked below the operating result. Despite providing adequate reserves for the UK BI Court ruling in September 2020, the Company has recorded a discrete combined ratio of 90 per cent during the period. The outlook for the company’s business remains positive. The falling equity markets and interests' rates could exert pressure on the insurers' balance sheet, life product profitability and investment management fees in near-term.

On 30 October, RSA shares closed at GBX 423.60. A week later, on 6 November RSA shares were trading at GBX 654.20 at GMT 2:42 PM+1. From January to till date, RSA shares have delivered a price return of 17.83 per cent.

The coronavirus pandemic and the economic fallout has severely impacted the portfolio of assets. Moreover, with another lockdown in place and surge in Covid-19 infections, the number of claims can increase. Also, customers might find difficulties in paying premiums as a lot of Britons have lost their jobs during the corona crisis. The company had already witnessed a COVID-19 effect on premium income of around £156 million YTD.