RSA Insurance shares surge but still short of possible bid price

The UK’s second-largest general insurance group might soon be Swiss.

At least shares of RSA Insurance Plc. have jumped their highest in one day since at least 2009 after Zurich Insurance Group Ltd, the UK’s largest counterpart in Switzerland, confirmed it was “evaluating a possible offer for RSA”.

Zurich bounced into disclosure by FT 

The Swiss group, which seems to have about 60,000 in its employ and operates in almost 200 locations around the globe, stated that it had noted “the recent market speculation in relation to RSA Insurance Group PLC and confirms that the company is evaluating a potential offer”.

There’s little doubt that this puts RSA ‘in play’, to use City argot meaning prone to potential corporate activity, but what is less certain is whether a deal will involve Zurich Group.

“This announcement does not amount to a firm intention to make an offer and there can be no assurance that any offer will be made”, the Swiss group pointed out.

This may be an acknowledgement beyond what is required for regulatory purposes, after Zurich was essentially bounced into going public with the discussions by a news report in the Financial Times.

According to the newspaper, Zurich was considering a bid for RSA worth £5.5bn/550p per share.

That compares with RSA’s £4.4bn market cap and an Ebitda (earnings before interest taxation, depreciation and amortisation) of £681m at the end of 2014.

The bid, if it were to come, would therefore be at quite impressive premium to Ebitda of 16.15x (and higher going forward considering RSA’s Ebitda is forecast to fall 22% this year).

However the premium to market capitalisation would imply c. 26% per share—compared to RSA stock’s close on Monday at £4.37.

That looks even more aggressive, given that Aviva only paid the equivalent of a 15% premium for Friends Life’s undisturbed market cap, before the takeover was formally sealed in April.

Shares hold back from bid price

Despite this, so far, RSA’s share price has risen strongly on Tuesday morning—trading as much as 15% higher at last count—but not quite far enough for the stock to match the value of the potential bid.

Classically, such shortfalls in a bid situation (or a possible one) tend to demonstrate the ‘wisdom of the crowd’ quite well: RSA’s share price betrays some uncertainty among its investors towards Zurich Insurance’s intentions.

The impending launch of new European rules governing how much money insurers must set aside to protect against potential market shocks, very probably played a large part in pushing Zurich to consider a deal of the kind on the table right now.

The aim would be to diversify revenue streams to make up for low investment returns and soft insurance prices in many markets.

However, investors in the UK group appear to be signalling that these imperatives should be worth more to a firm like Zurich, or even perhaps one of its rivals.

RSA’s strong market positions in Scandinavia, Canada, its large UK commercial franchise and operations in Latin America could certainly be of interest to significant players elsewhere in Europe and further overseas.

This view is partly balanced by RSA’s pension deficit, which has latterly been around £500m.

It increases the mooted premium Zurich has said it could pay by a respectable notch.

RSA still under investigation

As for RSA’s stock, perhaps even more caution than its holders have already ambivalently expressed this morning, might be in order.

Consider that this morning’s news has supercharged the orderly recovery from lows earlier this month at 404.70p.

These lows coincided with news that the UK’s Financial Reporting Council, a regulator, was investigating the conduct of certain individuals in connection with “financial irregularities” at the Irish division.

The investigation would cover 2012 “and relevant prior periods as a result of the identification of issues within the claims and accounting functions announced by RSA Insurance Group plc at the end of 2013,” the FRC said in a statement on 7th July.

RSA blamed a handful of executives at the Irish division for accounting irregularities that led to the group overstating its profits in Ireland and required it to tap shareholders for cash to plug the hole in its finances.

Either way, with the probe still on-going and RSA stock resting on ‘thin air’ whilst butting up against a falling trend from highs in February 2013, Tuesday’s 15% surge might well be at its limits.

Especially given indecisive momentum indicated by the Slow Stochastic sub-chart; where the faster ‘%D’ moving average (yellow) has crossed the longer term trend (in blue) on the downside.

Please click image to enlarge