The size of the job losses required to make the deal pay would complicate the efforts of Bob Scott, chief executive of CGU, to pose as a sympathetic partner willing to save the group from the clutches of a foreign bidder. However, bankers said that RSA would be hard pressed to justify to its shareholders turning down a bid that could yield cost savings on that scale.
Bankers said that CGU could afford to pay as much as 714p a share for RSA, a 23 per cent premium to last night's share price of 580p, without risking earnings dilution for existing CGU shareholders. It is unlikely to want to pay more than 650p for the group.
The projections are based on the assumption that CGU can deliver pre- tax cost savings of around pounds 330m a year, equivalent to around 15 per cent of the UK non-life cost base.
Many in the industry believe that given the overlap between CGU and RSA business, the potential savings could be much higher. If it follows the example of Axa, the French insurance giant which stripped out substantial costs when it took over the UK insurance group Guardian Royal Exchange in a pounds 3.5bn deal this year, a target of 40 per cent would not be unrealistic. One industry executive said: "The job losses would be spectacular."
After being initially sceptical about the idea of a bid for RSA, the City has warmed to the idea over the past few days, despite the continued refusal of either CGU or RSA to break their silence.
Having already largely completed the integration of the former Commercial Union and General Accident businesses in little more than a year, Mr Scott would have little difficulty convincing the City of his ability to squeeze costs out of the existing RSA operations, compared with Bob Mendlesohn, his opposite number, who is still struggling to make headway against the entrenched bureaucracy within the business.
One analyst said: "Scott is more of a technician. Mendlesohn is a good talker, a good strategist. But he is not so hot on detail."
CGU and Allianz are playing what looks like a game of chicken, daring each other to make the first move, with Axa watching from the sidelines.
Although Mr Scott has not made any further attempts to meet with Mr Mendelsohn since RSA rebuffed merger overtures from CGU in March, the RSA chief executive believes that there is a strong chance of one or the other making a move within the next few weeks.
Allianz, the German insurance giant, would have less scope to cut costs given the relatively small scale of Cornhill, its existing UK insurance operation.
However, the group has fewer capital constraints than CGU and could potentially top any bid from the UK group.
The strategic arguments for CGU are compelling. In taking over RSA, CGU would be creating the largest UK insurer with a market capitalisation of pounds 20bn, easily overtaking the Prudential, with pounds 18.2bn.
In European terms the combined CGU/RSA group would move up from fifth to third in terms of total premium income and would be ninth by market capitalisation. It would also be in the top 10 in the US.
Bankers said the competition issues would not be insuperable, despite the fact that the combined group would have a 30 per cent share of the UK non-life market.Reuse content