Royal & Sun plans Â£900m rights issue on back of strategy revamp
Monday 01 September 2003
Royal & SunAlliance, the FTSE 100 insurance giant, will this week launch a £900m rights issue as it sets out a strategy to return the company to growth after its mauling during the bear market.
The company is promising to invest heavily in the general insurance business, and is expected to say it sees particularly interesting potential in the UK commercial insurance market, where premiums have soared.
The final size and structure of the rights issue are yet to be decided, but rumours in the market last week suggested it would be priced at around 100p, a discount to the prevailing share price of 30 per cent.
The company will have a meeting with its advisers today to kick-start the countdown to an announcement on Thursday, which will come alongside the group's interim figures and the results of a strategy review conducted by the new chief executive, Andrew Haste. Cazenove, Merrill Lynch and Goldman Sachs are working on the deal, which they hope can raise £900m.
Big claims against RSA's general insurance arm, including for asbestosis, coincided with the stock market downturn which drained its life insurance business of capital. RSA admitted last year it was short of at least £700m it needed to take on new business and Bob Mendelsohn, then chief executive, quit.
RSA needs extra capital if it is to be able to underwrite additional insurance business.
Mr Haste believes that the City is ready to back a rights issue that it would not support under previous management. The company has pulled itself back from the financial brink, raising £540m through the flotation of its Australian life business, Promina, in May and slashing the dividend by almost two-thirds. The company has also closed its UK life insurance arm to new business, having failed to sell the division last year.
Ben Cohen, insurance sector analyst at UBS, told clients last week: "We believe the group will need to pursue a growth strategy at some stage, if it is to have a future in which investors will want to invest. We assume that UK commercial and personal, Scandinavia, and US personal lines will remain the core ... It will be difficult, given capital constraints, for this growth to be fuelled solely by retained earnings."
RSA shares have been one of the best-performing blue chips this year, and have risen 150 per cent since their nadir in March, when the company was temporarily ejected from the FTSE 100. At its peak in 1998, two years after the company was formed from the merger of Royal Insurance and Sun Alliance, the stock traded at more than £8.
Investors expect RSA to show that results are continuing on an improving trend, with the second quarter beating the first quarter's operating profit of £175m. A relative absence of natural disasters as well as higher premium levels mean many insurers are enjoying a purple patch.
However, Mr Haste must answer questions on the level of reserves needed to back the closed life fund. He will also need to dispel fears that, by raising capital so late in the insurance cycle, RSA has missed out on the very large rises in premiums introduced in the wake of the 11 September terrorist attacks.
Mr Haste joined RSA in April from Axa Sun Life. The company also has a new chairman, having replaced Sir Patrick Gillam with John Napier, who also chairs the water group Kelda.
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