RSA casts net wide to replace Mendelsohn

Royal & Sunalliance's chairman, Sir Patrick Gillam, is exploring the options for finding replacements for the embattled chief executive, Bob Mendelsohn, and some of his top team.

He is understood to be interested in candidates from both inside and outside the insurance industry.

Shares in the cash-strapped insurer gained as much as 6 per cent yesterday, before falling back and closing up 1.6 per cent at 125.25p. The strength of the shares this week has fuelled speculation that a rights issue may be imminent. Although a rights issue would normally depress a share price, investors are likely to take comfort from the additional capital it would raise. This would allow RSA to take advantage of the current boom in general insurance premiums.

Any rights issue, however, would almost certainly cost the chief executive and some of his senior management team their jobs.

Support for Mr Mendelsohn within the board of the troubled insurer is understood already to be waning. Under Mr Mendelsohn's stewardship, the company's share price has fallen from a peak of 773p in 1998 to as low as 95p. A spokesman for RSA said Mr Mendelsohn was still in office as chief executive but he would not comment on any potential changes to the management team.

Roman Cizdyn, an analyst at Commerzbank, said: "The stock fell over fears of bankruptcy. Fear is now being replaced by greed. The consensus is for a rights issue – the debate is about its size. Management heads are on the block, namely Mr Mendelsohn and the finance director."

The chief executive's departure would be welcomed by many shareholders, who have seen their dividend slashed and blame him for the company's poor performance. The company recently revealed a half-year loss of £319m and the loss of 1,200 jobs.

Mr Mendelsohn has said if he does resort to asking the market for capital and "the price is my head, then so be it". Other measures for raising capital are under consideration, such as increasing debt or taking out further reinsurance arrangements. Further disposals could be made but are thought to be difficult in the current market environment.

"We have said we recognise the need for further capital and we are reviewing various options open to us, including raising external capital. Until we have reached an end of this review, we will not make any further comments," a spokesman for the company said.

While the City hopes the capital raised in a rights issue will be ploughed in to growing the general insurance, the company's liability-ridden life funds may still be a drain on resources.

The life insurance business has now been closed in an effort to stem the flow of capital needed to support the funds, but talks are taking place with the FSA over its reserving policy for guaranteed annuities.

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