Stephen Hester, RSA chief executive

Little more than 18 months since Stephen Hester was ejected from Royal Bank of Scotland before his revival efforts were complete, he is set to leave another turnround project unfinished.

Yet shareholders in RSA, the FTSE 100 insurer where Mr Hester is chief executive, have reason to be more satisfied than the government was when he left part-nationalised RBS after clashes with chancellor George Osborne.

On Tuesday, RSA’s larger rival Zurich tabled an indicative £5.6bn offer for the company. The 550p a share price equates to almost double RSA’s tangible book value, a punchy multiple in a sector that trades at a significantly lower premium, typically of about 50 per cent.

The offer is pitched at a premium of about a quarter to RSA’s market value four weeks ago.

On that basis, it is perhaps unsurprising that RSA has indicated that its investors should accept Zurich’s proposal.

Some other measures could judge Mr Hester’s tenure less kindly, however.

Mr Hester was hired to turn round RSA after a series of profit warnings.

But under his watch, RSA shares have failed to climb back above the 573p level they were trading at a few months before his arrival.

While Mr Hester has made progress, stripping back the group to core markets, his efforts have been hampered by weak investment income and intense competition.

Analysts say that without the premium offered by Zurich, RSA’s shareholders would face a long wait for Mr Hester to fully deliver on all his financial targets and generate a similar return.

“They’ve got the choice of 550p now, or 550p in a couple of years,” says Sami Taipalus at Berenberg. “I know which I would pick. The bid represents excellent value for RSA shareholders.”

Under the prospective terms, RSA shareholders would also be entitled to receive its recently declared interim dividend of 3.5p.

Investors in RSA told the board they were eager that the opportunity presented by Zurich did not slip away, according to people familiar with the matter.

The purchase of the UK insurer would give Zurich access to the attractive insurance market of Scandinavia, make it the second-largest operator in Canada and allow it to make savings by integrating its business in the UK with RSA’s.

Ben Ritchie, senior investment manager at Aberdeen Asset Management — Zurich’s third largest shareholder — says: “I can see the strategic logic behind it. It comes down to the price that’s being paid, and the implied valuation looks OK.”

“There’s at least a reasonable chance that there’s quite substantial cost synergies that could be realised, particularly from the core UK and Ireland business. And the Scandinavia and Canada operations are decent businesses, in decent markets.”

Other investors remain unconvinced, however. Andrea Williams, senior equities fund manager at Royal London, which holds shares in the Swiss group, says she is “somewhat disappointed” as she believed Zurich managers were focused on returning cash to shareholders instead of pursuing big M&A.

Mr Taipalus warns that Zurich will struggle to deliver chunky savings in Scandinavia, where RSA generated a quarter of its premium income last year.

The Swiss group has a modest presence in the region, limiting scope for it to reduce expenses.

Zurich says the price offered for RSA “reflects our calculations on how we see it [the deal]. It is based on certain assumptions made in the past few weeks, based on publicly available information”.

The Swiss group is expected to raise additional capital to help pay for RSA but says “it is far too early” to comment on how it would fund any deal. The possible options “will be part of the thinking and analysis in the next four weeks”.

Zurich’s success will come down to execution. On that note, says Mr Ritchie of Aberdeen, Mr Hester’s efforts to put RSA back on track have already helped.

“Stephen Hester has done a pretty good job of streamlining RSA and selling sub-scale assets, so in that sense the deal has been made easier,” he says.

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