RSA takeover "wishful thinking"

Shares in RSA Insurance Group were 4% lower in Thursday morning trading after the independent review by PricewaterhouseCooper was released.

The British insurer, which has seen a 23% tumble in its share price over the past year, said the reviews by PwC, KPMG and RSA's internal audit found the financial irregularities were confined to the Irish business.

Shares in the company had recovered from their low of 90p on 16 December to 100p by 8 January, but slumped to 97p on the latest update.

The PwC review described the RSA group control framework as appropriate in terms of structure and design and supported the board's view that inappropriate collaboration among a small number of senior executives in Ireland undermined control effectiveness over claims.

RSA confirmed the impact of the financial and claims irregularities were £72 million and £128 million respectively - totalling a combined £200 million.

With regards to the controls within the Irish finance function, which did not operate effectively, RSA said a local programme of remediation had already begun.

Martin Scicluna, RSA executive chairman, said: "The issues which emerged in our Irish business in 2013 were completely unacceptable and I have made it my personal priority to ensure that this never happens again.

"Our investigations have confirmed the claims irregularities in Ireland were, in large part, the result of deliberate collaboration between a small number of executives there. These actions do not reflect the culture, ethos and values of our business that have served us well. We acknowledge there are lessons to be learnt and we are tightening elements of our control and financial framework in response."

Scicluna was appointed on 13 December after the former chief executive Simon Lee stepped down.

The business had released another profit warning the same day and announced the completion of its Irish reserve review, with an additional £130 million pumped into the division alongside the £70 million announced in November.

Analyst View

Barrie Cornes, analyst at Panmure Gordon, said while the £200 million injection was deemed to be a one off and enough to cover the shortfalls, the key issue is the regulatory capital position and how it is going to be improved.

"We think the 2013 final dividend will be cut or passed completely and that the company will try to sell some of the family silver to avoid a £500 million plus right issue. At 82p per share we thought RSA could be bid for and ultimately broken up, hence our trading 'buy' recommendation on 13 December. But following the share price recovery we view this outcome as little more than wishful thinking," he added.

He maintains his fundamental 'sell' recommendation and 90p target price.