Insurance group RSA has revealed the details of its discounted £773 million rights issue as chief executive Stephen Hester seeks to repair the More Than parent’s balance sheet after it slumped into the red last year.
The group, which fell to a loss following an accounting scandal at its Irish business, is offering existing shareholders three new shares at a 40 per cent discount of 56p each for every eight they hold.
The cash call is fully underwritten by two banks, ensuring it raises the cash even if investors do not take up their rights.
Mark Williamson, financial sector analyst at Peel Hunt, said: “Although we are not fans of RSA as a business, it makes sense for existing shareholders to subscribe.”
Hester, the former boss of Royal Bank of Scotland, said: “Following a comprehensive review of the options available to RSA, the board believes that the rights issue will enable the group to restore its capital position and keep ahead of anticipated industry capital trends.”
Costs associated with accounting irregularities in Ireland pushed the insurer to a pre-tax loss of £244m for 2013, compared with the previous year’s profit of £448m.
In January, RSA moved to draw a line under its Irish woes – which led to the departure of previous chief executive Simon Lee – after a review found the irregularities did not amount to a group-wide problem.
The insurer said an inquiry by accountancy firm PwC had confirmed the issues were isolated to Ireland, where a small number of executives were alleged to have been involved in “inappropriate collaboration” to sidestep group controls.
PwC’s report found RSA’s governance processes were “appropriate” for a group of its size and complexity, and a number of recommendations aimed at “improving the balance of trust” had been adopted.
The accountancy giant was brought in after a routine internal audit in November highlighted financial and claims irregularities totalling £72m in Ireland, triggering three profit warnings. The amount set aside was later raised by £128m to cover a surge in motor insurance bodily injury claims.
Under Hester’s plans to strengthen the insurer’s balance sheet by raising up to £1.6 billion in capital, the £773m cash call will be accompanied by disposals and money saved by scrapping its dividend.
Shore Capital analyst Eamonn Flanagan, who has a “hold” rating on RSA’s shares, said: “The need for the capital raising has been well flagged and its announcement represents the start of a long road of delivery for Hester to rehabilitate RSA after a pretty torrid 2013.”
The rights issue is being fully underwritten by Bank of America Merrill Lynch and JP Morgan Cazenove.