Zurich - Cash-rich Zurich Insurance is weighing a bid for British rival RSA which could top $8 billion and attract counter-offers as insurers look to diversify amid toughening regulations.
European Union rules due in January governing how much money insurers must set aside to protect against market shocks have already prompted some tie-ups.
The rules reward insurers with a breadth of geographical or sector coverage, as this cuts their capital costs. With low investment returns and soft insurance prices in many markets, analysts expect more deals to come.
Following recent speculation, Switzerland-based Zurich, a 45 billion Swiss franc ($47 billion) firm offering a range of life and general insurance products, said it was looking at a bid.
“Zurich notes the recent market speculation in relation to RSA Insurance Group PLC and confirms that the company is evaluating a potential offer,” it said on Tuesday.
“This announcement does not amount to a firm intention to make an offer and there can be no assurance that any offer will be made.”
RSA, which has a market capitalisation of 4.4 billion pounds ($6.9 billion) and is best known for its More Than home and motor insurance brand, said it had held no talks with Zurich and received no proposal, advising shareholders to take no action.
The Financial Times said Zurich was considering a bid valuing RSA at 5.5 billion pounds ($8.6 billion), or 550 pence a share. Barclays analysts said Zurich had around $3 billion in surplus cash and could take on debt of up to $5 billion.
“RSA has many strengths that would complement our business,” a Zurich spokesman told Reuters. “RSA is very clearly strong in Britain but also in Scandinavia and Canada. And they have business in Latin America, a market which we want to expand.”
Shares in RSA stormed as much as 15 percent higher to 504.5 pence before trimming gains on RSA's response.
They were trading at 496 pence at 11.54 GMT, up 13.3 percent while Zurich shares were down 1.2 percent.
After multiple profit warnings, triggered in part by an accounting scandal in Ireland, RSA hired former RBS boss Stephen Hester last year to lead its recovery. The British general insurer swung into profit in 2014.
RSA announced the appointment of Scott Egan, a former group financial controller at Zurich Financial Services, as its new chief financial officer earlier this month.
It also appointed former Zurich executive Steve Lewis as chief executive for UK and western Europe in January.
Deal value
A tie-up between Zurich and RSA would follow several big insurance deals. Swiss giant ACE bought upmarket property insurer Chubb Corp this month in a $28 billion deal to get access to wealthy clients who pay higher premiums, at a time when fierce competition has cut deeply into the industry's profit margins.
Zurich and RSA would be a good fit, analysts said, but there could be counter-offers.
“AXA or a number of other US and European insurers could be interested,” said Barrie Cornes at Panmure Gordon. “RSA is now effectively in play.”
French insurer AXA told Reuters it did not comment on market rumours.
In its most recent results, RSA posted a 1 percent rise in net written premiums and said profits were ahead of plan, boosted by disposals. It was also weighing a possible sale of its Latin American business, a source told Reuters earlier this year.
However, RSA is battling a competitive UK insurance market and has struggled to boost investment income in the current low-interest rate environment.
The firm's largest shareholder is activist investor Cevian Capital, with a 13 percent stake.
Canaccord Genuity analysts said 550 pence a share would be a “fair offer”, upgrading their recommendation on RSA to “buy” from “sell” and saying the purchase would give Zurich a leading position in Britain. RBC analysts said RSA's Scandinavian presence was particularly attractive.
Shore Capital analyst Eamonn Flanagan also upgraded his recommendation on RSA to “buy” from “hold”.
He said the idea of an outright sale of RSA was preferable to speculation it could be broken up, given concern any partial sale could see money diverted to plug a pension deficit.
Barclays analysts said RSA had a pension deficit of around 500 million pounds, while Zurich itself has a UK scheme deficit of around $2 billion, “so Zurich has significant experience of managing UK pension issues,” they said.
Reuters