Zurich says any offer for RSA would be in cash

Recently, there has been a move towards consolidation in the insurance sector – and this is due to new European rules about the reserves that insurance companies must maintain.

Zurich has until August 25 to make a firm bid or walk away.

After a fresh spike in market speculation the previous day that a deal might be on the cards, Zurich confirmed it was “evaluating a potential offer” for its smaller rival.

RSA said it has not held talks with the Swiss insurer or received a proposal from the firm.

RSA issued a terse statement in response yesterday, noting Zurich’s announcement. “And they have business in Latin America, a market which we want to expand”.

Probable cost-cutting benefits justify an acquisition price of 550 pence a share, said Mark Cathcart and Anasuya Iyer, analysts at Jefferies global Ltd. And, in the last month, shares in RSA have gradually crept up from less than 400p to 450p prior to today’s announcement from Zurich.

RSA is run by Stephen Hester, the former boss of Royal Bank of Scotland. The company swung to a profit in 2014. Morgan Stanley is advising Zurich Insurance.

A tie-up between Zurich and RSA would follow several big insurance deals. Swiss group ACE bought upmarket property insurer Chubb Corp this month in a $28 billion deal to get access to wealthy clients.

Zurich and RSA would be a good fit, analysts said, but there could be counter-offers.

Panmure Gordon analyst Barrie Cornes said: “There could be a number of other interested parties including Axa”. And, when earnings growth is also factored in, RSA could return to its status as a great income play in the years ahead. “Scandinavian insurance markets have oligopolistic characteristics, with few market players and strong profitability with low levels of competitions”. Its largest shareholder is activist investor Cevian Capital, with 13 percent.

Media reports indicate that the bid is likely to be exclusively in cash.

He said Shore Capital has not favored the idea of a breakup of RSA, in part because of the deficit in the company’s pension plan, which might prompt the plan’s trustees to seek some of the proceeds of any sale because of the potential weakening of the sponsor’s covenant.