RSA Insurance Group’s share price plunges as Zurich tells RSA: It’s not you, it’s us

RSA Insurance Group’s share price plunged yesterday after rival firm Zurich revealed it was walking away from a £5.6bn takeover bid.

 

RSA’s share price closed down 20.84 per cent as investors digested the shock news. Zurich’s share price was also down, albeit a less remarkable 2.79 per cent. 

 

Zurich said it was abandoning the bid after its own performance was affected by a number of issues, including losses associated with the explosions at Tianjin, China in mid-August estimated at an aggregate of $275m (£177m).

 

The company also warned that weaker-than-expected profitability in the general insurance business in the first half of 2015 could continue into the third quarter.

 

Zurich offered 550p per share in cash, providing RSA investors with a premium of roughly 20 per cent to the 440p it was trading at when news of the offer first broke after a leak, forcing Zurich to make an offer on 28 July.

 

RSA said in a statement: “Zurich’s interest in acquiring RSA was unsolicited. Since that time, RSA has continued to make good progress in the delivery of its action plans, as evidenced by our half-year results. Trading results for July and August have been positive and ahead of our expectations.”

 

Analysts agree that while Zurich investors may well be feeling relief at avoiding having to pay 20 per cent a premium, for RSA, the owner of More Than, the hard work begins here.

 

RSA ran into trouble in 2013, when an accounting scandal engulfed the company’s Irish business, and the British insurer was forced to inject £200m into the operation. The insurer has been struggling to get back on track since then.

 

Hester was bought in to help turn the business around and sold off chunks of the non-core business, especially in Latin America, and raised £748m through a rights issue just a few months after joining the group.

 

But analysts say this means much of the cost-cutting has already been done, and there is limited scope for further improvements to increase earnings. 

 

Beleaguered RSA shareholders will have to take comfort in the fact that nothing was thrown up in Zurich’s due diligence, said Eamonn Flanagan at Shore Capital.

 

But most analysts agree it’s unlikely another bid will come in for RSA anytime soon. 

 

RSA’s hefty pensions scheme means there are few firms big enough to absorb the cost.

 

Barrie Cornes of Panmure Gordon said that one of the main attractions for Zurich was the opportunity to make savings on joint UK operations, and any firm considering an offer, without a UK base, would be likely to offer far less than Zurich’s 550p. 

 

UK insurers who could make an offer include AXA, which previously said it was not interested, Generali and Allianz.

 

In the meantime, he says, “the real graft beings here. Hester now faces a challenge”.

 

Speculation was rife that Hester was preparing to move to Barclays once the deal was completed. Some analysts think this is still a very real possibility, given his banking background. 

 

Now much of the work has been done on RSA, he may feel his job there is done.

 

 

Zurich first revealed its intention to approach RSA at the end of July, which sent shares in the British insurer shooting up by 12 per cent. 

 

When Zurich’s discussions regarding a potential bid were first made public, RSA said in a statement that it had “not held talks with or received a proposal from Zurich”. 

 

Just over a week after Zurich confirmed its interest in RSA, chief executive Stephen Hester betrayed little enthusiasm for the deal when he told City A.M.: “Hopefully, the talks will be over quickly enough that it won’t have an impact, because it’s unsettling for our staff. The plan for this company is to make it successful on its own.” 

 

When Zurich made its formal offer of 550p per share, RSA's stock rose by over five per cent, and the company said its board had indicated that it would be willing to recommend the offer. 

 

The firm then applied to the Takeover Panel for an extension to discuss the deal further. The deadline for discussions to end was set for today.

 

RSA has been struggling to restore its share price to its previous strength ever since it was hit by a financial scandal at its Irish business two years ago.

 

RSA blamed a handful of executives at the division for accounting irregularities that led to the group overstating its profits in Ireland. 

 

RSA’s Ireland chief executive Philip Smith resigned in late November 2013 after being suspended along with finance chief Rory O'Connor and claims director Peter Burke, while the company investigated accounting procedures at its Irish business. 

 

The scandal also led to the resignation of former RSA chief executive Simon Lee.

 

 

• He started out with Credit Suisse First Boston, where he spent 19 years and became the company’s youngest ever managing director at 35.

 

• The king of turnarounds, when he joined Abbey National in 2002 they were losing billions of pounds. He rationalised the failing company and sold it off to Santander for £9bn. Probably best known for replacing Fred Goodwin at RBS after the financial crisis. 

 

• He stayed there until 2013 on a turnaround mission, cutting 11,000 staff from across the organisation, and selling billions of pounds-worth of non-core assets. 

 

• There was controversy over the £1m bonus he was awarded from RBS in 2012, and after intense political pressure he ended up turning down the bonus. It was also reported that he fell out with Chancellor George Osborne over the speed of the RBS privatisation. Replaced Simon Lee at RSA in February 2014. Recently, his pay deal at RSA faced controversy when more than one-third of investors voted against his remuneration package.