Zurich walks away from RSA takeover following insurance losses from Tianjin

RSA said Zurich had confirmed that its due diligence process had given the British insurer a clean bill of health

Zurich Insurance has abandoned its £5.6bn takeover of RSA, after losses following the August explosions in the Chinese port city of Tianjin drastically affected its own financial strength.

A tie-up between Zurich and RSA would have been the largest takeover in the insurance sector for 15 years and would have given the UK insurer’s chief executive, Stephen Hester, who joined RSA in February 2014, an £8.5m payout.

Mr Hester, the former Royal Bank of Scotland chief executive, would also have been available to become chief executive of Barclays at that point, something which has been widely speculated on in the City.

Despite a clutch of takeovers in the sector in recent months, RSA confirmed in a stock market statement that the deal was off, sending its shares plunging 21 per cent to 403.3p. The shares had closed at 509p on Friday.

RSA said Zurich had confirmed that its due diligence process had given the British insurer a clean bill of health and that there was nothing in its financial position that would have prevented the 550p-a-share takeover.

The Swiss insurer catalogued a string of problems ahead of its third-quarter trading update, saying it expected to report a $200m (£129m) operating loss in the third quarter.

Rather than pursuing the deal, Zurich said it would now conduct an in-depth review to restore the performance of its general insurance business, where it was also seeing weaker-than-expected profitability and was expecting large losses in addition to those relating to Tianjin.

The Tianjin disaster, where at least 100 people died, would cost Zurich at least $275m, it said, adding that there was no certainty of the final cost.

In another blow, a recently completed review of its reserves identified a $300m shortfall in relation to liabilities arising from the US motor industry.

RSA shares have climbed more than 16 per cent since Zurich’s unsolicited approach at the end of July. Zurich shares have fallen by 13 per cent over the same period. Analysts at Shore Capital yesterday downgraded RSA to “hold” from “buy” after learning of Zurich’s withdrawal.

The deal had been expected to revitalise the British insurance sector and had also triggered a flurry of other deals.

Aviva completed a £5.5bn takeover of Friends Life earlier this year, while this month has seen the £3.5bn sale of the Lloyd’s of London insurer Amlin to its Japanese rival Mitsui Sumitomo.

There has been a surplus of capital in the insurance sector due to an unusual lack of disasters in recent years, which has pushed premiums down. Companies have been looking to mergers as a way to continue growing.