We may put in £5.5bn offer for RSA, admits Zurich

The insurance industry is facing another major shake-up after the Swiss-based giant Zurich revealed it is weighing up a bid for the troubled FTSE 100 insurer RSA.

Zurich ended years of speculation about its interest in RSA by confirming it was “evaluating a potential offer” for its smaller rival, which bankers predicted could come in at about £5.5bn. It is the latest sign of merger activity in the sector, which saw Aviva buy Friends Life for £5.6bn in April.

RSA, which has endured a torrid 18 months since the discovery of a £200m black hole in its Irish business in late 2013, said it “has not held talks with or received a proposal” from its suitor. Market sources indicated that Zurich’s announcement was prompted by speculative press reports and an accompanying rally in RSA shares, which rose 18 per cent to 518.5p.

Analysts predicted that rival bidders could emerge. Zurich has until 25 August to make a firm bid for the company.

Barrie Cornes, an analyst at Panmure Gordon, said. “We believe that others will now place the slide rule over the company that has for many, many years been a perennial takeover story. We think that Axa or a number of other US and European insurers could be interested.”

RSA is best known for its More Than brand and is run by the former Royal Bank of Scotland chief executive Stephen Hester, who axed the company’s dividend and launched a £775m rights issue shortly after replacing its former boss Simon Lee last year.

Mr Hester, who has been linked recently with the vacant top job at Barclays, has also sold off businesses in areas including Hong Kong, Poland and Canada to shore up RSA’s balance sheet, although a rumoured sell-off of its £500m Latin American business has not materialised.

Experts believe Zurich’s unexpected move has been prompted by RSA’s vulnerable position as well as low premium rates across the global industry and continued low investment yields.

Any buyer will, however, have to contend with a number of problems at RSA, including its pension deficit, an ongoing inquiry by the Financial Reporting Council and a legal battle with the former head of its Irish business, Philip Smith.

Zurich has said it has $3bn ($1.9bn) in excess capital that it will return to shareholders if it cannot find any suitable takeover targets.