A poor trading performance from Zurich Insurance has prompted the Swiss insurer to withdraw its offer to buy RSA Insurance (RSA). The initial offer was worth around 550p a share, and RSA's share price plummeted by a fifth to 406p on the news.
Ironically, Zurich confirmed that all due diligence on RSA was in line with its expectations, and without the latest developments, the deal would have proceeded on the terms announced in August.
Zurich's problems centred on losses of around $275m (£176m) relating to a series of explosions at a container storage station in China. However, this is a best 'guess-estimate', and the eventual cost could be higher. A further update will come with third-quarter results on 5 November. However, Zurich has already indicated that even without claims relating to the China explosion, the general insurance business delivered a weaker than expected first-half performance; a trend that is expected to have continued into the third quarter. Current estimates suggest that the general insurance business will report an operating loss of around $200m for the third quarter.
Where does this leave RSA? The company continues to make progress in the delivery of its Action Plans. So far, it has completed disposals in Hong Kong, Singapore and China, netting gains of around £500m, while cost savings are expected to reach £250m by 2017. Medium-term targets include a return on tangible equity of 12-15 per cent by 2017.
Figures at the interim point in June saw pre-tax profit jump from £69m a year earlier to £288m, and a reinstatement of the half-year dividend. Crucially, RSA's core combined ratio of claims to income improved from a loss-making 100.3 per cent to a profit making 96.9 per cent.
