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London-based RSA becomes attractive takeover subject

Insurer catches Zurich's eye despite Irish unit's scandal


Despite an accounting scandal in its Irish unit and ongoing court fights and regulatory investigations, RSA Insurance Group P.L.C. could be the subject of a bidding war by rival insurers.

That potential became apparent last week, when Zurich Insurance Group Ltd. said it is mulling what likely would be a cash offer for the London-based RSA, which was formed by the 1996 merger of Royal Insurance Holdings and Sun Alliance Group and traces its roots to 1710 with the establishment of the Sun Fire Office.

Analysts said an offer for RSA likely would be in the range of £5.5 billion ($8.53 billion), and several said that £5.50 ($8.53) per share would seem a reasonable offer.

RSA said last week that it had not been approached by Zurich.

Should Zurich follow through with a bid, analysts said that could spark rival offers.

“There is a high likelihood that more bidders for RSA may emerge after Zurich announced its intentions,” Sami Taipalus, an analyst at Berenberg Bank in London, said in an investor note.

Large European insurers such as Allianz S.E. or Axa S.A., or U.S. players such as American International Group Inc., would be the most likely potential bidders, he said, likely because of their size.

“RSA is now effectively in play,” Barrie Cornes, an analyst at Panmure Gordon & Co., said in an investor note.

The company was forced to make two profit warnings in 2013 after an accounting scandal in its Irish unit, but it swung back to a pretax profit of £275 million ($426.5 million) last year.

The insurer also has made several management changes and been subjected to litigation and regulatory probes since then.

In addition, RSA has a large pension deficit. At the last formal valuation in March 2012, the pension fund had a deficit of £477 million ($739.8 million), making it 93% funded, according to RSA. RSA has about 19,000 employees, according to its website.

Eamonn Flanagan, head of the Liverpool, England, office of Shore Capital Group Ltd., said Zurich's announcement signals a greater likelihood of a bid for the entire company rather than breaking it up, which could cause the pension fund trustees to seek some proceeds of any sale if the pension covenant were weakened.

“Our view has been that despite the group's recent woes, such as in Ireland, there are some terrific assets in RSA that are attractive to corporate predators, such as in Canada and Scandinavia,” he said in an investor note. “In addition, the United Kingdom would offer Zurich the opportunity for some pretty material cost savings.”

Ben Cohen, a London-based analyst at Canaccord Genuity Ltd., said that while Zurich shareholders may be cautious about taking on RSA's pension liabilities, any deal would see some synergies and enhance Zurich's position in the United Kingdom, Canada, Scandinavia and Latin America.

"Merger of equals'

“While Zurich is clearly larger than RSA overall, the combined operations of these in Canada, the United Kingdom, Latin America and Ireland are of comparable size,” Mr. Taipalus said in an investor note.

“RSA had combined net written premiums of $9.5 billion in these regions in 2014, while Zurich had gross written premiums of $8.2 billion,” he said. “Further, there is substantial overlap between the two in terms of business lines. Therefore, the Zurich takeover of RSA is more like a merger of equals in these markets,” he said. “The deal would also buy Zurich a meaningful presence in the Nordic nonlife insurance space.”

A deal between Zurich and RSA would not be a huge surprise given the number of mergers going on in the property/ casualty insurance market, said one broker who asked not to be named.

But while certain M&As — notably Ace Ltd.'s proposed takeover of Chubb Corp. — have a clear strategic rationale, Zurich buying RSA would represent a stronger company buying a weaker one and would appear a more defensive move, the broker said, to keep Zurich from becoming a takeover target.

“Unlike other recent transactions in the nonlife space, the acquisition of RSA would not do anything to strengthen Zurich's hand in the increasingly competitive U.S. and global commercial lines markets,” Mr. Taipalus said in his note to investors. “This is not necessarily a problem, but there is a small risk that it could put the group at a disadvantage against more aggressive peers.”

In a note for investors Thursday, however, Berenberg analysts said that of Zurich's three potential options — buying RSA and keeping it; buying RSA and selling its Nordic operations and keeping the proceeds; and forgetting the proposed deal and returning cash to shareholders — they believed the latter would represent the best value for shareholders.

While there likely would be potential synergies and costs savings in the deal, notably in the United Kingdom, “insurance M&A rarely delivers material synergies as the cost of integration tends to outweigh the benefits,” they said.