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Zurich reviews business after pulling out of

Future of RSA unclear as options remain limited

Zurich reviews business after pulling out of

Zurich Insurance Group Ltd.'s abandonment of its multibillion-dollar bid for RSA Insurance Group P.L.C. has left some doubt whether there will be another offer for RSA as Zurich works to improve its own recent poor performance.

In calling off its tentative £5.6 billion ($8.79 billion) bid last week for RSA just one day before the deadline to make a formal offer, Zurich said it is undertaking a review of its own nonlife business.

While Zurich said it found nothing during the due diligence process that would have prevented it offering to buy RSA, Zurich also said its expected a $275 million loss from a series of August explosions at the port of Tianjin, China, and other adverse third-quarter developments — including the need to strengthen its U.S. auto liability and U.S. construction reserves by about $300 million — mean that its nonlife insurance segment is likely to report a $200 million loss for the quarter.

In light of the “recent deterioration in the trading performance” of its nonlife insurance business, Zurich said in a statement, it had terminated its RSA offer and will take “the necessary action to deliver on the required performance of the general insurance business.”

Zurich said Kristof Terryn, its recently appointed CEO of general insurance, would conduct the in-depth review of nonlife operations.

For its part, RSA reiterated that Zurich's approach was unsolicited and said its insurance business performance for July and August — more detail of which will be given Nov. 5 in an interim management statement — was ahead of expectations.

“The board and management of RSA look forward to the future with confidence,” RSA said in a statement.

In addition, RSA CEO Stephen Hester said he would not be surprised if other suitors came forward.

But analysts weren't convinced that RSA, which had earlier financial problems leading to the selloff of most of its business and contracting its operations to the U.K. and Scandinavia, would get another offer.

“Zurich had a particularly strong combination of funding capacity and synergies with RSA; thus, if Zurich couldn't make it work, we doubt that other Western insurers can either,” Deutsche Bank A.G. analysts said in an investor note. “In our view, therefore, that leaves only the Japanese or Chinese insurers, who could be interested in building their global scale, but who wouldn't derive any synergies.”

“It remains to be seen whether the recent focus on RSA flushes out other corporate interest,” said Eamonn Flanagan, head of the Liverpool, England, office of Shore Capital Group Ltd. “While we would not rule this out, we suspect it may take some time.”

RSA's share price “has fallen significantly, and we believe it represents significant value,” Andy Hughes, an analyst at Macquarie Group Ltd., said in an investor note.

For its part, Zurich said it remains committed to its target of a 12% to 14% return on equity.

“While the RSA deal had some merit, we welcome Zurich's capital discipline,” Sami Taipalus, an analyst at Berenberg Bank in London, said in a note to investors.

He said Zurich's nonlife review likely would focus on global commercial property, and U.S. property in particular.

“Likely post-review actions include an increase in the large-loss budget (Zurich has previously hinted at this), reunderwriting of certain areas, changes to reinsurance purchasing and, possibly, some further moderate reserve increases,” he said.