Zurich drops RSA bid. Focus on profitability more urgent than scale

Demonstrating that M&A in insurance and reinsurance is not always the answer, Zurich Insurance Group has announced that it has decided against making the expected bid for RSA Insurance Group, as it decides instead to focus on profitability.

There has been a lot of discussion of the potential Zurich acquisition of RSA, which came to light back in July when Zurich said it was evaluating a bid. The deal would have combined two of Europe and the world’s largest primary insurance groups, resulting in an almost certain reduction in reinsurance bought by a combined entity.

For reinsurers and the ILS community, as major insurers (such as ACE and Chubb) come together through mergers or acquisitions, in search of the same scale, relevance and diversification that reinsurance firms are searching for, rationalised reinsurance buying, as groups merge, is expected to result in some shrinking of premium opportunities.

However in the case of Zurich or RSA, this is no longer a threat, as Zurich has announced that an immediate focus on profitability and that after a deterioration in trading performance the insurer would not look to make the acquisition offer anymore.

Zurich said that discussions with RSA have been terminated and that it “does not intend to make an offer to acquire the entire issued and to be issued ordinary share capital of RSA.”

In a second announcement Zurich explains that this is because of a “recent deterioration in the trading performance in the Group’s General Insurance business.”

Meaning that Zurich’s “focus instead will be on taking the necessary actions to deliver on the required performance of the General Insurance business.”

Sounds very sensible. Rather than getting mired in a complex and lengthy acquisition and integration process, Zurich has instead decided to focus on getting its house in order, to deliver profitability to its own shareholders.

The “deterioration in trading performance” is largely down to an announcement of an estimated impact from the Tianjin blasts in China and an expectation of reserve deterioration on U.S. motor insurance business.

Zurich explains that; “It currently estimates aggregate losses of approximately USD 275 million related to the series of explosions at a container storage station in the Port of Tianjin in China in mid-August 2015.

Zurich says that this is currently a best estimate, but that uncertainty remains due to the complexity of the event and that the losses and final costs to Zurich could rise. This estimate is net of reinsurance and before tax.

The other deterioration is an expected continuation of weaker general insurance business performance through Q3, with the Tianjin losses continuing the trend of higher impacts to Zurich which it saw in the first-half.

Further to this, Zurich also explains that; “Recently completed reserve reviews indicate a likely negative impact of around USD 300 million in the third quarter in relation to current and prior year liabilities for U.S. auto liability and certain other lines of business.”

As a result of the deterioration in the general insurance business, Zurich says that “General Insurance CEO, Kristof Terryn is conducting an in-depth review of the business.”

The General Insurance business is currently expected to report a loss of around $200m for the third-quarter.

So, no matter how much insurance and reinsurance firms believe they need to engage in M&A, for scale, diversification, or any other reason, Zurich provides a good example that it should not be at the expense of focusing on profitability and getting the underlying business in good shape.

It’s not clear whether the deterioration in the general insurance business perhaps came out during merger discussions, perhaps affecting their progress, of that we cannot be sure. But this example should caution insurers and reinsurers, that before entering into an M&A process make sure your business is actually ready for it.

On the topic of a reduction in reinsurance or ILS demand. This now won’t be seen due to the acquisition being dropped, but reports during Monte Carlo from the media suggest that the insurer is seeking to further rationalise its panel of reinsurers anyway, as it goes through the kind of centralisation and restructuring of reinsurance spend so many insurers have been through lately.

But of course, if the losses worsen, it could become attractive to leverage reinsurance more again at Zurich. The insurer said it uses reinsurance “strategically”. When losses rise, or reserves deteriorate, it is strategically sensible to use reinsurance. That suggests the insurer won’t reduce its use of cover for ever.