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Zurich drops RSA bid as rising claims hit insurer's profit

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(Bloomberg) – Zurich Insurance Group AG abandoned a 5.6 billion-pound ($8.7 billion) offer for RSA Insurance Group Plc as the Swiss company grapples with a surge in claims that will lead to a quarterly loss at its biggest unit.

The biggest Swiss insurer expects a loss of $200 million at its general insurance unit in the third quarter, the company said in a statement Monday. RSA dropped 20 percent, reducing its market value by more than 1 billion pounds, while Zurich shares fell 1.3 percent as of 1:44 p.m. in Zurich.

The dropped bid puts the focus back on the $3 billion in excess capital Zurich had planned to use to acquire RSA. The insurer on Monday reiterated that it intends to either distribute the money to shareholders or acquire another company.

Difficulties at the general insurance unit may hamper the company’s efforts to meet profit targets set for the end of next year.

“There will be increased pressure on the management now,” Stefan Schuermann, an analyst with Vontobel in Zurich said by telephone. “They have to deliver. Time is short.”

Zurich has a target of 12 percent to 14 percent return on equity by the end of next year, up from to 10.2 percent in the second quarter.

China explosions

The general insurance unit, Zurich’s largest business, will be affected by claims from a series of explosions in China last month that may come to about $275 million. The unit will also be hit by an increase in reserves for U.S. auto liabilities and other services of around $300 million.

“Increasing reserves is poison for the market because it shows they may not have been conservative enough,” said Daniel Bischof, an analyst at Baader Helvea.

Analysts including Thomas Seidl at Bernstein in London now expect the company’s excess capital will be returned to shareholders next year.

RSA said in a separate statement that the findings of Zurich’s due diligence on a deal were in line with expectations and would not have prevented a bid. Analysts including Shore Capital’s Eamonn Flanagan said another offer for RSA can’t be ruled out after the company improved its balance sheet with a series of asset disposals including the recent sale of Latin America operations.

“I expect M&A speculation will hang around on RSA for a bit longer yet,” Flanagan said in a telephone interview. “The focus on RSA over the last couple of months would have drawn everyone’s attention to it.”

RSA said its trading for July and August has been “positive and ahead of our expectations.”

– With assistance from Sarah Jones in London.

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