Zurich’s Bid for RSA May Ignite Deal Flurry in Europe: Real M&A

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Chart: RSA Shares

With Zurich Insurance Group AG on the verge of pursuing its biggest acquisition in more than a decade, Europe is poised to add to the consolidation that is sweeping the industry globally.

RSA Insurance Group Plc shares surged almost 20 percent on July 28 after Zurich said it was considering an offer for the London-based provider of property and auto coverage. Zurich is said to be raising financing ahead of a potential offer for $8.7 billion RSA, people familiar with the talks said last week.

Insurance companies worldwide have been targeted in about $64 billion of acquisitions so far in 2015, more than double the amount in the same period a year ago. While the U.S. and Bermuda accounted for the lion’s share, cash-rich European firms face the same pressures that are driving consolidation elsewhere, raising the specter that others such as Allianz SE and Axa SA may follow Zurich and seek bigger transactions.

“‘There is definitely scope for a similar-size deal or even larger in Europe,’’ said Sam Evans, global insurance deal advisory lead at KPMG in London, whose clients include both Zurich and RSA. ‘‘The general expectation is there is a lot more activity to come.’’

Squeezed Margins

Insurers are merging as their margins get squeezed amid increased competition from alternative players entering the industry, and as investment income dwindles from record low interest rates.

Combining can help the firms cut costs, while shoring up their positions in markets they see as important. The largest purchase announced this year was Ace Ltd.’s agreement to buy Chubb Corp. in the U.S. for more than $28 billion.

A deal with RSA could bring ‘‘significant benefits’’ in terms of synergies and cost advantages, Zurich Insurance Chief Executive Officer Martin Senn said on Thursday. He spoke as the company reported second-quarter profit that fell short of analyst estimates, sending the stock down more than 3 percent.

There has been some dealmaking within Europe. Aviva Plc bought smaller rival Friends Life Group Ltd. for $8.3 billion and the Lloyd’s of London market has also seen a flurry of activity led by XL Group Plc’s takeover of Catlin Group Ltd. Otherwise, transactions have been mostly limited to asset disposals and smaller purchases.

Breaking Ranks

Stricter European-wide regulation on the industry in 2016, known as Solvency II, has largely quashed M&A activity in the region amid uncertainty about how much capital insurers will be forced to have on their balance sheets.

Once insurers get regulatory approval on their capital models, appetite for doing deals is expected to return, say analysts including JPMorgan Chase & Co.’s Ashik Musaddi and Mark Cathcart at Jefferies Group.

‘‘We have argued over the past year for sector consolidation with the conglomerates leading the way,” said Cathcart in a telephone interview. “It only takes one to break ranks and then everyone else will breaks ranks. I love that Zurich might get RSA, it makes sense. M&A on the continent will happen.”

While Allianz and AXA, two of Europe’s biggest insurers, have previously said they’re not interested in making large transactions, they could be tempted if the market reacts positively to a Zurich-RSA deal, Cathcart said.

RBC Capital’s Kamran Hossain said he sees more chance of deals happening in the Lloyd’s sector including potentially Novae Group Plc and Hiscox Ltd., while JPMorgan’s Musaddi said he expects to see more activity by medium-sized players including Belgium’s Ageas and NN Group NV of the Netherlands.

“Zurich throwing their hat into the ring would have caused consternation at the management board level of most big insurers,” Trevor Moss, an analyst at Berenberg, said in an interview. “It’s a catalyst for the European insurers to at least think about it.”

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