Is it a bargain or a belly ache? That’s the question Zurich’s top brass will be asking themselves over the next month as they consider making a bid to buy RSA.
On the surface it seems there’s much to like about it. RSA’s Canadian and Scandinavian businesses are solid assets that would give Zurich greater scale in those areas.
There are also some nice bits of RSA business that would fit well within Zurich. A good example is RSA speciality lines, which would sit nicely in Zurich’s corporate book.
Well capitalised
Furthermore, RSA head Stephen Hester has done some deep remedial work, meaning the business is well capitalised, albeit with a large pension deficit that will need careful consideration by Zurich as it evaluates a bid.
But the UK provides the largest proportion of RSA’s business (see below) and it is here where Zurich will have much work to do.
RSA’s 2014 results revealed that it is still failing to make a commercial underwriting profit. Total UK commercial operating ratio (COR) was 102.1%.The temptation for Zurich is that it can expand its footprint in the UK’s SME area, a place where it would like more scale. The flipside is that RSA’s performance in the UK has been underwhelming.
Feeling the pressure
Compare that with Zurich’s UK general insurance business, which in 2014 a reported 95.5% COR, and it is clear that Zurich’s UK arm would come under pressure if it absorbed RSA.
Then there’s personal lines. RSA has struggled in motor in recent years, with many brokers speculating that its pricing was wrong. Last year it pulled away from brokers that had a high proportion of their business in motor.
Its UK motor COR improved to 102.4% from 110.6%, but it still remains in underwriting loss territory.
The overall personal lines book is 95.9%, but this is partly thanks to benign weather conditions. If there is major flooding or bad weather, RSA UK would take a hammering.
Software investment
Another issue to contend with is investment in software. It is well known that RSA needs to update its software systems and this will be a big project for Zurich.
Zurich already has this process underway among its own businesses, enlisting Capgemini and Guidewire to update its claims handling software and modernising its extranet broker trading with a Duck Creek-powered system. Meshing all this together with RSA’s IT infrastructure could turn out to be difficult and costly.
Overall, it’s clear that there is a lot of complexity in merging Zurich UK business and RSA UK business. Zurich has set a deadline of 25 August for whether it will definitely put the bid in or not.Of course, there will be talk of all the cost savings that the deal will bring.
Frequently though, such cost savings from large mergers and acquisitions fail to materialise.
Rest assured there will be plenty of analysis and number crunching going on at the insurer’s Swiss headquarters over the coming month.
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