Former frontrunner cites impact on shareholder value among reasons for exit.

See last month's story: Zurich-RBS deal doubt

Zurich has withdrawn from the race to buy RBS' £7bn GWP insurance assets, increasing the likelihood that the bank will be forced to hold onto the business.

In a statement the Swiss insurer, previously considered to be the frontrunner in the race, said it had chosen to not bid for the £5-7bn valued division after carrying out a detailed review of the business.

It comes just days after the company confirmed 870 job losses in its UK business in order to shave a tenth off its expense base, and less than a month after the insurer's advisors, Citigroup, suggested the acquisition would have an adverse impact on the group's return on equity and share value.

The move is a tremendous blow to RBS, and means the field of bidders has narrowed from its original 15 to just three - Europe's largest insurer, Allianz, and US giants Allstate and Travelers.

It follows reports last week that the bank, which put its insurance assets up for sale in April, had set a deadline for second round bids of the end of this month.

It also comes a month after its chief Zurich chief James Schiro announced his company was the best fit for the business and RBS chief Sir Fred Goodwin insisted that it would achieved its full expected price, believed to be at least £6bn. RBS is looking to raise £4bn in tier one capital from a sale of assets, after raising a record £12bn in a rights issue last month.

Zurich shares rose almost seven per cent in the wake of the news.

The statement said: "[Zurich] has been considering making a bid for the insurance business of Royal Bank of Scotland and has carried out a detailed review of the opportunities. Following such review, the Group has decided to withdraw from any further discussions.

"Zurich will continue to assess growth opportunities in line with its stated strategic and financial targets, in furtherance of continued shareholder value."

Last month, Citigroup's note to investors suggested that any price greater than £5.8bn for RBSI would be dilutive to the groups' 16 per cent return on equity target. RBS reportedly rejected a £6bn bid from Warren Buffet's Berkshire Hathaway two months ago. Given the static performance of RBS' overall UK book, the research concluded that Zurich was better placed to pursue organic growth and via its own direct business in which it has invested heavily, Connect.

Zurich's exit follows that of a slew of other trade buyers including AIG, Generali and Ping An, and increases the possibility that the bank could reintroduce private equity bidders into the frame after shutting them out in May.

It also raises speculation that the business, which controls a third of the UK private motor market and includes Direct Line, Churchill, Privilege, UKI and broker only insurer, NIG, will be split and sold. NIG, which controls £850m in premium has been repeatedly linked with a number of parties, including AIG. Despite falling profits, NIG is still considered a viable target given its strong IT platform and presence in the SME market.

RBSI's operating profits fell £66m last year to £683m, despite a net padding of reserves in the wake of the floods of £81m.

Zurich added that it would recommence purchasing shares under its previously announced share buyback program, commencing tomorrow.