Zurich Insurance Group AG Chief Executive Officer Martin Senn is under increased pressure to buy RSA Insurance Group Plc after the two companies reported earnings.
Second-quarter profit at Switzerland’s largest insurer unexpectedly fell, missing analyst estimates, Zurich said on Thursday. Meanwhile RSA’s first-half profit surged 84 percent, a sign CEO Stephen Hester’s turnaround plan is paying off.
Zurich is weighing a purchase of RSA, which has a market value of about 5.3 billion pounds ($8.3 billion) in what would be the Swiss company’s biggest purchase since 2000. The profitability of Zurich’s non-life insurance business is dwindling, while RSA’s increases as Hester cuts costs and sells businesses. Senn said on Thursday that a deal would be a “complementary fit” and provide financial benefits.
“These results show Zurich really needs the Royal Sun deal,” said Stefan Schuermann, an analyst at Vontobel, referring to RSA’s former name. The results “show even more challenges on the non-life side, where Royal Sun sits, adding pressure to really do something.”
Zurich’s shares was down 4.4 percent at 285.1 francs by 1:29 p.m. local time. RSA fell 1.6 percent to 515.5 pence. RSA still trades still near the highest level since 2013 after Zurich said last week it was considering making a bid, stirring speculation that others firms including Allianz SE, Europe’s largest insurer, may make an offer.
Core Earnings
Zurich said second-quarter net income fell to $840 million as profit at its general insurance unit slumped 43 percent to $460 million. The core operating ratio, a measure of profitability, worsened to 100 percent in the second quarter from 95.6 percent a year earlier. A number above 100 percent means an insurer is making an underwriting loss.
In contrast, RSA’s operating profit jumped to 259 million pounds in the first half after expenses fell 10 percent. Its COR improved to 96.9 percent from 100.3 percent a year ago.
Hester, who reinstated RSA’s first-half dividend at 3.5 pence a share, said he is is increasingly confident he can reduce expenses by more than 250 million pounds by 2017.
“The sharp increase in profitability is appearing in the way that we wanted,” said Hester, who was hired to revive the company in 2014 after it reported three consecutive profit warnings. “When you do a major turnaround and pull the levers hard, there is a uncomfortable pause as we wait for the results to show through. We have hard evidence today.”
Speaking of Zurich’s possible takeover, he told journalists the “ball is in their court.”