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RSA tanks 20% after Zurich Insurance ends bid talks

Zurich Insurance has terminated its takeover talks with RSA Insurance, as the Swiss insurer also revealed that its general insurance business would make a third-quarter operating loss of up to $200 million.

Zurich announced on July 28 that it was considering making an offer for RSA, which is best known for its More Than consumer brand, in a deal that some commentators estimated could be worth as much as as £5.6 billion ($8.7 billion).

U.K. rival RSA Insurance attributed the end of the talks to the deterioration in Zurich Insurance's general business.

"As a result of recent deterioration in the trading performance of Zurich's General Insurance business, Zurich has terminated discussions with RSA regarding a possible offer," said RSA Insurance in a statement on Monday.

The U.K. insurance group's shares tanked around 21 percent on the news early on Monday, and continued to have a rocky session, closing 20.8 percent lower. Shares of Zurich finished down around 2.8 percent in Monday's trading.

The bid was unsolicited, RSA Insurance said on Monday.

"Zurich has confirmed to RSA that the due diligence findings were in line with their expectations and, while the process had not been finally concluded, they had not found anything that would have prevented them from proceeding with the transaction on the terms announced on 25 August 2015," the RSA statement said.

Zurich issued a preliminary third-quarter trading update on Monday, in which said its estimated aggregate loss from the August explosions at a chemicals storage facility in Tianjin, China, would be $275 million.

In addition to this estimated loss, Zurich flagged that weaker-than-expected profitability in its general insurance business would continue into the third quarter. Overall, the insurer said that it expected the business would report a third-quarter operating loss of about $200 million.

"Given the deterioration in profitability in certain parts of the General Insurance business, and following his appointment as General Insurance CEO, Kristof Terryn is conducting an in-depth review of the business," Zurich said.

Panmure Gordon has cut its rating on RSA to "sell" from "hold" on the back of the news. It also lowered its target price to 385 pence (599 cents) per share from 550 pence.

"We had thought that the deal would go through, which would have been an excellent exit route for long suffering RSA shareholders. RSA will now have to do the tough job of delivering earnings from its reduced size," Panmure analyst, Barrie Cornes, said in a research note on Monday.

Marcus Rivaldi, executive director of credit & equity analytics at Twelve Capital, however, remained positive on the U.K. insurance company, saying he would personally be buying RSA.

"I think RSA will remain a potential bid target. It's just a question of who else out there can find those sort of synergies that Zurich were able to find to generate a similar type of price target for RSA."