Zurich Insurance proposes $8.8 bln takeover of rival RSA

(Repeats to add link to Breakingviews column)

* Zurich proposes 550 pence a share in cash

* RSA says willing to recommend offer

* Analysts say deal looks inevitable, counterbids may emerge

By Carolyn Cohn and Paul Arnold

LONDON/ZURICH, Aug 25 (Reuters) - Zurich Insurance (Xetra: ZFI1.DE - news) made a friendly 5.6 billion pound ($8.8 billion) takeover proposal for British rival RSA on Tuesday, paving the way for one of Europe's biggest insurance deals.

Zurich said a month ago it was weighing a bid but left it to the last day under British takeover rules to unveil a cash offer of 550 pence per share, roughly in the middle of the price range expected by investors in Zurich and RSA.

RSA said it planned to recommend the proposal to its board and gave Zurich another four weeks to come up with a firm takeover offer, though the Swiss insurance company reserved the right to ultimately bid below 550 pence per share.

Tighter European capital regulations due to come into force in January 2016, strong competition in the insurance sector and low investment returns have encouraged several insurance mergers and more are expected in Europe and the United States.

The deal is similar in size to Aviva (Other OTC: AIVAF - news) 's agreed takeover this year of rival UK insurer Friends Life (Other OTC: RSLLF - news) and would beat Exor's $7 billion purchase of Partner Re.

Analysts say a merger could offer operating efficiencies for Zurich, which like RSA has a large presence in Britain, and also provide the Swiss insurer with better access to Canada, Scandinavia and Latin America, where RSA has a strong presence.

Zurich, which has said it would not overpay and is seeking a return on any investment in RSA of at least 10 percent, said it had reached a "common understanding" with RSA on how the British general and commercial insurer values itself.

RSA, known for its "More Than" home and car insurance brand in Britain, is in the early stages of a turnaround under former RBS (LSE: RBS.L - news) boss Stephen Hester.

CAUTION

Shares (Berlin: DI6.BE - news) in RSA rose 4.5 percent to 517.5 pence by 1030 GMT, still well below the offer proposal. Traders said this was because there was no firm bid and there was an outside chance an offer could be lower than 550 pence, given issues such as the management of its more than 7 billion pound pension scheme.

Adding to market caution was uncertainty over whether stocks would fall further on the back of weakness in Chinese markets that has driven the FTSE 100 down 15 percent in August.

One top 10 shareholder in Zurich was unhappy with the offer price given the weak macroeconomic backdrop, saying it would be hard for the Swiss company to hit its desired return targets.

"After a large market sell-off, it's a big price. More than the market expected. It (Other OTC: ITGL - news) seems Zurich management is rather ignorant in regards of market forces," said the shareholder, who declined to be named.

Analysts at Berenberg said the offer premium of 26 percent to RSA's share price before Zurich first signalled its interest on July 28 meant the choice was easy for RSA shareholders, whose largest is activist investor Cevian Capital with 13 percent.

Zurich, though, would need to save $500 million to reach its target of a 10 percent return on investment, the analysts added, and could end up having to sell RSA's profitable Scandinavian business to make the numbers stack up.

Shore Capital's Eamonn Flanagan said a deal of some kind was "now seeming inevitable", though he did not rule out the possibility of a counterbid from another European insurer.

($1 = 0.6347 pounds) (Additional reporting by Freya Berry and Simon Jessop in London; editing by David Clarke)