RSA shares plunge after Zurich ditches $8.7 billion takeover plan

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* Zurich plans review of general insurance business

* Says remains on lookout for acquisitions, reiterates targets

* RSA reports positive summer trading, shares nosedive (Adds background, share prices, analyst reaction)

By John Miller and Carolyn Cohn

ZURICH/LONDON, Sept 21 (Reuters) - Zurich Insurance abandoned its proposed 5.6 billion pound ($8.7 billion) bid for Britain's RSA on Monday, after forecasting a $200 million third-quarter loss largely due to the devastating explosions at the Chinese port of Tianjin.

A day before a bid deadline under British takeover rules, Zurich said it would conduct a review to improve the performance of its general insurance business, instead of taking over its London-listed rival, sending RSA shares down by as much 23 percent.

RSA, which is pursuing a turnaround strategy under former Royal Bank of Scotland boss Stephen Hester, said Zurich had found nothing untoward in its "due diligence" checks on its books that would have thwarted a deal on the 550 pence per share terms proposed on Aug. 25.

RSA, best known in Britain for its MoreThan insurance brand, also said its July and August trading had been positive, but its shares were trading at 404p at 0813 GMT, 8 percent below their closing price the day before Zurich said it was weighing a bid.

Zurich, whose shares were down 1.6 percent at 257.8 francs by 0813 GMT, announced aggregate losses of around $275 million from the massive explosions at a container storage station in Tianjin last month. It said the final cost was uncertain but it did not expect a significant rise in claims.

The Swiss insurer also said recently completed reserve reviews indicated a likely negative impact of around $300 million in the third quarter for U.S. auto liability and other lines of business.

"Given the deterioration in profitability ... General Insurance CEO Kristof Terryn is conducting an in-depth review of the business," Zurich said in a statement.

ON THE LOOKOUT

A spokeswoman for the company said it remained on the lookout for acquisitions and a sale of its general insurance business was not an option, as a large part of those operations remained profitable.

The company is likely to hit the lower end of its mid-term targets for a 12 to 14 percent after-tax return on equity from operating profit for 2014-2016, the spokeswoman added.

RSA, which swung into profit last year following losses in 2013 and posted above-forecast results in the first half, had stressed it had not put itself up for sale and was confident on its prospects.

Tougher regulation and hefty competition in the insurance sector, including from non-traditional providers, have encouraged a number of insurance tie-ups.

But analysts were doubtful other bidders would come forward to buy RSA, after European rivals Allianz and AXA , which like Zurich offer both life and general insurance, had indicated they were not interested.

RSA shareholders had welcomed the proposed offer, but some Zurich investors had said they would prefer the cash-rich insurer to give money back.

Activist investor Cevian Capital, RSA's largest shareholder with a 13 percent stake, declined comment. ($1 = 0.6437 pounds) (Additional reporting by Sinead Cruise in London and Oliver Hirt in Zurich; Editing by Louise Heavens and David Holmes)