Strong half-year results strengthen the bank’s demand for the asking price of £7bn.

Royal Bank of Scotland is in the driver’s seat following its half-year results, and is unlikely to sell its insurance arm at a discounted price, according to a leading analyst.

Leigh Goodwin, an analyst at Fox-Pitt Kelton, believes RBS is now in a stronger capital position and can hold out for its asking price of up to £7bn for the insurance business, which includes household names Direct Line and Churchill.

He said: “Officially, the business is still for sale. I don’t think they’re going to let the process drag out because there are a lot of staff members interested in what’s going on. But these results confirm they won’t have to sell it cheaply.”

Last week RBS posted an overall pre-tax loss of £691m after credit market write-downs of £5.9bn. The loss was less than market predictions, and was in line with previous disclosure.

The bank’s insurance arm reported a £403m operating profit for the first half of 2008, up from £258m year-on-year. RBSI also showed a strong recovery in its contribution to the group, with an increase of 41% to £513m. If it had not been for the £125m impact of the June 2007 floods, the contribution would have grown by a more modest 5%.

The bank said own-brand home insurance policies that were in force grew by 23% since December, and overall in-force policies grew by 46% to £5.5m versus £3.8m in 2007.

RBSI’s insurance premium income, net of fees and commissions, dipped 3% to £2.4bn. This reflected 4% growth in its own brands offset by an 11% decline in the partnerships and broker segment.

Total income fell slightly to £2,786m, down from £2,843m. Direct expenses grew by 17% to £410m due to increased marketing investment in its own brands, including the launch of Direct Line for Business.

Net claims dropped 13% to £1.9bn thanks to better weather conditions. Excluding the impact of the 2007 floods, net claims costs fell 6%.

The UK combined operating ratio, which included manufacturing costs, but excluded floods, improved from 95.8% to 94.6%.

US insurance giant Allstate is still considered the frontrunner to buy RBSI, and is thought to have made a formal bid.