Allianz, Travelers and Allstate remain suitors for RBS' insruance division.

RBS could still sell its insurance £5-7bn business, including Direct Line and Churchill, despite frontrunner Zurich’s exit from the bidding.

The field of original bidders has narrowed from 15 to three – Europe’s largest insurer, Allianz, and US giants Travelers and Allstate. However Allstate has beefed up its RBS bid team by partnering with investment bank JP Morgan, alongside existing adviser Lehman Brothers, to arrange financing.

In a statement last week, Zurich said it had decided against bidding for RBS’s insurance division (RBSI) after carrying out a detailed review of the business. The decision came on the heels of the company having confirmed 870 job losses in its UK business in order to shave a tenth off its expense base.

A month before, Zurich chief James Schiro had said his company was the best fit for the business, and RBS chief Sir Fred Goodwin insisted that it would get its full asking price, believed to be at least £6bn.

A day after withdrawing from the bidding for RBSI, Zurich announced it would strengthen its bancassurance business by taking a 50% stake for £700m in the life insurance, pension and general insurance operations of the fourth largest bank in Spain, Banco Sabadell SA.

“We have always said we wanted to increase our market position in this important market,” Schiro said. “It is also consistent with our multi-distribution strategy, and reflects our disciplined approach to acquisitions.”

Zurich will have management control of the jointly owned companies and fully consolidate them but Banco Sabadell will continue to be a 50% stakeholder.

Zurich will finance the transaction with internal resources. The transaction is expected to close by the fourth quarter of 2008.

Meanwhile, RBS continues to look at which assets it should keep and which it should sell. It is believed that the bank plans to offload parts of ABN Amro and retain its stake in the Bank of China.