The rumour mill is in overdrive yet again over a possible RBSI sale as potential bidders, including Berkshire Hathaway, enter the picture. But could its painful losses resulting from the explosion in bodily injury claims have left it vulnerable to a cheeky offer from a savvy investor?

Here we go again: the most talked about insurance sale that never was is back on, with widespread media speculation over who’s in the frame to buy RBS Insurance. Potential bidders including Warren Buffet’s investment vehicle Berkshire Hathaway prompted gleeful headlines over the bank holiday, including the Sunday Times’ ‘Buffett emerges as surprise bidder for Direct Line’.

That’s overstating it, however – at least according to RBS. The bank admits it has started the process of appointing corporate advisers to help it sell or float its insurance division, but says nothing else has changed, and that it is not in talks with any buyers.

The European Commission demanded the sale as a consequence of the bank’s bailout in November 2009, when it was given until December 2013 to make the divestment.

Group chief executive Stephen Hester said at the time that an IPO was the preferred option, and this official position remains unchanged.

Since 2009, the group has been preparing itself for a sale. Just last week, it announced the closure of 14 offices in a bid to cut costs. It has also put NIG’s loss-making personal lines book into run off, to the dismay of some brokers..

But it’s a little more complicated than that, thanks to the recent explosion in bodily injury claims. With its vast motor books, RBS Insurance was hit particularly hard – it made an operating loss of £203m in the second quarter of this year, bringing its total losses for the half year to £253m, compared to a profit of £217m in the first half of 2009.

Its second-quarter combined operating ratio was 128.7%, compared with 91.3% for the same period in 2009. RBSI attributed these eye-watering losses to bodily injury claims – including £241m for prior-year claims for which it had not reserved.

While such losses are not unusual across the market at the moment, the inclusion of these prior-year claims at this stage suggests RBSI is taking the financial hit now as it gets its house ready for a sale or IPO, with all the stringent due diligence that will entail.

Shopping around

Suddenly, RBSI has turned from a business making a healthy profit to one haemorrhaging money in claims. That raises a question mark over an IPO – would corporate investors be willing to back the business with these results on its books?

It also creates an opportunity for canny investors such as Buffett, or private equity houses; RBS has no choice but to sell, with a limited time frame. So a smart investor could hope to force through an offer of substantially less than the £4.5bn that private equity giant CVC offered for the business in 2009.

RBS is keen to play down talk of a trade sale, but potential buyers abound. Many names have been linked to the business in previous rounds of the sale: as well as CVC and Buffet, these include US giant Allstate, Italian insurer Generali and Zurich.

RSA group chief executive Andy Haste has previously ruled out bidding for any of the RBSI businesses – but having made a move for Aviva since then, there is bound to be speculation over whether he’s acquisition-hungry enough to change his mind.

Running in tandem

One source close to the business suggests that RBS is running the IPO and trade sale processes in tandem, to see which comes out with the best price. “If they’ve got any common sense at all, they’ll be doing them in parallel,” the source says.

“They’ve been doing the background work for an IPO for many months now. And the due diligence needed to do a trade sale is pretty much the same. They can work towards both, and see which comes out best.”

Whichever it is, the sale or IPO will be the end of a long and painful road for RBS. Hester was furious when he was ordered to sell the business last year, having planned to make it a central plank of the bank’s recovery.

But the European Commission demanded the sale due to concerns over unfair competition following the huge sums of state aid pumped into RBS.

It was not the first time RBSI had been on the market. In April 2008, RBS’s then chief executive Fred Goodwin announced the sale of some non-core assets – including the insurance division. But he put a massive price tag of £6bn-£7bn on the business, and initially excluded private equity bidders from the sale.

The timing was bad: the City was just waking up to the extent of the credit crisis, and for the first time in years, money was looking tight.

Time to choose

As the auction progressed, bidder after bidder ruled themselves out of the race – AIG was understandably occupied elsewhere; Berkshire Hathaway publicly walked away; Zurich left the running; and Allstate was rumoured to have gone in too low.

RBS was left with little choice but to open the sale to private equity bidders. CVC Capital put in a bid for the business, as did a consortium fronted by former Norwich Union boss Patrick Snowball and including BC Partners and Apollo Management.

By this time, things had changed. Goodwin had left the building, to be replaced by Hester – who, as we know, wanted to hold onto the business and so cancelled the sale. Then the European Commission stepped in.

Uncertainty has reigned at RBSI for more than two years, and a large number of high-profile staff have left the company, many going to emerging rivals such as LV=.

As the insurer hits the headlines yet again, only one thing is certain: the 2013 deadline is looming, and for RBSI, it’s making your mind up time.

NIG dumps personal lines book

As the debate rages around the future of RBSI, brokers will be focused on one comparatively small part of the bank’s insurance empire: NIG. The broker-only insurer has made news this summer with its surprise decision to withdraw from personal lines, announced to the broker community via email on 11 August.

NIG wants to focus the business on commercial lines, but can it maintain its relationship with brokers that have been left high and dry by its sudden withdrawal of a major market? And why did RBS put its personal lines book into run-off instead of trying to sell it?

There was anger among brokers about the sudden nature of the decision. One large motor broker, who did not wish to be named, believes partners should have been warned at least three months in advance.

“Giving brokers a month to transfer a book of business is a near impossible job to do. It is not just a case of getting your products and your pricing agreed by another insurer; it’s a case of implementing the IT infrastructure with your new partner insurers,” he says.

Long regarded as a champion of the middle man, NIG once commanded unrivalled broker loyalty. “It always had such a strong reputation. It was broker only and you really got the feeling when you dealt with NIG, it was really behind the broker,” Ashbourne managing director Peter Smits says.

Atraxia chief executive Stuart Randall agrees that NIG’s accessibility was a major attraction. “It was a relatively small company, with a short command chain, and you could get close to the people who mattered,” he says.

NIG managing director Jon Greenwood stands by the insurer’s approach. He says it wished to inform brokers of its decision as quickly as possible following the end of the consultation with the 280 staff affected by the run-off.

“On the same day we concluded that consultation, we gave the fastest possible indication to the brokers of our decision and within 48 hours had given them specific details about how it affected them,” he says. “In addition, we had all of our field sales forces talking to their individual contacts on a personal basis, to the extent that is practically possible with 2,000 brokers. That is an awfully big community to get around.”

So why did NIG to decide to run off the business? As with the rest of the group, bodily injury claims hit hard. Greenwood explains: “The fact is, if we were to look at the performance of that motor book, we had a combined operating ratio of 162%.

“Clearly, that generated very substantial losses and, although last year was a particularly bad year, the performance of the motor book had been unsatisfactory for a number of years. From a COR of 162%, it was just felt that it was unsustainable to carry on.”

The commercial business remains profitable and Greenwood believes the insurer is now well placed to build on its 4% market share. “The purpose of the run-off was for us to create the right business model to grow this business and therefore the commercial arm of one of the UK’s largest general insurers. We have got a business that has fantastic potential.” IT

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