Is RBS about to hang up on insurance?

Ever since it initiated a restructuring that resulted in the cull of over 100 managers and the realignment of its competing brands, it was all too tempting to conclude that RBS putting its insurance division up for sale was an inevitable move.

All that was required, sources said, was a catalyst. A £6bn sub-prime writedown, followed by the largest rights issue in UK banking history should suffice.

Yet what is much more difficult is to demonstrate with any degree of certainty which elements of RBS' £5.2bn GWP division will be off-loaded, to whom, and for what price.

Given that RBSI includes two of the strongest brands in the UK market in Direct Line and Churchill (and with it, almost a third of the £10bn private motor market) it being linked with virtually every insurer on the face of the planet is not surprising.

Certainly, under fire chief Fred Goodwin’s statement that he receives a phone every month from prospective buyers has put the rumour-mill into overdrive. Not that he needed to say anything. No one disputes the overall quality of RBS' insurance assets. And from strategic fits (along either new or existing lines) to building a stronger presence in the UK, it is easy to build a case for all those with which it has been linked.

But at this stage, no one candidate is an overwhelming favourite to buy the business as a whole.

Should the business be split and sold, however, it is a different matter.

“RBS are hedging their bets on how much of the business it is has to sell. At this stage, it looks as though it could just be NIG.

Source close to RBS

The group’s broker-only arm, NIG, has been on the block for the some time. The front-runner in the race appears to be AIG, keen to grow its presence in the small-end commercial market, in which NIG is a key player. Despite two years of instability caused by senior staff departures, questions over its service to its brokers, and its reported business losses last year, it still has a strong reputation.

Given that RBS has assets across the globe it is more willing to divest than RBSI, hiving off £500m GWP NIG could be a natural play for them.

“RBS are hedging their bets on how much of the business it is has to sell," A source close to the company says.

"At this stage, it looks as though it could just be NIG.”

"NIG’s separation from the rest of the insurance division would make it an obvious target for a sale," an analyst at a major consultancy adds. “NIG is not as well established as Churchill and Direct Line. It has gone through about half a dozen owners in a 20 year period. It’s very unsettling for an organization."

“AIG are blowing hot and cold on the UK market,” says another.

“Europe is a big gap for them. They have a commercial lines hub in Paris, and could be looking to add one in London. They should not be ruled out.”

“RBS do not want to sell an asset that they value.

Chris Hitchings, Keefe Bruyette & Woods

On the other hand, Direct Line’s early – and extremely successful – forays into the SME market could tempt AIG to make a play for the whole business. It will certainly perk the interest of other suitors, such as private equity, who see a big upside in building new distribution models.

All that being said, it is important to note both analysts' and RBS’ language. The bank has said it needs to raise £4bn in tier 1 capital; a chunk of that will come from the proposed £3.5bn sale of Angel trains. Goodwin also told the press on Tuesday that other options could be to sell a stake in the business; again, see private equity, or perhaps an investor from the Middle or Far East.

Then there is the less glamourous option of not selling it at all.

Chris Hitchings, analyst at Keefe Bruyette & Woods, says: “RBS don’t want to sell an asset that they value. And they need the cash now. It would take months to conclude a sale.”

But other sources suggest that the bank may not necessarily have a choice. Ironically, when RBS bought Chruchill from Credit Suisse for £1.1bn in 2003, it was to shore up a hole in its own balance sheet. Whether it wants to or not, RBS may have to pass the torch.

Ultimately, however, the majority of experts suggest that RBS has enough irons in enough fires to allow it to hold on its heavyweight insurance brands. Despite its needs to raise the capital, precious few suggest it is in a weak bargaining position. Furthermore, were it to sell the division it would fetch a price of £5bn at the very least, and closer to double that sum.

In the meantime, then, it looks a given that both Goodwin’s and Direct Lines' phones will remain engaged.