Who’s set to buy RBSI?

Barely a week since RBS announced the potential sale of its insurance arm, a queue of suitors spanning the globe has formed. Despite the commotion caused by the bank’s £12bn rights issue, for RBS chief executive Sir Fred Goodwin it is business as usual. The phone, as Goodwin says, hasn’t stopped ringing.

Though the bankers in charge of the sale of the insurance arm, which includes the famous Direct Line, Churchill and NIG brands, have yet to distribute their proposal to prospective buyers, a number have already expressed an interest both behind closed doors and in public.

Given the profitability, positioning and clout of RBSI’s various brands, this is hardly surprising. Research estimates that the direct private motor market, of which the group controls a third, will grow from £8bn in 2006 to £14bn by 2012. By the same date, direct commercial business, into which Direct Line has recently moved will grow to £5bn.

The majority of commentators agree that a trade buyer, such as Zurich, AIG or Generali, is first in line, and that a deal will take many months to conclude.

“RBS Insurance is already one of the most efficient underwriters and the industry is one of the most commoditised in Europe

Keefe, Bruyette & Woods

Creating value
One party that has already ruled itself out is Aviva. Last week chief executive Andrew Moss said that the sheer size of any deal (with cost estimates ranging between £5bn and £8bn) would complicate matters, adding: “I think value creation would be difficult for us.”

His is a view shared by analyst Keefe, Bruyette & Woods, which said on Friday: “RBS Insurance is already one of the most efficient underwriters and the industry is one of the most commoditised in Europe.”

It added: “We believe that many insurers may baulk at the requirement of asking shareholders for equity capital to acquire a 32% share of the notoriously competitive UK motor market.”

Breaking up is hard to do
Analysts have also questioned whether private equity houses would be able to raise the estimated £2.5bn in debt to finance a deal for the whole of RBSI. They could take a stake, but would RBSI be satisfied with selling just part of the business?

“If you break up RBS it has more value. You can take the brands and have them compete with each other

Senior market source

A senior market source says: “RBSI has spent a lot of money integrating the business. It will be harder for it to split. That should also be part of the attraction for a potential buyer.”

But breaking up the business may be attractive. Some parts, such as NIG, could realise greater profits in the hands of the right buyer. A senior market source says: “If you break up RBS it has more value. You can take the brands and have them compete with each other.”

Finally, the group could always opt to retain its insurance division. As one source close to RBS says: “There are other areas of the bank to be looked at before insurance is seriously hit upon. RBS sees RBSI as an extremely valuable asset, not just in terms of the brands it controls but also in the fact that a profitable general insurer is an excellent way to quickly raise liquid assets.”

But with the weight of interest driving up the valuation of the business that option seems less likely by the day.