Royal Bank of Scotland’s Insurance Unit May Tempt European Buyers

April 23, 2008

Royal Bank of Scotland’s insurance arm offers a once-in-a-lifetime opportunity for buyers to scoop up a key share of the UK market just as it begins to show signs of recovery, and suitors are already eyeing the unit.

Financial pressures on the sector and the cut-throat nature of the UK market, however, could deter buyers from paying up for a mature, if well-regarded, business, which analysts and bankers value at up to 8 billion pounds ($15.80 billion).

After days of speculation, RBS confirmed on Tuesday it was considering the sale of all or part of RBS Insurance — Britain’s second-largest general insurer and the country’s largest provider of motor cover — as part of disposals to shore up its balance sheet alongside a 12 billion pound rights issue.

“It’s not a decision we’ve taken lightly. It’s been a member of the family for some time, but it feels a time when there would be better owners for that business than us,” RBS Chief Executive Fred Goodwin told reporters.

RBS Insurance, which includes brands Churchill, Direct Line and Privilege, could be worth between 5 billion and 8 billion pounds, on UK sector multiples of 8 to 10 times earnings.

“It’s a big business with strong brands. I think they’ll find buyers,” one financial services banker said.

Others, however, were sceptical of the high valuations.

“The big question is who has that much money at the moment?” another industry banker said. “I find the idea that you could get a huge premium price for RBS Insurance intriguing.”


Analysts said the business, one of the most efficient and profitable in the sector, would be attractive to players like Allianz, Zurich Financial Services, AXA or Generali, with undersized or non-existent UK businesses, particularly at a time when the UK motor market is showing its first, tentative signs of recovery for years.

All four are reported to be already eyeing the unit.

“These are all people trying to build their position in Britain and with RBS you can basically buy the UK personal and motor market,” one industry analyst said.

However, despite ongoing speculation, few European players have shown an appetite for a major deal in the UK in recent years. ZFS, scalded by its 1998 acquisition of Eagle Star, has focused on bolt-on acquisitions elsewhere, while Generali has long eyed UK assets but says prices are too high.

Players with sizeable UK businesses were likely to count themselves out under competition rules as the bank sees a sale of the whole business, to take advantage of an integrated platform, rather than a break-up of the portfolio by brand.

Goodwin, however, remained confident and brushed aside concerns the business was too interlinked with the bank. He said RBS typically received one phone call a month from suitors for the insurance arm and said they expected that to grow.

“There’s a basis for being confident. Many of the potential purchasers have been on the sidelines of the current financial turmoil —it’s affected insurers less than the banks,” he said.

RBS, which runs a personal finance venture with supermarket giant Tesco, would provide a platform that European players could roll out beyond Britain, with RBS already running profitable operations in Spain, Germany and Italy.

RBS said it expected disposals to generate 4 billion pounds in core capital this year and most of that would likely come from insurance, as the other asset on the block, 3 billion pound rolling stock arm Angel Trains, would generate only minor gains.

Goodwin said RBS would not be forced into a firesale of its assets and had a “safety valve” allowing it to meet its new capital ratio targets even without the sales.

(Additional reporting by Mathieu Robbins and Simon Challis; Editing by Andrew Hurst)

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