Insurer heavyweights to challenge private equity houses for RBSI

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Allianz, AIG and Generali believed to be in the running to buy insurance arm.

Some of the world’s largest insurers, including Allianz, AIG and Generali, are believed to be in a race with private equity houses to buy RBS’s £5bn GWP insurance division (RBSI).

AIG is already understood to be in informal talks to buy its £500m GWP broker-only insurer, NIG. AXA has ruled itself out of the bidding for the division, which RBS put on the market this week after it launched a £12bn rights issue designed to shore up its balance sheet.

RBSI, which includes leading personal lines brands Direct Line and Churchill, could be broken up or sold as a whole.

In a statement issued to the Stock Exchange on Tuesday, RBS said: “As part of an ongoing exercise...to increase capital levels, the board has identified for possible whole or partial disposal of RBS Insurance and other smaller assets which are not central to the powerful UK and international banking franchises.”

Generali, the fourth largest insurer in Europe, said earlier this month that it had €5bn (£4bn) to spend on acquisitions. Allianz, which is understood to have approached RBSI unsuccessfully in the autumn, could also be keen to launch a renewed bid.

“AIG is keen to develop its SME business along the lines of its European model.
Senior market source

RBS chief executive Fred Goodwin said the insurance division might benefit from a change in ownership. The bank added, however, that it would only sell its insurance assets if it achieved a satisfactory price. “RBS is determined to achieve full and fair value in respect of any such disposals,” it said.

Sources suggested that selling Direct Line and Churchill would be seen as a last resort by the group, pointing to other assets that it could offload, including Angel trains, valued at £3bn.

NIG, repeatedly linked with a potential sale last year, is already believed to be the subject of talks involving AIG. A source close to RBS said: “AIG is keen to develop its SME business along the lines of its European model.”

RBSI made an operating profit of £683m last year. Analysts suggested that it would fetch a price of at least £5bn – more than enough to raise the £4bn tier 1 capital required by the group to boost its capital adequacy rating.

The bank added that it expected post-tax sub-prime writedowns of £4.3bn in 2008.

Who's next?

As RBS unveils its record 12bn pounds rights issue and potential sale of its insurance arm to raise capital, speculation mounts over whether other UK banks follow suit.
And with HBOS and Barclays seen by many analysts as the next banks to seek additional capital, could other bank-owned insurance assets come under the knife as banking bosses look for cash injections to shore up their balance sheets?
JP Morgan estimates that Britains four largest banks, RBS, HBOS, Lloyds TSB and Barclays, have a 37bn pounds shortfall in capital.
Unlike RBS, the UK banks mainly act as intermediaries for other insurers products, so there is little to sell. RBS has separate insurance businesses with their own distinct brands which could be sold off and operate under a new owner.
The key will be how embedded the insurance business is to the bank's core banking proposition, says a senior banker.
Looking through the insurance assets owned by the UK banks there appears to be little that could be separate from their core operations.
Another senior banking executive comments: HSBC is trying to build its insurance business, so it is not likely to sell it off. Barclays has a broking deal with Norwich Union, so there is nothing to sell.
One insurance asset that could be sold is Esure, which HBOS part owns in a joint venture. That said, Esure is tiny compared to RBSI, which controls over 5bn pounds in premiums. Such a sale would have limited impact on the HBOS balance sheet if it decided to raise the for sale sign.