RBS set to shelve sale of insurance arm: reports

RBS could be set to shelve the sale of its flagship insurance division, RBSI, following the exit of frontrunner Zurich two weeks ago.

Leigh Goodwin, analyst at Fox-Pitt Kelton, said yesterday that it was likely the bank would opt to hold onto the £7bn GWP division given the lack of appetite among potential buyers. He said: "It looks now as if there is a less than 50% chance they will sell the business."

His comments come after RBS chief Fred Goodwin repeatedly stated that the bank would not be forced into a sale of its insurance assets. Sources have said that despite insurance being seen as non-core to the bank's operations, RBSI is regarded internally as one of the company's most important, and cash generative assets. It posted operating profits of £683m last year.

Goodwin recently said: "It's not as if [RBSI is] a bad business, and selling it would be dilutive to earnings."

The bank has a raft of other assets it is in the process of selling.

Fox-Pitt Kelton's Goodwin added that it was unlikely that the remaining frontrunner for RBSI, Allstate, would match the bank's asking price, believed to be in the region of £7bn. The value of RBSI has slipped as numerous bidders including AIG, Berkshire Hathaway, Generali and Ping An have withdrawn from the race.

Goodwin said: "If [RBS] didn't get the right price from Zurich, why would they get a better price from Allstate?"

Allstate, which appointed Lehman brothers last month to advise on its potential bid, is the largest listed car and home insurer in the US. Sources have questioned its willingness to develop an international portfolio, especially in the UK, given current market conditions. It sold its overseas insurance assets to RBS in 2001.

Allstate's market capitalisation is $25bn. Its shares have risen around 2% since Zurich aborted its bid, while Zurich stock has climbed 11% in the same period.

Earlier this month, reports said that RBS had set a provisional deadline of the end of this month for second round bids. Zurich, which was understood to have lined up financing from sources including Deutsche Bank and Credit Suisse, withdrew after its corporate advisors questioned the asking price given the limited organic growth of RBSI and the lack of synergies that could be achieved from any deal.

RBSI's leading brands, Direct Line and Churchill, have struggled to grow their business due to fierce competition in their core motor market driven by the rapid increase in business transacted through online price comparison sites.

While RBSI controls around 31% of the UK motor market, Direct Line deliberately does not feature on aggregators, which now account for an estimated 60% of personal lines business.

RBS put its insurance division on the block in April as part of measures, including a £12bn rights issue - the largest in UK history - to boost its capital adequacy, or tier 1 ratio, to over 6% by the end of the year to insulate itself against instability in the global financial markets. This target included raising up to £4bn in capital gains from a sale of RBSI.

However, RBS has a number of other assets it can dispose of in order to meet this target. It boosted its capital by at least £250m last month through the sale of Angel Trains, and is currently in discussions to offload ABN Amro's Australian and New Zealand divisions which should raise around £400m.

Other possiblities include selling a 50% stake in Tesco Personal Finance - worth around £800m in capital gains - and its $7bn, 5% stake in Bank of China next year.

It could also hive off elements of its insurance business, including Linea Directa, its joint venture in Spain and NIG, RBSI's broker only UK commercial arm.