RBS says insurance is core part of business as sale plans pulled

AFTER ten months on the market, Royal Bank of Scotland has pulled the sale of its insurance arm after bidders failed to match its £6-7 billion price tag.

In another departure from the previous management's strategy, chief executive Stephen Hester yesterday declared RBS' insurance assets as a core part of the group for the future.

Under Hester's predecessor, Sir Fred Goodwin, RBS Insurance – which includes the Direct Line, Churchill and Privilege brands – was put up for sale as part of the bank's recapitalisation scheme last April which sought to shore up its balance sheet.

But, after testing the water, RBS, set to be 70 per cent owned by the UK government, concluded that, at the current level being offered by bidders, a sale would have destroyed shareholder value in the company.

Hester said: "Given RBS's broader considerations, it was important to test the market for this business which has demonstrated that a sale on terms currently available would destroy value for RBS's shareholders."

While RBS was prepared to sell if the business had received an acceptable bid, Hester is understood to see a good strategic fit for it within its wider retail and commercial banking operation, through which it sells thousands of policies a week.

"RBS Insurance benefits from a leading market position, strong cash generation and low capital requirements," Hester added yesterday.

He continued: "It does not absorb funding or risk-weighted assets and is not closely connected to the credit cycle.

"It is an impressive, well-run business with great people and excellent customer franchises. It can play an important role as we return the RBS group to standalone strength."

In pulling out of the sale, Hester, who last month agreed to sell RBS's shareholding in Bank of China for about 1.6bn, signalled a further move to focus on its core UK market.

Shares in RBS, which have collapsed since it announced last month that it will post a 28bn loss for 2008, rose 1.2p, or 5.8 per cent, to 22p.

MF Global analyst Mamoun Tazi said the sale was good news. "It's the wrong time to sell an insurance business that generates excess cash flow."

Other analysts have warned that the assets, among the most efficient in the UK, offered little scope for cost cutting or efficiencies of scale, making it unlikely bidders would be willing to pay the asking price.

RBS has never commented on how much it expected to raise but maintained it would never be forced into a fire sale.

At least two bids from private equity are believed to have been tabled, but these are thought to have been at around 5bn, most recently from a consortium led by Patrick Snowball, the former head of Aviva's UK business.

These two bids are understood to have been highly conditional, based on RBS funding the deal and maintaining a stake in it after the sale, reducing the capital benefits to the group.