Turnaround for RBS insurance arm a boost for sell-off

THE sharp bounceback into profitability of Royal Bank of Scotland's insurance business in the first half of 2011 will provide a tailwind for its sale, City experts have forecast.

RBS revealed on Friday that its insurance division, including well-known brands such as Direct Line and Churchill, struck a profit of 206 million, a sharp recovery from the loss of 253m made in the same period of last year. A profit of 139m in the three months to end-June followed a 67m profit in the first quarter of the year.

Stephen Hester, the bank's chief executive, said that the earlier loss had been partly caused by an upsurge in vexatious claims in motor insurance but that the recovery had been driven by a rise in both motor and household premiums.

In addition, the insurance arm, which also includes the Green Flag and Privilege brands, had benefited from an ongoing programme to consolidate insurance centres, attacking the costbase of the business. This programme aims to cut the number of insurance centres from 36 to 13.

The City believes the turnaround of the division's trading fortunes and restructuring will help facilitate its sale. This has been ordered by the European Union by end-2013 in return for the bank's 45bn taxpayer bailout in the 2008 financial crisis.

Paul Mumford, senior fund manager at Cavendish Asset Management, which holds RBS shares, commented: "The turnaround at RBS's insurance business is timely for the sale. It is bound to give the brands up for grabs a better market value.

"If RBS can build on this recovery, my guess is the higher the price they will be able to get. It's good news."

Mumford said a further positive backdrop for the sale were good recent trading performances from the likes of Prudential, Aviva and Legal & General, who might all be potential suitors.

Richard Hunter, head of equities at stockbroker Hargreaves Lansdown, said it was an "irony" that RBS would probably prefer to keep the insurance business given the gathering momentum of its recovery.

"The rebound in performance, and bounce back into the black, will move the price that RBS eventually gets for the insurance arm into the upper part of the range so it is useful. Trading conditions for the division have improved noticeably," Hunter said.

A spokesman for RBS insurance confirmed that motor and household premiums had gone up in the first half, but said it was company policy not to disclose figures.

RBS also said it was still targeting end-2012 for the sale of the division, a year before the Brussels deadline, but that an alternative flotation of the business had not been totally ruled out.