RBS Will Sell Off Insurance Arm in Second Half of 2011


The Royal Bank of Scotland ( RBS ) Group ( RBS ) generates just about 6% of its value from its insurance arm by our analysis. This 6% translates to about $2.3 billion of the $39.1 billion we estimate the company is worth today. But the company seems to have made up its mind to do away with the insurance business for good, and will exit this business in the second half of 2011. RBS competes with other worldwide banking institutions and financial services group like Citigroup ( C ), Barclays ( BCS ), Bank of America ( BAC ), UBS ( UBS ) and JPMorgan Chase (JPM).

Our price estimate for RBS stock stands at $13.43 , roughly in line with market price.

RBS' Insurance Division Has Done Well in the Past…

RBS underwrites and sells retail and SME insurance. Its brands include Direct Line, Churchill and Privilege, which sell general insurance products direct to the customer, as well as Green Flag and NIG. Through its international division, RBS also sells general insurance in Germany and Italy.

RBS is the largest personal lines insurer in the UK. Brands like Direct Line, Churchill and Green Flag are household names, and have helped the firm become the UK's largest motor insurer and the number two household insurer.

… But Things Aren't Looking Too Bright…

RBS' insurance arm reported operating losses of £295 million ($457 million) in 2010, after barely breaking even in 2009. The number of policies-in-force had already been on a steady decline since 2006, and the division's decision to reduce its high-risk policies also hit average premium figures.

RBS Group chairman Phillip Hampton announced at the bank's annual general meeting (AGM) last week that the insurance part of the business had been experiencing particularly tough trading conditions of late and they had been keen to pin down a sale schedule.

… Making it a Good Candidate for a Sell-Off

The RBS Group has been working on reducing its non-core assets since it was nationalized by the UK government during the economic crisis in 2008. The bank has already sold more than £120 billion (nearly $200 billion) in assets over the last 2 years.

Our estimated value of the insurance division factors in an improvement in the division's underlying profitability - something resounded by the chairman in his address. What needs to be seen is how profitable potential buyers consider the business, and how much RBS could gain from its eventual sale.

See our complete analysis for RBS stock here

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: BAC , BCS , C , RBS , UBS



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