The Royal Bank of Scotland (
) 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 (
), Barclays (
), Bank of America (
), UBS (
Our price estimate for RBS stock stands at
, roughly in line with market price.
RBS' Insurance Division Has Done Well in the
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
… 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