RBS may find it hard to sell its insurance companies

ROYAL Bank of Scotland could struggle to fetch a good price for its insurance arm despite a dramatic turnaround at the unit, with grim market conditions, scarce capital and memories of earlier failed sale attempts conspiring to deter buyers, analysts said.

The bank’s Churchill and Direct Line insurance arm, which has four core sites in Yorkshire – three in Leeds and one in Doncaster – is up for sale to appease regulators irked by RBS’s bailout during the credit crisis and analysts put its value at about £4bn.

RBS this month hailed a return to profit at the business after soaring bodily injury claims pushed it £295m into the red last year, and said it aimed to offload the unit, probably via a public share sale, in the second half of 2012.

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Bankers and analysts say that while management deserves credit for transforming the insurance arm’s fortunes, persuading either equity investors or trade buyers to pay top dollar will still be difficult.

“The history is that lots of people have prodded RBS insurance with their bargepole and walked away,” said Investec analyst Kevin Ryan.

“It comes down to the issue that although the top 10 insurers have something like 80 per cent of the market, they still compete with each other like terriers in a sack.”

The UK motor market, bedevilled by stiff competition and a surge in frivolous claims encouraged by “no win, no fee” lawyers, is seen as one of the least attractive corners of the European insurance industry.

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Insurers hope new legislation will stem the rise in claims, but analysts say the cut-throat competition which has contributed to a collective underwriting loss for the motor insurance industry every year since 1994 is unlikely to ease.

In the run-up to an initial public offering, RBS’s insurance arm’s patchy profits performance could invite unflattering comparisons with Admiral Group, the UK’s only listed pure motor insurer and the undisputed star of the industry.

Admiral, with a 10 per cent market share against RBS’s 30 per cent, has avoided the rise in claims afflicting rivals and delivered an unbroken run of profit growth since floating in 2004, making it one of Europe’s best-performing insurance stocks.

“We’ve seen from Admiral that there is (investor) appetite if the structure is right. It depends on the company and its track record,” said Shore Capital analyst Eamonn Flanagan.