RBS Fair Value $8.70: Readies For Insurance Arm Spin-Off

by Trefis Team
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RBS
Royal Bank of Scotland
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The RBS Group (NYSE:RBS) has reportedly added UBS (NYSE:UBS) to the list of investment banks that will oversee the spin-off of its insurance business as the Direct Line group. [1] RBS had already appointed Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS) as joint bookrunners for the listing of the insurance business later this year. The 82% state-owned British banking group has to get rid of its insurance business by the end of 2013 as part of its bailout agreement with the British government.

We have a $8.70 price estimate for RBS’s stock, around 30% ahead of its current market price – which is the effect of the significant bias against the European banks among investors as a result of the deteriorating debt situation in the region.

See our full analysis for RBS here

RBS Insurance (RBSI) underwrites and sells retail and small and medium-sized enterprise (SME) insurance and is the largest personal lines insurer in the U.K. with brands like Direct Line, Churchill and Green Flag. Through its international division, RBSI also sells general insurance in Germany and Italy.

Late last year, the bank detailed its plans to place a part of the business directly in the market through an IPO as the Direct Line group (see RBS Looking at $1.5B Insurance Group Dividend). RBS expects to earn as much as £1 billion ($1.6 billion) as pre-IPO dividend from the listing, with the insurance business valued at around £4 billion ($6.5 billion). The banking group also has other “fallback options” in place in case the IPO route is not seen as rewarding enough. One such option is sale to suitors like CVC Capital Partners (see RBS Insurance Finds A Familiar Suitor in CVC).

RBS Insurance has been struggling in the recent past to keep up its performance with the number of in-force policies as well as the premiums earned on them showing a steady decline over the past few years. The impact of a change in the number of in-force policies on the bank’s overall valuation can be understood by making changes to the trend-line in the chart above.

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Notes:
  1. Exclusive: UBS Wins Direct Line Role, Sky News, May 29 2012 []
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