The Royal Bank of Scotland (RBS) Group (NYSE:RBS) intends to milk its insurance cow as much as possible before the proposed 2H 2012 spin-off of the ailing business. RBS’ finance director John Reizenstein recently announced that the parent company is looking to take as much as £1 billion ($1.56 billion) as a pre-IPO dividend from RBS Insurance (RBSI) late next year.  The 83% state-owned global financial institution competes with the likes of Citigroup (NYSE:C), Barclays (NYSE:BCS), Bank of America (NYSE:BAC), UBS (NYSE:UBS) and JPMorgan Chase (NYSE:JPM).
We maintain a $12.60 price estimate for RBS’ stock, which we are in the process of revising to factor in the effects of the debt situation in Europe (Ireland in particular), an increasing number of lawsuits against the bank and the impact of the ICB’s recommendations for U.K. banks.
RBS announced plans to exit the insurance business earlier this year
The insurance business has been a steady and reliable source of income for RBS in the past – as evidenced by the fact that RBS is the largest motor insurer in the UK and the country’s number two household insurer. But the business’ fortunes have reversed in recent years with an operating loss 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. And with the bank working hard raise capital through the sale of any non-core or loss-making assets, it was only a matter of time before the insurance division was targeted.
RBS values its insurance business at about £4.3 billion ($6.6 billion), and expects to place a part of the business directly in the market through an IPO, provided the markets are conducive later next year. The bank also has other “fallback options” in place in case the IPO route is not seen as rewarding enough.Notes: