Royal Bank of Scotland Group Plc’s decision to sell its insurance business is likely to prompt a string of other banks to reconsider the strategic value of owning insurers.
Faced with billions of dollars in writedowns, bankers expect lenders to conclude that providing a waterfront array of banking and insurance products matters less than freeing up cash, tied up in non-core units, to shore up hard-pressed banking arms.
“Banks are now acknowledging that the value they offer in the insurance chain is through their distribution power rather than producing the insurance products themselves,” said Mark Oldcorn, head of European insurance in the investment banking department at Credit Suisse.
“But the backdrop to that realisation is of course the current crisis, which has forced many of them to face up to the fact that they are light of capital,” said Oldcorn.
Turkey’s Yapi Kredi Bank is already looking to sell or find a partner for its insurance business, but many other banks across Europe are set to either sell these units outright or sell stakes in them to insurers to free up capital and focus on selling others’ products through their branches.
“It’s a real trend, accelerated heavily by the credit crunch, and is likely to be played out through quite a significant reconfiguration over the next couple of years,” said Anupam Sahay, group strategy and development director at Aviva.
“That will happen across Europe, but we’re also seeing the same in Asia,” said Sahay, whose group has the largest number of bank distribution deals in the world.
Some banks were already turning cold on owning insurance units, because accounting rule changes will prevent them from double counting the capital they hold in their insurance operations as regulatory capital in their banking business.
Insurance businesses have also sat uneasily in banks, whose focus on current cashflow creates a tension with the differing accounting methods and strategy used for insurance, which tends to focus on creating long-term value.
Now the credit crunch has exacerbated these two factors as banks need both capital and cashflow.
M&A TREND
Speculation has centred on banks such as Fortis NV, which could potentially sell its non-life insurance businesses in the Benelux region or in the UK. Fortis declined to comment.
HBOS could also dispose of its Clerical Medical unit and potentially also its stake in wealth manager St. James’s Place, argue bankers.
HBOS has set a 4 billion pounds ($7.8 billion) rights issue to help it weather the downturn and said it had looked at, but ruled out, disposals, including its insurance assets, because it did not want to sell quality businesses at distressed prices.
But with insurers trading at a premium to banks — at 11.5 times 2008 earnings and 10.5 times 2009 earnings, compared with banks’ 10.8 times 2008 earnings and 8.3 times 2009 earnings, according to data from KBW — banks can hope to sell the operations at attractive multiples.
“I think it is a seller’s market given that in most cases these are qood quality assets with strong demand for them from insurers,” said an investment banker.
For the attractive assets, there will be no shortage of buyers from the insurance industry, with the likes of Aviva, AXA , Sampo and Zurich Financial Services on the hunt for new deals to boost growth.
For some cash-strapped banks selling their insurer could prevent them from going to their shareholders for more cash, or reduce the amount of cash they need to raise from investors.
But other better-funded banks could choose to sell insurance units to further their strategic goals in the banking sector.
“Stronger banks could sell their insurance units and use the proceeds to roll up weaker rivals,” said Oldcorn.
Lloyds TSB could choose to sell Scottish Widows, raising 8 billion pounds into the bargain and use the proceeds to launch a bid for a weaker rival such as Alliance & Leicester, bankers say.
Lloyds’ shares responded positively to its CEO’s hints in February that it could make acquisitions, but it has denied it plans to finance those through a sale of Scottish Widows, which has been a cash cow for its parent, providing over 3.6 billion pounds in excess capital to the group in the last three years.
But the pace of dealmaking is likely to hot up in the coming months. “Our view is that this is a significant trend that could have legs for the foreseeable future,” said Oldcorn.
(Editing by David Holmes)
Topics Europe
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