Banks Consider Selling Their Insurance Units to Boost Their Strategic Gains

With the Royal Bank of Scotland deciding to sell its insurance business, experts are predicting this move to trigger other banks into reconsidering whether owning an insurer is a worthwhile strategic policy.

Bankers expect that lenders will decide the providing of a vast array of insurance and banking products, is less important than freeing up money tied up in non-core units. This will help to shore up hard pressed banking arms in the face of billions of pounds of write-downs.   

Head of European insurance in the investment banking department at Credit Suisse, Mark Oldcorn said, “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. But the backdrop to the realisation is of course the current crisis, which has forced many of them to face up to the fact they are light capital.”

Some struggling banks may find that selling their insurer may mean them not having to approach their shareholders for more money, or reduce the amount of cash they need from investors.

Other better off banks may see selling their insurers as a move to further their strategic goals. Oldcorn said, “Stronger banks could sell their insurance units and use the proceeds to roll up weaker rivals.”

Banks across Europe are in line to sell their insurance businesses outright or sell stakes in them to help to free up cash so they are able to focus on selling other products through their banks.    

Group strategy and development director at Aviva, Anupam Sahay said, “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. That will happen across Europe, but we’re also seeing the same in Asia.”

Many banks had begun to turn their backs on owning insurance units due to the rule changes in accounting which prevented them from double counting the capital they hold in their insurance operations as regulatory capital in their banking business.  

These businesses have been sitting awkwardly amongst banks due to their focus on long term value as opposed to the banks focus on current cash-flow. These differing factors have only been heightened by the credit crunch as banks need both capital and cash-flow.

HBOS could sell its Clerical Medical unit and its stake in wealth manager St James Palace say investment bankers, “I think it is a sellers market given that in most cases there are good quality assets with strong demand for them from insurers.”  

But HBOS, who has set a £4 billion rights issue to help it weather its financial downturn, said it had looked at, and ruled out disposing of quality businesses at distressed prices.   

For the appealing assets on the market, there is likely to be no shortage of takers from the insurance industry, with Aviva, AXA, Sampo and Zurich Financial Services looking to boost their growth. 

Investment bankers predict that Lloyds TSB may choose to sell Scottish Widows in order to raise £8 billion so they can launch a bid for a weaker Market rival such as Alliance and Leicester.

With deal making only likely to intensify, Mark Oldcorn said, “Our view is that this is a significant trend that could have legs for the foreseeable future.”