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D-day approaches in RBS auction

As D-day approaches for the protracted auction of RBS’ Insurance operations there are now thought to be just three insurers firmly in the running.

RBS’ bankers, Merrill Lynch and Goldman Sachs have, The Insurance Insider understands asked the remaining parties, Allianz, Allstate and Travelers, to firm up their bids by this Friday, 25 July.

And of these three, it is understood that sources close to the sale process regard Travelers as being the least determined to land a winning bid with Allianz and Allstate believed to have expressed a greater appetite in discussions so far.

The prospect, of course, remains that with the early pacemakers, including the former favourite Zurich Financial Services (ZFS) having dropped away, RBS may fail to secure a bid that meets their often referenced but never disclosed minimum reserve price.

Early in the bidding process, press commentary suggested a figure of around £7bn+. However, tellingly, noises from the RBS camp have moderated this to between £5bn and £7bn.

So, what is the price where a deal can be done and who is likely to succeed?

Based on historical earnings and the strength of the franchise, analysts, including Barrie Cornes of Panmure Gordon, point to a fair value in the £5bn to £5.5bn range.

From Allianz’ perspective, the group could secure some synergy benefits. However, these are unlikely to be more than £20mn to £30mn per annum, so would justify paying a premium of only £150mn to £250mn on top of fair value, sources suggest.

It is also understood that a number in excess of £5.5bn “would be difficult for RBS to ignore”.

Balanced against this is the key question of, what is Allstate’s global ambition?

Historically, the group has tended to focus on its home market, earning a reputation as prudent underwriters rather than buccaneering deal makers. Does their interest in RBS mark a departure from this stance or is it perhaps the action of a disciplined management, who knowing what they do best (running winning personal lines businesses) have identified a target whose profile largely matches their own?

RBSI may well represent a compelling one-off opportunity for the company to begin to develop a true global footprint.

Whichever way, with a relatively robust stock price (since 1 May – just after RSBI was put up for sale – Allstate is down less than 15 percent, while Allianz has fallen more than 25 percent, and Zurich by a similar amount before rallying after withdrawing its bid) cash reserves and well regarded management, this could be a perfectly timed deal.

The fortuity of timing became clear in the past week when the AA insurance index confirmed that motor insurance premiums are rising year-on-year (see story 9).

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