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August 31, 2010
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The UK government owns 84% of Royal Bank of Scotland. In 2008, after the subprime mortgage crisis devalued its assets and precipitated losses, the bank got a shot in the arm from the country’s government, which injected funds to shore up its capital. Its insurance companies include Churchill Insurance, Direct Line, Privilege and NIG.
Earlier in 2008, the bank had decided to divest its Churchill and Direct Line units to raise funds after the government pressured it to sell off these loss making units. The private equity company CVC had then offered $4.5 billion for the deal. Though it is uncertain as to how much the deal will fetch now, industry experts believe the valuatuion will fall south of what was earlier quoted.
Increasing claims from car accidents led to heavy losses at Direct Line and Churchill. The European Commission, which controls legislation of its 27 sovereign Member States -- UK being one of the member countries -- has set 2012-end as the deadline for the company to divest the loss making unit. This forced sale comes as a price for being bailed out by the UK taxpayer at the height of the financial crisis.
Royal Bank of Scotland will carry out the sale of its insurance division under “Part VII" restructuring. Insurance business transfers -- Part VII transfers as they are commonly known in the UK -- enable the complete transfer of business from one insurer to another, with no contractual liability remaining with the original insurer. Such transfers require neither the permission of the policyholders nor any voting mechanism, although a court sanction is necessary.
Last week, Royal Bank of Scotland hired a team of advisors -- KPMG, PwC, Deloitte and law firm Norton Rose -- to smoothen out the sale process. Last Thursday, the company also announced that it was shutting down 14 of the 27 offices in its Churchill and Direct Line businesses, and planned to cut 2,000 jobs.
As for Buffett, who turned 80 yesterday and runs more than as many businesses, the deal will supplement his existing insurance operations. Berkshire’s insurance business holds a major share of the market and has been generating ‘float’ -- excess cash in Buffett’s parlance -- for further investment in business.
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