Royal Bank of Scotland Group PLC, Britain's second-biggest bank, on Wednesday agreed to buy Credit Suisse Group's Churchill Insurance Group PLC for $1.8 billion in cash to create the United Kingdom's No. 3 general insurer.
The transaction, which would include the repayment of $165 million of debt, would enable Royal Bank to sell more products such as home insurance to its customers and to increase its policies by more than half, to 20 million, it said in a Regulatory News Service statement.
The purchase is subject to regulatory approval and should be completed in the third quarter, Royal Bank said.
Fred Goodwin, the Edinburgh banking company's chief executive, wants to acquire businesses such as insurance and credit cards to boost earnings as revenue gains and cost savings dwindle from its $35 billion purchase of National Westminster Bank in 2000. (It has also been acquisitive in the northeastern the United States in recent years.)
"Small acquisitions make sense" for Royal Bank, said Andrew Hobson, who helps manage about $826 million, including shares of the bank, at Exeter Asset Management Ltd. "NatWest was a massive undertaking. Investors wouldn't want a big acquisition at this stage."
The sale would help Credit Suisse, which is based in Zurich, bolster the capital base of its Winterthur insurance unit. Oswald Gruebel and John Mack, the co-CEOs of Switzerland's No. 2 bank, are trying to reorganize the division, which dragged the parent to a $2.5 billion loss last year.
Buying Churchill, a U.K. nonlife insurer focusing on home insurance, would make Royal Bank's Direct Line telephone and Internet general insurance division "an effective competitor" and balance its "strong position" in motor insurance, Mr. Goodwin said during a conference call with reporters.
Last year Churchill, which also insures cars and travel, generated premium income of $2.6 billion and a pretax profit of $142 million. Buying it would increase Royal Bank's earnings before goodwill amortization and integration costs in the first 12 months, and the annual cost savings would exceed Churchill's pretax profit last year, he said.
Churchill, which employs 8,000, and Direct Line would have a combined work force of about 20,000, Mr. Goodwin said. Royal Bank plans to cut "hundreds rather than thousands" of jobs as it combines the businesses, he said.
Royal Bank also said Wednesday that, because of its "strong" income growth and credit quality, it will report first-half earnings in line with analysts' forecasts of about $5.6 billion for its pretax profit before goodwill and one-time costs. It is scheduled to release first-half earnings on Aug. 5.
