Co-op in talks with Markerstudy about £300m insurance sale

The Co-op Group, Britain's best-known mutual, is in detailed talks about a £300m sale of its insurance business to Markerstudy Group, a privately owned company which underwrites more than 5% of the UK's motor insurance policies.

Sky News has learnt that discussions between the Co-op and Markerstudy are at an advanced stage, although a definitive decision to proceed with a transaction has yet to be reached by either of the two boards.

If completed, a deal would see the Co-op restructuring its presence in the UK general insurance market at a time of profound changes to the industry's distribution model.

The mutual, which has recovered strongly from its near-death experience five years ago, has been exploring a sale of its insurance operations since the summer.

The AA, Aviva (Other OTC: AIVAF - news) , RSA Insurance (LSE: RSA.L - news) and Saga (Frankfurt: 2S8.F - news) are all understood to have expressed an interest in a deal with the Co-op, but sources close to the situation confirmed on Monday that Markerstudy was the party most likely to seal a takeover of the business.

They added that GSO, the credit arm of alternative investments giant Blackstone (NYSE: BX - news) , was among the parties approached about helping Markerstudy to finance the acquisition.

Marketstudy operates through brands such as Zenith and works with more than 1000 brokers and intermediaries.

If a deal falls through, the Co-op could look at a reinsurance trade as an alternative to a sale.

The disposal of the insurance arm, which made £11m in underlying profit in 2017, is being viewed sensitively within the Co-op Group because of its prospective impact on the insurance division's workforce, which numbers about 1000 people.

Any sale, which could result in significant redundancies, would not lead to the Co-op exiting the UK insurance market, however.

Sources said that a buyer would be required to commit to a long-term deal to sell insurance products under the Co-op brand as the mutual attempts to expand the proportion of its 4.5 million-strong membership base who buy at least one of its policies.

The Co-op currently underwrites its own home and motor insurance policies, while travel insurance policies are underwritten by Mapfre (LSE: 0NQ2.L - news) , a US-based insurance group.

It also sells pet insurance plans with Allianz (Swiss: ALV-EUR.SW - news) , the German insurer.

The decision to examine a sale comes more than five years after the Co-op put the division on the block in contrasting circumstances.

Board members hired Rothschild, the investment bank, in 2013 to oversee an auction as the Co-op scrambled to fill the £1.5bn black hole in its balance sheet created by the crisis at the bank it owned at the time.

Its life insurance business was sold to Royal London, another mutual, but the general insurance sale process was abandoned in early 2014 after directors concluded that the additional proceeds were no longer required.

Sources have said that a sale would free up a significant amount of capital tied up in the Co-op's insurance arm for regulatory purposes, allowing it to invest in other growth initiatives.

The mutual has engineered a remarkable recovery from its near-death experience five years ago, when it launched a corporate governance overhaul and brought in new leadership to stabilise its finance and restore public trust after the scandal involving Paul Flowers, its former bank chairman.

Since then, it has disposed of several businesses, including its farming operations and its remaining stake in the Co-op Bank, which is now controlled by a consortium of American hedge funds but continues to use the brand.

The Co-op has set a target of 80% of its membership base becoming insurance customers within about five years, up from just one-third today.

Last year, the insurance arm reported revenue of £331m but terminated a contract with IBM (NYSE: IBM - news) to upgrade its IT systems after a series of problems.

More broadly, the Co-op Group's financial performance has improved substantially under Allan Leighton, its chairman, and Steve Murrells, who took over as chief executive last year.

Its food retailing arm, the Co-op's largest business, has outperformed many of its rivals in a challenging climate.

The Co-op, which is being advised by Fenchurch Advisory Partners, declined to comment on the talks with Markerstudy, which also refused to comment.