Royal Bank of Scotland is considering selling a strategic stake in its insurance business and running the owner of Direct Line and Churchill as a partnership as it moves to raise capital to repair its tattered balance sheet.

Bankers managing the sale of RBS Insurance are preparing to send out sales memorandums to prospective buyers, including private equity and trade buyers, over the next few weeks.

A source close to the sales process said: “Some people would be interested in buying a large stake and having a partnership."

Analysts are speculating that the Edinburgh-based bank, which hoisted a “for sale” sign over the businesses this week, will be able to sell its insurance unit for about £6 billion.

RBS confirmed that it was selling its insurance business as it pressed on with a deeply discounted £12 billion rights issue that has raised hackles among its big institutional shareholders. Going for a rights issue, after pledging for months that it had no need to raise capital, has put the jobs of Sir Fred Goodwin, chief executive, and Sir Tom McKillop, chairman, on the line.

The bank is aiming to free £4 billion in capital gains from the process, which is running alongside its record breaking rights issue. Merrill Lynch is managing the sale, helped by Goldman Sachs. Banking sources said that there was huge interest in RBS Insurance, which also includes the Privilege car and home insurance operations.

RBS Insurance underwrites a third of UK retail motor premiums, according to analysts at Keefe, Bruyette & Woods (KBW), who said that a new owner would be in a position to redefine the market for insuring cars in Britain.

Personal motor insurance accounts for more than half of the business’s gross written premiums, KBW said.

Direct Line was founded in 1985 and RBS bought Churchill in 2003 for £1.1 billion. As well as selling through the well-known brands, RBS Insurance underwrites policies sold by Tesco, Nationwide and several car retailers.

KBW suggested that potential bidders were AIG, the American insurance giant, Allianz, of Germany, and AXA, of France. Warren Buffett’s Berkshire Hathaway reinsurance group, Generali, of Italy, and the Swiss Zurich Financial Services were also named. Aviva, Britain’s largest general insurer, yesterday ruled itself out as a bidder.

Banking sources said that RBS would prefer to sell the business as a whole but would consider the sale of individual business lines, as well as a strategic stake. Sources close to the bank said that it would sell only if it received a sufficiently high offer but it hoped to complete a sale by the end of the year.

Apax and Kohlberg Kravis Roberts are said to be considering a consortium bid, with Lehman Brothers, the investment bank, in line as an adviser.

RBS shares closed the week almost 2.5 per cent higher, up 8¼p at 349p. RBS will offer 11 new shares for every 18 existing shares, priced at 200p.

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive