Peter Wood, the company's founder and a director of Royal Bank, is understood to have told the bank's board that a flotation is essential to keep together the 30-strong team that has built it up virtually from nothing in just four years.
Direct Line sells insurance directly over the phone and cuts out paying broker commissions. It has been more than doubling the number of motor policies it sells each year and is increasingly offering household policies as well.
Royal Bank has denied that a flotation is being considered for the near future, but it has not ruled out a sell-off in the longer term.
Mr Wood told a recent meeting of City analysts that he is pressing for a flotation after the announcement this December of soaring profits for the current year, ending in September. A source close to both the bank and Mr Wood said a spin-off is expected for next year, when Direct Line is likely to be making pounds 100m a year before tax and will have more than pounds 500m in the bank.
Direct Line employees believe the company will be hived off. 'There are a lot of people taking an interest in what is happening at Direct Line,' said Laura O'Connel, the operations spokeswoman. 'A partial or whole flotation could figure in the equation, but there are no plans at present.'
Mr Wood, who was paid pounds 6.2m last year in salary and bonuses, is expected to earn more than pounds 10m this year as the costs of building the operation become less significant.
He also wants Royal Bank, which only has two representatives on Direct Line's 11-man board, to allow the insurer to expand into new business areas such as life insurance and deposit-taking. Some of these businesses could bring it into head-to-head competition with Royal Bank.
Victor Blank, the chairman of Royal Bank's merchant banking side, Charterhouse, successfully pressed for the operation to be sold when the parent would not back its European expansion plans. A pounds 235m deal to sell Charterhouse to two European banks was announced last week.
Direct Line's progress is in stark contrast to that of Royal Bank, which recently announced a plunge in profits to just pounds 21m last year, after a huge rise in bad debt provisions.
Direct Line made pounds 15.1m in the year to 30 September after generating premium business of pounds 400m. Analysts are predicting it will make well over pounds 40m this year and, on current business projections, close to pounds 100m in 1993-4. Internal projections are that Direct Line could earn up to pounds 150m in the following year.
That would enable Royal Bank to put a valuation of more than pounds 1bn on Direct Line.
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