Grim forecast on Direct Line profits hits RBS shares

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Royal Bank of Scotland's shares were knocked yesterday as BZW, the investment bank, sharply cut its forecasts for the company's Direct Line insurance subsidiary due to sustained pricing pressure on premiums and a big increase in personal liability claims.

Hugh Pye, a top-rated analyst at BZW, yesterday recommended that investors sell RBS shares, a constituent of the FTSE 100 index, after slashing its forecast for Direct Line's profits from pounds 50m to pounds 16m for the 1995/96 year. Shares in RBS, which have been buoyed recently by takeover speculation, dropped 13p to 522.5p, a sharp contrast to other top equities which registered further rises to take the FTSE 100 index to an all-time high of 4,058.8.

Looking further ahead, BZW has cut its 1996/97 forecast for Direct Line, which landed its founder Peter Wood a pounds 24m payout for his share stake a couple of years ago, from pounds 75m to pounds 25m and for 1997/98 from pounds 100m to pounds 33m.

Overall, BZW said Direct Line would hit RBS's profits and it cut its forecast for the bank to pounds 675m of profit for its latest financial year, which ended last month. While that is lower than its earlier forecast of pounds 709m it is still an increase on the pounds 602m that RBS made in 1995.

"Direct Line is suffering from a sharp increase in personal liability claims and the lack of any easing in premium price competition," Mr Pye said.

"Uncertainty in Direct Line's reserving requirements is likely to deter potential aggressors. Further rumours will probably trigger the approach denials that put paid to last year's speculation," he added.

Direct Line declined to comment yesterday as it is in the "closed period" ahead of its results.

But at the halfway stage Direct Line said it expected an improvement in the premiums it charged for motor insurance, which accounts for around 75 per cent of its business, during the second half of the year. Analysts, though, are cutting their forecasts because competition in the market has remained fierce and the sharp increases in premiums necessary to build up profits are not emerging.

"Insurers are putting premiums up but it's pretty modest at 3 to 5 per cent against claims which are rising [at a similar rate], which is allowing no great improvement in profits," said Trevor May, insurance analyst at Salomon, the US investment bank.

Also adding to insurers' woes, especially those in the motor industry, is a sharp increase in personal liability claims through the courts, which are granting higher awards because they have started to assess personal injury awards through Ogden tables.

These tables standardise the claims awarded by projecting future earnings potential of the injured party. "The resulting rewards are significantly higher than hitherto, and not allowed for in current premium rates," said BZW.