RBS sells Direct Line stake on eve of revealing losses

Royal Bank of Scotland last night sold its remaining 28 per cent holding in the insurer Direct Line just hours ahead of its full-year results.

The state-owned bank, which is expected to unveil a loss of up to £8bn this morning, is in line to make £1.15bn from placing the shares with institutional investors.

RBS sold its majority stake in Direct Line through an IPO in 2012 after European Union regulators demanded the disposal as the price for its government bailout.

The latest sale came as Direct Line yesterday reported a massive rise in pre-tax profits to £424m last year, compared with £249m in 2012, despite taking in less money from premiums year-on-year.

Fewer claims across the year meant that its combined ratio improved by 3.1 per cent to 96.1 per cent. Any figure below 100 per cent shows that an insurer is earning more in premiums than it pays out in claims.

Paul Geddes, the chief executive of Direct Line, said: "In UK motor, our improved pricing capability and claims management, as well as benefits arising from recent legal reforms, enabled us to reduce average prices for customers by 3 per cent during 2013. In home, recent UK weather events have emphasised the importance of insurance."

Shares in Direct Line firmed 2p to 263p as it raised its final dividend 5 per cent to 8.4p. A second special dividend of the year, worth 4p, took total dividends to 20.6p.

The company is also benefiting from a tough cost-cutting programme in which it hopes to save £1bn by the end of this year.

Oliver Steel, an analyst at Deutsche Bank, said: "Direct Line has announced a strong set of numbers, with a confident outlook statement, a second special dividend and higher than expected solvency position likely to raise expectations of further special dividends."

Nevertheless, the spectre of the after-effects of some of the UK's worst flooding in a generation loomed large over Direct Line's profits announcement. The company, which is facing up to £110m in claims from the wet winter weather, joined a growing chorus of insurers to warn that immediate action must be taken to prevent thousands of flood-prone homes being left without protection over the next few years.

Direct Line said the Government-backed Flood Re scheme, which will see the industry offer subsidised cover to 350,000 households, should be enforced next year as planned and not delayed any further.

This week Bronek Masojada, boss of rival Hiscox, said that Flood Re should be extended to include even more households. The lifeboat will be funded by a levy on all home insurance policies.

Mr Geddes said: "We have to draw a line somewhere because there are thousands of households counting on it being put into action.

"It's a public policy debate, but the more people that are covered by the scheme, the more everyone else is going to have to pay."