Sceptical traders set to undermine Direct Line

Brokers say queues are forming to short-sell shares in insurer's flotation

City brokers are warning that the float of insurer Direct Line could be undermined by an army of sceptics poised to bet against the shares when they start trading this week.

Bankers indicate that Royal Bank of Scotland, the parent company of the insurance company with the famed red phone, has found buyers for the 33 per cent stake it is selling to stock market investors.

Investors will pay between 160p and 195p for the shares, though all indications are that the price will be to the lower end of the range, leaving Direct Line valued at closer to £2.5bn than the £3.5bn hoped for.

Some are warning that the shares could move even lower, with Direct Line at risk of being punished for the recent poor track record of high profile floats, including Manchester United and Facebook.

Espirito Santo analyst Joy Ferneyhough said in a note: "The headwinds from the current softening pricing environment, macro challenges to the home and commercial market, and margin pressure from regulatory changes ... will be too much."

She puts the company's value at just £2.4bn. Spread-betting houses say it could fall further than this, at least initially, with customers getting ready to short-sell the stock.

David Jones of the leading spread-bet firm, IG, said: "Based on the recent performances of the likes of Glencore, Ocado, Manchester United and, of course, Facebook, there is a somewhat cynical attitude out there for flotations at the moment – we do have a few clients forming an orderly queue and waiting to short sell it on its debut."

Manoj Ladwa, at TJ Markets, said of the stock: "I wouldn't buy it. Floats have a tendency to perform badly from the off as those who bought into the listing look to take a profit. Just look at Facebook.

"The company operates in a mature industry, in a competitive environment and is likely to come in for selling pressure on Day One."

RBS is selling Direct Line, Britain's biggest motor insurer, to win European Union regulatory approval for the Government bailout it received during the 2008 financial crisis.

The flotation, London's biggest in a year, comes just as an anti-trust probe into the British motor insurance sector begins.

The shares are being offered to retail investors as well as institutions, something welcomed by the retail stockbrokers that will pick up commissions, but which some say suggests large City institutions are not that keen on the business.

Stockbrokers involved in the listing report good interest from private investors. Investment advisors say investors who do buy the stock are buying into a recovery story.

The company suffered a £378m loss two years ago as it was forced to hike reserves after a surge in personal injury claims.

It bounced back to profitability in 2011 and made a £106.5m pre-tax profit in the first half of this year.

The management team, led by chief executive Paul Geddes, is generally well regarded.

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