All systems go as Direct Line defies recession in £3bn float

RBS-owned insurer targets small-time punters with stock market launch

Royal Bank of Scotland Chief Executive Sir Fred Goodwin (REUTERS)

Direct Line yesterday defied the ongoing recession, nervy stock market conditions and the continuing eurozone crisis to press the button on a £3bn flotation that it hopes will attract investment from small-time punters.

The insurer owned by Royal Bank of Scotland (RBS), the taxpayer-backed bank that collapsed in the financial crisis, insists it is ready to join the stock market as a stand-alone entity.

Sceptics note it is being sold off due to an EU ruling and point out the climate for fresh investment into companies going public is far from positive.

RBS was ordered by European regulators to sell Direct Line as part of its £45bn government bailout at the height of the banking crisis.

It must sell at least 25 per cent of its stake by the end of the year and have no shareholding at all by 2014.

The float is being led by Goldman Sachs and Morgan Stanley, who are assumed to have gathered enough indications of support from large institutions to get it away. Retail investors will also be given the chance to buy into the float.

Asked why they should do so, given that they may feel they already own the business, chief financial officer John Reizenstein said: "I think that is a question for RBS. We will make the shares available through intermediaries, retail investors can take advice on whether it is a good idea or not."

Several companies have lately pulled their floats. The latest example – in the same sector as Direct Line – came this week when Talanx scrapped its IPO plans. The German insurer complained of lukewarm investor interest just days after saying it would proceed.

Paul Geddes, the Direct Line chief executive, insisted that "the read across doesn't work... we are in very different markets".

It was revealed yesterday that Direct Line has paid dividends to Royal Bank of Scotland of £1bn this year.

This was one of several figures revealed in documents about the flotation which were intended to show Direct Line is ready to be a stand-alone business, although it may increase the feeling that the bank would keep the insurer if it could.

As part of the effort to woo investors, Direct Line talked of a "progressive" dividend policy and also pledged for the first time to become profitable from underwriting next year.

Analysts expect the business, which is Britain's largest motor insurer, to break into the FTSE 100 with a value of perhaps £3bn.

The figures also showed pre-tax profits fell by 43 per cent to £106.5m in the six months to the end of June, after £109m of restructuring charges.

Said Mr Geddes: "We think we are ready. We have got the business back on track. Investors will get a business that is performing well."

Direct Line intends to pay out 50-60 per cent of its profits in dividends, he added.

The insurer was started 25 years ago. As well as Direct Line itself, it also owns the Churchill, Green Flag and Privilege insurance brands and has more than 4 million motor insurance customers and a similar number of home insurance policies.

Last week the company, which employs 15,000 staff, said it would cut 900 jobs to save costs as part of cost-saving moves in readiness for joining the stock market.

The float comes just ahead of a likely investigation into the car insurance industry by competition authorities.

The Office of Fair Trading recommended a "provisional" referral of the sector to the Competition Commission in May, but has been consulting the industry over the summer.