RBS’ Direct Line flotation a big draw for small investors

By JAMIE GRIERSON AND KRISTY DORSEY
Published on 11/10/2012 00:00

SMALL INVESTORS will be able to secure shares in Royal Bank of Scotland’s insurance arm Direct Line Group from today in what is expected to be London’s biggest stock market listing of the year.

Conditional trading of Direct Line shares will start shortly after RBS publishes the final price, which will be between 160p and 195p per share.

At the mid-point of this valuation, the Churchill and Direct Line firm would be worth £2.66 billion, at the lower end of earlier City estimates.

Demand has been strong, 
according to retail stockbrokers, of which 20 were appointed to take orders from investors.

Richard Hunter, head of equities at Hargreaves Lansdown, said “thousands” of buyers had registered for shares since the pricing details were announced.

“The issue seems to have captured the retail investor’s imagination, with a well-known brand in the midst of a turnaround story appealing,” he said.

“The additional possibility of a decent dividend yield is also an attraction given the current interest rate environment.”

Retail investors had until Tuesday to apply but they will find out early today what the allocation policy is; that is, how many shares will be available to them through stockbrokers.

RBS is floating up to 33 per cent of the business initially, with further tranches to come.

The state-owned bank must sell a majority stake in Direct Line Group by the end of next year and divest of the entire company by the end of 2014 under a European-imposed condition of its £45bn bail-out received in 2009.

While demand from retail investors is said to have been strong, some institutional investors are understood to have been more sceptical amid 
concerns over the pressures faced by the insurance market.

The float pricing was dealt an immediate blow by the Office of Fair Trading’s announcement, just hours before, that it was referring the motor insurance industry to the Competition Commission for full investigation, a process which could drag on for around two years.

This puts a question mark over the profitability of Direct Line’s motor insurance business which represents around 42 per cent of premiums.

There are also concerns over some of Direct Line’s UK businesses, some of which are paying out more in claims than they are receiving in premiums.

The UK business is also closely tied to the fortunes of the economy, as well as external factors such as the weather.

But the group returned to profitability last year and has committed to distributing 50 per cent to 60 per cent of after-tax profit as a dividend, implying a yield of up to 7.5 per cent - an attractive proposition for investors, given the record low interest rates.

It also has a stable of well-known and established household brands, Direct Line, Churchill, Green Flag, Privilege and NIG, offering insurance on homes, cars, pets, travel and small businesses.

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