Direct Line flotation on track 
in spite of £40m weather bill

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TOUGH markets have not derailed the flotation of car and home insurance giant Direct Line, its owner Royal Bank of Scotland revealed.

RBS’s insurance division, which includes the Churchill, Green Flag and Privilege brands, will be one of the stock market’s biggest initial public offerings (IPO) of recent years when it floats in October. It could command a value of £3bn to £4bn.

The insurer, based in Bromley, Kent, employs 15,100 staff, including about 3,700 in Yorkshire, and also has operations in Germany and Italy.

RBS finance director Bruce van Saun said floating Direct Line offers “the best possible value to us rather than a trade buyer or private equity buyer”.

“Direct Line Group continues to be on track as first-half profit improved six per cent despite the £40m increase in weather claims,” he added.

RBS chief executive Stephen Hester said the bank has “flexibility in the (IPO) timetable”. “If market conditions are not right we are able to wait,” he said.

The business increased the number of its live policies by two per cent to 20.1m. Direct Line said net claims fell 18 per cent to £1.2bn in the period as the bad weather claims were offset by the exit of the personal line broker business and reserves released under its transformation plan.

Direct Line also revealed plans to cut another £100m of costs, including an unspecified number of redundancies. A Direct Line spokesman said: “The initiatives, focused on reducing administration costs in central functions and improving marketing efficiency, are designed to provide us with more opportunities.

“A significant proportion of the savings will come from non-people sources, for instance in reducing distribution costs. But clearly a consequence of efficiency is less people, so there will be some redundancies.”

Its Doncaster site employs 723 staff and its three Leeds sites have a total 3,023 employees.

RBS must sell Direct Line by the end of 2014 in return for its £45bn taxpayer bail-out in 2008, which left the state holding 82 per cent. The European Commission says RBS must cede control of the insurer by the end of 2013.

Mr Hester said the IPO will be in three separate tranches of shares.

During the six months Direct Line bolstered its competitive position after securing a five-year contract with Sainsbury’s Finance to provide customers with home and car insurance.

It also introduced a new management system to deal with motor claims at Churchill, Direct Line and Privilege, as well as new home claims at Churchill, to improve efficiency.

Headed by chief executive Paul Geddes, it has also recruited former Norwich Union executive Mike Biggs as its chairman.

Mr Geddes said: “Aside from certain transitional services provided by RBS Group, we have essentially achieved the goal of operating as a standalone insurance company.”

The figures came as its parent RBS reported deeper losses and another £310m of provisions to cover a recent IT failure and two mis-selling scandals.

The bank revealed it has set aside £125m to pay for the computer failure that affected 17m RBS, NatWest and Ulster Bank customers, leaving many locked out of their accounts. RBS also took another £135m hit to cover compensating customers mis-sold payment protection insurance (PPI), taking its total bill for PPI to £1.3bn.

RBS also took a £50m charge to compensate small businesses that were mis-sold complex interest rate swaps – and admitted this could go higher.

Pre-tax losses at the bank almost doubled to £1.5bn from £794m a year earlier. However, bad debt writedowns fell 37 per cent year-on-year to £2.6bn.

“We believe that the worst is behind us,” said Mr Hester. “We need to demonstrate the bank has really changed, physically and culturally, from the go-go times pre-crisis. We will have wrenching times to go through.”