Royal Bank of Scotland - which is being forced by EU competition regulators to divest itself of insurer Direct Line by end-2014 - has announced plans to float part of that operation. Between 25 and 33 per cent of the existing shares will be offered in a price range between 160p and 195p a share - implying a market value for the insurer of £2.4bn-£2.9bn. But investors thinking of diving in - the closing date is 9 October - may want to exercise caution.
To begin with, Direct Line is hardly the sector's best performer. It reported a combined ratio (of claims to premiums) of 101 per cent at the half-year stage - meaning an underwriting loss. In contrast, rivals RSA and Admiral both revealed profitable 95 per cent ratios. Moreover, Direct Line's core business is motor cover - responsible for generating 41 per cent of premiums - and prospects there look weak. Motor specialist Admiral, for example, revealed an 8 per cent slide in its motor rates with its half-year figures. And as insurers sacrifice margin for market share, further rate pressure is expected.
"Short- to medium-term top-line [earnings] upside is likely to be modest given existing UK market share of around 19 per cent and competitive conditions," thinks analyst Nick Johnson at broker Numis Securities. That said, Direct Line does plan to cut £100m of costs by 2014 and Mr Johnson estimates a prospective yield of between 6.1 and 7.5 per cent.
Then there's the competition regulators to worry about. At the same time that RBS was releasing IPO details, the Office of Fair Trading announced that it was referring the motor market to the Competition Commission (CC). The OFT reckons that "competition appears not to be working effectively in the private motor insurance market". The CC has up to two years to report - hardly an ideal sentiment backdrop.
