Direct Line Floatation Performs Well in Early Hours
On 11 October RBS’ insurance business Direct Line (LN:DLG) went to IPO on the London Stock Exchange with share prices climbing up to 184p in morning trading.
**Shares Met With High Demand**
RBS set the share price at 175p valuing the company at £2.625 billion, below what many in the City expected. The stock opened up 3 percent in early trading and was changing hands on the secondary market for over 183p.
The bank listed 30 percent of the company or 450 million shares for sale and raised £790 million. Retail stock broker The Share Centre said the floatation was met with high demand from private investors and buy orders were running into the thousands.
“The issue seems to have captured the retail investor’s imagination, with a well-known brand in the midst of a turnaround story appealing. The additional possibility of a decent dividend yield is also an attraction given the current interest rate environment.” said Richard Hunter, head of equities at Hargreaves Lansdown.
**RBS Forced to Sell**
The bank is forced to sell all of its insurance business to comply with European Union aid rules. Back in 2008 RBS nearly collapsed and received a £45.5 billion taxpayer rescue package – the biggest bail-out in the world. The lender has already given up hundreds of its branches to Santander UK as part of the agreement with the European Commission.
!m[First Day of Trading Sees Insurance Business’ Shares Gain on Retail Investors Optimism](/uploads/story/559/thumbs/pic1_inline.png)Unconditional dealing with Direct Line is expected to begin on October 16 and by 2014 the bank must have sold all of its shares.
**Analyst Warn of Bubbling Trouble in Insurance Sector**
Retail investors supported high demand for Direct Line but many institutional investors remained sceptical due to concerns over the hardships faced by the insurance market.
According to Eamonn Flanagan from Shore Capital, over a third of Direct Line’s operating profit for the first half of the year remains under question because of an ongoing investigation led by the Competition
Commission. The referral for the investigation in the motor insurance industry was delivered by The Office of Fair Trading and the process could drag for more than two years.
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Adding to concerns are some of the UK branches of the insurance business, which are continuously paying out more in claims than they receive in premiums. Direct Line’s UK business is also more closely tied to the economy and to external factors such as weather.
**About Direct Line PLC**
Direct Line Insurance Group PLC provides personal and commercial insurance and services, offering a wide range of products including home, automobile, travel, property, pet and accident insurance.
The company operates throughout the UK, Germany and Italy and owns a stable of well-known brands including Direct Line, Green Flag, Churchill, NIG and Privilege. Last year the group managed become profitable again and has pledged to distribute 50 to 60 percent of the after-tax profit as dividends, turning its shares into an attractive buy for retail investors looking for alternatives to the record low interest rates.
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