RBS Prices Direct Line in Biggest London IPO Since Glencore

Royal Bank of Scotland Group Plc plans to raise about 1 billion pounds ($1.6 billion) in the initial public offering of Direct Line Insurance Group Plc, pricing the stock at a discount to lure investors.

RBS (RBS) is offering as many as 500 million shares, between 25 percent and 33 percent of the company, priced at 160 pence to 195 pence apiece, the Edinburgh-based bank said today in a statement. The range’s mid-point values Britain’s biggest motor insurer at 2.66 billion pounds, marking the biggest U.K. IPO since Glencore International Plc (GLEN) raised $10 billion in May 2011.

“Today’s announcement reflects the level of investor interest that has been shown at this stage of the transaction, which we believe underlines the potential that exists in Direct Line Group,” Paul Geddes, the insurer’s chief executive officer, said in the statement.

Direct Line’s mid-point valuation is 22 percent less than the 3.4 billion-pound estimate published in a report by Commerzbank AG, a co-manager of the IPO. Investors including JO Hambro Capital Management Ltd. this week said RBS would need to price the stock at a 25 percent discount to attract interest. RBS is selling the insurer to comply with a European Union penalty imposed after the bank took state aid during the 2008 financial crisis.

Underwriters’ Fees

Morgan Stanley (MS), Goldman Sachs Group Inc. (GS) and UBS AG (UBSN) are managing the IPO as bookrunners, while Bank of America Corp., Citigroup Inc. and HSBC Holdings Plc (HSBA) are joint lead managers. The banks will receive as much as 2.6 percent of the money raised in the sale in fees. Intermediaries selling the stock to individual investors will receive a 0.4 percent fee, RBS said.

Market volatility caused by Europe’s sovereign debt crisis has crimped the pace of stock sales in the region this year. Companies raised $1.5 billion this year in London IPOs, compared with $15.6 billion in the same period last year, according to data compiled by Bloomberg.

Direct Line competes in a U.K. market that hasn’t made an underwriting profit in the last decade because of surging personal-injury claims, according to the Association of British Insurers.

The IPO comes as the Competition Commission, a U.K. antitrust regulator, begins a probe into the country’s motor insurance market, which the Office of Fair Trading deemed “dysfunctional.”

Court Decision

The insurer said pretax profit may be eroded by between 30 million pounds and 45 million pounds depending on the outcome of a Court of Appeal decision relating to increased damages costs in the industry. The firm also signed a five-year distribution agreement with RBS this month, it said.

Geddes is focusing on controlling expenses and improving underwriting after the firm lost money in 2010 because of rising claims costs. The firm “messed up” by failing to manage claims and raise premiums quickly enough, RBS CEO Stephen Hester said in 2009.

The insurer, which has about 8.5 million mainly U.K. home and motor insurance customers, returned to profit in 2011 and earnings rose 7 percent to 224.2 million pounds in the first half of this year. It paid out 1.01 pounds in claims for every pound it took in premiums in the six months ended June 30.

Geddes will receive a salary of 760,000 pounds, annual bonus of 1.33 million pounds and long-term incentives valued at as much as 1.5 million pounds a year, the IPO prospectus said. He will also buy 56,179 shares in the IPO at the offer price, the company said.

To contact the reporter on this story: Kevin Crowley in London at kcrowley1@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net;

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