RBS Raises 787 Million Pounds in Direct Line Share Sale

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RBS Raises 787 Million Pounds in Direct Line’s Initial Offering
The offering values Direct Line at 2.63 billion pounds, less than the 3.4 billion-pound valuation put on the unit last month by Commerzbank AG, one of the banks managing the sale. Photographer: Jason Alden/Bloomberg

Royal Bank of Scotland Group Plc, Britain’s biggest government-owned lender, raised 787 million pounds ($1.3 billion) in an initial public offering of its insurance unit forced by European Union regulators.

RBS sold 450 million shares in Direct Line Insurance Group Plc, or about 30 percent of the insurer, for 175 pence each, the Edinburgh-based lender said in a statement today. The stock rose 7.4 percent to 188 pence in London trading.

RBS was required to sell the operation to comply with European Union state aid rules after receiving a 45.5 billion-pound government rescue in 2008, the biggest bank bailout in the world. The lender must sell its remaining Direct Line stake by the end of 2014.

“Although below what we believe the group expected to be valued at at the start of this process, this is a reasonable outcome,” Eamonn Flanagan, a Liverpool, England-based analyst at Shore Capital Group Ltd., wrote in a note to clients today.

The offering valued Direct Line at 2.63 billion pounds, less than the 3.4 billion-pound valuation put on the unit last month by Commerzbank AG, one of the banks managing the sale. The IPO values Direct Line at 1.1 times its tangible book value of 2.3 billion pounds, according Oriel Securities Ltd. That’s less than competitors such as RSA Insurance Group Plc, which trades at about 1.6 times tangible book value.

Injury Claims

Investors including JO Hambro Capital Management Ltd. had pressed for a discount because Direct Line focuses on the U.K. motor market, which hasn’t generated an underwriting profit for insurers in a decade because of surging personal-injury claims exacerbated by no-win, no-fee lawyers.

Direct Line paid out 1.01 pounds in claims for every pound it took in premiums in the six months ended June 30 and plans to reduce this to 98 pence in 2013. 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.

The Competition Commission, a U.K. antitrust regulator, began a probe into the U.K. motor insurance market last month after the Office of Fair Trading deemed it “dysfunctional.”

Direct Line’s valuation is “reasonable” given its exposure to the U.K. motor insurance market, Shore’s Flanagan said. The stock will have a dividend yield of about 7.6 percent, he added.

Individual Investors

The lender also tried to boost demand by offering shares to individual investors, who bought 15 percent of the stock on sale and will own about 4.5 percent of the company, Direct Line Chief Executive Officer Paul Geddes said on a conference call today.

Morgan Stanley, Goldman Sachs Group Inc. and UBS AG are managing the IPO as bookrunners, while Bank of America Corp., Citigroup Inc. and HSBC Holdings Plc are joint lead managers. The banks may sell a further 67.5 million shares if they exercise the over-allotment option in full.

The banks will receive as much as 2.6 percent of the money raised in the sale in fees. Intermediaries selling the stock to those investors will receive a further 0.4 percent fee, RBS said.

Initial share sales in Europe, the Middle East and Africa have raised $6 billion this year, compared with $37 billion in the same period last year as market volatility caused by Europe’s sovereign debt crisis slowed the pace of stock sales, data compiled by Bloomberg show. Direct Line’s IPO is the biggest in London since Genel Energy Plc raised 1.3 billion pounds in June 2011, the data show.

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