September 28, 2012 / 2:16 PM / 7 years ago

UK car insurance probe overshadows Direct Line IPO

LONDON (Reuters) - British anti-trust regulators will investigate the car insurance market over fears consumers are being overcharged, casting a cloud over the planned flotation of industry leader Direct Line, which looks set to be valued at the lower end of expectations.

Shares will be offered at between 160 and 195 pence per share, giving the business a market value of 2.66 billion pounds at the mid-point of the range, Direct Line’s owner, Royal Bank of Scotland (RBS.L), said on Friday.

Analysts had expected Direct Line, which also trades under the Churchill and Privilege brands, to fetch between 2.5 and 3.5 billion pounds.

If priced at 195 pence, the insurer could raise as much as 975 million pounds, in London’s biggest initial public offering in over a year.

RBS, 82 percent government-owned after receiving a bailout during the 2008 financial crisis, was told to sell Direct Line by EU regulators as a condition for taking state aid.

The bank set the price range for the offering hours after the government’s consumer watchdog ordered an anti-trust probe of the motor insurance market on the grounds that ineffective competition was forcing up costs for consumers.

The Office of Fair Trading (OFT) referred the industry to the Competition Commission for an inquiry that could take up to two years, saying the market may have features that “prevent, restrict or distort competition.”

The probe could “put a spanner in the works” of the IPO, Shore Capital analyst Eamonn Flanagan wrote in a research note.

Edinburgh-based RBS has been under political pressure to secure a good price for Direct Line to reduce the British taxpayer’s current loss of 22 billion pounds on the 45 billion pounds the government pumped into the bank to secure its future.

A successful sale would be a boost for RBS, under investigation for its role in a global interest rate rigging scandal and for possible breaches of sanctions on Iran, and under fire at home after a computer systems failure caused havoc for millions of customers.

The OFT’s concerns centre on how insurers provide replacement vehicles and repair services to customers involved in accidents they do not cause.


Insurers of drivers who are not at fault refer them to car hire firms and repair garages which charge more than the market rate in return for a fee, the watchdog said in a provisional finding in May.

That pushes up the claims bill for insurers of at-fault drivers, ultimately inflating consumers’ insurance premiums, it said.

“Competition appears not to be working effectively in the private motor insurance market,” OFT Chief Executive Clive Maxwell said on Friday.

“The insurers of at-fault drivers appear to have little control over the bills they must pay, and this may be leading to higher costs for them and ultimately higher premiums for motorists.”

Competition regulators could order changes that would make it harder for insurers to boost profits through fees for ancillary services such as replacement vehicles.

Income from such fees accounted for about 30 percent of Direct Line’s operating profit in the first half of 2012, Shore Capital estimated.

One of RBS’s 25 biggest investors told Reuters the investigation could weigh on Direct Line’s stock market valuation.

“This is just what the Direct Line float wanted,” the investor said sarcastically. “There was already a lot of downward pressure on the Direct Line price. It only looked OK at the bottom of the range, even before this latest twist.”

The anti-trust probe had been widely expected after the OFT provisionally decided to refer car insurers to the Competition Commission in May.

Analysts said investors were also cautious towards Direct Line because of poor growth prospects amid intense competition in the motor and home insurance markets.

“It’s going to be quite hard to increase large market shares, and the rating environment for motor insurers has become quite competitive - that’s probably the biggest headwind,” said Nick Johnson of Numis Securities.

“The noise around the Competition Commission inquiry is not helpful, but it’s not insurmountable.”

Shares in rival motor insurer Admiral (ADML.L), which makes about 60 percent of its profit from ancillary products, were down 3.7 percent at 1445 GMT, making it the biggest FTSE 100 faller. RBS shares were up 1 percent.

Additional reporting by Sinead Cruise and Kylie MacLellan; Editing by Elaine Hardcastle, Mark Potter and Pravin Char

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