Direct Line IPO backers enjoy healthy returns

INVESTORS who took a punt on last year’s Direct Line IPO were yesterday rewarded with a strong rise in underlying profits.

Britain’s leading home and motor insurer floated in October in a £2.6bn deal that helped revive London’s moribund IPO market. Shareholders who bought in at the initial 175p price yesterday saw their shares rise slightly to 210.7p, a 20 per cent increase in just four months.

However, chief executive Paul Geddes warned that 2013 would be a tough year for the industry: “There is no room for complacency as we face a competitive market, particularly in UK motor, where there are also expected to be significant legal reforms.”

Last year regulators began an investigation into the motor insurance market after a probe by Office of Fair Trading concluded that ineffective competition was inflating drivers’ insurance costs.

Geddes’ downbeat outlook may affect rival Esure, which on Wednesday announced plans to follow Direct Line onto the London Stock Exchange. Direct Line’s operating profits rose 9.3 per cent to £461.2m last year, although hefty one-off restructuring costs meant net profits fell 27 per cent to £250m.

The company yesterday confirmed that it is on track to cut £100m from its annual cost base by 2014. It has also driven up profits at its motor insurance business by refusing to cover some riskier drivers.

Direct Line was formerly part of RBS group but the bank was forced to dispose of the group following its government bailout. RBS still retains around two-thirds of the company, which it has to sell before the end of 2014.