Ready to thrive on its own but still waiting for the launch date

 
Marc Sidwell
Follow Marc
S A

S A slow year for IPOs, so hopes of a Direct Line Group flotation are high, even as it awaits final confirmation.

Direct Line is keen to stress the extent to which it has now prepared itself to operate separately from RBS Group, but it should also still benefit from the connection. A five-year agreement for it to continue to provide general insurance products to RBS is expected to be finalised later this month. It’s a good sign, especially alongside its recent agreements to extend its contracts with Nationwide Building Society and Sainsbury’s Bank.

The separation is not without short-term costs – profit before tax is down £81m compared to the first half of 2011 as a result. The group is committed to making gross cost savings of £100m annually by the end of 2014, although this represents less than 10 per cent of its 2011 cost base. Perhaps more important for its fortunes after it goes its own way is its new, open-ended aim of a return on tangible equity of 15 per cent. That may seem ambitious, with the current annualised 2012 figure at 10.2 per cent, but it was apparently brought down from 12.1 per cent by the £800m in dividends paid to RBS and £500m of debt issuance.

Together with an operating profit for the first half of 2012 of £224.2m, up seven per cent on the same period of 2011, it all suggests that Direct Line Group could have a promising future going its own way. So long, of course, as all this doesn’t make it too tempting a bargain for private equity to resist.