RBS to float its insurance unit on the LSE

Royal Bank of Scotland (RBS) Group, the state-owned lender, plans to go ahead with the initial public offering (IPO) of its insurance unit, Direct Line, the British bank announced on Friday.

The IPO, which analysts expect could value the insurance unit at nearly $5 billion, could be the largest listing on the London Stock Exchange over the past year. However, analysts are wary about the success of the IPO, especially in the wake of the cancellation of an IPO by Germany's third-biggest insurer, Talanx AG, earlier in the week.

Direct Line is the largest home and motor insurer in the UK. European Union regulation has forced RBS – which was rescued by the British government through a £45-billion taxpayer bailout following the 2008 financial crisis – to float the company as a condition for taking government aid.

''We look forward to being a listed company and are more committed than ever to providing customers with excellent products and service levels, whilst seeking to deliver sustainable returns for our shareholders, targeting a 15pc return on tangible equity from ongoing operations,'' said Paul Geddes, chief executive, Direct Line.

According to John Reizenstein, the chief financial officer, ''we've had lots of discussions with institutional investors for about a year and there's a lot of interest.'' The IPO is being managed by Morgan Stanley, Goldman Sachs Group Inc. and UBS AG as bookrunners, while Bank of America Corp., Citigroup Inc. and HSBC Holdings Plc are joint lead managers.

The company saw profits grow by seven per cent to £224.2 million in the first half of 2012. It returned to profit last year after reporting a loss in 2010. Direct Line has about 8.5 million home and motor insurance customers in the UK.

RBS plans to sell at least a quarter of the shares in Direct Line through the IPO. The public will also be able to participate in the issue. Private equity investors have also shown interest in the company, though differences over its valuation have led to delays.
 
Analysts point out that the last-minute cancellation of the IPO by German insurer Talanx highlights the need for more realistic valuations.