Direct Line IPO Overshadowed by UK Car Insurance Probe

British anti-trust regulators are set to investigate the car insurance market over fears consumers are being overcharged, which is casting a cloud over the planned flotation of industry leader Direct Line.
Oct. 4, 2012 - PRLog -- Shares will be offered at between 160 pence and 195 pence per share, giving the business a market value of 2.66 billion pounds at the mid-point of the range according to Direct Line's owner, Royal Bank of Scotland.  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.

The Royal Bank of Scotland which is 82 percent government-owned after 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 just hours after the government's consumer watchdog ordered an anti-trust probe of the motor insurance market because ineffective competition was forcing up costs for motorists.

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."  

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.

Currently under investigation for its role in a global interest rate rigging scandal and for possible breaches of sanctions on Iran plus problems with computer systems failure which caused havoc for millions of customers, RBS really need a successful sale.

The OFT's concerns are around how insurance companies provide replacement vehicles and repair services after accidents which are not the drivers fault.   There are car hire firms and repair garages which are charging more than the market rate in return for a fee, the watchdog found earlier this year.    This increases claim costs for the driver who caused the accident but inflates everyones insurance premiums overall.

"Competition appears not to be working effectively in the private motor insurance ( market," OFT Chief Executive Clive Maxwell said.  "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 ("

Analysts have said that investors are also cautious around Direct Line because of poor growth prospects amid intense competition in the home and motor insurance markets (
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