Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) raised 787 million pounds ($1.3 billion) in an initial public offering of its insurance unit.
Forced by European Union regulators, Britain’s largest government-owned lender offered 450 million shares, or about 30 percent of the insurer, in Direct Line Insurance Group for 175 pence each. With this price, the offering was valued at around 2.63 billion pounds, far short of the 3.4 billion-pound valuation by Commerzbank AG, one of the banks managing the sale.
The Edinburgh-based lender was compelled to divest its stake in the unit to meet the requirements of the European Union state aid rules after receiving a 45.5 billion-pound government rescue in 2008, the largest bank bailout in the world. As per the agreement, RBS was required to offload its remaining stake in the company by 2014.
However, many investors, including JO Hambro Capital Management Ltd, demanded a discount, as the company, which focuses on U.K. motor market, has not been generating an underwriting profit for insurers in a decade because of surging personal-injury claims exacerbated by no-win, no-fee lawyers. For the half of the year, ending June, Direct Line paid out 1.01 pounds in claims for every pound it took in premiums, but it plans to bring the ratio to 98 pence in 2013. Direct Line, which has close to 8.5 million customers, returned to profit in 2011, and for the first half of the year, its earnings rose by 7 percent to 224.2 million pounds. The motor insurer has been undergoing a probe since last month, by U.K. antitrust regulator, after the Office of Fair Trading deemed it “dysfunctional”.
Direct Line Chief Executive Officer Paul Geddes said on a conference call today, that the shares have also been offered to individual investors to boost demand. Collectively, these individual investors have bought 15 percent of the stock offered and will own about 4.5 percent of the company. Morgan Stanley (NYSE:MS), Goldman Sachs Group, Inc. (NYSE:GS) and UBS AG (NYSE:UBS) are managing the IPO as book runners, while Bank of America Corp (NYSE:BAC),Citigroup Inc. (NYSE:C) and HSBC Holdings plc (LON:HSBA) (NYSE:HBC) are joint lead managers. The banks managing the IPO will be paid around 2.6 percent of the money raised, while the intermediaries will receive a further 0.4 percent fee, Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) said. The banks may sell an additional 67.5 million shares if they exercise the over-allotment option in full.
As per the data compiled by Bloomberg, Direct Line’s IPO is the biggest in London since Genel Energy PLC (LON:GENL) raised 1.3 billion pounds in June 2011.