Direct Line Rises to Highest Since IPO Amid Asset Sale Talks

Aug 01, 2014 11:55 am ET

(Updates with closing share price in second paragraph.)

Aug. 1 (Bloomberg) -- Direct Line Insurance Group Plc rose to its highest level since its initial public offering in 2012 after the U.K.’s biggest home and motor insurer said it’s in talks to sell its German and Italian operations.

The stock rallied 5.1 percent to close at 299.4 pence in London as the insurer also said it will pay a special dividend of 10 pence a share in addition to increasing the interim dividend 4.8 percent to 4.4 pence.

Italy and Germany “are great businesses, have got strong positions and perform well, but there is a question whether they might be worth more to someone else,” Chief Financial Officer John Reizenstein said on a conference call today. “We have decided to explore potential disposals of the operations and discussions are taking place with a number of parties.”

Reizenstein said the talks came after a strategic review of the international unit in the first half of the year, adding that it wasn’t about cash flow or dividends. He didn’t provide details about the price at which the units in Germany and Italy may be sold.

The units are valued at about 427 million pounds ($719 million), RBC analyst Gordon Aitken wrote in an e-mailed report to clients from London.

No Certainty

Direct Line, in which Royal Bank of Scotland Group Plc sold a first stake in an IPO in October 2012, is the latest British insurer to explore asset sales abroad. RSA Insurance Group Plc has raised more than 600 million pounds from asset sales in eastern Europe, Canada and China this year while Aviva Plc has reduced the markets it operates in to 17 from 28 in 2011.

Direct Line’s international unit contributed 13.4 million pounds to the insurer’s operating profit of 249.1 million pounds in the half year, the statement showed. That’s down 4.3 percent on the previous year.

Disposals are “sensible given these businesses should be worth more to an insurer with an established motor presence in these markets,” Aitken said. “We would expect the proceeds to be passed back to shareholders in the form of a special dividend.”

Goldman Sachs Group Inc. is advising the insurer on the potential disposals, according to two people with knowledge of the discussions. Direct Line said in the statement that there was no certainty that a sale would occur.

The insurer said its on track to meet its cost-saving target of about 1 billion pounds this year after reducing costs by another 5.4 percent in the first half to 496 million pounds.

Gross written premiums from continuing operations fell 5.1 percent in the period to 1.87 billion pounds. Premiums for U.K. motor coverage declined by 9 percent in the first half, while prices declined by an average 2 percent in the second quarter.

The stock has rallied 20 percent in 2014, the best performer on the FTSE 350 Nonlife Insurance Index.