The chief executive of internet-based motor-to-home insurer company Esure must be optimistic that the company’s proposed stockmarket float will be well received after rival Direct Line (DLG) today announced a strong set of results for 2012.
Direct Line, which Esure founder and chief executive Peter Wood also launched, reported a 26.2% rise in pre-tax profit to £60.2 million in the fourth quarter, while announcing an 8p final dividend.
Direct Line advanced 0.5% to 211.5p on the news. The shares have risen by 21% in value since listing at 175p on the London Stock Exchange in October 2012. This was despite pre-float jitters, due to valuation concerns and that part state-owned lender Royal Bank of Scotland (RBS) was forced to sell the business and turned to retail investors after failing to secure interest from trade or private equity buyers.
Analysts suggest that Esure will be valued at between £600 million and £750 million when it lists. Media reports reckon the valuation could be even higher, potentially up to £1 billion. Direct Line’s £2.6 billion market cap and its subsequent performance must give Wood and his fellow directors’ confidence that Esure could be just as popular.
However, there is a dark cloud on the horizon. Esure provides motor insurance among its offering and this is a section of the industry that is expected to not only lower its premium costs in the next few years but could also be forced to alter its business model. This risk also applies to Direct Line.
Concerns that costs are being inflated due to referral fees is being examined by the Competition Commission, which in the next two years is to rule on if drivers are paying high premiums to cover unnecessarily high breakdown and repair costs.
Direct Line’s run has been impressive for a deal sold as an income play. With RBS having to sell almost two-thirds of the company in the coming years, the overhang is likely to damage the company’s value, while a ruling by the Competition Commission means the industry is in for a major shock.