Float will test DLG’s financial flexibility - Moody’s

Rating agency Moody’s says Direct Line Group’s (DLG) initial public offering (IPO) will be a further test of the insurance group’s financial flexibility.

The rating agency has affirmed its A2 financial strength rating of DLG’s main underwriting subsidiary, UKI, ahead of the IPO, saying the flotation plans were factored into the rating.

DLG’s current parent RBS announced on Friday that it was pushing ahead with plans to float at least 25% of the company on the London Stock Exchange in the second half of this year. RBS has to sell a controlling stake in the insurance group by the end of next year and the entire stake by the end of 2014.

Moody’s said DLG’s overall financial flexibility is good but constrained by its limited record of accessing the capital markets because of its current ownership. The agency said DLG passed its first financial flexibility test with its £500m bond issue in April 2012.

It added: “This planned IPO will be another major and larger test of stand-alone financial flexibility.”

Moody’s said the A2 rating on UKI reflects DLG’S very strong position in the UK personal lines market, a relatively conservative investment portfolio, good capitalisation and relatively low financial leverage.

These strengths are offset by relatively weak geographic and business diversification, and the challenge of sustaining recent performance improvements within the very competitive UK motor market which remains vulnerable to bodily injury claims inflation.