Now that Direct Line Group has set its heart on a flotation, what is in store for the business?

Today the largest personal lines insurer in the UK has fired the starting gun on its flotation with an announcement to the Stock Exchange over its intention to list. The business will float a 25% stake and analysts value it at £3bn. The float will happen in three tranches and it must be finished by 2014 on the orders of the European Commission to abide with state aid rules.

The flotation is the largest of a UK company this year and is fraught with risk for a number of reasons. First, stock markets are very nervous. The UK economy is still sluggish and eurozone break-up risks loom. Some people believe Direct Line Group’s valuation on the market may only be half the £3bn being punted by analysts. The markets are so poor that German insurer Talanx canned its planned flotation earlier this week.

Second, there is looming regulation threats, such as the Office of Fair Trading probe into motor insurance and the way it’s sold. That could reduce ancillary income.

Third, rates in private motor are flattening. After a couple of years where premiums surged 40%, the market is now levelling off. That means it will be harder for Direct Line Group to achieve underwriting profitability.

The right team

The pluses for Direct Line group are that investors will see that the management team is looking pretty strong. Chief executive Paul Geddes took over a basket case that was losing money hand over fist. He’s made some tough decisions, such as closing offices and making redundancies, but that’s reduced the expense base and made the company more competitive.

Chairman Mike Biggs is a seasoned head with vast experience in insurance. Geddes can turn to him for support. Biggs also knows how markets work and how to woo investors, having worked at floated insurance behemoth Resolution.

Geddes has also hired some good people, such as personal lines head Tom Woolgrove and claims boss Steve Maddock.

Underpinning this is a fantastic brand. Direct Line Group is a slickly marketed company and instantly recognised by customers.

Overall though, you can’t help but feel that Direct Line Group has made a questionable decision in deciding to float. It could have sold off to private equity for a guaranteed price, but instead is plunging itself into very volatile markets. This is one massive gamble with very high stakes.