Direct Line: cost control - FT.com Getting an initial public offering away can be a nervous, touch-and-go affair. So everybody involved in the flotation of insurer Direct Line last October is likely to be looking back with satisfaction. Its shares are up by almost a third on the offer price, outperforming rivals Admiral and RSA. But even after that, on 12 times forecast earnings the shares are at a discount to Admiral and esure, both on 14. The discount partly reflects an overhang. Royal Bank of Scotland still owns 48 per cent of Direct Line and has to sell the stake by the end of next year. The discount might also reflect higher costs at Direct Line. Operating expenses were 26 per cent of gross premiums last year. At Admiral the proportion was 19 per cent. So it is little surprise that Direct Line's shares jumped 4 per cent on Wednesday as the company announced another round of cuts. The last round - £100m of savings outlined last year - only just offset increases elsewhere, so annual costs were expected to remain steady at £1.1bn between 2011 and 2014. The latest cuts, a big chunk of which will come from headcount reductions, will bring those costs down to £1bn, with the possibility of more to come. The cost line is important because advances in premium income cannot be taken for granted. The world of UK motor and home insurance is characterised by aggressive price competition on comparison websites. The UK motor insurance market, which accounts for 40 per cent of Direct Line's premiums, fell 1.5 per cent in 2012, according to Deloitte, and is likely to fall further in 2013. And Direct Line, which is focusing on value rather than volume, might not even match the market. Its premiums in the first quarter fell by almost 5 per cent. If revenue growth is not going to sustain Direct Line's impressive start, the heavy lifting will have to come from further down the profit and loss account.