Direct Line Insurance Group Plc sold its German and Italian businesses to Spain’s Mapfre SA for 550 million euros ($701 million) as the company pares back its international operations to cut costs and pay a dividend.

The U.K.’s biggest home and auto insurer expects a pretax gain from the sale of about 160 million pounds ($261 million) and will return “substantially all” of the net proceeds to shareholders, it said in a statement today.

Mapfre, Spain’s largest insurer, said it will add 1.6 million clients with the transaction and 714 million euros of premiums. Direct Line, which was spun off from Royal Bank of Scotland Group Plc over the past two years, rose as much as 3.1 percent in London. It’s the latest British insurer to sell assets abroad as it strives to meet a cost-saving target of about 1 billion pounds this year.

“Proceeds received are ahead of market expectations,” William Hardcastle, an analyst at Bank of America Corp. in London, wrote in a note today. “We continue to be positive on the stock” becauseDirect Line “continues to return its surplus capital, with minimal incremental capital required each year.”

Shares of Direct Line rose 0.8 percent to 299.5 pence at noon in London. Mapfre slipped 0.6 percent to 2.90 euros in Madrid trading.

Profit Share

The sale price is about about 1.9 times 2013 net asset value, Direct Line said. Direct Line shares surged on Aug. 1 after the company said it was in talks to sell the businesses. The international unit generated 13.4 million pounds of operating profit in the half year, compared with 249.1 million pounds for the entire group, the company said at the time.

“The sale of our international businesses to Mapfre is a good result for all of our stakeholders,” Direct Line Chief Executive Officer Paul Geddes said in the statement. “Our U.K. personal and commercial lines businesses are continuing to implement the many initiatives we have under way.”

Direct Line said today that it had a “strong” risk-based capital coverage ratio of about 149 percent as of June 30, which allows it to return most of the proceeds to shareholders. Regulatory approval for the deal is expected to take three to four months, it said.

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 its markets to 17 from 28 in 2011.

Mapfre’s Plans

The deal is second-largest international acquisition Mapfre has done since it bought U.S. Commerce Group Inc. in 2008, Chairman Antonio Huertas said at a press briefing in Madrid today. “It is a great transaction for Mapfre,” he said.

The acquisition will be profitable for the insurer from the beginning, generating profits this year of about 30 million euros, Huertas said. Mapfre will add 1,400 employees with the deal, and will not cut jobs, he said.

It allows Mapfre to expand in Europe, a strategic market for the Spanish insurer, Huertas said. He didn’t rule out more acquisitions in Europe, the U.S., Mexico and Asia, where the company operates in the Philippines and Indonesia.

–With assistance from Sarah Jones in London.