Barclays downgrades Direct Line to 'equalweight'

Barclays downgraded Direct Line Insurance to ‘equalweight’ from ‘overweight’ and cut the price target to 369p from 443p as it took a look at UK motor insurers.

The bank noted Direct Line has been one of the best performing insurance stocks since its IPO in 2012, more than doubling from its 170p IPO price and returning two-thirds of the price as dividends.

“However, we believe the stock is now fairly valued as we lower our estimates for the loss of its Nationwide and Sainsbury’s contracts.”

The bank said it expects more special dividend from Solvency 2 in 2016, but thereafter, it estimates dividends will be around 80% payout of earnings, offering a yield of approximately 6%.

“Although we believe Direct Line will benefit from the pricing cycle, we believe Direct Line is most at risk from reduced reserve releases.”

Overall, Barclays said it was positive on the UK motor market, as it reckons this is the first major property and casualty market to inflect and harden.

“We believe DLG as the largest player in the market is poised to benefit,” it said.

At 1030 BST, Direct Line shares were down 1.5% to 355.40p.