Barclays upgrades Direct Line, expects it to be 'highlight' of results season

Barclays upgraded its stance on Direct Line to 'overweight' from 'equalweight' and lifted its price target to 413p from 384p as it took a look at motor insurers.

The bank said it expects strong full-year earnings for the sector as a whole, as it benefits from price increases through the year ahead of claims inflations.

It expects Direct Line to be the highlight of the results season, with strong underlying earnings and a 12.8p special dividend on top of the final dividend of 13.35p.

"DLG refinanced debt in the period, which, while negative for earnings, is accretive to capital and hence any special dividend," it said.

"We expect Direct Line to report a solid end to the year, benefiting from Ogden driven price increases from Q2, coupled with favourable reinsurance costs throughout the year."

Barclays is constructive on the UK motor sector and recommended investors own the defensive, underwriting-focused insurers that are not reliant on growth and have higher payout ratios.

"We believe investors should view the UK motor sector as an attractive, defensive, income sector. At this part of the cycle, we believe investors should continue to invest in the sector, but we do have a preference for those insurers…that focus on value over volume, are not reliant on policy growth and have attractive valuations and dividend yields."

Barclays said Direct Line has a total expected return of 19% over the next 12 months.

At 1300 GMT, the shares were down 1.8% to 364.90p.