Berenberg cuts Direct Line to 'hold' from 'buy'

Direct Line Insurance Group’s rating has been downgraded to ‘hold’ from ‘buy’ by Berenberg as the broker said “questions remain about earnings sustainability”.

“We believe there is some risk regarding the sustainability of Direct Line’s earnings,” Berenberg said in a note on Wednesday.

“High reserve releases, lower than forecast cost savings and a shrinking direct market all cast doubt on future earnings.”

Berenberg said older accident years have been incredibly profitable for Direct Line but these years are now contributing increasingly less releases.

The broker said it does not expect to see the same developments in more recent accident years. Berenberg believes it will be difficult for management to offset falling reserve releases with the current accident year and operating improvements.

“As reserve releases decline, we expect earnings to be flat at best, thus we believe it will be challenging to grow the dividend from here,” the broker said.

Berenberg reiterated a target price of 406p.

Direct Line on Tuesday posted its half year report for the six months to 30 June on Tuesday. Operating profit fell 5% to £316.9m, hurt by lower investment gains and the new Flood Re levy, but the group beat its own consensus estimates of £263m.

Shares dropped 0.72% to 388.20p at 0951 BST on Thursday.