Jefferies upgrades Direct Line to ‘buy’

Jefferies upgraded Direct Line on Thursday to ‘buy’ from ‘hold’ and lifted the price target to 210p from 175p, as it pointed to an improving market outlook and depressed valuation.

"We forecast a Solvency II ratio of 161% by HY 2023, improving to 184% by FY 2025," Jefferies said. "This, combined with improving pricing conditions and at an attractive 6x 2024F P/E multiple, leads us to upgrade to buy."

Jefferies said it reckons the insurer can restore its Solvency II ratio without having to raise equity.

The bank said that in a scenario where market conditions sufficiently harden, it expects Direct Line to outperform Admiral. "Furthermore, we see value in a DLG/Admiral pair trade," it said.

"With market pricing improving, we view DLG as the best way to play this theme, given that a) DLG currently trades at a 6x 2024F P/E multiple and b) we expect the favourable market conditions to earn through into DLG's result quicker than Admiral.

"If pricing conditions do not adequately improve, then we would still expect DLG to outperform, as we expect poor margins from 2022 to impact Admiral's result for longer in the form of lower profit commissions."

At 1035 BST, Direct Line shares were up 1.8% at 168.35p.