JPMorgan downgrades Direct Line as risk/reward now balanced

The risk/reward for Direct Line is now more balanced, said JPMorgan Cazenove, as it downgraded its stance on the insurer to 'neutral' from 'overweight' and cut the price target to 430p from 450p following the company's trading statement on Wednesday.

The bank noted that Direct Line has been the best performer in the UK motor sector over the last six and 12 months and said it increasingly sees earnings upgrades as necessary for outperformance.

"Yesterday's trading statement was only negative at the margin we believe (we view the weather claims as one off and the premium figures only slightly weaker), however the comments on pricing/claims reinforce our view that the pricing backdrop in motor is unhelpful.

"While we continue to see the long-term attractions of Direct Line's differentiated model, balance sheet, and generous distribution policy, we believe the risk/reward has now become more balanced. For this reason we move to a neutral rating."

Direct Line has been the bank's top pick in the sector for a number of reasons, including a strong and conservative balance sheet, a generous distribution policy and continued cost saving potential.

JPM said that while these reasons remain valid, with continued headwinds from reserve releases to come and potential pressure from a softening motor cycle, there is less urgency to deploy fresh money into the company.

On Wednesday, Direct Line reported a 5% drop in gross written premiums for the first quarter and warned that claims associated with the cold weather at the beginning of the year would eat up its full annual weather budget.

Total gross written premiums in the period fell to £769.9m from £810.3m in the first quarter of last year and the company said claims associated with the big freeze would be around £50m.

At 0955 BST, the shares were down 1.5% to 360.30p.