Berenberg downgrades Direct Line to 'hold'

"The debate on Direct Line continues to rumble on," Berenberg said.

"The company is trying to recapitalise itself and questions persist about how best and how quickly it can do this. Our base-case assumption - this is the part investors may need to brace themselves for - is that Direct Line will also not pay a dividend for the whole of FY 2023 (this is in addition to not paying the final 2022 dividend, which has already been announced)."

The bank said that while it reckons Direct Line has the ability to generate good returns in the long term, if the cancelling of the dividend is announced, this would lead to further underperformance - hence the rating downgrade.

However, it also said that not paying a dividend could be the right option.

"In our view, Direct Line has four options to recapitalise itself: raise capital, raise debt, increase the use of reinsurance, or stop capital distributions," Berenberg said.

It argued that cancelling the 2023E dividend is the most effective and cost-efficient way for Direct Line to recapitalise, and it helps to preserve the value of the shares over the long term, rather than potentially devaluing them permanently if the other options were utilised.

"Not paying the dividend would bring solvency back into a more comfortable range by December 2023 - at around the 167% mark, we estimate," it said.

Berenberg said it had cut the price target to reflect a higher cost of equity associated with the shares.