Analysts at Berenberg slightly lowered their target price on insurer Direct Line from 159.0p to 152.0p on Tuesday, stating the group was “not deserving of a higher valuation”.
Berenberg said the stark fall in Direct Line’s valuation has led many investors to question whether or not it was an appropriate time to step in.
However, the analysts believe “good reasons” to remain cautious remain, noting that the firm has yet to demonstrate it can grow in UK personal lines despite investing heavily into new pricing systems, that its expense ratio has risen toward its 20% target, and that its capital position remains “precariously thin” during a time of “acute economic uncertainty”.
“We forecast Direct Line to generate combined ratios of 101.9%, 98.1% and 97.2% for 2023, 2024 and 2025 respectively, and these weak underwriting returns are not supportive of a valuation above 7x 2024E EPS, in our view,” said the German bank, which stood by its ‘hold’ rating on the stock.
Reporting by Iain Gilbert at Sharecast.com
