Direct Line Insurance Group PLC (LON:DLG) should report a solid end to the year, thanks to price rises driven by regulation and favourable reinsurance costs, Barclays Capital said.
Barclays raised its rating on Direct Line to ‘overweight’ from ‘equal weight’ and raised its target price to 413p from 384p.
Last year, the insurance industry managed to persuade the government to change the way compensation payments to accident victims are calculated.
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The government cut the so-called Ogden rate, used to calculated compensation payments, from 2.5% to -0.75% in February. But following an outcry from insurers, the government in September proposed a rate of between 0% and 1% in draft legislation.
Barclays expects Direct Line’s full year results to benefit from higher prices in the second quarter on the back of the Ogden rate revision. The bank expects the stock will deliver a 19% return over the next 12 months.
“While the pricing cycle is slowing, we expect the sector to report strong full-year earnings as the sector benefits from price increases through the year ahead of claims inflation,” Barclays said.
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“The initial price increases post Ogden were more than required, boosting profitability.
“We expect Direct Line to be the highlight of the results season, with strong underlying earnings and a 12.8p special dividend on top of the final dividend of 13.35p – a 7.0% yield for the final dividend alone as the company works to a 160% solvency ratio.”
Shares in Direct Line fell 1.9% to 364.5p in morning trading.