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(Sharecast News) - Analysts at Berenberg very slightly lowered their target price on insurance group Direct Line from 160.0p to 159.0p on Friday following the announcement of its quota share deal.
Direct Line announced a 10% quota share deal on Thursday, which it expects to add six percentage points to solvency and which will, in Berenberg's view, lead to earnings dilution of roughly 4%.
The German bank stated that the deal was "relatively minor" and did not fix the Direct Line's underlying issues or sufficiently address its thin capital buffer.
"However, it does fit the narrative of the company continuing to muddle through this turbulent time," said the analysts, who stood by their 'hold' rating on the stock.
"Direct Line's solvency is still precariously low: we estimate circa 151%. As a reminder, solvency was 152% at June 2022 and since then the company has de-risked its investment portfolio (+6ppt), cut the final 2022E dividend (+17ppt) and announced a 10% QS deal (+6ppt), but solvency is still only c151%. We do not think this is a good approach, but it does fit the narrative of the company muddling through. We now expect the company to pay an interim dividend of 7.6p to appease many income funds that would become forced sellers should a 2023E dividend not be paid; however, will still think Direct Line will not pay a final dividend. We estimate solvency will end 2023E at 166% under this scenario."
Reporting by Iain Gilbert at Sharecast.com
