Direct Line at Inflection Point, Analyst Sees Attractive Risk/Reward

Goldman Sachs analysts view FTSE 250 stock Direct Line Insurance Group (LON: DLG) as nearing a turning point, highlighting an “attractive risk/reward opportunity” based on an expected improvement in underwriting and solvency.

In a note to clients this week, the investment bank stated: “We believe Direct Line is at an inflection point, and the expected turnaround in underwriting and solvency offers an attractive risk/reward opportunity.”

Their analysis of the UK motor insurance sector reveals a “moderating trend in price momentum and claims inflation continuing in 2Q24,” with pricing still sufficient to cover claims inflation.

If this trend holds true for Direct Line, Goldman Sachs believes the company's “turnaround in underwriting performance in 2024 remains on track.”

The upcoming DLG Capital Markets Day on July 10 is seen as a significant catalyst for the stock by Goldman Sachs. The bank maintained its Buy rating on Direct Line.

The company's shares have dropped more than 5% in the past month. However, this year it is up 8.2%, while over the past 12 months, DLG shares have rallied more than 45%. It currently trades around the 197.4p mark.

On the other hand, just over a week ago, Berenberg downgraded Direct Line to Hold from Buy with an unchanged price target of 220p. The investment firm said it is skeptical about Direct Line's capacity to achieve a 13% net insurance margin in 2026.

Meanwhile, Morgan Stanley resumed DLG with an Equal Weight rating and 205p price target in June, noting that the UK Motor industry is showing signs of recovery. Analysts at the investment bank said written margin was over 10% and DLG's other business was performing in-line.