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On Wednesday, CFRA analysts downgraded Direct Line Insurance Group Plc (LON:DLGD) (DLG:LN) (OTC: DIISF) from ’Buy’ to ’Hold’, while increasing the price target from GBP2.70 to GBP2.90. The revision was partly based on a comparison to Aviva (LON:AV)’s price-to-book value (P/BV) in its takeover bid.
Direct Line’s 2024 net profit of GBP163 million met analyst expectations, despite a 60% year-over-year drop from GBP223 million in 2023. The company managed to shift to an ongoing operating profit of GBP205 million in 2024, recovering from a loss of GBP190 million the previous year. This turnaround was supported by a 25% year-over-year increase in gross written premium, an improved net insurance margin of 3.6% (up from -8.7%), a more favorable combined ratio of 96.4% (down from 108.7%), and a net insurance claims ratio of 69.9% (down from 82.1%).
The company has maintained its target of GBP100 million in gross run-rate savings by 2025, which represents 25% of its projected pretax profit for that year. Additionally, Direct Line anticipates a net insurance margin of 13% by 2026, a significant improvement from the 3.6% margin reported in 2024.
The CFRA’s outlook is influenced by the ongoing GBP3.7 billion takeover bid from Aviva for Direct Line, which is expected to be completed by mid-2025. The analysts have maintained their 2025 earnings per share (EPS) forecast for Direct Line at GBP0.21, aligning with consensus expectations, and have introduced a 2026 EPS estimate with an 18% growth to GBP0.24.
Despite the positive aspects of Direct Line’s performance and the anticipated growth, the analysts’ downgrade reflects their view that there is limited upside potential for the stock, prompting the shift to a ’Hold’ rating.
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