Motor insurers Direct Line and Esure in line of fire for Barclays

Amid a continued soft market in UK motor insurance, with further pricing declines in April-May, Barclays on Friday downgraded Direct Line to ‘equal weight’ from ‘underweight’ and cut its target price to 357p from 420p, while Esure was also downgraded.

The partial reversal in the Ogden rate and the potential for whiplash reform has resulted in pricing falling 8-9% from the peak.

Although this fall in pricing is "entirely rational", analysts said, these cycles "tend to overshoot", particularly as all the listed players are looking for growth and the bank's proprietary analysis shows Aviva and Allianz take share too.

Expecting insurance management teams to have more cautious guidance at upcoming first-half results, the analysts factor in a 3% fall in pricing for 2018 and flat for 2019, leading to a cut in EPS forecasts for 2018-2020.

“As the most liquid stock in a sector dominated by a negative top-down view at present, Direct Line may find itself in an unfavourable position – despite defensive characteristics and attractive yield, investors either don’t have to own any of the motor insurers, or use DLG as an instrument to short the theme," the note read.

Direct Line was, however, viewed as "well positioned for the current soft market environment through its diversification and prudent underwriting approach, as well as balance sheet reserves that should allow further reserve releases,” Barclays said.

Cost of equity was increased for Hastings and Esure, reflecting the risks from their growth ambitions. "Generous dividend yields of 6-8% are currently the biggest argument in favor of UK motor insurers, but payout is directly linked to earnings – lower earnings would therefore lead to lower dividends."

Esure was cut to 'underweight' despite weak recent performance, as aggressive growth amid lower shoparounds are expected to result in weakening technical profitability, with the biggest earnings risks in 2019-20.

The analysts reiterated an 'underweight' stance for Admiral.