Broker snap: Bank of America upgrades Direct Line to 'buy'

17th May 2013 11:25

Bank of America Merrill Lynch (BofA) has raised its rating for Direct Line Insurance Group (DLG) from 'neutral' to 'buy', saying it is now its most preferred stock in the property and casualty (P&C) insurance sub-sector.DLG is now the most preferred stock, at 1.2 times estimated 2013 book value while offering a 14.3% 2014 return on equity and trading at just 8.1 times 2014 earnings. This represents a 15% discount to the European insurance sector.Admiral, while no longer the bank's sector preference, is still rated as a 'buy' with the 7.4% yield the key attraction. RSA, the broker's other non-life insurer under coverage, is still rated 'neutral' as the markets await result delivery and acquisition execution.BofA said: "Admiral has been a strong performer year-to-date (YTD), appreciating 11%. Consensus earnings estimates have been stable, with multiple expansion the driver. "In contrast, RSA and DLG have depreciated 10% and 5% YTD. RSA following the much publicised dividend cut, while the explanation for DLG's fall is less clear."While current operating dynamics in the UK insurance sector are not favourable - combined ratios moving sideways, motor prices likely to decline, home and commercial margins to remain stable - the broker thinks that dividend yields are the core attraction."This subsector carries an average dividend yield of 6.9% versus European insurance sector at 4.3%."DLG has the greatest yield amongst its peers at 7.8% - "which would rank it the highest in the FTSE 100" - and has the greatest potential to increase it further, BofA said.The stock was up 3.84% at 213.4p by 11:46 on Friday.BC