Citi upgrades Direct Line on cost-cutting potential

4th Jul 2014 09:36

Citigroup has upped its rating for Direct Line from 'neutral' to 'buy', saying it sees "significant upside" from further cost reductions at the insurance group.The bank has hiked its target price for the stock from 244p to 306p."We think Direct Line can increasingly use its market-leading position as a competitive advantage in terms of pricing, claims and cost efficiency," Citi said.The bank believes that Direct Line will be able to lower costs in motor and home insurance, as well as improve profitability of commercial and international operations over time. "This should drive earnings growth independent of pricing trends."Direct Line has an high expense ratio at 34% compared with other insurance companies across the global industry at 22%. "The issue lies with administrative costs (rather than commissions or claims handling) and this should be more within management control. We expect continued improvement in costs and note Direct Line has to date consistently outperformed guidance on this."It also sees signs of a trough in motor pricing, while profits in home insurance are "relatively defensible". The shares trade at 10 times estimated 2015 earnings, a discount to the wider UK sector which trades at a multiple of 11 and the global sector at 12.Direct Line's stock was 1.4% higher at 281.7p by 10:11 on Friday.BC