Direct Line gets double upgrade from Citigroup after plunge

By Geoffrey Smith 

Investing.com -- U.K. insurer Direct Line (LON:DLGD) stock jumped at the open on Wednesday after being upgraded from Underweight to Overweight by analysts at Citigroup, who argued that the sharp selloff that followed its profit warning in January had gone too far.

By 04:25 ET (08:25 GMT), Direct Line stock was up 5.1%, easily outperforming the broader U.K. market, which was flat.

Citi analysts said that the measures taken by Direct Line to shore up its profitability since January should be enough to remove the risk of it having to raise new equity. They added that Direct Line's performance in motor insurance, where it had complained of inflationary pressures from repair shops, was actually marginally better than most of its U.K. peers.

They added that pricing pressure is flattening out and approaching an inflection point, improving the outlook for sector earnings given sharp rises in premiums to car owners by the insurance industry.

The problems in motor, combined with a surge in claims for building damage after a cold snap in December, drove Direct Line to a £45 million (£1 = $1.2509) last year and forced it to suspend its payout, causing it to be dumped by U.K. dividend funds.

At the time, it had also warned that inflation in motor repair costs would also hurt its results this year.

Citi analysts said the 35% drop in the group's stock price since the start of the year now means that the risks are "skewed to the upside."