Direct Line among JP Morgan’s top picks in European insurance sector

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Direct Line Insurance Group PLC (LON:DLG) is one of the ‘top picks’ among European insurance companies for analysts at JP Morgan as the investment bank upgraded its view on the sector to ‘overweight’ from ‘neutral’ following a recent decline in the year to date.

In a note on Tuesday, the investment bank said that while the sector has “underperformed significantly” with a 32% fall in the year to date compared to an 18% decline in the wider market, the drop has “overshot the widening in credit spreads” which they said suggests that the sector “could recover some ground”.

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Meanwhile, the bank said US bond yields have also started to move higher, which “historically has been positively correlated with the sector’s performance”, adding that they also saw scope for dividends to be reinstated.

 In terms of individual companies, JP Morgan said they preferred “quality names with good visibility of capital return and limited exposure to commercial [property & casualty insurance]” such as Direct Line.

“Overall, ahead of [the third quarter], we have argued that the personal lines/[small and mid cap] insurers are better positioned than the large caps and reinsurers given the claims outlook, and we continue to avoid companies with particularly high levels of asset or credit risk”, the bank said.

Shares in Direct Line were 0.6% higher at 267.9p in mid-morning trading.

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