Nomura has started coverage of newly-listed Direct Line Insurance Group with a 'reduce' rating and 174p target price, saying that the restructuring will take time to translate into share price performance.

The group, a significant personal lines insurer in the UK with 19% and 18% market share in personal motor and home insurance, respectively, experienced major reserving issues in 2009 and 2010, but appears to be on the "road to recovery" with new management, Nomura said in a research report on Tuesday.

"We have confidence in management executing its plans, and indeed, look for the group's stated target of a 15% return on tangible equity to be achieved in 2014E. Meanwhile, we expect there are more operational efficiencies to be had from the business, over and above the current expense savings, while there could well be outperformance on the underwriting performance also," the broker said.

Meanwhile, Nomura believes that there could be a "step change in the dividend" next year given a high operating coverage ratio of around 2.0.

However, the broker said that all these positives are, to an extent, already reflected in the share price.

"In addition, in our view, to gain full realisation of the restructuring potential, we believe data points of performance are required. Hence, we believe in the short term, as we head into full-year results, that there is better relative value in Admiral and RSA."

By 10:36, shares of Direct Line were down 1.53% at 190.05p.

BC

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