The Direct Line share price is testing new lows. Do I sell?

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So far, this year has been a horror show for shareholders of Direct Line Insurance Group (LSE: DLG). The Direct Line share price has bombed, making it one of the worst performers in the FTSE 250 index in 2023.

As an existing shareholder in the well-known insurance group, do I sell up and move on? Or should I sit tight and wait for a recovery in 2023-24?

DLG: Damn, Losing Greatly

My wife bought Direct Line stock for our family portfolio in late July 2022. We paid an all-in price of just over £2 per share.

At first, things were looking good and I was pleased with buying this high-yielding mid-cap stock. On 6 January, the shares closed at 235.3p . At this point, the value of our holding had jumped by 17.5% in just over five months.

On 11 January, Direct Line unveiled a gruesome profit warning that sent its shares plunging southwards. At the end of that day, they had crashed by almost a quarter (-23.5%). Yikes.

Even worse, the company cancelled its full-year dividend, leaving the stock with a forward cash yield of 0%. This was done to shore up the insurer’s weakening balance sheet, solvency and cash flow.

Given that we’d bought this stock to generate passive income, I was furious. But then CEO Penny James fell on her sword, departing on 27 January after nearly four years at the helm.

Collapsing further

After profit warnings in November and January, I’m hopeful that Direct Line is set to turn the corner later this year. But Mr Market disagrees and keeps sending the shares ever lower.

This week, the Direct Line share price has been plumbing depths never seen since the group listed in London in October 2012. On Wednesday (29 March), it dived to an all-time low of 133.29p.

On Friday, the shares closed at 137.5p, just 3.2% above rock-bottom. Over one year, they’ve crashed by 50% and are down 60% over five years. Blimey.

What now for the stock?

Currently, UK home and motor insurers are getting hammered by soaring claims inflation and bad weather. They’ve responded by raising premiums steeply, typically by double-digit percentages.

In time, higher premiums should translate into better underwriting results for Direct Line and its peers. In turn, this should bring down the group’s combined operating ratio (losses divided by premiums). This is forecast to be a healthier 97.5% this year and 95.6% in 2024.

Hence, I see 2022-23 as perhaps being the insurance group’s toughest year in its 38-year history. But I also expect Direct Line to turn this tanker around in time.

Also, with the stock more than halving (-50.9%) from its 52-week high, I think the market reaction may be overdone. Indeed, I see most potential problems for Direct Line as already baked into the current share price.

Hence, my wife and I have no intention of selling our shares right now. In fact, if I had spare cash, it would be on my buy list. Of course, I could well be wrong, but I’m expecting the share price to rebound strongly before 2023 is out!

The post The Direct Line share price is testing new lows. Do I sell? appeared first on The Motley Fool UK.

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Cliff D’Arcy has an economic interest in Direct Line Insurance Group shares. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services, such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.

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