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

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

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

DLG: Damn, Big Loser

My husband bought Direct Line shares for our family portfolio at the end of July 2022. We paid a total price of over £2 per share.

At first, everything looks good and I am happy to buy this high yielding mid-cap stock. On January 6, the stock closed at 235.3p. During this time, our holdings have increased in value by 17.5% in five months.

On January 11th, Direct Line announced a dire profit warning that sent the stock plummeting south. By the end of the day, it had fallen by almost a quarter (-23.5%). Yawis.

Even worse, the company canceled its dividend for a full year, leaving the stock with a forward cash yield of 0%. This is done to maintain the insurance company’s balance sheet, solvency and cash flow.

Since we bought this stock to generate passive income, I am angry. But then CEO Penny James fell on the sword, leaving on January 27 after nearly four years at the helm.

Collapsed more

After the profit warning in November and January, I have hope that Direct Line is set to turn the corner later this year. But Mr. Market did not agree and continued to send the shares lower.

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

On Friday, shares closed at 137.5p, just 3.2% above rock-bottom. Over a year, they fell 50% and fell 60% in five years. Blimey.

What now for stocks?

Currently, UK home and motor insurers are being hit by claims inflation and bad weather. They responded by rapidly increasing premiums, usually by double the percentage.

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

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

Also, with the stock more than half (-50.9%) off its 52-week high, I think the market reaction may have been overdone. Indeed, I see most of the potential problems for Direct Line have been baked into the current stock price.

Therefore, my husband and I have no intention of selling the shares. In fact, if I had the money, it would be on my shopping list. Of course, I could be wrong, but I expect the stock price to rebound before 2023 is out!