Direct Line’s share price has crashed by half! Should I buy it today?

It has been a difficult 12 months for Direct Line (LSE: DLG) share price, which has fallen 35.3% in that time. Measured over five years, the FTSE 250 shares of the insurance company fell 56.31%.

There is a good reason why Direct Line Insurance Group has fallen off my radar. It has fought a sea of ​​problems and, so far, lost.

This stock is struggling

I won’t lose the company when it’s in trouble. The big danger is that I only notice Direct Line after the recovery has kicked in, and miss a huge buying opportunity. For someone who calls himself a contrarian investor, it’s a betrayal of principle.

Unfortunately, today’s full-year results bring more bad news, with acting CEO Jon Greenwood admitting “2022 is a tough year” for the group.

“The state of the motor and housing market is challenging, with high claims inflation and regulatory reform creating major problems for the business, and we are not able to address these challenges as effectively as we would like,” said.

As if that wasn’t enough, “Extraordinary weather and difficult investment markets also affected” the result.

Direct Line posted a full-year pre-tax loss of £45.1m, down from profits of £446m the previous year. Operating profit fell 94.6% to £32.1m. Analysts had expected £70m. Unsurprisingly, the stock fell as a result. They are down 4.56% as of this morning.

That naturally tempts me. The stock currently looks cheap by conventional metrics, trading at 6.8 times earnings. But with earnings per share down for three years in a row, I’m wary.

Motor claims cost inflation reached 14% last year, although Greenwood took measures to restore margins and reduce the impact. But it won’t be easy, as motor insurance is a very competitive market, as cash-strapped consumers turn to comparison sites to hunt down the cheapest deals from rivals.

The dividend has also been cut

Direct Line also faces long-term threats from climate change. 2022 is the highest “weather event costs” since the group was listed more than a decade ago at £149m. That was higher than the £73m assumption, largely due to the December freeze, which saw prolonged sub-zero temperatures in Scotland and North West England.

As the market goes against this former FTSE 100 favorite, whose market-cap has now shrunk to £2.2bn, investors must be brave against the crowd.

I buy stocks with a minimum five to 10-year timeline, and I find it pays to buy companies at the point of maximum distress. With a two-thirds dividend cut in 2022 from 22.7p to 7.6p, we could be right now.

Greenwood stressed that Direct Line’s fundamentals remain strong, but are far from brilliant. Analysts at Citi recently said it is necessary “up” its solvency problem. Today, we learned that the solvency capital ratio will drop from 176% to 147% in 2022.

Buying Direct Line today seems a bit of a punt. It could also be a winner if sentiment has bottomed out on the company’s bottom line, which it probably has. It’s on my watch list again, although I’m going to buy another struggler BT Group first. When I get the money to invest, Direct Line might be next.