It’s been a tough 12 months for the Direct Line (LSE: DLG) share price, which has fallen 35.3% in that time. Measured over five years, the FTSE 250 insurer’s shares are down 56.31%.
There’s a good reason why Direct Line Insurance Group has fallen from my radar. It’s been fighting a sea of troubles and, so far, it’s been losing.
This stock is struggling
I’d be daft to lose sight of companies when they’re having a rough time. The big danger is that I only notice Direct Line after the recovery has kicked in, and miss a huge buying opportunity. For somebody who calls himself a contrarian investor, it’s a betrayal of a principle.
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Unfortunately, today’s full-year results brought more bad news, with acting CEO Jon Greenwood admitting that “2022 was a tough year” for the group.
“Motor and Home market conditions were challenging, with high claims inflation and regulatory reforms creating substantial headwinds for the business, and we did not navigate these challenges as effectively as we would have wished,” he said.
As if that wasn’t enough, “exceptional weather and difficult investment markets also significantly impacted” its results.
Direct Line posted a full-year pre-tax loss of £45.1m, down from a profit of £446m the year before. Its operating profits slumped 94.6% to £32.1m. Analysts had been expecting £70m. Unsurprisingly, the shares plunged as a result. They are down 4.56% so far this morning.
Which naturally tempts me. The stock now looks cheap by conventional metrics, trading at 6.8 times earnings. But with earnings per share falling for three years in a row, I’m wary.
Motor claims costs inflation hit 14% in the last year, although Greenwood is taking action to restore margins and mitigate the impact. It won’t be easy though, as motor insurance is a highly competitive market, as cash-strapped consumers hit the comparison sites to hunt down the cheapest possible deals from rivals.
The dividend has been slashed too
Direct Line also faces a long-term threat from climate change. 2022 saw the highest “weather event costs” since the group listed more than a decade ago at £149m. That was well above the £73m assumption, largely due to December’s freeze, which saw prolonged periods of sub-zero temperatures across Scotland and North West England.
As the market turns against this former FTSE 100 favourite, whose market-cap has now shrunk to £2.2bn, investors must be brave to go 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 misery. With the full-year 2022 dividend cut by two thirds from 22.7p to 7.6p, we could be at that point now.
Greenwood insists that Direct Line’s fundamentals remain strong, but they’re far from brilliant. Analysts at Citi recently said it needs to “shore up” its solvency issue. Today, we learned the solvency capital ratio fell from 176% to 147% in 2022.
Buying Direct Line today seems a bit of a punt. It may prove a winner if sentiment has fallen below the company fundamentals, which it possibly has. It’s on my watchlist again, although I’m planning to buy another struggler BT Group first. When I’ve got cash to invest, Direct Line may be next.
