What’s next for the Direct Line share price after heavy falls?

Direct Line Insurance Group’s share price has been on a downward trajectory for most of the last year, with the shares already down almost 20% in 2023 after the insurer cancelled its final dividend following a big rise in claims. Meanwhile, CEO Penny James has stepped down, and rating agency Moody’s lowered the stock’s outlook to ‘negative’.

Direct Line Insurance Group’s [DLG] share price has been on a downward spiral for most of the last year following a grim 2022, and the prospects of a turnaround aren’t looking particularly rosy after a troubled start to this year.

Direct Line’s share price is down over 18% so far in 2023 after the UK insurance giant cancelled its dividend for the current financial year. The move, announced in last month’s trading update, follows a jump in motor and home insurance claims, along with a fall in the value of its commercial property investments.

CEO Penny James stepped down at the end of January. Analysts are also less than optimistic about the stock, with a recent downgrade from Moody’s that lowered the stock’s outlook to ‘negative’, adding salt to Direct Line investors’ wounds.

What’s happening with the DLG share price?

Direct Line’s share price has fallen 36.26% over the last 12 months and 18.89% already in 2023 after closing at 179.50p on Friday, 10 February. The shares have consolidated over the last month though, climbing 10.84% above 11 January’s 52-week low of 161.95p. However, the stock has fallen 41.97% from its 52-week high of 309.30p, recorded on 15 February 2022.

CEO resigns as Direct Line shares continue to slide

Direct Line shares plunged 23.49% on 11 January after the company revealed in its trading update that it would be cutting its final dividend. The company blamed higher claims costs over the last 12 months after a rise in subsidence claims due to the prolonged hot summer, as well as the freezing weather in December and January, and a decline in the value from commercial property investments. This is likely to push total claims for 2022 to almost double the previous expectation of £73m to around £140m.

A few days later, rating agency Moody’s changed its outlook on the business from ‘stable’ to ‘negative’, blaming the downturn in profitability and a challenging future earnings picture. Concern over the length of time it could take for Direct Line to rebuild its capital resilience has also weighed on Moody’s downgrade, coupled with a possible temporary, negative impact on the company’s access to external market funding.

The bad news in January didn’t end there. On 27 January, the company announced that Penny James was stepping down as CEO with immediate effect. Chief commercial officer Jon Greenwood has taken on the role as acting CEO until a permanent replacement is in place.

Insurance sector faces challenging outlook 

The ability of Direct Line and its fellow insurers to combat some of their problems is set to be hindered by a number of factors. While claims inflation has become a significant issue, simply raising prices may not work, as the soaring cost of living squeezes policyholders' capability to pay, argues S&P Global Market Intelligence’s insurance expert, Ben Dyson.

Adding to insurers' difficulties, premiums fell dramatically in the first of 2022, notably across home insurance, says Ekaterina Ishchenko, director of EMEA insurance at Fitch Ratings. This downturn follows the Financial Conduct Authority's ban on insurers offering new customers lower prices while increasing them for existing customers looking to renew their policies. The outlook in the UK’s non-life insurance space in 2023 is uncertain at best, according to Ishchenko, because “the margins are very, very thin”.

Direct Line has other issues to contend with, of course, not least recruiting a new CEO to replace James but also rebuilding capital. The company said last month that it has taken steps to boost its solvency capital ratio, which is set to come at the lower end of its target range of between 140% and 180%. The group still has work to do in this area though, according to Berenberg analyst Thomas Bateman, who said: "They need to recapitalise, and they need to be clear on how they're going to do it, rather than just muddling through.”

How do analysts rate the Direct Line share price?

Analysts’ outlook on Direct Line’s share price appeal has deteriorated over the last 12 months. As of 9 February, just one analyst rated the shares a ‘buy’, versus five a year earlier, according to the Financial Times. Six analysts currently rate Direct Line’s shares as ‘outperform’ (down from 11 in February 2022), while a majority of eight analysts have a ‘hold’ recommendation. Two have placed an ‘underperform’ rating on the shares, while one analyst now has a ‘sell’ recommendation.

The median 12-month price target of 185.00p offered by the 16 analysts following the stock represents a small potential upside of 3.06% compared with last week’s close at 179.50p.