Image source: Getty Images It’s fair to say that Direct Line Insurance (LSE: DLG) shares have been one of the worst performers in my portfolio over the last couple of years. I bought shares in this insurance group quite a few years ago, and everything went well at first. But since the start of 2021, the trend has been down. Last week’s profit warning triggered a further slump. Direct Line stock is now trading at below its 2012 flotation price, at record lows. I’ll share my views on Direct Line’s problems in a moment. But first, let’s take a look at the losses investors might have suffered over the last two years. Direct Line’s shares have fallen by more than 40% since January 2021, from about 320p to around 175p today. Fortunately, the insurer has paid some big dividends during that time, totalling 45p per share. Crunching the numbers, my sums suggest that a £1,000 investment in January 2021 would be worth just £685 today, including dividends. Is there hope for shareholders? Direct Line’s problems started a few years ago. Competitive conditions in the motor insurance market made it harder to win business without slashing prices. I think it’s also possible that the company had fallen behind slightly, in terms of IT and marketing. Chief executive Penny James launched a programme of tech investment to improve the company’s data analysis and pricing capabilities. Early indications seemed promising to me, until last year’s surge of inflation resulted in a sharp rise in motor claims costs. The freezing weather before Christmas added to the misery — the company is currently handling around 3,000 claims for burst pipes and similar damage, at an estimated cost of £90m. These are all temporary problems, in my view. Although they could happen again, they might not do so for a while. I think it’s also fair to expect that Direct Line will budget more carefully in the future for this kind of event. If I’m right, then the current share price slump could be a buying opportunity. A possible 11% yield? Although Direct Line has cancelled its final dividend for 2022, the firm hasn’t yet made any comment on the 2023 dividend. At the time of writing, broker forecasts for next year still suggest a dividend of perhaps 20p per share. That could give Direct Line shares a forecast yield of 11% — very tempting. Personally, I think this payout is unlikely to go ahead. My sums suggest we’ll see a much smaller dividend in 2023 — although I’d be happy to be wrong. For now, I’m still holding all of my Direct Line shares. I’ll probably wait until the firm’s 2022 accounts are published in March before I make a final decision. I still like the business, which has a well-known brand and a big market share. Historically, it’s been very profitable too. My problem is that I’ve lost some confidence in the company’s management. I think some of the problems being faced by the firm could have been planned for, and handled more successfully than they were.
