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Direct Line - Penny James steps down as CEO

Penny James is stepping down as Direct Line's Chief Executive Officer, a position she's held since 2019.

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Penny James is stepping down as Direct Line's Chief Executive Officer, a position she's held since 2019. The decision will take immediate effect and also means James will no longer be a Director.

Jon Greenwood, currently Direct Line's Chief Commercial Officer, is Acting Chief Executive Officer while the group looks for a permanent replacement.

View the latest Direct Line share price and how to deal

Our view

Market conditions are tough, together with some company-specific issues mean a new CEO will be tasked with trying to stoke Direct Line's engines. This won't be an easy task or a quick fix.

Having spent most of the last 6 months with a forward dividend yield over 10%, Direct Line's finally succumbed to trading pressures and the final dividend's been given the chop. That's despite assurances that the final dividend was secure. This is a perfect reminder that returns are never guaranteed and we wouldn't be surprised to see the yield come under more pressure over 2023.

Poor weather conditions over December meant a material increase in weather-related claims, pushing annual levels to around double more than typical numbers. Weather's also had a knock-on effect to motor claims. When we add in the rising costs of covering insurance claims, profitability comes under pressure. An insurer's combined operation ratio measures the percentage of premiums that are paid out as claims or expenses. This now is expected to come in at over 100% for the current financial year, into non profit territory.

Personal insurance remains highly competitive, and with rivals offering pretty generic products, few companies can maintain any semblance of pricing power. That has tended to have negative consequences for combined operating ratios as companies are forced to cut prices to attract customers. Price comparison websites have only exacerbated the problem.

One area we've been encouraged by is Direct Line's retention rates, but it's new business that's proving tricky to come by in key areas like Home. That's putting downward pressure on the number of in-force policies.

One of Direct Line's key advantages is its brand. This has helped it price more aggressively than competitors in the past and also secure a relatively high proportion of direct sales (without selling though price comparison sites). The second is scale, because the new, leaner cost base can be spread across more policies. New technology infrastructure helps the group compete on price comparison sites, and is improving underwriting accuracy.

All-in-all, the challenges outweigh progress at the moment and analysts aren't expecting free cash flow to recover until at least the end of 2023. And even with recent efforts to bolster its position, the group's important solevency ratio is lower than we'd like.

Overall, we think Direct Line's targets are ambitious but not unachievable - although a lot's riding on the new technology investments living up to their billing. The challenges are reflected in a below-average price to earnings ratio, which looks appropriate in our view.

Direct Line Group key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

Penny James is also HL's Senior Independent Director

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 31st January 2023