- Chief executive steps down after dividend ditched
- Slim capital position leaves future dividends in doubt
- New deal signed to shore up solvency ratio
Insurer Direct Line (DLG) said its chief executive Penny James had agreed with the board to step down with immediate effect as the company initiates a process to find her successor.
In the meantime, chief commercial officer Jon Greenwood has been appointed as acting chief executive subject to regulatory approvals.
The change in leadership shouldn’t come as a surprise to investors who are still reeling from the news a fortnight ago of the scrapped dividend and worries over the eroded capital position of the company.
SOMEONE'S HEAD HAD TO ROLL
Investment director at AJ Bell Russ Mould commented: ‘You can’t walk away from the kind of stock market disaster served up by Direct Line this month without a senior executive carrying the can.
‘It was not so much the decision to scrap the dividend in and of itself which did for James, it was more what lay behind it.
‘Direct Line had been happily buying back its own shares less than a year ago and left its capital buffers too bare to cope with a period of extreme weather events in 2022, which while unusual shouldn’t have been enough to put Direct Line in such a perilous position.’
Sometimes a company’s share price can bounce on news of a change at the top but the lingering uncertainty around the firm’s precarious capital position left the shares trading down 1% at 176.8p.
WHAT IS THE COMPANY DOING TO REBUILD CAPITAL?
The company has announced new ‘strategic reinsurance arrangements’ which are expected to increase the firm’s solvency capital ratio by six percentage points.
Yet Berenberg insurance analyst at Thomas Bateman argues the new arrangements don’t solve the problem. ‘This deal is relatively minor and does not fix the group's underlying issues or sufficiently address its thin capital buffer.’
Bateman estimates the deal will lead to earnings per share dilution of around 4% from 2024.
WILL DIVIDENDS RESUME?
Historically, Direct Line has been a prodigious dividend payer shelling out 269p per share in regular and special dividends since 2013.
However, while the focus remains on rebuilding the solvency ratio the resumption of dividends remains questionable.
Mould said: ‘There has to be a risk of no dividend for 2023 either as the company looks to rebuild its capital position. Which would be truly lean times for a shareholder base who had got used to a generous stream of income.’
Bateman was more optimistic, ‘We now expect the company to pay an interim dividend of 7.6p to appease many income funds that would become forced sellers should a 2023 dividend not be paid; however, will still think Direct Line will not pay a final dividend. We estimate solvency will end 2023 at 166% under this scenario.’
Disclaimer: Financial services company AJ Bell referenced in the article own Shares magazine. The author of the article (Martin Gamble) and editor of the article (Ian Conway) owns shares in AJ Bell.
