Paul Geddes can give himself a pat on the back. During nearly a decade in charge of Direct Line, its outgoing boss has transformed the insurer from an unloved afterthought in a dusty corner of Royal Bank of Scotland to a blue-chip stock pumping out special dividends.
Geddes has slashed millions of pounds of costs and shed non-core assets to create a leaner operation. The insurer has always prided itself on customer relations, selling motor and home insurance directly to most customers rather than paying commission to brokers.
Geddes, who is due to stand down this summer, is in demand among headhunters, and is a contender for the John Lewis chairmanship. It might seem like an easy job for his successor, Penny James, who steps up from her role as finance boss next month. Yet Direct Line and insurers in general face a road littered with challenges.
One speed bump is the pressure to evolve in the digital age. Insurers have been slow to adapt. Analysts expect James, an industry veteran who joined just over a year ago from the Prudential, to invest in technology and digital services to keep up.
In the past week, the company has quietly rolled out Darwin — perhaps branded as a nod to evolution — on moneysupermarket.com.
The new digital brand is aimed at price comparison sites only, the first time Direct Line has set foot in this arena. It aims to compete on rates by using artificial intelligence and machine learning to generate prices. With the bulk of motor insurance sold through comparison sites, the move is certain to give the business a boost.
Insurers across the board also have to deal with pressure from watchdogs to treat loyal customers better, rather than give away the best rates to newcomers, which could lead to price caps.
In a future of driverless cars, they will feel the heat. Such vehicles are expected to improve road safety, which could lead to fewer insurance claims, but lower premiums.
Direct Line’s share price has flattened over the past few years. After floating on the stock exchange in 2012 at 175p, the shares more than doubled to touch 370p in 2015 and 2017, but have come off the boil since.
In a blow to investors last month, 2018’s special dividend was nearly halved to 8.3p as the board bolstered capital buffers amid Brexit uncertainty. With the share price having dropped by 8% since early April, some analysts reckon the company now looks cheap.
Despite these roadblocks, with a dividend yield of about 6% and with the push into comparison sites, Direct Line is revving to go. Buy.