RBSI stands by NIG as uncertainty mounts over loss-making division

RBSI has insisted NIG will remain in the group, despite analyst concerns that NIG will appear an anomaly to stock market investors if it continues as part of a listed RBSI.

Companies House filings posted late last week reveal that NIG’s continuing commercial business made a loss of £8.4m in 2010, compared with a profit of £12.7m in 2009.

The broker-only commercial insurer, which put its personal lines business into run-off last July following a string of losses, shares the RBSI stable with direct personal lines insurers Direct Line and Churchill, as well as affinity specialist UK Insurance. NIG’s 2010 premium revenue from its continuing operations is dwarfed by that of Direct Line and Churchill.

“I think NIG would be somewhat anomalous within a newly quoted RBSI,” Shore Capital analyst Eamonn Flanagan said, suggesting investors would not give the company the credit it deserved. “It is not right to say the market is not going to understand it, but I don’t think the market will be terribly patient with it.”

While acknowledging the benefits of commercial lines, Flanagan said they can be more volatile than personal lines. “You can have five fabulous years, then one year it can knock you over. Is that what the new institutional shareholders of Direct Line and Churchill will be ready for?”

He praised NIG’s strong brand and people, but added: “It deserves a better future than being stuck within the combined entity of RBSI.”

The Royal Bank of Scotland has to sell its insurance unit by 2013 under the terms of its 2008 bail-out by the UK government. While the company says all options remain open, it is understood to have favoured an initial public offering, and many view this as the most likely option.

But whatever happens, RBSI is keen to demonstrate to would-be investors and the market its ability to run a diverse book of business, and so insists it is keeping NIG.

“While others might speculate about the appropriateness of NIG’s fit with the wider RBSI, it is absolutely and categorically an integral part of the RBSI story and will be a part of the divestment,” NIG chief executive Jon Greenwood said.

NIG made an overall loss, including its discontinued business, of £78.8m in 2010 – 25% worse than 2009’s loss of £63.1m. But the discontinued business’s results improved by 7%, leaving the blame for the deterioration firmly on the continuing business. The continuing business combined ratio worsened to 108% in 2010 from 102%, while the loss ratio rose to 70% from 62%.

NIG was not alone – UKI lost £7.9m, Direct Line £79.7m and Churchill £53.3m.

The £21.1m deterioration in NIG’s continuing business came from two main sources. An £11.7m cut in expenses was offset by a £26.9m decrease in cash inflow, resulting both from lower premium income and investment income. Net insurance claims also increased by £19.9m to £247.4m from £227.5m.

Greenwood played down the £8.4m commercial loss, describing it as “small”. “We were attacking the motor bodily injury issue and exiting unprofitable lines of business, which did hit the 2010 results,” he said. “In addition, the weather in December had an adverse impact on our property portfolio.”

But he added: “We are delivering on our strategy of improving our underwriting selection and de-risking the business and are confidently investing in NIG to enhance its position as an energetic and forward-thinking commercial specialist. We expect the benefits of that work to show through in 2011.”

The 2.9% reduction in gross premium revenues, coupled with the improvement in net commercial motor loss ratio to 91% from 100%, show that NIG’s underwriting efforts are starting to take effect.

But this high ratio, coupled with the deterioration in the commercial property loss ratio to 61% from 44%, shows there is still work to be done.