Analysts on RBSI: A good start, but ...

RBS Insurance’s first presentation to equity analysts ahead of its planned 2012 float has received a lukewarm reception from its audience.

While analysts praised the company for engaging with the investment community, they still feel more disclosure would be required, and questions remain whether the company is truly on the road to recovery after its 2010 losses.

“There is still detail concerning claims triangulations and things like that that we are no wiser on but it is a step in the right direction - it is starting to give more detail,” Panmure Gordon analyst Barrie Cornes said.

In particular, Cornes welcomed the breakdown of results by unit, which show separate underwriting results and gross written premium for RBSI’s broker commercial lines unit NIG.

“I thought the presentation was good in the sense that it is the first real attempt by the insurance management team to reach out to the insurance analysts and the investor community ahead of a potential float,” Cornes said. “I thought it was good to warm the market by giving information that we hadn’t really received previously to that level of detail.”

Collins Stewart analyst Ben Cohen added: “I thought they were making reasonable claims about what they can do as a business and what they would look to do as an independently listed company, particularly about the growth that the business could achieve and the return on equity they would look to make.”

In the presentation, RBSI chief financial officer John Reizenstein said That a “respectable” ROE figure for the insurer as a standalone entity would be in the mid-teens. Chief executive officer Paul Geddes said that he imagined the business would be “broadly stabilising” in 2012, and focusing on returns rather than growth.

“You could argue if they got back to their historic market share that would be positive in terms of growth, but I think investors would be very sceptical about how you would do that without disrupting the market,” Cohen said. “To increase your market share by 15% when you’re already number one would mean pricing would go out of the window. However,  RBSI stressed that a proper return was a number-one priority rather than growth.”

However, while acknowledging that RBSI’s first half 2011 profit is a large improvement over the loss made in the same period last year, Cornes said the future was still unclear for RBSI.

“It is a bit early to tell whether that is a long-lasting improvement in underwriting performance and the business has really turned a corner,” he said.

However, Cornes acknowledges that RBSI’s management team has been completely overhauled since the last time RBS tried – and failed – to divest its insurance arm in 2009.

Cornes said events leading up to the ill-fated sale attempt essentially led to the troubles RBSI faced in 2010, when it had to strengthen reserves by £529m, leading to a loss of £295m.

“Clearly there have been issues at the company,” he said. “Our view is that they were looking to boost premium income ahead of their sale a couple of years ago. Obviously now the impact of that has come home to roost in terms of claims problems that they had last year, which now seem to be improving with the new management team and new approach to underwriting.”