Can NIG's job cuts help the company prosper?

As painful as the medicine is to swallow, the patient that is NIG can come out much stronger in the long run if it sees through the 90 redundancies that it announced yesterday, and here’s why.

A brief glance at the half-year results in commercial for NIG’s parent, Direct Line Group (DLG), show that commercial combined ratio, which NIG makes up the bulk of, has remained flat at about 112% between 2011 and 2012. In basic terms, NIG is losing 12p on every pound of premium that it is writing.

The losses are greater than that if you strip out the £58m of reserve releases that was pumped into the business in the first six months of the year, well up on the £31.7m injected this time last year.

Has DLG been pumping in reserves to swell results in the run up to the flotation? Who knows. Even though NIG’s performance is not particularly out of kilter with its commercial peers, it is still on an unsustainable trajectory.

Tough decisions

Action is needed even more urgently when you consider the parlous state of UK commercial insurance. A brief glance at this week’s Insurance Times Top 50 Insurers 2012 shows that commercial liability, for example, ran at 109.4% last year, and is seemingly on course to spiral deeper into loss-making territory in 2012.

So DLG chief executive Paul Geddes, who has shown his mettle in the past by closing nine of NIG’s 18 offices, has taken the decision to put the company back on a sustainable path by reducing the expense base.

It could, in fact, keep NIG a step ahead of its rivals, who have been relying on their personal lines book to prop up commercial, even though rate rises in motor are now flattening.

NIG could use its lower expense base to price competitively and undercut rivals, although the management must be careful not to get drawn into this seductive drug. Betting heavily on a market turn is a dangerous game, which is why outstanding performers like Allianz don’t do it.

Changes to NIG’s business model

Turning back to yesterday’s announcement, there is every chance that NIG can maintain or even improve service. The model it is pursuing, in basic terms, is shoving all of the back office work and support roles into two big centres, while leaving the underwriters at the coal face to trade with brokers in the regional offices. It is the modern insurer’s efficient business model, and it is proven to work.

These changes can help NIG remain competitive and, more importantly, consistent. That’s something that’s been missing from the firm in recent years when you consider the axing of its personal lines book two years ago.

NIG could strategically use this moment as a bedrock to offer consistent pricing to brokers over a long period of time, something that they all crave.

Geddes gamble

The final interesting twist to this whole NIG story is that Geddes has firmly nailed his colours to the company’s mast, despite apprehensions in the City. Analysts are concerned that the NIG commercial book could be volatile and out of line with the results of the personal lines book. The easiest option would be to spin it off and reward shareholders with a juicy dividend.

But Geddes is determined to keep NIG, and he speaks like a true leader in the words he uses to describe his belief in the firm, which is a small part of the company’s overall earnings. But he must get it right.

If NIG’s results deteriorate and end up being a blot on the DLG copy book, then Geddes would stand accused of making a major strategic blunder with taxpayers’ money.

This week’s announcement could go a long way to helping Geddes avoid that nasty fate.