RBSI plans for 20% ROE seen as mission impossible

Doubts emerged this week over RBS Insurance’s ambitious plans to transform the business in time for an EU-enforced sale in 2013.

The bank group also revealed that RBSI chief executive Paul Geddes is in line for a £1.9m pay packet, depending on performance. According to the firm’s annual report, Geddes will have to target a return on equity (ROE) of more than 20% by 2013.

Last year RBSI – which includes insurers Direct Line, Churchill and Privilege – made an 8% negative ROE.

Analysts believe Geddes and his team face a difficult challenge to meet the new target.

On the one hand, RBSI wants to achieve a high ROE in order to convince potential shareholders in the run-up to planned flotation in 2013 that they will get a positive return on investment.

But a higher ROE also means RBSI may have to give up market share by focusing on underwriting profitability. That could lead to a lower valuation for taxpayers, who own 83% of the group following the bank bailout in 2008.

Shore Capital analyst Eamonn Flanagan said: “Firms such as RSA are shrinking the business at the moment because the return on equity is not good enough. But they’re writing more business in Latin America or Asia. To us, if it’s a quoted company, this is the sort of language that they have to speak.

“Our view would be that RBS Insurance is shielded from some of this stuff because they are part of RBS; they were never a standalone quoted company.”

RBSI, the largest personal lines insurer in the UK, has shown it is aiming for growth again after a string of deals across the group.

Direct Line is offering a range of deals, including a promise to beat the current price of rival home insurers, 12 months’ car insurance for the price of 10, and 12 months’ pet insurance for the price of nine. In commercial, Direct Line is offering a “guaranteed to beat” offer on tradesman insurance, while sister company NIG is undercutting rivals with a similar deal on package business.

As he attempts to transform the company, Geddes stands to gain a £400,000 annual performance payout and £1.5m worth of shares maturing in three years, based on achieving targets.

The bank may also help Geddes with relocation, following his decision to sell his home in Scotland, which is reported to be worth £2.85m.