Rok goes into administration - what went wrong?

Building group Rok going under this week could hardly have come as a shock to the insurers using the firm’s services. Gaping cracks were clearly visible in Rok’s business from at least back in May. Yet both Tescos/Aegas and AXA’S subsidiary Inter Party Assistance signed new deals with the troubled builder in the past three months. Others, like Zurich were stuck in long-term relationships with Rok, which claimed to be the number one provider of building repairs to the insurance industry.

So what went wrong – and what will the consequences be?

Making headlines

Rok’s woes became public in May when it issued a profit warning, which highlighted underperformance in its plumbing, heating and electrical (PHE) division. Accountant BDO Stoy Hayward was brought in to investigate and in August reported “serious failings in the financial controls of the PHE business”.

The drama increased when Rok said it would suspend finance director Ashley Martin. The result? The following day, on 11 August, Rok had lost almost half its value as its shares plummeted 45% to 13p.

By the end of August Rok unveiled pre-tax loss of £3.8m for the six months to 30 June, which it put down to a £6.4m loss, previously unknown to senior management, in its PHE division.

In a farcical twist, in September, Rok reinstated Martin “without reservation”, upon which he resigned. All creating more hard-to-ignore headlines.

Yet, amidst all this, AXA’s wholly owned subsidiary Inter Party Assistance chose Rok for a £40m contract, announced on 31 August, to provide emergency home repairs. As the bad press continued to swamp Rok, on 26 October, Tesco and Aegas, which had both been working with Rok since 2007, agreed to expand the arrangement so that Rok would handle half of all Tesco Underwriting’s building repair claims, including construction work, claims management and validation.

What's the prognosis?

So now that Rok has gone into administration – with its fate yet to be decided by administrator PricewaterhouseCoopers - how much of a tight spot are its insurer clients in?

Tesco has said the impact is not as bad as it sounds as Aegas has only been managing its claims for a short time, while both AXA and LV= have been reducing their exposure to Rok and new claims can be passed to alternative builders. But the fact remains that Rok’s demise is causing all those using its services a serious headache.

For example, LV= has some 300 live cases with Rok and has set up an emergency teams to deal with existing cases. AXA has also set up a 12-stong special team.

Sean Walkden, supplier relationship unit manager, claims at AXA, says: “We don’t know what Rok will become so we are moving some work to other providers while working with customers to find alternative solutions, whether as cash settlements or them bringing in a local builder. We are also writing to all clients affected.”

'Things will get worse'

Paul Clarke, a partner at PwC who covers insurance and is not involved with Rok, said that the pain could get worse for insurers.

“At the moment, the administrators are keeping the business ticking over, so insurers have the administrative hassle of tracking down client records, dealing with irate customers and possibly finding another builder.

“However, if a buyer for Rok cannot be found, things will get worse.”

Clarke warns that this would risk the continuity of supply and service levels while a new builder was found, as well as significant costs.

Buy cheap, buy twice?

So why did insurers deal with Rok in the first place? Low cost seems the most likely explanation, and this is certainly backed up by claims from Rok’s rivals in the press that it was bidding for work at suicidally low rates.

Clarke says that if this was the case, the insurers that contracted with Rok would have been taking a short-termist approach, as the risks they face now “could cost them more than what they have saved”.

Walkden admits lessons may be learned: “We may end up having more contingency arrangements and monitoring the builders we work with more closely. I like to think we monitor them very closely already but we may need to review the types of company we work with.”