Where now for RBSI?

RBS Insurance was meant to be the bargain of the year, offering some of the industry’s best known brands at a knockdown price of £3bn. But since the stricken bank’s new chief executive, Stephen Hester, took RBSI off the market in February – saying a sale would “destroy value for RBS shareholders” – the insurance arm has undergone yet another management shake-up, as well as job cuts and office closures.

Yet against the odds RBSI continues to churn out impressive results. Fuelled by the continuing success of Direct Line, its 2008 pre-tax profit was up 15% to £780m, although its 2009 first quarter operating profit dropped 31% to £101m. Only last week NIG posted a £52m after-tax profit for last year – a 350% increase on 2007 – while Churchill and Privilege continue to perform steadily.

The RBSI management remains tight-lipped about the future, refusing to talk until Paul Geddes, the chief executive in waiting, takes the reins this summer. But the sudden changes and lack of communication have left industry watchers scratching their heads. What do the management changes mean? How will problems with the misfit of the group, NIG, be resolved? And now that the sale is over, what is the business strategy for taking the group forward?

The past year, when the parent bank was at the centre of the UK’s economic storm, has been the most testing time for the group since its formation in 1993. RBS posted a £40bn loss for last year, the biggest in UK corporate history, and put RBSI up for sale to raise capital. Then, following a government equity injection and a struggle to find a buyer, the sale was cancelled.

But the management shake-up that followed has raised eyebrows. RBSI chief executive Chris Sullivan, who led Direct Line, Churchill and Privilege through the banking meltdown, is to step aside in late July to make way for Paul Geddes, former head of UK retail. Alastair

Greer became the head of household and life, while Steve Treloar was promoted to managing director of motor.

One industry source believes Sullivan’s role has been to “stabilise the ship” while a decision was taken over whether to dispose of the asset. “As a result of due diligence, RBS would have got an external review on its business and formed opinions on those alternative views.”

The source believes the promotions round focused on the ‘career people’ of the group, adding: “More of the people have a retail focus than a pure insurance industry focus. Some of the new guys are wet behind the ears.”

Perhaps the biggest upheaval has been at NIG, now part of RBSI’s newly-named commercial and broker division. Not long after a decision was taken in April to close eight of its 15 offices and shed 130 jobs, Jon Greenwood, previously head of household and life, replaced temporary boss Nigel Pearce. Pearce had only been in the role for a few months following the departure of Andy Cornish.

To add to the confusion, Charles Crawford, a widely respected veteran and former managing director of NIG, announced he was leaving his partnership and international business role at RBS to join loss adjuster Davies.

The chopping and changing of four bosses in four years has not surprised former RBSI staff. One says: “The restructure and changes at the top have always been done in the middle of the night. You come in the next day and nobody is there. There have been so many heads and directors, it’s worse than Chelsea.”

But the former staffer believes Greenwood is well regarded and has a good way with staff. “You would think it would help the culture and feel of the place.”

One of the bidders for RBSI when it was still up for grabs was Patrick Snowball, one-time chief executive of Norwich Union, now Aviva, backed by by private equity. “It was a great asset. I have always believed it would be a great business as a standalone but I respect the fact that they decided to retain it within the group,” he tells Insurance Times. “Any business like an insurance company that is a subsidiary of a large financial service group may not get that focus and attention of a standalone business.”

That feeling hasn’t been shared at RBSI. Instead of running Direct Line, Churchill and Privilege as standalones, Sullivan merged all three into two categories: motor, and household and life. Not long after arriving at RBSI in January 2007, he concluded that a lot of the same things were being done across the three brands, so the merger would save costs and improve efficiency.

The ex-staffer says: “I think the categories were a sensible way given the number of brands and the confusion over the brands.”

But perhaps Sullivan’s legacy will be defined by the brave decision to push Direct Line into the highly competitive commercial lines arena. Recognising that, even with its brand power and competitive pricing, there is only so much market share Direct Line can maintain in the era of the aggregator, Sullivan launched Direct Line for Business in January last year.

Taking it forward to gain market share in the small end of SME will be the big challenge for new boss Geddes. So can it work?

One broker source says: “We’re really seeing that Direct Line ‘price, price, price’ mentality being taken up by small businesses. It’s not so much about quality of service, but how much you can save. Their presence has grown and it’s certainly having an influence.”

However, brokers believe the commercial lines sector is much more complicated than personal lines and fraught with danger.

Robert Nicol, partner at Glasgow-based commercial lines broker Orr Kerr Dykes, says: “There was a flurry of TV adverts about six months ago and we were waiting for something, but we have not seen any impact on our business. We’ve not had any clients leave to go to Direct Line. It could work for them if they get the insurance right, but it’s also an area where you can get your fingers burnt.

“The small-end guys will go for it, the sort who will tell you anything to get a piece of paper. That leads to the risk of claims getting cancelled because of faults in the application.”

If Direct Line for Business is a success, grabbing market share in the same way it has in the personal lines sector, will it be competing with NIG, which distributes commercial insurance through brokers?

Charles Earle, one-time commercial lines managing director of NIG and now chief executive of underwriting agency Arista, says: “It’s a distribution strategy that certainly is full of potential for conflict. If I were a broker, I would not like it if I lost a bit of business to Direct Line. It is difficult one.”

It’s a problem that both Geddes and Greenwood may have to work closely on. Earle believes Greenwood has a huge task on his hands.

In an efficiency drive to help it through the downturn, NIG is undergoing a three-way process, he says. It is closing its offices and making job cuts, splitting up sales and relationship management from underwriting and delivery of service, and moving the handling of small business to one centre.

Earle says: “It is a massive management challenge to get those done right. To get each one right is very difficult. To get all three right at once? I do not envy the guy who has the job.”

Under the watchful eyes of the bankers, Greenwood and Geddes face the challenge of sustaining RBSI’s large market share in a ferociously competitive and evolving sector. That’s after bringing stability to a company that has gone through blood-letting and yet another management shake-up.

They can only hope they get long enough in their jobs to prove their worth.