Strategy & Operations » Governance » Insurer sees week of disastrous news

THE DIRECTORS of 300-year-old insurer RSA, and its many stakeholders, will not look back fondly on November 2013.

In fact, the dark period at the FTSE 100 firm can even be narrowed down further – to the week beginning 4 November. In the course of five days, RSA had to post two profits warnings to the stock exchange.

The first came as severe weather events during 2013 – including the northern European storm, which could cost the insurer £65m – contributed to what it described as “an exceptionally tough year for weather events”. This appeared to contrast with analyst views, as the Financial Times reported that it had seen lower weather payouts across the industry than in average years.

Foreshadowing the even bigger governance problems, RSA revealed later that week that it had also noted more frequent and higher-cost injury claims in its Irish division. And Ireland turned out to be the source of an unscheduled statement to the markets after their closure on Friday 8 November.

The insurer announced its Irish divisional CEO Philip Smith, CFO Rory O’Connor and claims director Peter Burke had been suspended, pending the outcome of investigations into the functions by internal auditors. RSA estimated that the issues would see its operating results £70m lower than market expectations. No findings had been made against the directors at the time of writing.

The review of the company’s Irish operations is to be undertaken by PwC. The Big Four firm was parachuted in by RSA Ireland’s parent company to run a “comprehensive review” of the financial and regulatory reporting processes as well as the controls within the claims and finance functions.

RSA also injected capital into the Irish division to ensure its solvency ratio is in excess of 200%. In addition to this, the review will seek to assess the adequacy of the remedial actions being taken. PwC will report back to the RSA board before the end of the year.

Simon Lee, RSA group chief executive, said: “We are extremely disappointed with the issues which have been identified and their financial impact on the group. While the investigation is ongoing, I am confident that these issues are isolated to the Irish business. No policyholders have been affected and all our Irish businesses continue to operate as normal.

“Nevertheless, we want to ensure that the actions being taken in Ireland and across the group are correct and that all lessons are learnt. While these issues are serious, they do not have a material, long-term impact on the group.”

Meanwhile, RSA has announced it has replaced its suspended management team – Adrian Brown (currently chief executive of UK & Western Europe) will be acting CEO of RSA Insurance Ireland, Chris Rash (currently group chief accountant ) will be acting CFO and David Pitt (currently claims director for UK & Western Europe) will be leading the Irish claims function.

Market reactions to the announcement were predictably negative: the company’s share price fell to 104p in Monday 11 November trading, from 126p on the previous Friday, valuing the group at £3.95bn by market cap.

The revelations have made the role of RSA chief executive Simon Lee more tenuous, with numerous column inches in the City papers devoted to investor concern about the future. Their concerns have focused on RSA’s ability to maintain its dividend after two big hits to its bottom line, while others questioned whether the financial black hole would be limited to £70m. One shareholder suggested the company should consider disposals to prop up the business.

The most colourful quote relating to Lee’s position came from Standard Life’s Euan Sterling, who said in The Independent: “Using a Scottish football analogy, I’d say that his coat is on a shoogly peg – in other words, not nailed into the wall properly.”
Lee, RSA CFO Richard Houghton, the insurer’s other executives, as well as its investors anxiously await PwC’s findings in the coming weeks.