Interview - Tom Woolgrove & Steve Maddock: Delivering the hard numbers

Nothing motivates like a fast-looming deadline. And when that deadline is 12 months and ticking, the task is to transform the fortunes of a UK insurance giant and you're charged with maximising shareholder value for an inevitable divestment, the stakes are pretty high.

That's the situation in which Tom Woolgrove and Steve Maddock find themselves, but it appears to be one they are relishing. As managing director of personal lines and MD of claims respectively at Royal Bank of Scotland Insurance, the success or otherwise of their individual turnaround tasks will fundamentally influence the insurance arm's attractiveness to external investors come divestment D-Day.

No pressure then — especially when the first tranche of any initial public offering could happen as early as this time next year, well ahead of the December 2013 deadline, not to mention RBSI's failure to secure a buyer last time it was on the market in April 2008, when the price tag was thought to be between £5bn and £7bn.

And then there are the financials. Last year, RBSI posted a £295m loss (2009: £58m profit) and combined operating ratio of 115% (2009: 106%) having set aside £100m for bodily injury claims in quarter three on top of the £320m already pumped into its reserves in Q2.

Filings at Companies House, registered on 8 June, subsequently revealed all four underwriting companies — Direct Line, Churchill, NIG and UKI — suffered losses in 2010.

Hardly an enticing prospect you would think, but one they seem more than eager to have taken on — Mr Maddock joining from RSA last February, where he was UK technical claims director, with Mr Woolgrove following him in April, from HBOS General Insurance, where he had previously served as MD.

In November 2009, Group CEO Stephen Hester referred to the divestment plan as "radical restructuring" designed to bring the bank back to its "standalone strength". And the same could be said of the efforts of Mssrs Woolgrove and Maddock on the insurance front.

Yet both are relaxed in their native Bromley HQ, moving easily from enthusiastic nodding and vocal endorsement of each other's points to light-hearted ribbing, descending at times into full-blown laughter. Hardly the actions of the condemned man — so confidence in delivering the goods must be high.

Heart of the business
As personal lines MD, Mr Woolgrove is responsible for the pricing, underwriting functions and product category management of a retail business representing approximately 85% of RBSI, both by premium and slightly more by profit. And with underwriting and claims the natural cornerstones of every insurer's performance, it is clear his efforts coupled with those of Mr Maddock will be crucial.

"We're the critical heart of the business," concedes Mr Woolgrove. "Pricing, underwriting and claims need to be incredibly joined up. So we had to understand the issues, agree an action plan and quickly do something about it." This process, he says, was complete within a couple of months, despite neither knowing the other prior to joining RBSI.

"When I came in Paul [Geddes, CEO] was very clear that pricing and rating was one of his priorities. RBSI has huge scale and relationships with lots of UK customers but there was a real sense through 2008 and 2009 that discipline had been lost. So my part of the bargain is to put the right risks on, understand our insurance risk cost, then balance profitability with growth. And Steve's been the other critical part of that equation in claims."

Mr Maddock describes how they found the business in the "eye of the perfect storm" upon their arrival last year. "There was a fairly rampant bodily injury issue throughout the market; investment yields pretty much at an all-time low; and customers being more discerning around value. Add to that the fact the business had already been up for sale, then not up for sale, which had clearly been a distraction. But we quickly concluded there were some really solid assets we could do a hell of a lot with. So task number one for both of us was to get rigour and control into the business."

"We've got some fantastic assets in the business, assets that many of our competitors will only ever aspire to," he continues. "We also have a very deep customer base — with two, if not three, of the most iconic brands in the market. That scale brings us procurement power, proprietary call on our own adjusting networks and accident repair centres, and clearly gives us some really stand out advantage.

"As a relatively new team we are also extremely philosophical: what is done is done; ultimately, we are going to be judged on the value we create and the results we deliver. So both of us have deliberately set out our stall and there is strong evidence beginning to flow through the results in terms of the effect we are starting to have on the business."

The figures appear to back that up. In May, RBSI reported an operating profit of £67m for Q1 2011, compared to a loss of £50m in the same period for 2010 — a result described by Mr Geddes as "another solid quarter in our recovery".

Mr Geddes added at the time: "The improved performance shows that our clear actions on de-risking and re-pricing our book, combined with significant investment in our transformation programme, are starting to bear fruit."

Together, Messrs Woolgrove and Maddock believe they are building a genuine joined-up capability that will give RBSI "real advantage over some of our competitors", with Mr Woolgrove adding: "From last year, necessity has driven fast decision making, it's made the teams closer; it's brought decisiveness. That has to be our challenge. The quality of business that I write is absolutely informed by the claims experience that Steve has, and vice versa."

"We have got an abundance of data; what we have started to do is convert that into information and meaningful insight," adds Mr Maddock. "But, more importantly, what we have got is our teams talking candidly to each other."

"Unless you have a shared view of where your performance is, both looking back and looking forward, you can't deliver results," says Mr Woolgrove. "You have to have a shared perspective on the world. So our teams work really closely together; there are formalised mechanisms for sharing data; and there is a structured process. How else can we deliver those results?"

As for the previously mentioned investment programme, Mr Woolgrove says: "We shouldn't claim credit for something that had already been established. But for me it was extremely positive, a real signal of the organisation's intent: tens of millions of pounds in pricing — and a similar, bigger number in claims.

"As we start to be more confident we are looking at how we use our new pricing engine to set rates; what's the right balance between profitability and growth; what's our shared view of future claims inflation; and finding a path towards delivering the results that ultimately investors will look for — and that's a very practical thing."

Quick transformation
Much reference has been made to RBSI's claims transformation programme: "We liken it to a three-and-a-half year transformation programme that we are shoe-horning into 18 months," says Mr Maddock. But wrapped around that programme is a new operating platform due to go live this month, specifically Guidewire's Claims Center. "What that enables us to do is codify our processes within the system," explains Mr Maddock. "We have imaging workflow that enables us to drive consistency and access to information."

Initial scope has been significantly broadened and delivery accelerated, with full implementation of the programme brought forward by around a year.

Mr Maddock explains there are three essential strands to the multi-million pound transformation project. First is to "instil control and rigour" using management information and analytics to better correlate operational performance and external factors with RBSI's own internal financial performance. "Making sure the connections are right with the underwriting, the finance and the actuarial communities — joining the dots up." Having also put in place a whole new claims team and structure, Mr Maddock says this has driven end-to-end ownership and, therefore, accountability.

The second phase is focused on customers and indemnity spend. For example, he points to six claims strategies across its main spend areas "that have got treble-digit million pound annualised benefit attached to them".

The third strand is around "radical simplification" of the operating model — in other words, site closure. To put this in perspective, RBSI's motor claims were simultaneously processed in 23 locations and within 21 different functions. That footprint has been pared down to a mere eight sites, where it is starting to effect end-to-end claims processing through eight steps and increasingly assigning individual case managers to customers.

RBSI has also started to segment claims spend and competencies, re-profiling experience within the claims function to meet its new requirements. "For example, take bodily injury," says Mr Maddock. "Is it an insurance process, is it a legal process, or a medical process? The answer is it's all three. So why, as an industry, do we just throw insurance resource at it? Increasingly you'll see 25% of our population going forward being lawyers; we're getting smarter at what we do, re-crunching the litigation process and bringing them in at the front end."

Tough decisions
Necessity has meant the "radical simplification" on claims has been mirrored across the business — with a 2000-strong headcount reduction announced last year, and a similar shrinkage of sites overall.

"Collectively as a business we had a huge number of sites where we had sub-scale operations — this was as true in sales & service as claims," says Mr Woolgrove. "We have a publicly stated goal to reduce our property footprint, which has the secondary benefit of cost savings, but that wasn't the primary reason for doing it.

"The large number of sites just drove unnecessary complexity. So we are moving to larger scale sites with all the benefits that go with that. Unfortunately that has led to a number of role reductions — both volume-related but also from the simplification that Steve's talked about."

In hard numbers, this means by the end of 2013, RBSI will have shrunk from 35 to 13 sites. "Clearly that carries an impact for any individual that has to move or create different arrangements so we have to plan very carefully for each one of those closures," says Mr Woolgrove.

He stresses all communication has been "open and honest" with as much as 18 months notice given to some affected staff.

"The staff have been absolutely fantastic," says Mr Maddock. "They responded in an extremely mature way. One of the things we have benefited from is not waiting until we have answers to everything. That early transparency gives people warning of what's coming and they can contribute to the solution. There are no surprises. Some might argue it carries fundamental risk giving people that much notice but it's just the right thing to do. And people will ultimately judge us by the action we take rather than the words that we use."

Could the overall job losses exceed the 2000 quoted? "It's fair to say we are well on track for the numbers announced," says Mr Maddock. "But the reality is that we are continuing to look for opportunities to make ourselves efficient in an extraordinarily competitive market. So you can never say never."

As for the divestment itself, there is no clearer picture yet on the route this will take or whether an IPO is the most likely. "All we know for certain is that RBS Group cannot be a shareholder of this entity but there are multiple routes via which the transaction could be taken," stresses Mr Woolgrove.

"Our goal is to maximise shareholder value and the advice to date is that an IPO could be the way to do that. For us as a leadership team, it is the hardest and most extreme option in terms of a transaction. So, if you plan for that, all other variants are potentially easier. But at the end of the day, the market might have no appetite, we don't know what the capital markets will look like at this time next year and the group could well receive a better and more attractive offer.

"As management, our task is simply to get this business in the best possible shape and the more successful we are at driving sustainable returns, maximising efficiency, generating the best capital, the more options the group will have. An IPO is not in our gift to decide; it is for group. But we are very clear in terms of what our objectives are and we have a very finite time period in which to act upon it.

"Market IPOs are always uncertain; what we have at least is the certainty that there will be a transaction. Therefore, we plan on that basis and take actions that get the business in the best possible shape prior to that. And I do believe investors will be attracted to this business given its scale, its brands, its channels and our ability to execute."

No interview with RBSI incumbents would be complete without raising the inevitable question about commercial underwriter NIG and the possibility of it being sold off separately. Mr Hester was adamant back in November 2009 that he saw "no commercial merit" in breaking up the insurance division, and Mr Woolgrove is keen to reiterate this point.

"NIG remains a core part of our business. Jon [Greenwood] sits around the 'ex co' table with as much influence and impact on the leadership community as anyone else" he says; although Mr Maddock is happy to "take a fiver for every time that speculation comes around".

Referring to the plans unveiled in April to merge its four underwriting functions for GI brands by applying to the High Court for a Part VII transfer under the Financial Services & Markets Act, Mr Woolgrove adds: "The choice was made to bring NIG into that single underwriting entity; that signals very clearly what we are looking to do — it's a core part of the business."

Home and away
And what of the possibility of international expansion? This division bucked the trend in 2010 with GWP up 20% on 2009 and Italian market share of the direct market said to be approaching 30%.

"Growth through commercial, products and international is definitely something we are receptive to," says Mr Maddock, "but that isn't a substitute for making sure the fundamentals of the UK business are there, effectively buying us the right to go on and do other things."

"Fixing and delivering personal lines, strong and consistent performance has to be our immediate focus because that will drive transaction value," agrees Mr Woolgrove. "But if you look at our commercial and international business there are capabilities and experience that we should leverage in the medium term from the core personal lines business — be that multiple brands, direct distribution or electronic trading." Or, as Mr Maddock puts it: "The sun cream is staying firmly in the bag for the moment."

In March, it was confirmed a new brand is on the horizon with a decision to be taken by the year end. Potential options are being tested with colleagues and customers alike, according to Mr Woolgrove, explaining that the timing of the rebrand fits with the insurance arm's intention to be "effectively separate ahead of the transaction". While Mr Maddock's following comment suggests an unveiling may be imminent. "We need to talk to our staff and other stakeholders first. But, needless to say, whatever we do, it will be cost-effective."

Referring back to the culture of openness they have tried to instil, Mr Woolgrove admits this has resulted in management receiving "very full and frank views" back but insists that's the type of environment it wants to create. "To have people that are as committed and buoyant as they are now, sets us in great stead for the next 18 months."

While Mr Maddock concludes: "The reality is that any public company is susceptible to any type of acquisition, so our situation is no different. But if we get the fundamentals of this business back to where we believe they can be — and we will — that will create fantastic options.

"We have spent a lot of time impressing on staff that, if we get this right, any outcome will be extremely favourable for them and they have been brilliant and responded accordingly. It's one of the things that impressed me coming into this business: there is real will and desire within our staff to see this organisation get its 'mojo' back."

Woolgrove & Maddock on referral fees
"Our position is clear: we've been instrumental in leading the call for wholesale reform," says Steve Maddock, managing director of claims. "Without wholesale reform, the issue won't go away, it will just take on a different guise. We can ban referral fees but that leaves our customers extremely exposed to those very models Jack Straw has alluded to."

Tom Woolgrove, MD for personal lines, adds: "Any referral fee ban has to come in jointly with a reduction in the fixed fee schedule. If solicitors can afford to pay, say, £800 referral fees and still make a profit, that's a real cost in the system. We have been very clear: we will not unilaterally send our customers' data on a speculative basis; but we would refer a customer who has been in an actual accident and genuinely injured to one of our panel solicitors."

"To my mind we have an ethical model, one that serves our customers' interests well in an imperfect market," says Mr Maddock. "If we remove that, they will just get farmed off into a different, less ethical model, or the lawyers will simply retain the profit for themselves. We make sure our customers get fair and appropriate representation and any benefit gets fed into our combined operating ratio, helping us offset what is significant premium inflation.

"We are upfront with our customers. They have utter freedom of choice and we are very clear about the referral fees we take. That is the appropriate and the right thing to do. By taking that proactive approach, it stops wholesale farming taking place.

"As a market we have historically failed to fully understand the behavioural consequences that ensue from reforms we lobby for. You can track that right the way back to predictable fee regimes. These were introduced to give surety of costs; it was assessed to be cost-neutral if not cost-reductive. At that point legal fees were around 21p in the pound — now they are over 40.

"That's why you can't tackle the system in isolation."

"And that's why, despite the headlines, Jack Straw's intervention is very helpful. It has put the issue back on the agenda. The headline grabbing around insurers is unhelpful from a reputational point of view, but his arguments are going to be a stimulus for change. "