RSA Review - Hastening reform

After nearly three years in the job, Royal and Sun Alliance's chief executive officer, Andy Haste, seems to be performing well. Guy Anker explains the challenges that still face the company

When Andy Haste took the top job at Royal and Sun Alliance nearly three years ago, many would have been forgiven for thinking the former Axa Sun Life chief executive was inheriting a poisoned chalice.

After all, he replaced outgoing group RSA chief executive officer Robert Mendelsohn, who had hardly covered himself in glory. However, in 2005, the outlook is very different - Mr Haste has been credited by many with leading RSA out of the mire and back to the forefront of the UK general insurance market.

Many market commentators were surprised by Mr Haste's appointment, given his background in the life and banking sectors. He previously headed up the consumer loans products department of Nat West's US division and, before that, was president and chief executive of global consumer finance at GE Capital.

Low point

In December 2002, when Mr Haste joined RSA, the company's share price plummeted to a low of 118.5p - a 69% loss of value that year. His arrival came soon after the insurer was forced to close half of its claims arms, shut down four commercial operations in Liverpool, Leeds, Manchester and Hertford, and lay-off hundreds of staff.

RSA's most recent set of half-year results pays testament to its meteoric rise since then. It posted profits of £195m after tax for the six months to June 2005, and its share price stood at 94.75p at the time of going to press. Although that is lower than when he took over, Mr Haste seems to have arrested the freefall in the company's value.

RSA is now focusing on its core offering - general insurance. This was most evident when Mr Haste oversaw the sale of RSA's life arm in July 2004. Ian Sparshott, a partner of the insurance team of analyst firm Mazars, says of the move: "Selling its life arm has helped give the company a focus and get it back to what it does well."

To emphasise the damage the life business was causing RSA, the company recorded a deficit of £497m in 2004 due to the excess baggage of the life portfolio - a stark contrast to the interims posted last month.

Some might argue that Mr Haste's success was simply because he was in the right place at the right time, given the upward cycle that has seen most competent underwriters post profits over the last few years. However, Mr Sparshott is quick to heap praise on Mr Haste's achievements, regardless of the upturn in the insurance market.

"From what I have seen from the interim results, the effort that has been put in to turn around the core business shows that he has done a good job," Mr Sparshott explains.

"The rest of the market has also seen its results improving but RSA is not doing worse than the rest of the market, and you still have to get your own good results."

According to Geoff Miller, research director at Bridgewell Securities, RSA's change of fortune can also be attributed to Mr Haste's changes to company culture: "Changing the culture of the business has been critical. At that level there is little you can do about changing day-to-day operations. The message that has been coming out of RSA is that it is now seen as a place that is more confident about itself."

That confidence was demonstrated when it managed to lure former Norwich Union sales, marketing and underwriting director Bridget McIntyre away from the UK's largest general insurer to replace the retiring Duncan Boyle as UK chief executive on 1 November.

In addition, it has hailed the success of its direct arm, More Than, which it claims grew by 12% in the first half of this year. Mr Sparshott adds: "More Than is strong at the moment."

RSA has also been linked with a number of takeover proposals during the past year, although none resulted in a serious bid for the company.

Negative outlook

For all its promise, however, the company retains a negative outlook, according to ratings agency AM Best, which is still monitoring its US prior-year business and reserves development.

The sale of RSA's speciality US non-standard motor business, Viking Insurance, to Sentry Insurance in July has ended its ongoing US business but there are fears its long-term liabilities across the Atlantic could still come back to haunt the insurer.

For example, it was reported on 1 August that car giant General Motors is planning to launch a lawsuit against the insurer, seeking payment of all legal claims from asbestos-related lawsuits, which could top $1bn (£550m). RSA shares fell by 2.5p to 88.25p following this development, which halted the momentum it had gained after the company announced it had shaved its pension deficit.

And Mr Miller warns that despite Mr Haste's hard work this could be make or break for RSA in the future. "US liabilities that are bad only get worse and that can cause danger. For all Mr Haste's good work, there is nothing the group can do about that," he cautions.

"Maybe they could sell it off as a run-off vehicle but that is some way off. It is difficult to see when the US liabilities will tail off but it won't happen in the short term. It is like a Sword of Damocles hanging over the company."

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