On the Royal road to success

Royal & SunAlliance has been in the news for all the wrong reasons recently. The beleaguered insurer was forced to announce a deeply discounted rights issue in September, offering current shareholders the right to buy shares at 70p - 54.5% of market price - in a bid to raise £960m. RSA says it needs the money to boost its reserves by £800m after a review by Tillinghast revealed a £744m gap.

The rights issue has already cost RSA £34m, the amount paid to ensure the issue would be fully underwritten by Merill Lynch Goldman Sachs. The rights issue also cost the company its finance director, Julian Hance, who was forced to quit after the rights issue announcement precipitated a 13% slide in share prices.

Fight for the rights

As this share drop suggests, however, the biggest cost of RSA's rights issue may be loss of confidence in the company. RSA boosted its reserves twice last year, by £590m in February and £440m in November, and the news that it needs still more cash was not well received in the City.

Indeed, the company had to pull back from the £1bn rights issue in November 2002, when shareholders refused to sanction it. The departing chairman, Sir Patrick Gillam, instead presented details of a drastic downsizing, which included reducing staff numbers by 12,000, cutting underwriting by £3.5bn and jettisoning one third of the underperforming household and motor accounts.

Commentators could be forgiven for thinking that the combination of The Royal and Sun Alliance has created a behemoth rather less than the sum of its parts. Even Peter Webster, UK director of commercial, concedes: "It wasn't the most successful merger, you only have to look at the results."

Webster also concedes that the rights issue will impact on RSA's share prices, though he adds that this will be a short-term reaction. "I really am not an expert so I can't speculate," he says.

However, Webster is confident that RSA's future is bright. He points out that many insurance companies have had to increase their liabilities in the face of spiralling claims and so-called compensation culture. He also insists that RSA's most recent rights issue will draw a line under the company's ongoing problems with its reserves. "The thing to focus on is that we have a guaranteed underwritten rights issue to raise £960m in capital for reorganisation," he says.

"This will give the new chief executive, Andy Haste, and ourselves more flexibility. Whether people believe we've got the right amount is up to them but the key is whether we can create a solid base from which to operate."

Webster describes the £800m boost to RSA's reserves as "very prudent", pointing out that they take the insurer's reserves from a potential outcome basis to a best estimate, which is usually more onerous. "We've had an external consultancy telling us how good our reserves are and they've come up with the best estimate," he says.

"What we're doing here - and again what new chief executive is aiming at - is saying let's get some finality in here, let's ensure the past isn't constantly being a drag on the present," he adds.

Webster is confident that Haste will be able to push the company forward.

Haste joined the company in April, filling the gap that had been left seven months earlier by another high-profile exit, Bob Mendelsohn, and Webster is impressed by the vigorous approach Haste has taken.

"Early in his tenure, Andy announced he would be conducting a review," says Webster. "Management consultancy McKinsey came in to help us and after that review we are comfortable with the segments we are operating in."

Webster points out that RSA's 2003 interim results, published at the start of September, were strong. The group operating profit for the first six months of 2003 was £181m, compared with £54m for the first six months of 2002, while the company's combined ratio dropped to 99.3%. Webster points out that the UK commercial interim results were also strong, with underwriting profit of £26m and a combined operating ratio of 94.5%.

Strategy for change

He says the changes to the UK division of RSA during the past few months were all set out in the November strategy. He says: "Our UK commercial business in 2002 was strong and the first six months of this year have also been strong. We have taken some tough decisions but of the changes we announced in November, 75% have been completed. We only have 25% to go. We have got a strong agenda going forward."

Webster concedes there is still work to be done on the personal lines side of the UK business but adds that in this area too, tough measures have already been taken. RSA agreed to end its £400m premium household scheme with Halifax Bank of Scotland in August, for example, which Webster says was one of the changes set out in the November rethink.

He says: "We have strong positions in our key segments and we are still doing something to remodel the personal lines. We agreed amicably to conclude the HBOS deal at the end of the year. It's part of the new strategy we announced, though obviously at the time we couldn't be specific."

Webster says RSA is not cancelling the HBOS account to free up capital for the commercial account but says making sure the insurer has enough money for commercial accounts is part of the plan for the UK. "In our overall planning we want to ensure we have adequate capital to support the UK commercial business," he says.

Retaining investment

In fact, Webster says RSA will invest money in its remaining lines during the coming months. Webster would not be drawn on the investment but described it as "significant", adding: "We are going to invest in the business to ensure we retain our position. The investment is in the long term and will take place over three or four years."

Part of this investment will be in IT, according to Webster. He says RSA is determined to charge the right technical price for the risks and he sees good underwriting as an essential part of this. Webster points out that RSA writes a broad spectrum of commercial risks, from very small commercial business to large end global risks but says technology could be used to improve underwriting across the board.

"We want to ensure that the underwriting of the business becomes more sophisticated and are looking at the whole package," he says. "At the top end we believe we can invest to ensure the processes are better conducted, making sure everything runs as smoothly as possible. We are also developing technical tools to help underwriters underwrite more accurately.

For RSA's smaller commercial lines business, which is already largely automated, Webster says the insurer is investing in technology to ensure it has the right platforms for sales and underwriting. He adds: "I think we're already in an environment where we can work with Polaris and imarket. However, we can't wait for others to develop systems. We have to work towards it ourselves and have been working with IBM to do so."

Indeed, Webster says RSA's Enterprise centres for small business are indicative of the market response to his company. Initially, brokers doubted that the centralised, automated approach would work, he says, but it is now a popular way of dealing with the smaller end of the market. "Otherwise," he adds, "it can cost rather more to process than it is worth."

RSA also announced in early September that it would shed 1000 jobs but, again, Webster says this is in line with the strategy the company announced in November. As he points out, RSA announced it would cut its headcount to 1200 by the end of 2004 and the recent cuts take it to this level.

"No jobs have changed as a result of the announcement," he says. "These changes are planned throughout 2004 and with the 1000 we just announced we will hit our intended figure."

Webster says that many of those affected will retain their roles, as RSA intends to take these heads off its payroll through outsourcing. He describes it as "not so much job losses as outsourcing the resource", though the outsourced home for RSA's 400 facilities management cuts has yet to be found.

RSA is also outsourcing 500 technical application roles, which Webster hopes will kick-start its IT development, and 100 call centre jobs. These jobs may find a more exotic role. He says: "We are piloting an off-shore outsourcing arrangement for some call centre activity, though I can't say where. About 100 jobs will be affected by that arrangement."

Virtual outsourcing

However, Webster insists RSA will not become a virtual insurer, outsourcing all its functions. "Some functions we believe are critical to the insurance process," he says. "For example, claims and underwriting. Webster also says staff morale at RSA remains high, pointing to the results of the company's annual staff satisfaction survey. "While there was a slight shift downward it had not been materially affected when we spoke to them in May."

Really, he says, RSA is doing rather better than recent reports have suggested. "The UK results, and the UK commercial results in particular, were very positive for 2002 and even better for the first half of 2003," he says. "Without sounding arrogant, we're as strongly positioned as our peers. We have the spread and the performance and are in a good position on the commercial side. We've been working hard and successfully. That performance got overshadowed by other things."

But, ultimately, as Webster says: "Businesses do go through different perceptions but what breeds confidence is success."