Hester set to swing axe at RSA costs in next restructuring step

The new insurance boss has begun looking at a series of cost cuttings across the business to increase future profitability.

Stephen Hester says  he
Mr Hester, who was drafted in as chief executive in February, has begun looking at a series of cost cuttings across the business to increase future profitability. Credit: Photo: EPA

Stephen Hester is attempting to deliver what are estimated to be several hundred million pounds of cost savings at RSA Insurance Group as the next stage in the rehabilitation of the insurer.

Mr Hester, who was drafted in as chief executive in February, has begun looking at a series of cost cuttings across the business to increase future profitability.

It is understood that a specific savings target has not been set, but early work has begun on the costs programme as part of his desire to raise £750m through disposals, costs and ending unprofitable business lines.

The £750m, combined with the £750m raised through an emergency rights issue earlier this month, will go towards shoring up the FTSE 100 insurer’s balance sheet and bolstering its capital position.

The company sank to a £224m loss in the year to December 2013 on the back of fraud at its Irish arm and severe weather in Europe and Canada.

Mr Hester replaced Simon Lee, who left the business in mid-December, after three profit warnings in six weeks.

Sources indicated that Mr Hester has begun looking at budgets to work out where savings can be found.

Although the process is being spearheaded by Mr Hester, much of the work is being undertaken by chief financial officer Richard Houghton.

Sources went on to say that the pair are looking at cutting costs heavily in certain areas, but emphasised that some cuts will be used to fund reinvestment elsewhere.

Particular focus is to be placed on the UK business, with RSA’s annual report pinpointing the need to accelerate its domestic strategy.

“A key focus is to align the company’s UK expense base with those best in class,” wrote JP Morgan Cazenove analyst Andreas van Embden in a recent note. “Investment in (digital) technology should offset part of the savings RSA intends to achieve over time as the company will be looking to catch up with peers, primarily in personal lines,” he continued.

The cost-cutting review – likely to be discussed at the insurer’s half-year results

in August – is just one of the many undertakings Mr Hester is involved in to improve the company’s financial standing.

In February, he reduced the final dividend to zero, at the same time as announcing plans for the rights issue.

Last week, he announced plans to sell RSA’s Baltics and Polish businesses for €360m (£300m), a move which will add £200m to the group’s net assets when completed.

He has also begun to restructure his executive team, promoting Paul Whittaker, head of emerging markets, to a new role of chief operating officer.

In addition, long-standing UK and Western Europe head Adrian Brown is leaving the company to take up a senior role at acquisitive insurance broker AJ Gallagher’s international arm.

Mr Hester took control of the business from Martin Scicluna, RSA’s chairman, who ran the business on an interim executive basis following Mr Lee’s departure.

Mr Lee left RSA following a string of problems, most notably the fraud at its Irish operations. As well as Mr Lee, the three men who ran the Irish division also left the insurer.

A report by PwC into the fraud found that the incident was isolated, and related to problems within the Irish business rather than the group as a whole. Following publication of the report in early January, the company said that there had been “inappropriate collaboration” between a “small number of senior executives” in Ireland.

The insurer lost £200m as a result of the incident, saying the men who ran the business had “undermined control effectiveness over claims”.

Two of the three men who ran RSA Ireland – chief financial officer Rory O’Connor and claims director Peter Burke – were dismissed in “relation to large loss and claims accounting irregularities”.

Former RSA Ireland chief executive Philip Smith resigned in late November, saying later that he was being made the “fall guy” for the problems.

An RSA spokesman declined to comment.