RSA Insurance Group Plc (RSA) hired former Royal Bank of Scotland Group Plc Chief Executive Officer Stephen Hester to lead the U.K. insurer as it seeks to put a scandal at its Irish unit behind it.
Hester, 53, succeeds Simon Lee, who quit the London-based insurer in December after injecting a second round of capital into its Irish business within six weeks amid an accounting probe into the unit. Hester, who left RBS in October, will be paid an annual salary of 950,000 pounds ($1.6 million), the company said in a statement yesterday.
“The challenges of recent months have demonstrated that we haven’t lived up to our stakeholders’ expectations and performed to our true potential,” Hester said in the statement.
Hester will seek to put out fires at the U.K insurer after about five years doing the same at RBS, which took more bailout assistance than any other lender during the financial crisis. RSA needs to bolster its finances after accounting irregularities and weak reserves at the Irish unit cost 200 million pounds, helped erased more than 1 billion pounds of market value and prompted a round of departures of top executives.
“He’s a well-respected name in the City and he’s done a good job at RBS,” said Barrie Cornes, an analyst in London with Panmure Gordon & Co., who has a sell rating on the firm’s shares. “RSA needs someone with credibility.”
RSA rose 4 percent to 103 pence at 1:45 p.m. in London trading, giving it a market value of about 3.8 billion pounds. Some 1.07 billion pounds has been wiped off the company’s value over the last three months.
Hester will oversee efforts to rebuild RSA’s capital. The company is planning the sale of assets in central and eastern Europe, three people with knowledge of the plan said on Jan. 23. Chairman Martin Scicluna said last month that a review of the company’s capital position was progressing and “all options” were being considered.
“We view the appointment of Stephen Hester, a proven CEO with a track record of challenging restructuring stories, as clearly shifting the risk-reward of the RSA stock,” said Andy Broadfield, an analyst at Barclays Plc, who upgraded his rating to equal weight from underweight, meaning investors should no longer sell the shares. “For a more positive stance, we would need evidence that the balance sheet can be restored with limited earnings dilution.”
Investors expect RSA to raise as much as 750 million pounds to improve its finances, including saving about 140 million pounds by not paying dividends, Citigroup Inc. analyst Thomas Dorner said in a note to clients. While Hester has a “strong reputation,” Dorner kept a neutral rating on RSA shares because of “ongoing uncertainty over the group’s strategy and plans for raising capital.”
RSA said in November it was investigating whether the Irish unit reported the amount of premiums paid to the company earlier than it should have and the timing of when it set aside reserves to cover insurance claims. A PricewaterhouseCoopers LLP review found that inappropriate conduct by top Irish executives had undermined risk controls.
Irish CEO Philip Smith resigned in November, followed by Lee, the group CEO, a month later. The company fired two other senior Irish executives, Rory O’Connor and Peter Burke, last month.
At RBS, Hester had to deal with losses in an Irish subsidiary. The U.K. government-controlled lender pumped 14.3 billion pounds into its Dublin-based unit Ulster Bank since 2009 as bad loan losses soared following Western Europe’s worst real estate collapse.
Hester, a former investment banker who joined RBS in 2008 after its rescue, announced his departure in June after the U.K. Treasury pushed the Edinburgh-based bank to shrink its securities unit.
Hester, who replaced Fred Goodwin as CEO, reduced RBS’s balance sheet by more than 900 billion pounds and cut some 41,000 jobs out of 199,800.
American International Group Inc. and Hartford Financial (HIG:US) Services Group Inc., the U.S. insurers that received the biggest taxpayer bailouts in the financial crisis, each turned to former bank executives to help their recoveries.
“It’s not as different as he will be told it is,” Liam McGee, who was hired to run Hartford, said in an interview yesterday. “A fresh perspective and a fresh set of eyes is very helpful, and I think employees and partners and other constituents will find it refreshing.”
McGee became CEO of Hartford Financial in 2009, after about two decades at Bank of America Corp. McGee repaid the insurer’s rescue, bought hedges to guard against market fluctuations in Japan and sold units including a life insurer.
“An important perspective to bring to the industry is decisiveness,” McGee said. “I’m a believer in ‘you run through fire, you don’t walk through it.’”
AIG in 2010 hired Peter Hancock, who had spent 20 years at a predecessor to JPMorgan Chase & Co., where he established the derivatives group and served as chief financial officer. Hancock initially oversaw finance and risk at New York-based AIG and now runs the property-casualty operation, the insurer’s largest business.
“These people were effective because they had a core skill set and a vision and also a degree of flexibility,” said Cathy Seifert, an insurance equity analyst at Standard & Poor’s Capital IQ. “It’s the ability to manage a mature, slower growing, yet very competitive, highly regulated business.”
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