Tears, bullying and playing the blame game at RSA’s Irish unit

The former chief executive, Philip Smith, is taking the insurer to a Dublin employment tribunal for constructive dismissal. Joe Brennan reports on the scandal that triggered the biggest sell-off in the company’s shares for almost a decade

Joe Brennan
Tuesday 31 March 2015 09:16
Philip Smith quit RSA in November 2013, calling the internal investigation ‘fundamentally flawed’
Philip Smith quit RSA in November 2013, calling the internal investigation ‘fundamentally flawed’

Philip Smith’s son thought the worst when friends texted him on an evening in early November 2013, saying “Sorry to hear about your father.”

“He assumed I was dead,” Mr Smith, 47, told an employment tribunal. The hearing in Dublin this month concerns his claim that he was forced out of his €620,000 (£454,400) a year job as chief executive of RSA Insurance Group’s Irish unit. He had to Google his name “to discover that I had been suspended”.

Mr Smith’s constructive dismissal case sheds the most light yet on the controversy surrounding the events leading up to his exit in 2013 as head of Ireland’s largest insurer, amid holes in the unit’s finances.

The five-day hearing, dominated by disputed claims of bullying, delved into a scandal that began in Dublin and rippled to RSA’s London’s headquarters, triggering the biggest sell-off in the company’s shares for almost a decade.

At the heart of Mr Smith’s case is a quarrel over who was ultimately responsible for the Irish unit failing to set aside enough money to cover large insurance claims. Closing submissions to the three-member panel are due to be heard on 11 May.

Weeks after his suspension in 2013, Mr Smith resigned, saying he was made a “fall guy” for the episode.

Much of the tribunal hearing centred on Mr Smith’s management style. He ruled by fear, according to Derek Walsh, RSA Group’s general counsel; Mr Walsh referred to “extremely consistent and compelling” evidence from the 21 staff he interviewed for an internal report into the unit.

“You had men, professional men who had worked in financial services, weeping … crying, leaving the room, not being in control, shaking,” Mr Walsh told the tribunal.

They were “shaking with fear when they were talking – not about the reserving issue that was going to get them into trouble. But talking about why they had to do it, talking about Mr Smith,” he said.

A key part of Mr Smith’s case is that he hadn’t seen the draft report that Mr Walsh had co-authored before RSA submitted it to the central bank.

The report amounted to a “character assassination”, and the comments were “massively at variance” with his relationship with staff over the years, Mr Smith said.

The first sign that all wasn’t well emerged in a central bank review of the unit at the end of 2012, according to Mr Smith, who took over as chief executive there in 2007.

The regulator found that a cushion of money for unexpected insurance claims had been whittled down to 5 per cent of total provisions. The peer average was 11 per cent.

Parent company RSA extracted €255m of Irish reserves in the previous five years, he said. “The result of this practice was that the Irish business had no acorns put aside for a rainy day,” Mr Smith said.

During his evidence, Mr Walsh said: “It’s a matter of public record that RSA holds 5 per cent margin across all of its businesses”, and there was “nothing untoward” about the release of reserves within the company. On 1 October 2013, the country’s central bank told RSA it had found a number of cases where its Irish unit had delayed raising reserves where there was “adequate information to increase”, Mr Smith said at the hearing.

While RSA said Mr Smith was at fault for this, Mr Smith disputed that, blaming his subordinates.

Two weeks after the central bank raised its concerns, the company’s internal auditor raised a “red flag” that he found what he considered to be an “inappropriate process” of a small group of senior management setting large claims reserves, said Mr Smith.

Mr Smith presided over this “wrong” practice of fixing reserves for some large insurance claims below levels recommended by staff, Rory O’Connor, the unit’s former chief financial officer (who was later fired along with the unit’s claims director by RSA), told the tribunal. Mr Smith denied this.

Mr Smith controlled all information that left the Irish business, Mr Walsh said.

“There’s a story that somebody asked what the weather was, because they were coming over to Dublin the next day,” said Mr Walsh. “And they had to get that cleared with Philip to give the answer.”

RSA told investors about the problems on 8 November, and within days its shares had slumped 15 per cent, according to data compiled by Bloomberg.

Mr Smith quit on 27 November 2013, saying he would seek justice elsewhere rather than taking part in a “fundamentally flawed” internal investigation, according to his resignation letter which was read out at the hearing.

On 13 December Simon Lee, the chief executive, quit. There was no response to messages left for Mr Lee.

RSA is still counting the cost of the debacle, having sent £300m across the Irish Sea to prop up the Irish unit. In all, the company has raised about £1.6bn to shore up its balance sheet since the problems emerged in Ireland.

A central bank investigation into the episode is at an advanced stage, according to the regulator.

Mr O’Connor is also taking RSA to an employment tribunal. While he said he accepted that findings of “aggressive accounting policies” in a company-funded report were his area of responsibility, he is taking action over the disciplinary process that the company instigated. An RSA spokeswoman declined to comment.

Meanwhile, Mr Smith says he’s still dealing with the fallout from the affair. He hasn’t been able to find full-time work, he told the tribunal, and said he earned about €25,000 in consulting fees since he quit, and has mostly relied on his family for financial help.

“You can be a corporate darling when you’re bringing profit and growth back to the paymasters in London,” Mr Smith said. “And when issues go wrong and the organisation feels it has an exposure, then the individuals are unceremoniously pushed under the bus.”

© Bloomberg News

Stephen Hester: new broom under fire

Almost 18 months have passed since RSA first told investors about the problems in its Irish business, yet the company remains under significant pressure.

Simon Lee, who ran the insurer at the time, quit within weeks of the announcement. He had already fallen out of favour with investors earlier that year over a dividend cut, which was followed by three profit warnings in six weeks.

Mr Lee was replaced by the former RBS chief executive Stephen Hester, who announced his arrival by axing the company’s dividend and launching a £775m rights issue.

Mr Hester has since sold off £800m of the company’s operations (including those in Poland and the Baltic region) and steered RSA back into profit. However, its shares remain 20 per cent lower than they were in November 2013, premiums are still under pressure and investment returns sluggish. RSA is now understood to be considering a sale of its £500m Latin American business to slim its balance sheet even further.

Mr Hester, who faced a number of pay storms during his time at RBS, could soon find that shareholders begin to question his £2.1m pay package if things don’t start to pick up soon.

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