As news hit of the demise of HSBC’s motor insurance arm, the market was left to wonder how this vast, global bank could allow its insurer business to fail despite two serious takeover bids. Insurance Times pieces together the real story behind the headlines

On a Thursday morning in June, a tearful woman called Insurance Times. She had just read a story about the departure of HSBC Insurance (UK) chief executive Martyn Capewell from the business amid questions over its future. “No one is telling the staff what’s going on,” she said. “Many of us have worked here for years, and we just don’t know anything.”

Last week, her questions, and those of her colleagues and the rest of the insurance market, were finally answered. HSBC put its motor underwriting business into run-off; a major embarrassment for one of the world’s largest banking groups. The surprise decision ended a saga that had seen two lifelines totalling £110m thrown to the ailing insurer; the senior management leave under a cloud; and two takeover bids led by high profile industry figures – Andrew Gibson and Neil Utley – fall apart.

The fate of the business has been sealed, but many questions remain, including why HSBC had to pump all that money in, why it walked away from a deal with Utley that would have seen the business merged with IAG’s Equity, and what the impact on the troubled motor market will be.

The background

HSBC took over a small motor syndicate at Lloyd’s, Corinthians Policies, in 1996 at a time when banks were looking to move into insurance. The strategy may have been to sell motor policies to retail banking customers, but things didn’t quite pan out that way.

The insurer continued to focus on motor business, writing an estimated £180m by 2007.

It also had a smaller household book. It was run by Corinthians active underwriter, later HSBC Insurance (UK) chief executive, Martyn Capewell. Despite being the 26th largest UK insurer, it kept a low profile, gagged perhaps by the Byzantine bureaucracy that dogs multinationals such as HSBC.

Even before the full impact of the credit crunch had been felt, it became clear that HSBC Insurance (UK) did not fit with the rest of the bank. It was a small broker business that was not serving bank customers, and a non-core asset that was an unwelcome distraction. Market sources suggest that the banking giant toyed with the idea of selling off its insurance arm for some two or three years.

It finally made up its mind to do so towards the end of 2008 when, at the height of the financial crisis, a story appeared in Insurance Times claiming the business was for sale. HSBC, mindful of public perceptions at a time when all banks were under the microscope, responded with fury. Weeks later, however, it quietly confirmed that the sale process was happening.

HSBC prepared the insurer for a sale, which necessarily included calling in the actuaries and going through the books with a fine-tooth comb. It also injected £30m of capital into the business at the end of last year. This money is believed to have been used to bolster the reserves and sort out a problem with the pension fund ahead of a potential sale.

Meanwhile, a couple of bids were being put together. One was led by former Highway chief executive Andrew Gibson, backed by private equity; the other by Neil Utley, IAG UK chief executive. Both declined to comment for this feature.

Insurance Times understands that Gibson put in a bid for the business this spring. With plans to turn it around, launch new products and run off some of the old ones, the bid was a fairly modest one – and HSBC rejected it for being too low. It is also thought that the bank preferred Utley’s bid, backed by an international insurer, to one backed by private equity, with all the potential pitfalls that entailed.

Plugging the gaps

While the due diligence was going on, however, another hole was uncovered in the reserves – and this time it was even bigger. On 4 June 2009, HSBC injected a further £80m into the business, bringing its total lifeline to £110m.

A spokesman for the bank plays down the cash injection, putting it in the context of the global economy. “HSBC Group has a responsibility to ensure that any business or subsidiary for which it is responsible is appropriately capitalised and financially secure,” he says.

“Injecting capital into businesses is normal business practice and is used in appropriate situations. World financial markets have been through uncharted territory over the past 18-24 months and it has been more important than ever that our numerous businesses and subsidiaries throughout the world are well capitalised and financially safe and secure.”

Underwriters were struggling in an already soft market to build volume in preparation for a sale, potentially undermining the quality of the book, some sources suggest. At the same time, there were problems brewing in the claims department.

“They had a big black hole in the books,” says one well-placed source. “It was partly because of the underwriting, but also because they had not managed the backlog. Meanwhile, claims inflation had gone through the roof.”

Another source tells of a major account that was showing a 50% loss ratio in June 2008 that is now showing above 100%. “The claims were not being reserved. They failed to recognise the effect that these claims and the under-reserving would have,” the source says.

An HSBC spokesman said: ‘We have seen a number of changes implemented within our claims operation over the last 18 months, and our claims processing is currently up to date.’

Other market sources suggest that the nub of HSBC Insurance (UK)’s problem was its move from dealing face to face with tried-and-trusted brokers in its Lloyd’s days, to dealing with the volume brokers and playing on aggregators.

One broker, who knew the business well, says: “Martyn Capewell ran the [Lloyd’s] syndicate for years, which was very, very hands-on and dealt with a lot of trusted brokers. They were not getting the volume out of that, so they jumped into the big brokers. They sold through aggregators and did not have the experience for what was going to happen. They were just a bit behind the game.”

HSBC insists that it was not under-reserved. “The insurance business has never been under-reserved,”?the spokesman says, repeating: “The HSBC Group will, from time to time, inject capital into different businesses. This is normal and sensible business practice.”

In June 2009, chief executive Capewell and his second-in-command Bob Masters suddenly exited the company. Insurance Times was unable to contact Capewell for comment, and HSBC refuses to discuss individual staff.

Deal or no deal

Back in the sales process, the Gibson bid had been turned down and HSBC entered exclusive talks with Utley. This progressed for some months, with both sides apparently confident that a deal could be reached. It is believed that Utley would probably have merged the business into IAG.

Then, at the end of the summer, a surprise: the deal was off. Despite the apparent backing of the management of HSBC Insurance – the holding group that sat above HSBC Insurance (UK) and its sister business, HSBC Insurance Brokers – a higher-up at the banking group called it off. Why?

According to the HSBC spokesman: “We considered a number of possible outcomes for our motor insurance business and it was considered that we got best value for our shareholders by putting the business into ‘run-off’.”

According to a source close to the firm: “Someone from the bank turned it down. They described it as ‘a very, very good deal for Neil’.” The implication being that, during the exclusive sale process, Utley had managed to chip HSBC down to a price that would have seen it practically give the business away. While the insurance management was in favour, someone at head office did the sums and decided they didn’t add up.

It was always probable that HSBC could make more money by managing the run-off itself. It will have some assets left in the business – one source speculated as much as £80m – and, over the next two to three years, it could manage the run-off for as little as £20m.

Had the deal gone ahead, however, the bank would have rid itself of a tricky non-core asset: an unwelcome distraction for management at a time when all focus is elsewhere.

But it fell through – much to the surprise of the bidders, its staff, the market in general and even the firm’s own management. A number of brokers will now be looking around for new insurers, and rivals will be rubbing their hands in glee. For the motor market at large, the results may actually be positive.

“HSBC was a niche player, and this will leave a gap in the market in some of those non-standard areas. Clearly, fewer insurers means less competition and creates an opportunity for rates to rise slightly,” Swinton chief executive Peter Halpin says.

With one of the insurer’s three branches set to close and redundancy talks underway, however, the news is not so good for that tearful woman who called Insurance Times back in June, nor her 45 colleagues at risk of losing their job. IT