With a huge year-on-year profit slump, internal wrangling and the competition ready to pick off dissatisfied customers, the rural insurer needs to act

Who would say no to a 155% pay rise? Not rural insurer NFU Mutual’s chief executive, Lindsay Sinclair. But his £1m-plus pay cheque caused ructions earlier this summer, as the insurer has just posted some of its worst ever results, with profits down 57% year on year, and an underwriting loss of £150m.

The row couldn’t have come at a worse time for NFU Mutual. Insurance Times has learned of dissatisfaction among its powerful networks of agents as Sinclair’s management team tries to transform the business. There’s ire among customers, too, as premiums soar – and a group of formidable insurer rivals are circling like vultures.

NFU Mutual is one of the UK’s largest insurers, with a gross written premium of £1.21bn, coming in at 16th place in the Insurance Times Top 50 Insurers list. That’s ahead of household names such as LV=, Ageas and Brit. But it keeps a low profile in the market, and despite repeated requests, refused to speak to Insurance Times for this article.

So NFUM’s rationale for awarding Sinclair such a hefty pay cheque on the back of such poor financial performance remains a mystery. One local newspaper site blog reads: “Only two words come to mind – and they are ‘snout’ and ‘trough’.”

A change of strategy

The row exemplifies the growing discord between the old school self-employed NFUM secretaries who distribute the insurance, and the new management, led by Sinclair.

A former banker and one-time chief executive of ING Direct, Sinclair was a rare outside appointment for the insurer, where many staff had worked their way up through the ranks, often from backgrounds in farming. Under his leadership, since 2008 NFU Mutual has parachuted in staff from the commercial insurance market, and diversified outside rural insurance. It is also believed to offer capacity to larger brokers on big cases outside its rural specialism.

The rationale behind the strategy isn’t clear – but if the 2010 results are anything to go by, it’s a long way from success. NFU Mutual attributes its annus horribilus to industry-wide problems such as the sharp rise in bodily injury claims; exceptional weather-related losses; and a spate of agricultural thefts. When the results were released, the insurer issued a statement from chairman Sir Don Curry saying: “We experienced very different market conditions for general insurance, personal and commercial lines business in 2010.

The industry saw rises in car insurance premiums, particularly for young drivers, while home insurance premiums continued the gently accelerating trend of rate rises that began in 2009.

“Insurers were also dealing with an increasing number of homes damaged by extreme weather and flash floods, often in places that had no history of flooding.”

Rate increases for farmers

The losses, coupled with the industry trend for rising motor premiums, have prompted significant rate hikes at NFU Mutual.

These couldn’t have come at a worse time. In 2009, in celebration of its centenary, NFU Mutual gave all its members (ie policyholders) 20% of their premium back, as a mutual bonus. This year, the mutual bonus has dropped back down to its usual level of 10% but, for policyholders, this feels like they are being asked to pay more. The rising rates coupled with the smaller mutual bonus means that some farmers are seeing their premiums spiral by one-third year on year.

They’re not happy. On a popular online farmers’ discussion forum, there are numerous posts detailing NFUM’s price hikes and swapping contact details for local brokers. A typical post reads: “Just in for lunch and spluttering over the morning mail from NFU. Three vehicles renewal – total premium £2,600. Last year £1,670. ‘It’s gone up,’ they say. No accidents, convictions or changes in personnel during the year – and they say, ‘computer says no’. Can anyone recommend a good broker?”

In bygone days, the strong relationship between farmers and their local agent, or group secretary, could have helped ease this strain. The group secretaries have historically had extremely close relationships with the clients, offering a range of financial products, advice and other services. This unique distribution model has been one of the insurer’s greatest strengths, and an often unbreakable defence against rival brokers and insurers looking to break into their market.

Centralising the business

But worryingly for NFU Mutual, there is dissatisfaction among its ranks of group secretaries.

The insurer has been increasing its central control of the self-employed secretaries as it moves towards a more corporate way of doing business. “They’re moving away from the warm and cuddly rural idyll,” says one former agent who recently left to become a broker. “People understood the need for change, but they felt that management’s attitude was, ‘never mind the farmers’.”

For decades, the group secretaries had been autonomous, managing close relationships, sometimes over generations, and having a high level of clout with head office on their customers’ behalf. But that’s changing. “Bit by bit, there’s been a corporate stranglehold,” says the former secretary. “NFU Mutual has been desperately trying to take back more and more control over what the secretaries do.”

One bugbear is that the insurer has tried to take the management of major accounts away from the local secretaries, under the control of its Stratford head office. Another is that it has tried to make its agents sell different types of insurance, encouraging them to chase tradesmen and SME business.

There have also been rows over remuneration: whenever one agent leaves and is replaced by another, NFU Mutual is said to push commissions sharply down.

This has led to a strained atmosphere between the insurer and its distribution network, with a number of departures. It’s a problem the insurer can ill afford. “NFUM lives or dies by its agents,” says one rural broker who happily recounts how he won dozens of new clients following a popular NFUM agent’s departure from the company.

NFU Mutual has traditionally controlled around 60%-65% of the rural insurance market, but competition for the remaining third is fierce – and getting fiercer. Aviva is a player in this area, as is AXA, and both are aggressively trying to increase their books. Towergate and CCV own two of the major underwriting agencies – AIUA and BIB – both backed with RSA capacity. Primary Group’s Rural is on an aggressive growth drive, and there have been several incidents of teams moving between these players in the past few months.

“There’s a general anticipation that prices will increase, and everyone seems to be fighting for position at the starting line,” says AIUA’s sales manager Barry Wicks. He estimates that requests for quotations have gone up by 50% this year as farmers begin to look around for cheaper options.

NFU Mutual needs to take action, and fast. The insurer has said it expects to return to profit next year, though it has yet to detail how. It has enviable goodwill from the farming community, as well as a strong record in dealing with customers – it recently won a Which? Award for service. But it is under attack from competitors and beset by internal divisions. Sinclair has a big job on his hands to earn that hefty payrise.

To view our investigation infographic, click on the pdf, right.