CNBC Transcript: Interview with Stephen Hester, CEO of RSA Insurance Group

Following are excerpts from a CNBC interview with Stephen Hester, CEO of RSA Insurance Group.

You or your company or both are part of the Remain camp because companies and people's personal views are getting convoluted now. So just tell us exactly the stance of you and RSA.

SH: Well I think you've got it absolutely right. I'm personally part of Remain but so too is the company. Now clearly from a company standpoint really our only access of commentary is economic and I think we're very, very clear that RSA itself benefits from us being part of the European Union. Something like 50 percent of the market value of RSA is our European operations where we can trade with single passports and so on. But also insurers, as a group, hold a very large part of the UK's savings and one of the things that is clear is if there was an exit from the EU, the value of U.K. assets goes down. And that's not good for insurers, it's not good for all the people who have their savings with insurers, so that's why RSA believes that we're better off, from a business perspective, from an economic perspective, in the European Union

Why does the value of the savings go down? Let me just pin down that one.

SH: I think the value of savings goes through a number of different routes. First of all, Sterling falls as a currency and so obviously any Sterling denominated assets are worth less, relative to everything. I think even in the medium- to longer-term. The second is that the uncertainty premium and the risk premium causes a further drop in Sterling assets or in risk related Sterling assets. And there's some uncertainty around what scale, but I think it's very clear that the drop is there, we lose some of the credit rating and so on. So I'm not saying it's going to be a disaster, we can't survive...

So you think that Britain would be marked down on the credit rating scale?

SH: I think the credit rating agencies themselves have said that that's a likelihood...

Which means there's a flow and effect across all products…

SH: Exactly but I am certainly not in the camp that it would be a disaster. I think the UK is big enough and strong enough with enough ingenuity and so on to do OK outside the European Union. It's just clear that we will be poorer by an amount which is hard to judge. And so the issue will be: are they good reasons to deliberately want to be poorer? And that of course moves into the political realm of issues like sovereignty and so on and so forth.

So what don't you like about Europe? You're Remain, you like the idea of the company and indeed Britain remaining part of EU. What don't you like? If you had to side… any part of you, I'm sure Boris has been trying to get you on his side as well. What was the one thing that you really agree with the exit campaign now?

SH: Here's the thing that I think you can apply to many aspects of international cooperation or even human evolution just to be pompous for a second. That the history of human evolution is about people giving up sovereignty in exchange for a bigger collective power. But of course the frustrations of a bigger collective power are you have a small amount of influence so, you know, if you're a single person and you marry -- you give up some power some individual rights and you share them.

When you become part of a community, part of a county, part of the county, every single time you're saying more of us together can get more done, but our own individual voice is less important and therefore, we will be frustrated by other people have different voices and we won't always carry the day. So, this is true of being a member United Nations, is true of being in NATO, is true of being in the in the UK. Scotland's frustrated in the UK. Every single point of human evolution we have traded sovereignty since the caveman days for greater collective power.

The Brexit people would come back to you and say you're absolutely right. And they'll take your historical analogy and they'll say it becomes imperial and empires only in one way. Whether it's the British Empire, whether it's the Roman Empire, that actually once that that collective just gets too big or the central decision making body gets too far away from their subjects then you see collapse.

SH: Well and I think that's right and so I think that if you structure very big organizations in a command and control way, at least in terms of democracies, you do get tensions which are hard to break down. Now democracy, in theory, is your way through that, it creates frustrations because people are very slow to move democracies, don't agree you get stalemate and we get that at many levels of government. But I don't think it would be possible to describe the EU as an imperial empire.

What about regulation though? Because this is the one big comment that is raised by the Brexit campaigner - that Europe ties down Britain with too much regulation. What about in your business? Is there regulation that you're hampered by because of the Europeans, because of Brussels?

SH: You know I would scratch my head at this argument, in part because the people who almost invented bureaucracy and exported it to the world were the U.K. Just think, when it's a nightmare to do business in India as it sometimes is, it's British bureaucracy and from my standpoint many of the most bureaucratic regulations we deal with are made in the UK. The banking commission all the stuff that came out of that in banks being one example, and the gold plating that goes on.

When it comes to bureaucracy, if we pulled out of the EU, it seems to me we'd have a double set of bureaucracy,0 because anyone who does international business would still have to abide by the rules of the countries they trade in. And there will be another set of different UK rules. From the insurance industry standpoint, we've just spent the last 10 years and a huge amount of money trying to harmonize rules with our competitors, so that if we're competing against Allianz in Germany or AXA in France, and they're very big players in the U.K. market as we are in the continental European markets, we're all working to the same set of rules. I think that allows business to flow much better. So to me, the bureaucracy argument is actually the opposite way round to how it's claimed to be.

The pro Brexit camp would argue that just 6 percent of U.K. businesses actually trade with the EU, a far greater majority of them are small and medium sized enterprises that don't have to worry. So as much as it's a problem for your business, by far the greater majority of U.K. businesses don't have to worry about that.

SH:They don't have to worry about that aspect, although in an interrelated economy, if small businesses are suppliers to big businesses and big businesses are affected, then you still get, if you like, a trickle down effect. But it seems to me, the lesson of the world for tens of thousands of years is: you come together to achieve more. And it seems to me whenever societies, whether economically or in any other way, wall themselves off, there's trouble. It could be religious trouble, it could be racial, it could be political, could be economic -- walling yourself off in the world is not a recipe for success.

I think the exit camp would take that to its logical conclusion and suggest why just stop with Europe? What they'd like to do is go global. They don't want a small European organizational structure we're working in, they just want to go to the world, go to everybody. And whilst it might take some time to get deals, ultimately they'll get done and they would suggest then we'd be in a better place because we are part of the final, obvious and logical conclusion of a global structure.

SH: Well I think that everyone is in violent agreement on this point. That in today's world, it is better to be a member of lots of different clubs because you're trying to maximize your collective influence and take down as many barriers as you can and so, I don't think anyone advocating we stay in Europe is not saying we shouldn't stay in the UN. We're not saying Europe shouldn't have a free trade deal with China…

We haven't got a trade deal with China, we haven't got a trade deal with America and we don't have a trade deal with India. Is the UK more able to negotiate those outside of the EU the EU is blatantly been incapable of doing it within…

SH: You make a good point and so when you ask the leaders of each of those countries that you mentioned, who they're more likely to negotiate a trade deal with, they say with the European Union. It's bigger and more influential...

With 28 different countries that can't agree on anything…

SH: Let's look at the World Trade Organization, which is what we in the UK would be relying on if we came out of the EU, the World Trade Organization is the world's slowest body to negotiate trade deals because it's difficult when you're negotiating among lots of people you have less influence, it's slower. But nevertheless we all try.

Stephen Hester on banks

It is going from bad to worse for some of these banks. I don't see any sign of recovery despite the positive noises. RBS is trading at 21 pence in old money. And it's got this government overhang as well. Did you see a way out for the government, Stephen?

SH: You know I think that most major banks are now dealing with the core problem that most service industries are dealing with around the world. For the last seven years, eight years, since the financial crisis, banks have been dealing with the massive fallout of the financial crisis and regulation and political anger and so on and so forth of different scandals and fines. And we're now moving in a sense into business as usual, but business as usual as the service industries have not experienced it before. You no longer get in a service industry double digit growth, which bails you out of almost any problem. And so, service industries, like banks, like insurance, are having to say how do we live in a world of slow growth where our revenues don't go up every year? How do we do that? And where there are huge technological pressures?

And so the things that Toyota learned in the 1970s, 80s, that General Electric applied to aero engines, this intensity of operational skills and development and efficiency, the service industry has to learn today. Which is why we're seeing everywhere stories about robotics being applied to white collar jobs, not just to blue collar jobs. And so, I think each of these banks is is now struggling with the fact that historically, they've never had to live in a low growth environment for their service industry. And these are skills that are not fast to apply and as a consequence of that, return on equity is low because costs not coming down fast enough. And people are trying to work their way out of that equation.

That's a really defensive strategy though. There is another alternative, that's consolidation and your company itself was in the headlights from Zurich at the end of last year. Isn't that the other answer? Take over another business and growth?

SH: I always think that M&A, when you examine it, there are many stories about how it fails more often than it succeeds, in terms of value to the buying shareholder, and that's because if you use it as an escape from your own problems, you probably end up just multiplying your own problems because you had another headache of management in the integration to what you've got already. So certainly, as it relates to RSA, we've said no M&A, for at least 3 to 5 years, until we get really on top of our own issues, until we become amongst the best companies in our sector. Until everything that we currently own and control is going hummingly, no distractions. And I think we're in a world where, if you get distracted, the risk is you lose. You have to concentrate in these tougher climates.

So you're saying RSA is not for sale you would turn down an approach if it came in the next three to five years…

SH: RSA is owned by its shareholders and our shareholders have a right to decide. And we demonstrated in the case of Zurich that we would listen, even though I personally didn't specially agree with the price on offer, but our shareholders wanted to see it. Now I think in our case, 9 months later most of our shareholders are pretty pleased that Zurich went away, because the share price is going up nicely - we've outperformed the industry - that's on the back of our business results having turned sharply upwards, and I think we can outperform our industry for the next three years.

If it's not M&A, and as you say the marketplace is not growing very much, then you have two opportunities: one is to cut costs on one side, and the other is to take share. You've obviously been focusing somewhat on the costs. How do you take share in that marketplace going forward? What's the key?

SH: In the short run, most of the economic news is about slow growth, and likely to be for a while and, in relatively mature markets, in relatively slow growing markets, taking market share means someone else has got to lose it and that someone else doesn't want to lose it. And so there's a very good chance that if you take share from someone in the short run, you're making a mistake, you're pricing things wrong, you're taking a risk you shouldn't. So I think in the short run, in this kind of market conditions, what you do is consolidate your market share and really improve your capabilities.

Note to Editors


Sarah Whiteacre


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