180 Years of Post - The history of direct insurance in the UK: How Direct Line and Churchill took on the establishment and ended up as merger partners

As Post celebrates 180 years, Post content director Jonathan Swift explores the birth of direct insurance in the UK and how two key early movers Direct Line and Churchill went from rivals to merger bedfellows in a deal that literally 'shook up insurance'.

As Miller mentions one of the hardest businesses for RBS to get its head around was NIG. For Bunker the sales process offered other issues.

“Suddenly there were busloads of lawyers doing due diligence on us. Of course as a 100-year-old company if you were looking for things to put provisions on there were lots of opportunities, and so lots of problems were coming out of the wood work, which never came out from the Churchill due diligence,” he comments.

“Some were real [including the soon to be closed loss making Special Risks Division that had become embroiled in the fallout of the collapse of claims management company The Accident Group], and some weren’t. A lot of our business was binary in that some years it would do well, and others it would not, like pollution schemes. So they were reserving all of them on the worst basis that every scheme would fall down.”

As to how the brokers would react Bunker answers: “It is one thing being bought by Churchill, it is an entirely different thing being bought by Direct Line. But by then the brokers trusted us. However, I later found the original plan was to sell off NIG as part of the deal and I was annoyed because if it had wanted to sell it I could have helped it with that and possibly put together another MBO. But in the course of the due diligence it decided it liked it and kept it which was surprising given the provisions it put on; but it must have decided to keep it to [benefit when it got to] take it off.”

Pretty brutal

Miller remembers once it started the integration “was pretty brutal” – a word that was mentioned a few times researching this piece – with 300 people involved in 20 work streams. In terms of savings, as an ex-banker and having worked with RBS owned Direct Line for two years now he knew how to tick boxes when it came to projections.

“I know the [projected] figures where improved upon because once people knew the way RBS operated you never over committed,” he says. “It was one of those cases where if you said you could deliver £10m for one stream and £10m for another, but got £12.5m for the first and £8m for the second, it would demand the second figure needed to come up [even though you exceeded the overall proposed target].”

After settling on £1.1bn for Churchill and NIG, Miller comments the plan was to achieve a run rate synergy benefits in excess of £110m per year within three years after incurring one-off costs of £150m (of which roughly £50m related to IT work in establishing a single system and an integrated infrastructure to reduce IT operating costs by £35m per annum).

Almost £10m per annum in synergy benefits would be achieved by rationalisation of the portfolio of 102 properties but the impact on the combined pool of 19,500 full time employees was predicted to be negligible, Miller adds. Although the integration would reduce then current roles requirements by 700 staff, the growth projection of the two businesses actually increased staff requirements to 20,100 FTE in 2005 and 21,200 FTE in 2007.

Among the obvious synergies that RBS would look to benefit was reducing the number of senior managers. Some of those interviewed remember the process, which was handled by executive search specialists Whitehead Mann and Spencer Stuart depending on the level of seniority.

“One thing RBS was quite good at was integrating companies because it did not take any prisoners,” Bunker comments. “It had one way of doing things and it had done lots of acquisitions. Part of that is getting rid of people and that is exactly what it did.”

“All of us had to apply for jobs; it was not like you were plonked into a role,” Carter continues. “You were basically put into a pool and told you were up against say three other people as the candidates for a position. It was a brutal process as it only had 30 days to make the decision and get on with it. You were looking at [the other candidates] and thinking ‘only one of us is going to get this’.”

Bunker lasted six months post deal, having retained his role running NIG, but now answering to Charles Crawford who ran a new intermediary division that also absorbed Devitts. Blowers was among the first to depart noting: “I soon realised thing weren’t going to work as soon as we started having some sessions in RBS’ offices in Old Broad Street. David Hiddlestone followed me, and then Andy Webb. We met in a restaurant in St James post-deal and we had a sweep stake on how many people would be left after a year and I guessed the lowest number, and even I guessed too high. But then lots of the Direct Line team left as well, and it was an RBS implant operation after that.”

Even those former Churchill executives who stayed longer did so under seeming duress. “I stayed on for 668 days. I know – I counted every single one of them – and became chief operating officer of the combined [RBS Insurance] business,” explains O’Roarke. “I left as soon as I could when my non-compete restrictions expired in June 2005.”

First hand experience

Of course, when Churchill and Direct Line came together, it gave the two traditional rivals the opportunity to get first hand experience of how the other operated. Quinton comments: “It applies to both Direct Line and Prudential that they were more traditional, process driven and numbers focused; while Churchill was maverick and about the gut feel.”

To use a Civil War analogy Bunker describes Churchill as being like the Cavaliers and Direct Line, the Roundheads: “Direct Line didn’t do a lot of socialising, as it was very worried of talking to people outside the office and there was a big secrecy culture there. It thought its way was best and did not need to talk to anyone; whereas Churchill would get what it could from anywhere and had an extrovert culture. In contrast,  Direct Line had an introvert culture as far as I could see.”

Webb notes that while you could tell that given the background of some of the original Churchill employees they did not like Direct Line, the rivalry was more sporting than anything else.

“My personal perspective was that they didn’t dwell on it,” he comments. “I never saw the phone being blown up. I would describe it more as banter in a football sense, like Arsenal versus Spurs; or Liverpool versus Everton, it was not hatred. There was definitely some bad blood historically, but by the time I got there [Churchill was] on such a meteoric rise that it did not have time to worry about Direct Line. We were too busy kicking down doors. So it stopped becoming a distraction”.

A number of those interviewed for this article have commented how the culture at the merged RBS Insurance business changed almost overnight. But was it not the result of tensions caused by a legacy of years of tough competition and Churchill smashing up Direct Line phones?

“Ironically, that wasn’t a factor at all,” O’Roarke says. “Prior to the acquisition RBS had largely left Direct Line alone to run itself – however, after the acquisition the insurance division of RBS represented 22% of RBS Group income and so attracted a huge amount of interference from Edinburgh.  Hence, the Direct Line team felt that from 1 September 2003 (the date the Churchill acquisition completed) it had also been taken over – but by its own shareholders – hence we became collaborators against a common enemy – the bank.”

This view is echoed by those on the other side of the merger. Fernandes comments: “RBS took a greater and more intrusive interest in overseeing the new merged company, so the common enemy soon became ‘the group’. The sheer scale of the integration meant that wide-ranging promotion and development opportunities were limited in the bigger organisation, as the priority was to de-duplicate roles by limiting job applications to current incumbents.

“This clearly accentuated existing rivalry at a personal level, when perceived good people lost their jobs. It also led to wider frustration due to the ring-fencing of applications for the more enlarged roles, which also caused good people to leave.”

“I don’t think [the RBS management] had ever been able to get a true grip on Direct Line; it was very successful and the golden goose, the cash cow, but it was over there and successful in its own right and they did not like that,” Miller adds.

“So as soon as there was an injection of funds, it became an excuse to exercise more control over Direct Line and it very quickly went downhill from there in terms of being a good place to work. I always liked dealing with the Direct Line and Churchill people, but suddenly I was dealing with all these other people and I was thinking I don’t trust them, they seem to be in the headlights and showing that they are as tough and shitty as anyone else.”

Culture clash

Indicative of the culture clash to come, Bunker recalls: “After the deal was announced, the senior [Churchill] staff were invited to Glen Eagles for an RBS welcome party. We were forced to listen to the bag pipes, eat haggis, and then to watch a band of blokes in kilts doing a punk form of Scottish Country dancing to a rock beat. For many of us English, it was like revenge for [the 1746 Battle of] Culloden.”

RBS was synonymous with one person at the time of the Direct Line and Churchill deal, Fred Goodwin, also known as Fred The Shred. His presence, as alluded to, was soon felt by the combined workforce of the new RBS Insurance.

As one former Direct Line employee remembers up to his departure in 1997 “Peter [Wood] described his job as keeping the bank out of the business.” With Wood gone and the insurance group now a materially bigger part of the overall group Goodwin’s shadow loomed larger.

“He decided that he would come down to one of our meetings to see how we priced insurance and we had to rehearse for this as you would expect,” recalls Carter. “I am sitting over the table from Fred with about another ten people in attendance and he said ‘I am just going to sit here and listen’.

“But did he bollocks. He was supposed to come in for 20 minutes and after ten it was obvious he did not like what he was hearing and looked out the window and asked ‘How much would it cost to insure that car over there’? To which we responded ‘What is it? A Mondeo, who is driving it?’ and he replied ‘doesn’t matter’.

After some too-ing and fro-ing discounting other rating factors for another ten minutes, Carter concludes: “The net result was that the company turned itself inside out for six months so that next time he came down and asked the same question, we could put the registration into the computer and say £468. And that was a lot of wasted effort, to create what we called Pricing Cube. But it was done so we could answer Fred’s question, but it was not value adding.” 

The Churchill–Direct Line integration completed in September 2005, 24 months after the deal had been given the regulatory green light. However for some who had hoped this might signal a new dawn for the business, there was disappointment. As Miller remembers post-merger the Business Engagement Group was established to judge cases for investment, which had the unfortunate – but in his eyes relevant – acronym BEG or beg.

“I thought that as soon as we had got the integration complete the doors would open again – especially in terms of system development and enhancements where we needed help having put together two businesses on bare bones. There had been no development while the integration and migration of policies was going on and we had all this stuff waiting to go, but that wasn’t the RBS way,” he remembers.

“You’d spend ages developing the business case but it was never going be as good as the bank implementing something else. We were [now] the poor cousins. So two entrepreneurial companies, which had a fantastic balance in my view between growth, development and return, were now being strangled. RBS wanted it to deliver the growth and return but with the minimum amount of investment. So all the people would come to the BEG, to beg to get anything done, and most left disappointed.”

An unmitigated disaster

In conclusion, O’Roarke sums up RBSI as ultimately “an unmitigated disaster”. He adds: “The short-term integration targets were achieved with a clinical disregard for people and culture. As a result, the combined business lost over three million customers and 3000 of its best employees within five years.  By 2010 it had racked up huge losses and was a hollowed-out shell of what the two businesses represented in 2003. Happily, it has been well run since it gained its independence from RBS and is now a well-respected player in the market. 

The fallout of the Royal Bank of Scotland going from the world's largest company by assets (£1.9 trillion) and fifth-largest bank by stock market value to government nationalisation – and the subsequent spin-off of RBS Insurance as the FTSE 100 listed Direct Line Group is a story for another day. Although Crawford reflects on an interesting incident in 2008 when Zurich was mulling a bid for the RBSI assets.

“I remember sitting across the table from [the then managing director, UK direct and partnerships] Mike Quinton, [then CEO of European general insurance] Annette Court and a few others such as Ian Parker [then head of strategy, European general insurance] who had all gone to Zurich [from RBSI]. That rates as one of the most bizarre due diligence meetings in the history of insurance because we went to Goldman Sach’s office up by St Paul’s and we were sitting across the table from these people who were ex-Churchill and Direct Line asking us questions about our business that they already knew the answers to.”

But there is an interesting discussion to be had about what might have happened to Churchill had it continued to trade independently of RBS and Direct Line, especially given the work it was doing on ‘Project New World’.

“Churchill was on the cusp of being the first [mainstream] insurer to do a price comparison site and it was one of the real negatives of the deal that all of that was cancelled. We would have probably been the first scale aggregator,” Crawford comments.

“Our systems, like Direct Line’s, weren’t good enough for modern internet transactions, they were only good for batch based updates. You could transact through the internet but not to the degree you needed too and we recognised we needed to update and upgrade them.

“[Before the Direct Line deal] We were about two weeks from going live with our first product, household, with a system that allowed you too, like an aggregator [or quasi broker], quote for risks and place it with Churchill, or a panel underwriter. Essentially it was similar to what Admiral or Hastings have done since.” Post-merger Project New World was canned.

Reflecting on what was – and what could have been – Long says that Credit Suisse ultimately gave him the final say over whether the bank accepted the RBS deal or not, adding: “As it ended up [RBS] were paying £500m above NAV and I said as far as I was concerned my job was to create value, and we have done that.

“[But had it not happened and] working out our plans and those of Direct Line, I believe we would have been bigger than them by [the end of] 2004. And profitable.

“We were spending a lot of money on new computer systems and looking to challenge the status quo. One of my ideas was that if we did not pay a claim in x amount of days, we would give the customer all their premium back.

“The claims guys were in horror at that, but I said why should we not do that; if their car is smashed up why would we not repair it within a fortnight? What is your problem? And, of course, that dynamic forces everyone’s thinking.

“But instead of that, when RBS took over Churchill it preferred the Direct Line IT infrastructure that I helped spec out in 1984. It stopped all our development which meant we were on 20-plus-year -old systems. That sort of thinking went on [post-merger].”

Tracing the legacy

Since then, you could find former Churchill and Direct Line employees working at insurers or all shapes and sizes, with a number of significant direct players able to trace their legacy to founders brought up through the Bromley or Croydon schools of insurance, not least Admiral [former Churchill marketing director Henry Engelhardt], LV [Messrs O’Roarke, Bunker, ex-Direct Line group finance director Steve Castle, Churchill group company secretary Paul Cassidy and Churchill executive director Peter Horton] and Swiftcover [Blowers, Churchill finance director Steve Castle and Churchill head of marketing Tina Shortle].

As to Peter Wood and Martin Long they have very much taken different paths since leaving Direct Line and Churchill respectively.

Even before the merger, Wood – who also went onto work with failed London market insurer The Underwriter, invest in Lloyd's motor insurer Cox and successfully backed Go Compare – had found another banking partner in Halifax Bank of Scotland to launch Esure with ex-Direct Line colleagues Graham and Batabyal, a business built on an annoying advert that could trace its roots back to his former business.

“Peter had gotten to know [Michael] Winner at Direct Line because there had been an accident and Peter had had to intervene in terms of sorting it out. And they went to lunch and got friendly, and would regularly put the world to rights afterwards," says Graham.

“Winner, in his own inimitable style, told us our adverts were rubbish, and asked to write a script. So Peter told me ‘Winner is going to fax you a script and I want you to read it when you get it and tell me what you think’.

“And verbatim the first ‘calm down dear’ [Esure] advert script came through and I said ‘Peter, it is shocking, but it is so bad it will cut through and it will be remembered and recognised so we should do it’. The rest of the senior team were against it, but we did it and, of course, it was the thing that got us going’.

Even today Wood continues to follow developments in the insurance space, most recently leading a £2.5m seed funding round for sharing economy insurtech Pikl.

Long’s post RBSI career has mostly been characterised by his involvement in the buyout of his beloved football club Crystal Palace. Outside of this his only links with insurance included non-executive roles with managing general agent M4 Underwriting and Merlin Claims [then AMG].

However, his decision not to return to insurance in a more prominent way does not surprise those who worked for him.

“Martin wouldn't have enjoyed [present day] regulation. He did the right thing anyway and he would have looked at the Financial Conduct Authority and Prudential Regulation Authority as unnecessary hand cuffs when his intentions were always good,” comments Webb. “Controversially if I ever met anyone in insurance who did not need the FCA or PRA it is him; and they would have clashed. he probably looked at that and thought I’m not up for being measured and told what to do.”

“There are things we did then that I probably would not be able to do now like buying the staff a drink when we broke a [sales] record,” Long admits, with little regret for not extending his insurance career.

“Churchill was an embodiment of me: work hard, play hard and enjoy life; and I wanted other people to do the same. To have well paid, good jobs and achieve things by letting them get on with it. People are pretty good when left to their own devices, they are not so good when management gets in the way.” 

Which brings us back to the rationale of blowing up, smashing or shooting red phone. “Yes that was my idea,” Long chortles. “It was not done out of disrespect for Direct Line because as far as I was concerned it was the only serious competitor.

“But we had a ball every year for the staff and had to keep trying to come up with themes for a joke and I thought it would be funny to have a big red phone and blow it up so that is what we did.

“It was not meant to be nasty, it was a bit of a laugh. One year someone won the right to push the button and blow it up. It was about having fun. Everyone knew I was deadly serious when it came to business. But when it came to the ball – to thank the staff for their hard work – we just had fun. It wasn’t about taking the mick, it was just a bit of fun.”