The Co-operative Insurance – a case of “wait and see”

Thursday, 06 February 2014

For many reasons I was delighted with the recent news that The Co-operative Group, UK, is no longer selling their general insurance business.  Firstly, for the people working at The Co-operative Insurance it gives some stability after what must have been a very difficult time.  Secondly, it is great for the sector as The Co-operative Insurance was the original, first-ever, cooperative insurance business, established in 1867, a model that has since been copied in many countries around the world.  Thirdly, because CIS Insurance (as it used to be known) was one of the significant founders and supporters of ICMIF, with someone from CIS Insurance holding the position of Chairman from 1930 to 1968 and then in the role of Secretary for the Federation from 1968 to 1992. The loss of The Co-operative Insurance from ICMIF membership would have left a hole in the heart of the Federation.  Lastly, in my view, this is the first bit of good news for The Co-operative Group for a year and I believe it signifies a turning point after what has been a turbulent year.

I am sure many ICMIF members are aware of the issues surrounding The Co-operative Bank which started in April 2013 when it was announced that the bank had a GBP 1.5 billion hole in its balance sheet, due primarily to bad debts from loans acquired when they purchased Britannia Building Society (BS) in 2009.  The question many ICMIF members ask me when I meet them is what effect will this have on our sector? Will we get more regulation on our governance? What damage has it done to our sector’s reputation?

It would be naive of me to say it has had no effect; it has, but not as bad as people might think in my opinion.  The first point I would make is that this is a banking issue not insurance.  The second point is that the media focus has primarily been on the Chair of The Co-operative Bank, Paul Flowers, for his actions taken after he resigned from the Bank.  Thirdly, the cooperative business model is not the reason given by most intelligent commentators for the failure of the Bank, in fact all political parties in the UK have stated the reverse.  The last point I would make is to say “wait and see”, as I don’t believe all the facts on this story have surfaced yet.

Putting aside the media headlines that have accompanied Paul Flowers’ resignation, the story around the Bank originally became ‘a story’ when it was announced that there was a GBP 1.5 billion hole in the Bank’s assets.  Yet despite parliamentary enquiries, much TV coverage and various challenging media articles, nobody has actually questioned this number!!  I find that most unusual; to me this is the main issue but it’s one that no-one wants to talk about, where did the number come from?  Nobody is challenging the fact that there were bad debts from the Britannia BS acquisition which were generally thought to be around GBP 300 million, so who has since decided they were actually GBP 1.5 billion?  Without this figure the original story would not have existed.  So surely the challenge should be to ask where this figure originated rather than just accepting it.

The GBP 1.5 billion hole was widely thought to have bankrupted The Co-operative Bank so it therefore needed external capital.  Two hedge fund providers decided to invest in the Bank, which would seem to be a strange decision given that the bank was allegedly bankrupt; surely investors would only invest when they believe there is likely to be a sizeable return for their investment.  The Co-operative Group then decided they would keep The Co-operative Insurance business and no longer needed to sell the business to rebuild The Group’s reserves.  These two facts make me question the GBP 1.5 billion figure.

It is general practice when something bad happens in business that you put all the bad news together to give the ongoing future business a chance to succeed after the interest in the bad news subsides.  So the GBP 1.5 billion could be an overstated reserve, a ‘just in case’ figure, and the financial results in the coming years will benefit from substantial write-backs of the initial reserve.  Only time will tell, hence my “wait and see” comment.

The other big issue that isn’t being talked about is who decided on the figure of GBP1.5 billion as the reserve? Well, from my reading, it was a regulatory imposed reserve not a reserve supported by business decisions at The Co-operative Bank.  So is this another example of over-zealous regulation?  The UK regulator has tried to focus on The Co-operative Bank’s governance as the key issue in the recent public enquiries rather than where this amount came from. Unfortunately, this has been supported by negative media stories about weak corporate governance.  However, I believe that the governance of The Co-operative Bank was significantly strengthened under Paul Flowers’ chairmanship and with the blessing of the UK regulator; so was the governance debate deflecting the real issue of the GBP 1.5 billion reserve?

So, as I said earlier, I believe the truth about The Co-operative Bank has yet to come out. We will need to monitor the results over the next few years to see if this really was a result of over-zealous regulation.  If I am correct, then let’s hope there is as much media coverage about that as there was when the alleged problem was first identified. Somehow I doubt there will be, but at least the cooperative sector will be able to point to the real facts that this was not an issue relating to the cooperative business model. This should help to avoid any unfair increased regulation for cooperative businesses in the UK or globally.

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