Pressed RSA chief Stephen Hester faces new fight - over his pay

"I hate not winning, I hate it," Stephen Hester said towards the end of his tenure as chief executive of Royal Bank of Scotland.

Yet more than a year into his new job running insurer RSA, the turnround specialist is still a long way from success.

Drafted in after accounting irregularities in Ireland and a series of group-wide profit warnings had wiped 30 per cent off RSA's share price within about a month, Mr Hester has had an uphill struggle getting the company back on track.

Now the ex-RBS chief, who was dragged into successive bonus rows at the government-backed lender, is facing the threat of some RSA investors opposing his pay. Ahead of the company's annual meeting this week, the Investment Management Association, whose members oversee more than £5tn of assets, has issued an "amber top" warning - its second highest level of censure.

"There has been a concern [about executive pay], but there are bigger issues," says a director at one of RSA's largest 20 shareholders.

From the insurer's new London base, high up the "Walkie Talkie" skyscraper, Mr Hester has laid down plans to reduce a bloated cost base, replaced senior managers, and sold off overseas assets.

RSA, whose biggest shareholder is the activist Swedish fund, Cevian, says "the pace of change has been and continues to be intense."

But so far the financial results have disappointed. While Mr Hester has been at the helm, RSA's shares have underperformed the FTSE 100 by about 10 per cent.

Leading shareholders recognise that Mr Hester has been trying to revive RSA's fortunes at a difficult time. Ultra-low interest rates have dented the profits insurers can generate from investing policyholders' premiums. RSA's portfolio yielded 1.3 per cent last year - half the 2012 level.

Such weak investment returns have forced the industry to rely more on underwriting - just as markets have become more competitive.

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This week, Mr Hester will disclose a 15 per cent drop in net premiums written for the first quarter, Panmure Gordon estimates, pushed lower by disposals and reinsurance spending.

Such is the pressure that some analysts have once again raised concerns about the insurer's financial headroom, even though Mr Hester tapped shareholders for £750m in a bumper rights issue soon after his appointment.

"The actions taken so far appear to only have plugged the holes in the group's balance sheet without adding any excess buffers," wrote Sami Taipalus, analyst at Berenberg, in a recent report.

Yet the scale of the recent upheaval has raised the question of what levers Mr Hester has left to pull. "I don't think he's got many," says Barrie Cornes of Panmure Gordon.

The chief executive has already stepped up RSA's expense reduction plan. Earlier this year the company increased its annualised savings target from "greater than £180m" to at least £210m. But Mr Hester is conscious that overly-aggressive cost-cutting would put the group's rehabilitation at risk.

He has also jettisoned big chunks of RSA's global operations - Hong Kong and Singapore were the latest to go last month - meaning it could be starting to justify once again the Rapidly Shrinking Assurance moniker, which it earned during a previous contraction a decade ago.

In total Mr Hester has struck deals to sell about £800m worth of assets - a fifth of the group's market capitalisation - and more disposals could be on the cards.

RSA has been trying find a buyer for its Latin America businesses, which would be by far its largest sale yet. Berenberg says a sale of this business, estimated to be worth at least £500m, would "'fix' RSA's capital position".

However it would also leave the insurer dependent on the mature markets of the UK, Ireland, Canada and Scandinavia.

The scale of RSA's pensions liabilities is further limiting Mr Hester's room for manoeuvre. By the end of last year they had swelled to £7.6bn, 80 per cent more than its current equity market value.

Were Mr Hester to seek to generate value for shareholders by breaking up the company, trustees of its retirement scheme may demand a share of the proceeds. Thomas Seidl, analyst at Bernstein, says the size of the pensions deficit "suggests the current break-up value of the group is just £4bn - and hence below [the] current market capitalisation."

The scale of the liabilities would also discourage buyers from launching a takeover bid for the company, according to pensions experts and analysts.

A fund manager at a top 20 shareholder says he is prepared to give Mr Hester time. "They can just grind away, and eventually it will come right," he says. "But it will probably take longer than he imagines."

Nevertheless he does not expect Mr Hester to walk away any time soon. "I wouldn't have thought he'll hop it. It must be a bed of roses compared to RBS," he says.

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