S&P Cuts R&SA Group Ratings to ‘A-‘

Standard & Poor’s Ratings Services announced that it has lowered its long-term counterparty credit and insurer financial strength ratings on various operating entities of U.K.-based Royal & Sun Alliance Insurance Group PLC to single-‘A’-minus from single-‘A’, following the group’s announcement of its third-quarter results and wide-ranging strategic and financial plans.

The ratings were removed from CreditWatch, where they were placed on Oct. 23, 2002, and S&P called the outlook “developing.” The ‘A-‘ ratings are now the same as those affirmed by A.M. Best yesterday, following the company’s earnings and restructuring announcement.

S&P also noted that it had lowered to triple-‘B’ from triple-‘B’-plus its junior subordinated debt rating on notes issued by R&SA and guaranteed by Royal & Sun Alliance Insurance PLC, and had affirmed its ‘A-2’ short-term rating on R&SAIP’s $1 billion CP program.

S&P also revised its view on the insurer’s U.S. subsidiaries to “strategically important” from “core”. As a result the rating agency lowered the long-term counterparty credit and insurer financial strength ratings on various U.S. subsidiaries to triple-‘B’-plus from single-‘A’, and removed them from CreditWatch. S&P’s procedures usually require that “non-core” operations be given a rating one notch below that of the parent company.

“This change in status reflects the current position of the group, which makes it difficult to consider any operation outside R&SA’s home market as core,” said S&P. “In addition, the current capital position and earnings performance of the U.S. businesses are inconsistent with those expected of a core subsidiary.”

“The downgrades are based on Standard & Poor’s expectation that its capital and earnings targets for R&SA will not be achieved by year-end 2002,” stated S&P credit analyst Mark Button. “This reflects, in part, the impact on capital adequacy of the higher-than-expected reserve strengthening, and the drag on earnings caused by the adverse development in claims relating to prior years.”

The bulletin noted that while R&SA’s capital adequacy was expected to improve following the restructuring initiatives, and the selling off of certain operations, the overall result would be “the reduction in R&SA’s global presence, in particular in the Asia-Pacific region.”

S&P noted, however that the “pro forma GBP5.5 billion ($8.6 billion) of net premiums written continues to represent a sizable business, and the group is expected to maintain its very strong market positions in the U.K., Scandinavia, Canada, and Ireland, and a niche position in U.S. midmarket commercial lines.”

The announcement concluded by observing that “The developing outlook indicates that the ratings on the group may be raised or lowered.” Button indicated that the “successful completion of the planned actions on schedule will improve the rating profile of R&SA. Nevertheless, there is significant execution risk in completing the program of actions, reflecting the wide scope of the plans and the difficult market environment. Consequently, the ratings remain under pressure owing to the relative weakness of both capitalization and financial flexibility (that is, the ability to source capital relative to capital requirements) in the rating profile.”

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