Royal & Sun Alliance Ratings Lowered

September 30, 2002

A.M. Best Co. lowered the financial strength rating to “A-” from “A” of Royal & Sun Alliance Insurance Group plc (R&SA), U.K., and its core subsidiaries. Concurrently, it downgraded the “BBB+” and “BBB” ratings of the group’s subordinated debt and preferred stock to “BBB” and “BBB-,” respectively. The negative outlook was retained.

The ratings reflect the group’s very good but reduced risk-adjusted capitalization, improving operating performance, excellent business position in its key markets and modest long-term debt leverage. Offsetting factors include the ongoing potential for reserve deterioration in its U.S. operations and challenges associated with raising new capital.

A.M. Best is closely reviewing the core status of the U.S.-based subsidiary companies comprising the R&SA USA Insurance Pool following a significant deterioration in their stand-alone risk-adjusted capital position. Capitalization will be reviewed again upon the conclusion of an independent, third-party study of the group’s U.S.-based loss reserves, expected to be completed in September.

R&SA’s consolidated risk-adjusted capital base has continued to deteriorate following a total loss of 1.20 billion British pounds ($1.84 billion) at year-end 2001, further falls in equity markets and the revised 66 million pounds ($101 million) reserve strengthening for the World Trade Center claim. R&SA has already realized 725 million pounds ($1.11 billion) of the 800 million pounds ($1.22 billion) capital-release program announced in January 2002, but it needs additional funds to expand its general insurance business if it is to fully capitalize on the current attractive rating environment while complying with its own risk-based capital guidelines.

A.M. Best believes that there is still potential for a material asbestos and environmental reserve deficiency on the group’s U.S. operation, despite the asbestos reserve strengthening announced in Jan. 2002, largely based on the observed industry loss patterns and a relatively low U.S. survival ratio. A.M. Best is closely monitoring the development of these reserves, and any developments will be important factors in A.M. Best’s re-assessment of the negative outlook.

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