R&SA Affirmed and Lowered

A.M. Best Co. affirmed its “A-” (Excellent) FSR of The Royal & SunAlliance USA Insurance Pool (pool) and said the outlook remains negative. Meanwhile, S&P lowered its long-term counterparty credit ratings and insurer FSR on various operating entities of Royal & Sun Alliance Insurance Group PLC (R&SA) to “A-” from “A.” S&P removed the ratings from CreditWatch and noted that the outlook is developing.

The company’s U.S. operations are regarded by A.M. Best as strategically important to the group, but not core. Accordingly, they are now assigned financial strength ratings reflecting their stand-alone financial strength, enhanced by their strategic importance to the group. The rating on the pool also reflects its very good, albeit substantially reduced risk-adjusted capitalization, as well as the improving prospects for more profitable returns on the pool’s core business lines during the medium term. The rating explicitly recognizes the current and prospective maintenance of a very good consolidated risk-adjusted capital base supported by planned divestment of several operations.

Offsetting factors include the challenges associated with executing the proposed reduction of risk exposure through further disposals and the ongoing potential for further reserve deterioration in the United States. The latter is somewhat mitigated by the recently announced addition of USD 225 million (GBP 150 million) in asbestos and environmental (A&E) reserves, supported by a capital infusion of USD 250 million (GBP 167 million) from the U.K. parent.

The negative outlook is based on the pool’s ongoing exposure to adverse loss reserve development, substantial execution risk in divesting certain of its non-core businesses, the costs associated with exiting these lines and the ongoing challenges in rationalizing the pool’s expense structure in the face of planned and dramatic premium volume reductions.

In addition to its other ratings actions on the group, S&P’s lowered to “BBB” from “BBB+” its junior subordinated debt rating on notes issued by R&SA and guaranteed by Royal & Sun Alliance Insurance PLC (R&SAIP), the main operating company of R&SA. S&P’s also affirmed its “A-2” short-term rating on R&SAIP’s $1 billion CP program.

The group status of certain U.S. subsidiaries of R&SA was revised to strategically important from core. In line with this, the long-term counterparty credit ratings and insurer FSR on various U.S. subsidiaries were lowered to “BBB+” from “A,” and removed from CreditWatch.

S&P’s downgrades reflect the expectation that R&SA will not achieve S&P’s capital and earnings targets for the company by year-end 2002.

Topics USA