A.M. Best Lowers Ratings on Royal and Sun

January 17, 2002

A.M. Best announced that it has downgraded the financial strength rating to A (Excellent) from A+ (Superior) of the U.K.’s Royal & Sun Alliance Insurance Group (RSA), and continues to have a “negative outlook”.

it also lowered RSA’s subordinated debt and preferred stock from ‘a’ and ‘a-‘ to ‘bbb+’ and ‘bbb’ respectively. “The ratings reflect the group’s reduced but still healthy risk-adjusted capital base, modest levels of long-term debt, improving operating performance, positive pricing environment for the major lines of its core book and its excellent business position in its key markets,” said the announcement.

It noted that “offsetting factors” included “the ongoing potential for reserve deterioration in its U.S. operations and increased exposure to short-term borrowings,” and explained that the “negative outlook has been maintained, given the near-term uncertainties surrounding the group’s reorganisation of its risk profile and U.S. reserve review.” Best indicated it would probably revise the outlook when these uncertainties become clearer later in the year.

RSA’s main problem right now, according to Best’s analysis, is the reduction of its capital-base due to the falling equity markets, which have decreased the value of its investments, and its increased claims exposure, over $1 billion in gross exposure to WTC related claims alone.

“A.M. Best expects RSA to incur significant losses in relation to a number of separate events in the final quarter of 2001, “said the bulletin. It added, however, that, “the group’s operating outlook for 2002 is positive due to significant rate improvements, accelerated since the September 11 events and the re-underwriting of a large part of the portfolio. In addition, RSA has already made strong progress towards achieving its targeted underwriting performance goal of a combined ratio of 103% in its ongoing operations.”|”a.m., best, lowers, ratings, on, royal, sun

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