RSA Ups Loss Reserves, Warns on Earnings

February 6, 2002

The U.K.’s Royal & Sun Alliance announced increases in its loss reserves totaling £401 million ($571 million), principally from rising estimates of future asbestos claims, which more than doubled, and indicated that the move would wipe out profits for the year 2001.

R&SA increased reserves for asbestos by £371 million ($528 million) from its previous estimate of £318 million ($452.7 million). It left reserves for other environmental claims unchanged at £272 million ($387.2 million), but the total reserves for future claims in this sector now totals close to $1.4 billion.

The company also increased loss reserves for claims resulting from the WTC attacks by $15 million ($21.35 million ) to a total of $306 million, and added another reserve provision of £15 million in for the Enron bankruptcy.

While the actions will wipe out any profits for the insurer from last year, it was seen by many analysts as positive in that it removed some of the doubts that had been hanging over the company, and adversely affecting its share price. R&SA’s action on asbestos claims highlights the unknown factors surrounding compensation for workers, and others who may have been exposed to the fibers. Medical conditions from exposure to asbestos can take as long as 40 years to manifest. R&SA paid out a relatively modest £39 million ($55.5 million) last year in claims, but expects claims to continue for another 20 years.

Standard & Poor’s revised its outlook on various operating entities of R&SA to negative from stable following the announcement, but affirmed the company’s. single-‘A’-plus long-term counterparty credit and insurer financial strength ratings.

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