FSA Fines R&SA $2 Million; A.M. Best Lowers Ratings to ‘A-‘ (Excellent)

August 28, 2002

The U.K.’s Financial Services Authority (FSA) levied fines totaling £1.35 million ($2.05 million) against Royal & Sun Alliance for failing to implement appropriate procedures to reimburse thousands of pension fund buyers who were “mis-sold” retirement plans in the 80’s and 90’s.

Although the problem surfaced in 2000, and both R&SA and the FSA concur that it has since been corrected, the past breaches affected an estimated 13,500 R&SA customers who may not have received compensation totaling more than £32 million ($48.7 million). In levying the fines the FSA called the lapses “particularly serious.”

R&SA certainly isn’t alone. Around 350 insurers, agents and brokers have so far been disciplined by the FSA for selling pension schemes to their British customers which were less advantageous than those run by their employers and the government.

According to a BBC report R&SA failed to implement FSA regulations requiring insurers, who sold such policies to contact their customers, and offer cancellations, rebates and compensatory payments.

The fine was another body blow to the beleaguered company and its CEO Bob Mendelsohn. R&SA recently announced a £319 million ($485 million) loss (due in part to WTC and asbestos related claims); it plans to cut 1200 jobs, has lowered its dividend payment, and saw S&P reduce its ratings from ‘A+’ to ‘A’ (See IJ Website Aug.21). The accompanying sharp drop in it’s share price has put Mendelsohn’s job in jeopardy.

Although the fine apparently wasn’t a factor, the company’s overall situation won’t be helped by A.M. Best’s announcement that it too was lowering R&SA’s ratings from A (Excellent) to A- (Excellent). “The ratings reflect the group’s very good but reduced risk-adjusted capitalisation, improving operating performance, excellent business position in its key markets and modest long-term debt leverage,” Best’s announcement stated.

It noted, however, that “Offsetting factors include the ongoing potential for reserve deterioration in its U.S. operations and challenges associated with raising new capital. The rating agency is currently reviewing R&SA’s U.S. operations.” The company is currently raising around $1.2 billion by selling off non-core assets in order to concentrate on its p/c business.

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