Royal & Sun Under the Gun

November 4, 2002

Bob Mendelsohn’s departure in September as CEO of the U.K.’s Royal & Sun Alliance doesn’t seem to have helped the company very much. Last week it took another hit from asbestos claims with the filing of a lawsuit by Turner & Newall, former producers of the product.

R&SA’ shares dropped more than 13 percent on the news, and are still hovering around 100 pence ($1.56) where they were just before Mendelsohn’s departure. Analysts expect that the company will have to further strengthen its reserves by up to £500 million ($782 million) to meet new claims, even though it has denied liability in the latest lawsuit.

R&SA is already well into its efforts, begun under Mendelsohn, to raise £800 million ($1.25 billion) in new capital by selling off non-core assets, and has completed a number of deals, but it now may need even more capital, and it’s not in a very good position to get it.

The company is currently reviewing its options, and has indicated it will announce measures to address the problem when it reports quarterly earnings figures next Thursday. It would be difficult for R&SA to opt for a new share issue, however, given the already low price, and the saturation for insurance company shares in the U.K.’s capital markets.

A report from Dow-Jones Newswires indicated that the company would have to sell off more assets, including its Danish operation Codan, and could increase its quota share arrangement with Munich Re, currently at 10 percent, to 20 percent. The problem is that the more it sells off the less it has to generate profits, and the more it gives up to Munich Re the less money it makes on the premiums it takes in.

There is some hope, however, the DJ article cited one analyst’s opinion that R&SA was now writing quite profitable business, and if it could “put together two or three clean quarters,” it might be able to recover. On the other hand, if it can’t do that, or otherwise get back on track, a number of other analysts see it as an acquisition candidate in whole or in part.

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