R&SA Reports Improved 9 Month Earnings; A.M. Best Affirms ‘A-‘ (Excellent) Rating

November 7, 2002

The U.K.’s Royal & Sun Alliance Insurance Group plc reported that the Group’s combined operating result was $739 million for the first nine months of 2002, compared to $482 million for the same period in 2001. “Excluding the World Trade Center impact, the operating result showed a 5% improvement to $840 million (535 million pounds).”

The Group’s combined operating ratio on its p/c activities improved to 104% during the period, compared to 107.9% for the first three quarters in 2001. This reflected “continuing good performance, particularly across commercial and direct personal lines of business,” said the bulletin, but it added that there was still a significant “drag effect” from prior-year claims included in the figure. “Excluding these effects, the Group produced a combined ratio of 102.1%, which reflects the current sound underwriting environment,” said the announcement.

R&SA also said it would continue its restructuring plan in order to “strengthen its capital base and position the company for long-term profitability and growth, both globally and in the US. The plan is the latest step in an ongoing capital enhancement program that will enable the company to more fully benefit from current market conditions.”

It also announced plans to split its U.S. operations into two separate divisions, and expects to exit “several non-core US businesses that do not align with the company’s long-term goals.” (See related article in “National” section)

“The results we are announcing today show continued improvement but are still not at an acceptable level,” stated Bob Gunn, Group chief operating officer acting in the role of Group chief executive. “We have announced today a series of important actions that we believe will set us on the path to better performance, stronger results and improved returns for our shareholders. The scope and scale of these actions are more significant and far-reaching than anything we have previously undertaken, and we are committed to achieving them.”

A.M. Best Co. reacted positively to the news, announcing that it has affirmed R&SA’s financial strength rating of A- (Excellent) and the “bbb” and “bbb-” ratings of its subordinated debt and preferred stock. Best also changed its outlook to stable from negative.

The good results and Best’s affirmation would seem to vindicate R&SA’s business strategy, which has been having a hard time recently. Bob Mendelsohn, the Group’s CEO, was forced out in September following a precipitous drop in the share price and a lowering of its dividends due primarily to reserve strengthening for asbestos, the drop in equity values, and several severe weather events.

Best said its ratings “reflect the current and prospective maintenance of a very good consolidated risk-adjusted capital base supported by the planned divestment of several operations,” as well as “improving operating performance in ongoing businesses and the group’s excellent business position in its key markets.”

It noted that offsetting factors included “the challenges associated with executing the proposed reduction of risk exposure through further disposals and the ongoing potential for further asbestos and environmental (A&E) reserve deterioration in the United States.”

The U.S. exposures have been “somewhat mitigated,” said Best by the addition of $225 million in U.S. A&E reserves, supported by a capital infusion of $250 million in R&SA’s U.S. subsidiary.

Best said it believes that R&SA’s revised strategy, which potentially will reduce net premiums by 2 to 3 billion pounds – between 3 and 4.7 billion dollars- “will enable it to focus its existing capital resources on continuing to grow in its priority lines in its key geographic markets, the United Kingdom and the United States.”

“The impact of reduced prospective business volumes will be to reduce the overall capital required for the ongoing operations and, hence, fund both increased U.S. and U.K. non-life reserves and the run-off of the U.K. life business without raising additional capital,” the bulletin continued.

Best did note, however, that it “now regards the U.S. operations as strategically important to the group, but not core.” As a result the rating agency has issued a separate announcement concerning their financial strength ratings “reflecting their stand-alone financial strength, enhanced by their strategic importance to the group.”

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