Fitch Lowers R&SA Insurance Ratings to ‘BBB’

November 12, 2002

Fitch Ratings joined its colleagues, S&P and Moody’s, in announcing a downgrade of the long-term ratings of Royal & Sun Alliance Insurance plc (RSAIP) to ‘BBB’ from ‘A-,’ and its rating on the junior subordinated debt, approximately $1 billion, issued by Royal & Sun Alliance Insurance Group plc to ‘BBB-‘ from ‘BBB+.’ The agency also said it had assigned an ‘A-‘ Insurer Financial Strength rating to RSAIP with a negative outlook.

Fitch also lowered the Insurer Financial Strength Ratings of R&SA USA and its subsidiaries to ‘A-‘ from ‘A,’ and placed them on “Rating Watch Negative pending Fitch’s further assessment of the strategic importance of the US operations to the group.”

“The Negative Rating Outlook reflects the high execution risk of the group’s wide-ranging strategy and the danger that sufficient capital will not be raised, or earnings do not improve as expected over the cycle,” said Fitch. “At that stage, the agency believes the group will have limited options available to improve its financial position.”

Fitch and the other rating agencies have generally reacted negatively to R&SA’s third quarter and nine month figures, even though they are great improvement over last year’s results which were heavily impacted by the Sept.11 attacks.

The decision to pursue the sell off of non-core assets, and the decision not to seek further investment from the capital markets are generally seen as putting a further strain on R&SA’s capitalization. The ratings agencies are also reacting to the decision to split the U.S. operations into two divisions, and to cease a number of activities and cut jobs (See IJ Website Nov. 7).

Fitch said that based on the recent results announcement, it no longer thinks R&SA will reach its goals of improving its capital position and achieving a 103 percent combined ratio. In fact the company has said as much. It also said that “The group’s operating profit of GBP471 million [$735 million] was in line with expectations but the need for further reserve strengthening resulted in a Q3 combined ratio of 104%.”

“As 2002 is likely to be a year for making excellent underwriting returns for the market, it would appear the group will only achieve its combined ratio target over the complete underwriting cycle. This therefore suggests future returns will not meet expectations unless further corrective action is taken,” Fitch continued.

Fitch also noted that the extreme volatility in the stock markets during 2002 resulted in “a short-term investment fluctuation loss” of £516m “that has had major impact on the group’s shareholder funds,” which have fallen by 18 percent.

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