S&P Expects to Assign an ‘A’ Rating to Promina General Insurance Subsidiaries

March 31, 2003

Standard & Poor’s Ratings Services announced that it expects to raise the insurer financial strength and counterparty credit ratings on the principal Australian and New Zealand-based general insurance subsidiaries of the U.K.’s Royal & Sun Alliance, the Promina Group Ltd., to ‘A’ “subject to the successful completion of the initial public offering.”

“The current ratings on the two subsidiaries, Royal & Sun Alliance Insurance Australia Ltd. and Royal & Sun Alliance Insurance (New Zealand) Ltd., are ‘A-‘ with a developing outlook, largely reflecting the financial strength of the existing Royal & Sun Alliance U.K. parent. The outlook for the local Promina subsidiaries is expected to be stable,” said S&P.

Promina recently announced that it would sell 1.057 billion shares in an IPO, scheduled to be offered on the Australian and New Zealand Stock markets on May 12. It hopes to raise between A$1.6 billion and A$2.1 billion (U.S. $962 million to $1.26 billion). The majority of the proceeds will go to R&SA with Promina retaining around U.S.$ 90 million.

S&P said that the strong ratings reflected “the long-established and well-recognized franchise in general insurance, operating in both commercial and personal lines across Australia and New Zealand through various brands, including AAMI, APIA, SIS, and Royal & SunAlliance,” which is also reflected in the group’s “life insurance and funds management operations, although these operations do not command the same market position and influence as their general insurance counterparts, and form a smaller component of the Promina group.”

The report noted that although S&P “maintains a stable ratings outlook on the general insurance market, with a positive earnings horizon, its outlook on the life insurance sector remains negative, given a combination of poor investment market returns and flat sales volumes.”

“Promina’s solid business fundamentals and well-recognized franchise are supported by a proposed strong capital structure upon listing totaling about A$2.0 billion [U.S.$1.2 billion] and maintenance of supportive reinsurance arrangements,” stated S&P credit analyst Michael Vine. “The experienced management team has instilled a strong underwriting discipline that has resulted in improved operating performance for 2002, compared with past results, especially in some of the Australian intermediated general insurance lines.”

“Following successful completion of the IPO, the rating will be bolstered in the ‘A’ category, with evidence of sustainability of the business model, support of insurance brokers, and continued underwriting improvement. Key sensitivities Standard & Poor’s will monitor in the short to medium term, however, include potential operational risks associated with the IPO, and the transition to a publicly owned company after the initial separation from the current Royal & Sun Alliance U.K. parent,” the bulletin concluded.

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