Best Affirms RSA and Operating Subsidiaries Ratings; Outlook Stable

February 23, 2012

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating (FSR) of ‘A’ (Excellent) and issuer credit ratings (ICR) of “a” of the main UK operating subsidiaries of the UK’s RSA Insurance Group plc. Best also withdrew the ratings from three subsidiaries, which ceased business effective on January 1st 2012.

In addition Best affirmed the ICR of “bbb” of RSA, the non-operating holding company of the RSA group of companies as well as the debt ratings of RSA, which are guaranteed by Royal & Sun Alliance Insurance plc, and the preferred stock issued by RSA. The outlook for all ratings is stable.

The ratings of RSA’s operating subsidiaries “reflect the group’s consistently profitable operating performance and excellent business profile in its core markets,” Best explained. As an offsetting factor Best cited “the level of consolidated risk-adjusted capitalization, which although likely to remain good, has been reduced in recent years by a relatively high dividend payout ratio to shareholders and reducing bond yields.”

Moreover, Best continued, “the group’s organic growth plans and acquisitions continue to be supported only by internal capital generation, which has the potential to weaken the group’s risk-adjusted capital position, particularly through purchased goodwill.”

However, on the plus side, Best noted that the group’s “good operating performance in 2011 has led to a modest rise in shareholders’ funds to £3.801 billion [$5.974 billion] from the £3.766 billion [$5.92 billion] reported at year-end 2010.

Pre-tax profit in 2011 increased to £613 million [$963.5 million] from the £474 million [$745 million] reported in 2010, which was badly affected by adverse weather events in Scandinavia, Ireland and the United Kingdom, in addition to the Chilean earthquake early in the year.

Best added that RSA achieved a “solid underwriting performance, despite losses arising from the New Zealand and Japanese earthquakes, the Slave Lake fire in Canada and floods in Denmark, Ireland and Thailand. Performance was boosted by RSA’s acquisitions during 2010 in the Middle East, Ireland and Canada, together with targeted growth in profitable business in Scandinavia, Canada and Latin America.

“Overall favorable prior year loss reserve development also assisted results, although reserves required strengthening in relation to claims arising from the UK winter weather in late 2010 and deterioration in Italian motor business.

“The group reported strong underwriting results in 2011 in Canada, Scandinavia and Ireland. In the United Kingdom, challenging market conditions continue, but a good increase in net written premiums of 6 percent was achieved, driven by strong rate increases in personal motor and household business and some growth in commercial motor and specialty lines. Overall performance was supported by a good investment return from the group’s conservative investment portfolio.”

Best described RSA’s business profile as “excellent, reflecting its well-diversified international portfolio of commercial risks, personal motor and household business. The United Kingdom continues to be RSA’s largest market, representing 38 percent of the group’s consolidated net written premiums in 2011, although this proportion is expected to reduce slightly in 2012.

“Internationally, RSA maintains a strong position in Scandinavia (largely Denmark and Sweden) and Canada, where its presence has been bolstered through acquisitions. Additionally, RSA continues to build up its business in the emerging markets, particularly Latin America, Asia and the Middle East.

“Given RSA’s consistently good operating performance and excellent international business profile, upward movement in the group’s ratings could result from sustained improvement in risk-adjusted capitalization.

“Downward movement in the ratings could result from a significant deterioration in operating performance or erosion of risk-adjusted capitalization.

Best summarized the ratings affected by its actions as follows:
The FSR of ‘A’ (Excellent) and ICRs of “a” have been affirmed for the following subsidiaries of RSA Insurance Group plc:
— Royal & Sun Alliance Insurance plc
— Royal & Sun Alliance Reinsurance Limited
— Sun Insurance Office Limited

The FSR of ‘A ‘(Excellent) and ICRs of “a” have been withdrawn from the following subsidiaries of RSA Insurance Group plc, as they are no longer licensed to write insurance business:
— The Globe Insurance Company Limited
— The London Assurance
— Sun Alliance and London Insurance plc

The following debt ratings have been affirmed:
RSA Insurance Group plc (guaranteed by Royal & Sun Alliance Insurance plc)—
— “bbb+” on £500 million [$786 million] 9.375 percent subordinated notes, due 20 May 2039
— “bbb+” on $23.679 million 8.95 percent subordinated notes, due 15 October 2029
— “bbb+” on £450 million [$708 million] 8.5 percent perpetual subordinated notes
— “bbb+” on £375 million [$590 million] 6.701 percent perpetual subordinated notes

The following debt rating has been affirmed:
RSA Insurance Group plc—
— “bb+” on £125 million [$196.6 million] 7.375 percent preferred stock

Source: A.M. Best

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