A.M. Best Affirms Rating of Royal & SunAlliance USA Pool

November 8, 2002

A.M. Best Co. has affirmed the A- (Excellent) financial strength rating of The Royal & SunAlliance USA Insurance Pool (pool).

The outlook remains negative. The U.S. operations are now regarded by A.M. Best as strategically important to the group, but not core. Accordingly, they are now assigned financial strength ratings reflecting their stand-alone financial strength, enhanced by their strategic importance to the group.

The rating also reflects the pool’s very good, albeit substantially reduced risk-adjusted capitalization, as well as the improving prospects for more profitable returns on the pool’s core business lines during the medium term. The rating explicitly recognizes the current and prospective maintenance of a very good consolidated risk-adjusted capital base supported by planned divestment of several operations.

Offsetting factors include the challenges associated with executing the proposed reduction of risk exposure through further disposals and the ongoing potential for further reserve deterioration in the United States. The latter is somewhat mitigated by the recently announced addition of $225 million (GBP 150 million) in asbestos and environmental (A&E) reserves, supported by a capital infusion of $250 million (GBP 167 million) from the U.K. parent.

A.M. Best believes that the pool’s revised strategy, which includes a significant reduction in net premium income including, but not limited to, the group’s excess and surplus lines business, will enable the company to focus existing capital resources on growing its priority lines in key markets. The prospective reduction in business volume is expected to significantly reduce the overall capital required for ongoing operations and, therefore, allow for increased funding of existing reserves and the run-off of the discontinued businesses without raising additional capital.

The negative outlook is based on the pool’s ongoing exposure to adverse loss reserve development, substantial execution risk in divesting certain of its non-core businesses, the costs associated with exiting these lines and the ongoing challenges in rationalizing the pool’s expense structure in the face of planned and dramatic premium volume reductions.

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