Rating Agencies Take Action on R&SA USA

Standard & Poor’s Ratings Services and Fitch ratings both announced that they have downgraded their respective financial strength and counterparty credit ratings on the members of the Royal & SunAlliance USA Group. A.M. Best Co. said it has placed the ratings “under review with negative implications.”

S&P lowered its ratings two notches to ‘BBB-‘ from ‘BBB+’ on all of R&SA’s U.S. Units. Fitch downgraded its ratings a precipitous five notches from ‘BBB+’ all the way to ‘BB-.’ Both rating agencies indicated that they would also keep them on their watch lists “with negative implications.”

S&P specifically indicated its actions resulted from the company’s announcement “that it intends to strengthen its U.S. reserve position by approximately $600 million (pretax) or more in third-quarter 2003, and that it has entered into a definitive agreement to sell the renewal rights of RSA USA’s standard personal lines and a majority of its commercial lines business to Travelers Property Casualty Corp.”

Fitch stressed that from R&SA’s announcement that it has sold the renewal rights for its commercial and standard personal lines businesses, it is “effectively placing a majority of the RSA USA book of business into run-off. Additionally, RSA has indicated that it will infuse capital into RSA USA only to the extent needed to maintain minimum statutory requirements from the proceeds of a fully underwritten rights offering of GBP 960 million ($1.5 billion).” The rating agency added that it “no longer views the U.S. operations as being core or strategic to RSA for ratings purposes, and is adjusting RSA USA’s rating to more closely reflect its stand alone profile.”

Best’s review was undertaken essentially for the same reasons as those cited by S&P and Fitch. Its announcement indicated that “While the proposed restructuring in the U.S. will reduce R&SA’s global consolidated risk capital requirements, A.M. Best remains concerned that the restructuring will negatively impact the business profile of RS&A USA operations and may significantly erode the capital position of the U.S. insurance entities.” It added that it is “currently assessing the impact of this restructuring on the U.S. companies’ pro forma operating performance, capitalization and reserve adequacy and expects to conclude on the U.S. ratings by the time RS&A announces its third quarter results in November.”

The companies affected by the downgrades and review include: Royal Insurance Co. of America, Royal Indemnity Co., Connecticut Indemnity Co., Security Insurance Co. of Hartford, American & Foreign Insurance Co., Guaranty National Insurance Co. (CO), Fire & Casualty Insurance Co. of Connecticut (The), Viking Insurance Co. of WI, Safeguard Insurance Co., Globe Indemnity Co., Viking County Mutual Insurance Co., Peak Property & Casualty Insurance Corp., and Guaranty National Insurance Co. Connecticut.