S&P Revises R&SA Entities Outlook to Negative

July 9, 2003

Standard & Poor’s Ratings Services announced that it has revised its outlook on various entities of U.K.-based Royal & Sun Alliance Insurance Group PLC to negative from developing. However, S&P affirmed its current long-term counterparty credit and insurer financial strength ratings on the group.

It also affirmed its ‘BBB’ long-term junior subordinated debt rating on the notes “issued by R&SA and guaranteed by Royal & Sun Alliance Insurance PLC (R&SAIP; local currency A-/Negative/–, foreign currency A-/Negative/A-2), the main operating company of R&SA,” and its ‘A-2’ short-term debt rating on R&SAIP’s $1 billion CP program.

“The outlook revision reflects Standard & Poor’s concerns that the group may not achieve the necessary recovery in operating performance or fully deliver on the group restructuring and capital-release program,” stated S&P credit analyst Rowena Potter. “These concerns relate primarily to the U.S. operations.”

S&P said the current ratings “reflect R&SA’s strong business position, poor recent operating performance, adequate capitalization, and restricted financial flexibility (defined as the ability to source capital relative to requirements). The negative outlook reflects Standard & Poor’s concerns that ongoing issues relating to reserve adequacy at the U.S. operations may hinder prospective group operating performance and capital formation.”

It also indicated that it “expects the combination of increases in premium rates, risk reduction, and group restructuring to translate into a reported combined ratio of less than 102% in 2003, with an ROR in excess of 5%. The U.S. operations are collectively expected to achieve a combined ratio below 108%.”

S&P said the group has made “significant progress” in restructuring its operations and rebuilding its capital, noting particularly the recent successful IPO of its Australian and New Zealand operations, the sales of its health business in the U.K., and the sale of Royal Specialty Underwriting Inc. in the U.S. (See IJ Website July 2)

“Nevertheless,” said S&P “there remains some risk that the group will be unable to restore capital adequacy into the ‘A’ range according to Standard & Poor’s risk-based capital model by 2004, due primarily to concerns about the U.S. operations.”

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