Moody’s Affirms R&SA Group Ratings; Lowers U.S. Subs to ‘Ba3’

October 24, 2003

Moody’s Investors Services announced that it has confirmed the insurance financial strength rating at Baa2 of the Royal & Sun Alliance Group and its European operations, but has downgraded the ratings of Royal & Sun Alliance USA to Ba3. All of the ratings were given “negative outlooks,” except the Scandinavian operations where a stable outlook applies.

Moody’s said that the “confirmation for the non-US ratings concludes the review for possible downgrade initiated in September 2003, following the Group’s announcement of a rights issue, associated reserve strengthening and change in group strategy. The confirmation reflects in part the successful completion of the GBP960m [$1.62 billion] rights issue, with a generally favourable investor response.”

The funds will generally be used to provide reserve strengthening. The bulletin also noted that “the Group has successfully completed the renegotiation and renewal of its external bank lines which were due to expire in October 2003, and Group financial leverage is generally expected to be at lower levels going forwards. The completion of these two significant financial transactions helps to stabilise the Group’s position.”

Moody’s report added that “the decision to adjust and refocus the Group’s global strategy could, if successful, lead to a more stable and sustainable level of profit in future;” however, the rating agency indicated “notwithstanding the recent reserve strengthening (largely in favour of now non-core US operations), the Group will continue to be exposed to any adverse deterioration in its prior years exposure to run-off and disposed US operations.”

It also concluded that in “a worst case scenario, significant additional capital requirements could also be required to support the Group’s UK Life run-off funds. Furthermore, Moody’s commented that the smaller R&SA Group could face increased regulatory capital requirements in the medium-term in its home UK market, depending on the outcome of the many current industry-wide regulatory reviews.”

Moody’s said its “negative outlook for the long-term insurance ratings of the Group therefore reflects the negative influence that these factors could have on the Group’s financial position in the medium term.” The stable outlook for the Group’s Scandinavian operations reflects “the inherent strong credit qualities of these units, somewhat mitigating the Group’s wider outlook.”

Commenting on the downgrade of the US operations, Moody’s noted that “while the announced reserve strengthening action reduces the amount of uncertainty associated with RSA’s US loss reserve position, the US operations will remain relatively thinly capitalised. Moody’s remains concerned about the potential for further adverse loss reserve development, the high level of unsecured reinsurance recoverables and the recent unfavourable summary judgment ruling in US Federal District Court regarding litigation associated with trucking school student loan portfolios originated by Student Finance Corporation and insured by Royal Indemnity Company.

“Furthermore, in Moody’s opinion, the fact that the US operation has stopped writing a number of lines of business makes them subject to additional risks that are not usually present in active companies. Chief among these are the diminished liquidity profile associated with a fall-off in premium receipts, reduced bargaining power with reinsurers and the risk that capital levels become insufficient to provide an adequate cushion for adverse performance.”

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