Best Affirms R&SA’s ‘A-‘ Ratings

December 8, 2003

A.M. Best Co. announced that it has affirmed the financial strength rating of ‘A-‘ (Excellent) of the U.K.’s Royal & Sun Alliance Insurance Group plc and its core subsidiaries.

Best also affirmed the “bbb” and the “bbb-” ratings of its subordinated debt and preferred stock, removed the ratings from under review with developing implications, and assigned them a negative outlook.

“The ratings reflect R&SA’s significantly improved level of risk adjusted capitalisation following the GBP 960 million (USD 1,645 million) rights issue completed on October 16, 2003, and the company’s commitment to prospective expense savings from improved processes and Information Technology, further outsourcing and relocation of some businesses to lower cost centres,” said Best. “Meanwhile, R&SA has implemented a programme of improved risk profiling, more sophisticated product pricing, better use of technology and regular underwriting and claims reviews expected to lead to improved underwriting results. The main offsetting factor continues to be potential for further reserve deterioration.”

The bulletin noted the £500 million ($860 million) contribution R&SA made in the third quarter to strengthen reserves, mostly related to “discontinued business in the United States,” and the fact that it had set aside an additional £300 million ($516 million) pre tax as a “contingent reserve…for future potential adverse claims development.” Best said it now “believes that workers’ compensation, general liability and product liability are the lines of business most at risk to adverse loss development, as well as potential asbestos and environmental reserve deficiency.” The rating agency indicated it would “continue to closely monitor the development of R&SA’s reserves. Another offsetting factor is the uncertainty as to the scale and timing of the emergence of future retained profits.”

The report also noted that “results at the third quarter 2003 were in line with expectations with a combined ratio of 99.6 percent, excluding the impact of the reserve strengthening, and 108.1 percent after the reserve strengthening.” Best said it “believes that R&SA is likely to reduce its consolidated combined ratio across the insurance cycle as a consequence of expense improvements, the ongoing disposal programme and the withdrawal from certain unprofitable lines of business.”

The withdrawal from the U.S. market will have a significant impact on the group, reducing “its business profile with net global consolidated premium falling by approximately 20 percent at year end 2003 to approximately GBP 8 billion (USD 14 billion),” said Best. It still enjoys a strong presence in its core market sectors, the U.K., Canada and Scandinavia.

Best said it expects “the benefits of the restructuring of R&SA to begin to emerge in 2004, including an improved loss experience and stable investment return on a conservative portfolio designed to control investment risk exposure.”

The bulletin concluded that the group’s current level of risk-adjusted capitalisation will continue to support R&SA’s A- (Excellent) rating.

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