Best Announces Rating Actions on R&SA

September 13, 2004

A.M. Best Co. announced several rating actions concerning the U.K.-based insurance group Royal & Sun Alliance and its subsidiary companies.

Best affirmed the financial strength rating of “A-” (Excellent) of the R&SA Group and its core subsidiaries. It also assigned an issuer credit rating (ICR) of “a-” to each of these companies, and affirmed the ratings of “bbb” and “bbb-” of R&SA’s subordinated debt and preferred stock, respectively. The outlook on all ratings remains negative.

“The ratings reflect R&SA’s improving risk-adjusted capitalisation and improving operating performance, as well as its excellent business profile,” said Best. “The main offsetting factor continues to be the potential for further reserve deterioration–particularly in the United States–and the uncertainty as to the scale of future retained profits.”

Best said it expects R&SA’s prospective level of risk-adjusted capitalization to improve following a £450 million ($ 810 million) perpetual subordinated notes issue completed on July 23, 2004, and the prospective divestments of the U.K. and Codan life operations.

Commenting on R&SA’s improving operating performance, Best noted that the first half results were improved in line with its expectations, with a reported consolidated combined ratio of 99.7 percent; compared to 108 percent at year-end 2003. Best “believes that R&SA is likely to maintain the consolidated combined ratio below 100 percent on average across the insurance cycle for ongoing businesses due to expense reduction, the ongoing disposal programme and the withdrawal from certain unprofitable lines of business.

“As expected, results for the ongoing operations in the United Kingdom, Scandinavia, Canada and International businesses continue to improve despite high ongoing costs associated with the restructuring of the discontinued U.S. operations.”

Best also noted that the “benefits of the restructuring of R&SA are likely to begin to emerge in 2004, which include an improved loss experience and that the prospective level of risk-adjusted capitalisation will continue to support R&SA’s ‘A-‘ (Excellent) rating.

“The main offsetting factor continues to be the potential for further reserve deterioration.” It noted that £200 million ($360 million) pre tax remains from the contingent liability established in the third quarter of 2003 for future adverse loss development, relating largely to discontinued business in the United States. Best said it, “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 also intends to “closely monitor the development of R&SA’s reserves.”

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