S&P, Best Rate R&SA Debt

April 21, 2006

Standard & Poor’s Ratings Services and A.M. Best Co. have both issued bulletins concerning the proposed perpetual fixed-/floating-rate sterling-denominated subordinated notes to be issued by U.K.-based non-life insurer Royal & Sun Alliance Insurance Group PLC..

S&P assigned its “BBB” long-term junior subordinated debt rating, and also noted that the debt is guaranteed by R&SA’s subsidiary, Royal & Sun Alliance Insurance PLC (R&SAIP; rated ‘A-‘ / Stable outlook).

Best assigned an equivalent “bbb-” rating, and also indicated that the outlook is stable.

S&P said: “The rating on the notes, which is subject to confirmation following the receipt of final documentation, reflects their equity-like characteristics, including their perpetual tenor, the subordination of bondholders to policyholders and senior creditors, and the interest-deferral features.

“The notes are expected to qualify as Innovative Tier 1 capital under the U.K. Financial Services Authority’s regime, and as Category 2 (‘strong’) capital under Standard & Poor’s own, recently announced hybrid capital classification system. The proceeds received by R&SA will be used to partially refinance its outstanding obligations in respect of its $500 million 8.95 percent junior subordinated notes dated Oct. 15, 2029.”

Best explained: “The notes will rank pari passu with R&SA’s most senior-ranking non-cumulative preference shares and, as such, will rank junior to existing subordinated debt. The proceeds of this issue will be used to partially refinance existing subordinated notes, and equity credit will be given in the overall quantitative assessment of R&SA’s risk-based capitalization in line with A.M. Best’s guidelines.”

S&P made a similar analysis and indicated that the “notes are expected to be callable after a minimum 10-year period, and on every interest payment date thereafter. It is Standard & Poor’s expectation that the funds raised will remain a long-term feature of R&SA’s capital structure. The annual fixed coupons on the notes will be reset at the first call date. If not called, then the interest rate margin will step up by 100 basis points. As long as the notes continue to qualify as solvency capital for regulatory purposes, R&SA has the ability to defer interest payments at its discretion. Any deferred interest may only be satisfied via a stock settlement mechanism. The ‘A-‘ long-term counterparty credit rating on the guarantor, R&SAIP, reflects the group’s track record of successful execution of strategy, strong competitive position, and the expected continuation of its recent strong operating performance.”

S&P noted, however, that these positive factors are partially offset “by the group’s good (but not strong) capitalization and the potential for adverse reserve development, as well as R&SA’s poor historical operating performance and somewhat constrained financial flexibility.”

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