S&P Cuts R&SA’s Ratings, Reports RSA USA Outlook’s Negative

September 11, 2003

Standard & Poor’s has lowered its counterparty credit and financial strength ratings on Royal & Sun Alliance Insurance PLC’s (R&SAIP; A-/Negative/A-2) U.S. insurance operations (RSA USA) to ‘BB+’ from ‘BBB-‘ and removed them from CreditWatch. Standard & Poor’s also said that the outlook on RSA USA is negative.

“The ratings were lowered to reflect Standard & Poor’s view that RSA USA’s ongoing businesses could potentially be sold in the near term,” said Standard & Poor’s credit analyst Frederick Loeloff. “In addition, the managed run-off of its discontinued business lines will remain an earnings and liquidity drag for both RSA USA and, indirectly, Royal & Sun Alliance Insurance Group PLC (R&SA).”

R&SAIP is the main operating company of R&SA. The ratings had been placed on CreditWatch following R&SA’s announcement that it intends to strengthen its U.S. reserve position by at least about $600 million (pretax) in the third quarter of 2003 and that it is actively considering a range of options with respect to its remaining U.S. businesses.

The RSA USA units designated as ongoing businesses will function within their normal capacity.

However, expectations are that prospective loss-payment frequency/severity on modest premium collections and a declining invested asset base will place both operational and capital-management pressures on RSA USA’s operations and remain a primary cause for deteriorating liquidity in the near term. In addition, the prospective marginal support that R&SA has committed to provide RSA USA to maintain risk-based capital requirements in line with statutory requirements (2.0x) will leave the U.S. operations little or no cushion to generate investment earnings to offset potential prospective operational risk or adverse loss development.

Standard & Poor’s will remain in discussions with RSA USA – along with R&SA management – concerning their plans for RSA USA’s ongoing businesses and capital/risk-management strategies needed to support the U.S. operations’ ongoing business and related managed run-off.

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