The subordinated debt rating of Royal & Sun Alliance Insurance Group Plc was downgraded to Ba2 from Ba1. The group's other subsidiary ratings have also been downgraded -- please refer to the detailed list below.
The rating actions conclude the review for possible downgrade initiated on 11th April 2003. The outlook on all RSA group ratings outside the USA is stable; for the USA subsidiaries the outlook is negative. Moody's commented that despite recent improvement in the group's capital position, it has concerns about legacy issues in the USA, its ability to capitalize fully on favourable market conditions, and its ability to maintain its position and earnings in some of its core markets. In particular Moody's has concern about the capital position in the USA.
Moody's notes that RSA has demonstrated tangible support for overseas operations in the past and believes that it will continue to do so. However, any future capital injections that Moody's believes will be required over the medium term could strain the group's capital position. Moody's notes that first quarter 2003 results were positive at the group level for the first time in a number of years. Whilst performance in 2003 and beyond should benefit from a favourable premium rate environment and actions being taken by management regarding the restructuring of the group and cost-cutting measures, Moody's believes that meaningful capital replenishment from retained earnings will take time to achieve.
In the UK Moody's notes that the combined ratio in personal lines continues to remain high at 106.7%, although this has improved from 111.3% and does include a precautionary weather margin, and elsewhere RSA's ability to take full advantage of the favourable premium rate environment is somewhat constrained, having increased in 2003 its quota share with Munich Re to 15% from 10%. Moody's added that the recently announced tie-up between Direct Line and Churchill Group could potentially impact its UK personal lines.
Moody's added that in Scandinavia RSA has yet to redress the small losses that have been incurred in the last two years, but operations there are reasonably well capitalized and should not require additional support from the UK in the near term. In the USA, the negative outlook reflects Moody's continuing concerns related to a number of legacy issues facing RSA, including: the potential for further adverse loss reserve development, significant A&E liabilities, reinsurance recoverables, unfunded pension liabilities and uncertainty with respect to litigation issues facing the group.
Whilst Moody's notes that there have been no recent material adverse developments in these legacy issues, they continue to have the potential for further capital and earnings degradation. Positively Moody's commented that the first quarter results had shown good progress with the combined ratio reducing to 99%. Also the restructuring programme announced by the group in November last year has made real progress, with the successful IPO of the Australian business in May, the completion of a number of asset sales including the UK Healthcare and Assistance and USA RSUI businesses, and the commencement of the implementation of wide-ranging cost-cutting measures.
Moody's also notes that further asset sales are scheduled to take place in the near future, including the Puerto Rican business. These events and measures have provided, and will continue to provide, additional capital and liquidity in the near term, howev