At the same time, Standard & Poor's lowered to 'BB+' from 'BBB-' its long-term counterparty credit and insurer financial strength ratings on the operating entities of the Royal & SunAlliance USA group (RSA USA).
All ratings were removed from CreditWatch, where they had been placed on Sept. 5, 2003. The outlook on all entities is negative. (Standard & Poor's New York office will issue a separate media release later today with further details about the downgrade of RSA USA's operations.)
The affirmation of the ratings on R&SA's U.K. operations and on Sweden-based Trygg-Hansa Forsakrings AB, Publikt. follows a review of the impact that the recent announcement of a rights issue, U.S. rationalization, and reserve strengthening will have on the group's financial strength.
"The prospective capital position of R&SA remains in line with Standard & Poor's expectations, as the proceeds of the rights issue enable an increase in reserve strength and a restructuring of the U.S. operations, which have historically been regarded as a weakness in the rating profile," said Standard & Poor's credit analyst Ashley Gill.
"A robust performance in the first half of 2003 confirms that R&SA remains on track to achieve Standard & Poor's earnings expectations," added Mr. Gill. Prospective earnings are enhanced by an increase in targeted expense savings and a reduction in the proportion of business that R&SA will cede to Munich Reinsurance Co. (A+/Stable/--) as part of its quota-share agreement.The ratings reflect R&SA's strong business position, adequate capitalization, poor but improving operating performance, and restricted financial flexibility (defined as the ability to source capital relative to requirements).
"The negative outlook reflects Standard & Poor's concerns that execution risk in the group restructuring may hinder prospective group operating performance and capital formation," said Mr. Gill.
Standard & Poor's expects the combination of increases in premium rates, risk reduction, and group restructuring to translate into a reported combined ratio for R&SA of less than 102%, with an ROR of more than 5%. The group is expected to retain more than GBP200 million ($317.8 million) of earnings in 2003.
Standard & Poor's also expects R&SA's capital adequacy to be restored to and remain in the 'A' range (according to Standard & Poor's risk-based capital model) from 2004. The announced reserve strengthening increases confidence in relation to reserve adequacy, but Standard & Poor's will continue to monitor reserve development closely.