The rating of Royal & SunAlliance (R&SA) has been downgraded by agency AM Best. It was cut from A+ (superior) to A (excellent).
The world's oldest insurance ratings agency warned that further downward changes were possible.
Separate ratings on R&SA's subordinated debt and preferred stock were downgraded to BBB+ and BBB respectively.
AM Best said its decision followed cuts to R&SA's risk-adjusted capitalisation after the US terrorist attacks and the downturn in world stock markets.
It said in a statement: "R&SA's consolidated risk-adjusted capital base has been reduced to a level not consistent with an A+ rating after the fall in equity markets and the group's gross exposure (£750m) to the events of
"In order to capitalise on the attractive rating environment, while complying with its own risk-based capital guidelines, R&SA is restructuring its risk profile to allow it to write up to an additional £2bn of premium.
"This will require a decrease in
its equity holdings, a reduction in dividend payments and release of capital [approximately £800m] from the divestment of non-core businesses."
The measures would leave the company with enough capital to warrant the new rating.
AM Best warned that R&SA's execution of its strategy would influence the rating outlook. It added concerns about US reserves and warned that it expected R&SA to suffer "significant losses" for the fourth quarter of 2001.
However, the outlook for this year was good and AM Best said R&SA had made good progress towards achieving its goal of a combined ratio of 103%.
Ratings agency Standard & Poor's said it was not planning any changes to its stance on R&SA. It lowered its ratings in November 2001 from AA- to A+ and removed the company from credit watch, leaving the outlook stable.
Fellow ratings agency Moody's also downgraded R&SA in November.
A spokesman for R&SA said AM Best's action was "in line with the other ratings agencies".