Rating could drop to A- without fresh capital injection, says Litmus Analysis’s Stuart Shipperlee

RSA’s A rating is at “significant” risk of a further downgrade if the insurer does not perform a “material” equity capital injection, according to rating consultancy Litmus Analysis.

Such a downgrade could prompt some larger commercial insurance buyers with long-tail risks to look elsewhere for insurance.

On Wednesday Standard & Poor’s (S&P) cut RSA’s financial strength rating (FSR) to A from A+ and placed the rating on negative watch after the insurer discovered reserving problems in its Irish business.

Litmus analytical partner Stuart Shipperlee contends that the rating is at risk of falling a further notch to A-.

He said: “From our perspective, without a material equity injection, the risk to the rating is significant.

“[S&P] caps the further downside rating risk as ‘one notch’. That would mean an ‘A-‘ FSR  for the group’s core carriers.”

To improve capital adequacy, Shipperlee said RSA either has to inject fresh equity capital or remove some risk from the business.

The trouble is, both are likely to prove unpopular with shareholders.

Shipperlee said: “Current stock market sentiment towards the group seems to make the former unlikely (or at least contentious) and since the latter basically means reducing expected returns on capital employed going forward, shareholders might well not back that either.”

Shipperlee noted that A- from S&P is still a “perfectly healthy rating level in theory” and “one shared by hundreds of insurers globally”.

Many brokers use A- as their minimum acceptable rating before they have to seek client approval to use the insurer.

However, Shipperlee also noted that a minimum of A is not uncommon for buyers of larger commercial lines business with longer-tail risks.

He said: “RSA have been there before, carrying A- ratings for several years from both S&P and AM Best following the problems the group faced in the early part of the last decade.

“But, it’s not the credit profile an insurer of RSA’s scale would be looking for or, we would imagine, comfortable with.”