Insurer’s capital weaker than similarly rated peers, says rating agency

Rating agency Fitch says it is likely to downgrade RSA’s A financial strength rating if the insurer’s Insurance Group Directive (IGD) capital coverage remains below 1.7 times the minimum requirement.

The announcement follows a statement this morning from RSA saying that, according to a PwC probe, recently discovered accounting and reserving problems are confined to the insurer’s Irish operation.

RSA is also under threat of a downgrade from rival rating agency Standard & Poor’s (S&P). If the rating dips below A-, RSA could start losing business.

Weakened position

Fitch has RSA’s A rating on negative watch, which means it is at risk of a downgrade. The main reason for the negative watch is RSA’s “weakened capital position”, the agency said.

RSA’s IGD surplus fell throughout 2013. It started the year at 1.9 times, but fell to 1.7 times on 30 June and was 1.5 times as of 30 September – the most recent figure available.

RSA blamed the most recent IGD surplus decline on the cost incurred by paying its interim dividend and the effects of foreign exchange.

The insurer’s capital position has been eroded further by the reserving and accounting problems at its Irish operation, which will cost the insurer £200m to fix.

Catastrophe losses

The company has also been hit by claims from recent bad weather in the UK and elsewhere. While RSA has not released figures, Panmure Gordon analyst Barrie Cornes estimates the recent UK flooding could cost RSA between £20m and £25m, based on the insurer’s market share and total market losses of between £400m and £500m.

Fitch said: “For the rating to be affirmed Fitch would expect to see a reversal of the trend of declining capitalisation. If Insurance Group Directive capital coverage looks set to remain below 1.7 times during 2014, RSA’s ratings are likely to be downgraded.”

The agency also said that RSA’s capital position is “weaker than similarly rated peers”.

Recovery plans

Fitch noted that RSA will disclose how it plans to improve its capital position at its full-year results presentation in February 2014.

The capital plans will be determined by an internal review, which RSA is still conducting.

The insurer is remaining tight-lipped at this stage about how much capital it will need to raise and how it will raise it. In a response to an analyst’s question at a presentation this morning, RSA executive chairman Martin Scicluna said: “We started the business review four weeks ago. It’s work in progress. We’re looking at various options and various solutions.”

Dividend cut likely

Analysts believe there are several options for RSA to improve its capital, and that the final dividend for 2013 is likely to be at risk.

Panmure Gordon’s Cornes said in a research note this morning: “In order to avoid a fatal S&P downgrade below A- RSA will need to raise money, sell off some of the family silver or enter into a reinsurance arrangement that sees a large proportion of its profits handed to another company.

In our view it is almost certain that the 2013 final dividend will be cut and most likely passed as the dividend is rebased (yet) again.”

Shore Capital analyst Eamonn Flanagan agreed. “We now suspect that this review will incorporate a further rebasing of the dividend,” he said in a research note.

Rating agency discussions

While it may not have decided on a final course of action on its capital position, RSA is keeping rating agencies informed.

RSA UK and western Europe chief executive Adrian Brown said: “We’re having detailed conversations, keeping S&P very closely involved in the sorts of actions we’re considering and the actions that we’re taking, and trying to get them comfortable in where we are with the business in the actions that we’re taking.”

Brown declined to comment on whether a downgrade to the BBB range was likely for RSA, but added: “What we’re focusing on is showing S&P why we should retain our A rating and that’s what we’re looking to do.”

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